UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended January 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition period from __________ to __________.
Commission File Number: 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2844247
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Sweeneydale Avenue, Bay Shore, New York 11706
(Address of principle executive offices)
(516) 694-7060
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, Par Value $.0001 13,970,155
- --------------------------------------------------------------------------------
(Title of Each Class) (Outstanding at February 28, 1999)
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, April 30,
1999 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 100,836 $ 33,915
Accounts receivable, net of allowance for doubtful
accounts of $161,870 and $280,000, respectively 2,840,919 2,517,517
Due from Officer 100,000 --
Inventories 147,245 161,266
Costs and estimated earnings in excess of billings on
uncompleted contracts 17,795 55,352
Prepaid and other current assets 326,196 325,061
Deferred income taxes 110,000 --
------------ ------------
Total current assets 3,642,991 3,093,111
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$2,589,376 and $1,953,634, respectively 2,406,795 2,799,191
OTHER ASSETS
Goodwill, net of accumulated amortization of $43,627 and $36,526,
respectively 78,399 85,500
Note receivable, net of current portion of $114,197 and $80,460,
respectively 133,037 209,245
Other assets 166,952 167,642
------------ ------------
TOTAL ASSETS $ 6,428,174 $ 6,354,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,160,945 $ 3,269,973
Revolving credit note payable 1,875,512 --
Advances from factor -- 1,505,968
Billings in excess of costs and estimated earnings on
uncompleted contracts 220,221 266,000
Payroll taxes payable 57,458 641,790
Sales taxes payable 253,602 91,605
Current portion of long-term debt 777,679 955,367
Obligations of unconsolidated subsidiary, net 196,112 196,112
------------ ------------
Total current liabilities 6,541,529 6,926,815
OTHER LIABILITIES
Convertible notes, net of current portion 690,000 800,000
Long-term debt, net of current portion 569,333 227,604
Other liabilities -- 37,000
------------ ------------
Total liabilities 7,800,862 7.991,419
------------ ------------
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
par value $.01; 1,300,000 shares issued and outstanding 1,300,000 1,300,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value,
10,000,000 shares authorized -- --
Common stock, $.0001 par value,
50,000,000 shares authorized;
13,521,566 and 11,552,374 shares issued and outstanding,
respectively 1,352 1,155
Additional paid-in capital 28,697,093 28,126,648
Accumulated deficit (31,371,133) (30,989,396)
Less deferred compensation -- (75,137)
------------ ------------
Total stockholders' equity (deficit) (2,672,688) (2,936,730)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,428,174 $ 6,354,689
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
January 31, January 31,
1999 1998 1999 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 3,058,186 $ 2,840,676 $ 11,018,496 $ 9,737,411
Cost of revenues 2,894,453 2,680,110 8,421,988 8,951,962
------------ ------------ ------------ ------------
Gross profit 163,733 160,566 2,596,508 785,449
Selling, general and administrative expenses 733,411 970,141 2,436,761 3,235,254
------------ ------------ ------------ ------------
Income (loss) from operations (569,678) (809,575) 15 (2,449,805)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (245,265) (90,366) (679,316) (591,562)
Other, net -- 102,993 27,832 104,728
------------ ------------ ------------ ------------
Total other income (expense) (245,265) 12,627 (651,484) (486,834)
------------ ------------ ------------ ------------
Loss before income tax expense (benefit) (814,943) (796,948) (491,737) (2,936,639)
Income tax expense (benefit) 165,000 -- (110,000) --
------------ ------------ ------------ ------------
Net loss (979,943) (796,948) (381,737) (2,936,639)
Dividends on Series A Convertible Preferred Stock 19,500 19,500 58,500 72,096
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (999,443) $ (816,448) $ (440,237) $ (3,008,735)
============ ============ ============ ============
Net loss per common share:
Basic and Diluted $ (.07) $ (.08) $ (.03) $ (.30)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic and Diluted 13,842,010 10,475,481 12,779,318 10,147,194
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Number of Par Paid-in Accumulated Deferred
Shares Value Capital Deficit Compensation Total
---------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 11,552,374 $ 1,155 $ 28,126,648 $(30,989,396) $ (75,137) $ (2,936,730)
Proceeds from private placements of
common stock 735,000 73 129,927 -- -- 130,000
Note conversion 20,000 2 9,998 -- -- 10,000
Issuance of common stock for services 671,021 67 276,015 -- -- 276,082
Issuance of common stock for legal settlements 38,874 4 13,420 -- -- 13,424
Issuance of common stock for
employee and director compensation 258,333 26 98,374 -- -- 98,400
Amortization of deferred compensation -- -- -- -- 75,137 75,137
Dividends on preferred stock -- -- (58,500) -- -- (58,500)
Issuance of common stock and options for
accrued preferred dividends and related
interest 245,964 25 101,211 -- -- 101,236
Net loss -- -- -- (381,737) -- (381,737)
---------- ------------ ------------ ------------ ------------ ------------
Balance at January 31, 1999 13,521,566 $ 1,352 $ 28,697,093 $(31,371,133) $ -- $ (2,672,688)
========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(Unaudited)
<TABLE>
<CAPTION>
January 31, January 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (381,737) $(2,936,639)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 755,568 1.329,463
Provision (credit) for doubtful accounts (3,948) 80,187
Issuance of common stock and stock options for services 138,274 138,246
Gain on settlement of lawsuit -- (102,993)
Deferred income taxes (110,000) --
Other, net (15,332) (1,735)
Changes in operating assets and liabilities:
Accounts receivable (319,454) (322,016)
Inventories 14,021 (5,242)
Costs and estimated earnings in excess of billings on uncompleted contracts 37,557 (80,955)
Prepaid and other current assets 205,304 360,623
Other assets 8,103 (10,181)
Accounts payable and accrued expenses 330,347 1,311,451
Payroll taxes payable (584,332) 233,610
Sales taxes payable 161,997 --
Billings in excess of costs and estimated earnings on uncompleted contracts (45,779) --
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 190,589 (6,181)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 42,651 43,903
Advances to officer (100,000) (73,455)
Deposit on equipment lease (30,000) --
Proceeds from sale of assets -- 14,614
Proceeds from insurance settlement 20,332 --
Purchases of property and equipment (263,346) (623,692)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (330,363) (638,630)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt and factor advances (2,374,317) (536,213)
Proceeds from revolving bank line, net 1,875,512 703,675
Proceeds from equipment term loan 595,000 --
Dividends paid on redeemable preferred stock (19,500) (23,346)
Proceeds from issuance of common stock 130,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 206,695 144,116
----------- -----------
NET INCREASE (DECREASE) IN CASH 66,921 (500,695)
CASH -BEGINNING 33,915 654,377
----------- -----------
CASH - ENDING $ 100,836 $ 153,682
=========== ===========
Cash paid during the period for:
Interest $ 594,755 $ 97,093
=========== ===========
Taxes $ 2,750 $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared by management in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
These consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the fiscal year ended April 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications - Certain amounts included in the prior year's
consolidated financial statements have been reclassified to conform with
the current period presentation.
Loss Per Share - Basic loss per share is computed based upon the weighted
average number of common shares outstanding during each period presented.
Stock options, convertible notes and other applicable common stock
equivalents did not have an effect on the computation of diluted earnings
per share in the quarter and nine month period ended January 31, 1999 and
1998 since they were anti-dilutive.
3. LIQUIDITY AND BUSINESS RISKS
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. As of January 31,1999 the Company
has a stockholders' deficit of $2,672,688 and an accumulated deficit of
$31,371,133. The Company has financed its operations to date primarily
through issuances of debt and equity securities. At January 31, 1999, the
Company had $100,836 in cash, and a working capital deficit of $2,898,538.
The working capital deficit has increased primarily due to the net loss
incurred in the quarter. In addition, as of January 31, 1999, the Company
was in arrears with respect to certain sales tax obligations of
approximately $254,000. These factors raise substantial doubt about the
Company's ability to continue as a going concern. These financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
In June 1998, the Company entered into a revolving credit facility to
obtain a revolving credit line of $2,445,000, secured by certain of the
Company's assets. This revolving credit line was increased by $650,000 to
$3,095,000 in October 1998. Nine month results reflect efforts to improve
the Company's overall gross margins and control its selling, general, and
administrative expenses. Revenue growth is expected to continue and further
expense reductions are planned; however, no assurance can be given in this
regard. The Company is currently engaged in various discussions with
potential investors regarding possible equity transactions. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or
unexpected cash requirements, or that it will be successful in obtaining
additional financing to meet its obligations as they become due. The
Company's future cash requirements are expected to depend on numerous
factors, including, but not limited to: (i) the ability to successfully bid
on environmental or construction contracts (ii) the ability to generate
positive cash flow from operations, and the extent thereof, (iii) the
ability to raise additional capital or obtain additional financing, and
(iv) economic conditions.
4. EQUITY TRANSACTIONS
During May 1998 the Company received $68,000 from several private
accredited investors for 425,000 shares, or $.16 per common share. Also
during May 1998, a convertible note-holder converted a $10,000 note into
20,000 shares of common stock. During August and September 1998, the
Company received $62,000 from several private accredited investors for
310,000 shares, or $.20 per common share.
5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. EQUITY TRANSACTIONS (CONT.)
On August 18, 1998 the Company's Board of Directors granted options to
purchase 750,000 shares of common stock to the directors of the Company,
which included 250,000 to the Chief Executive Officer. In addition, options
to purchase 100,000 shares of common stock were issued to the Company's
Chief Financial Officer. All of these options are exercisable immediately
at an exercise price of $.34, and expire August 17, 2003.
On August 20, 1998 the Company's Board of Directors approved the Company's
1998 Stock Incentive Plan ("Plan"). Under the Plan, the Company is
permitted to grant awards up to a maximum of 2,000,000 shares of common
stock as restricted stock, incentive stock options, non-qualified options,
phantom stock and otherwise.
During the nine months ended January 31, 1999, the Company issued 534,382
shares valued at $231,082 related to prior fiscal year obligations for
legal and consulting services. The Company issued 136,639 shares and 38,874
shares valued at $45,000 and $13,424, respectively, for current fiscal year
legal services and a legal settlement. The Company issued 100,000 shares of
common stock valued at $37,000 to its Vice President of Business
Development which it had been contractually obligated to issue. The Company
issued 133,333 shares of common stock valued at $50,000 to its Chief
Executive Officer in connection with his annual bonus formula. The
Company's five directors were issued 5,000 shares each valued at $11,400 in
the aggregate. The Company issued 245,964 shares of its common stock and
30,000 options (exercisable at $.375) in payment of all accrued and unpaid
preferred stock dividends and interest due through October 31, 1998.
On October 2, 1998 the Company issued 50,000 stock options to an employee,
exercisable at $.40. On October 16, 1998 the Company issued 50,000 stock
options to an employee, exercisable at $.375. On November 13, 1998, the
Company issued 450,000 stock options to certain of its employees,
exercisable at $.375. These options expire in October 2003. During the nine
month period ended January 31, 1999, 697,937 stock options were forfeited.
In February 1999 the Company and its general counsel agreed to a two - year
retainer agreement for legal services. Under the agreement, general counsel
received 333,333 shares of restricted stock, or $100,000, for the term of
the agreement, and will receive $30,000 quarterly through December 31, 2000
for legal services . In addition, the Company issued 115,266 shares of its
common stock for consulting and legal services in February 1999.
5. RELATED PARTY TRANSACTIONS
The Company purchased materials and supplies of $175,964, and had an
outstanding balance payable at January 31, 1999 of $93,500 to a Company
with which one of its directors is affiliated. The same director is owed
$100,000 on a 12% convertible note payable in full in December 1999.
On December 16, 1998 the Company entered into an operating lease
arrangement with its Chief Executive. Under the arrangement the Company
will lease a forty-two foot fully-equipped custom built Topaz boat for a
period of two years. Annual rentals approximate $75,000. The leasing
arrangement was necessitated by a Marine Contractor Assistance Contract the
Company received with KeySpan Energy Corporation, covering the similar
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 the net loss incurred by the Company in the
current fiscal quarter, the bonus is now due back to the Company.
6. DEBT
On June 1, 1998 the Company entered into a 2 1/2 year (as amended January
19, 1999) Loan and Security Agreement ("LSA") with Business Alliance
Capital Corporation ("BACC"). The LSA consisted of two parts, a term loan
of $595,000 collateralized by the Company's equipment and revolving
advances up to a maximum of $2,500,000 (as amended October 19,1998),
collateralized by the Company's accounts receivable, subject to a borrowing
base of 80% of the Company's eligible accounts, as defined. Interest on the
LSA is at 3% above prime. The term loan carries a five year principal
amortization. Interest is
6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. DEBT (CONT.)
calculated on a monthly minimum daily average loan balance of $750,000. The
LSA carries an annual fee of 1% and a servicing fee of .5% monthly (to be
adjusted to .3% after the Company satisfies certain conditions, as defined)
of the average outstanding balance of the advances. The Company is required
to maintain a $250,000 life insurance policy on its CEO with BACC named as
an irrevocable beneficiary. The Company's CEO has given BACC an unlimited
personal guaranty on the LSA. In the event of a default, as defined, the
Company is required to pay interest at 8% above the prime rate to BACC. In
conjunction with the LSA, the Company utilized approximately $218,000 of
the proceeds of the term loan to repay in full the outstanding note payable
to the bank and certain other equipment related capital lease obligations.
The Company further utilized $200,000 of the proceeds to effect an
agreement with the Internal Revenue Service relating to its overdue payroll
taxes. On July 1, 1998, the Company terminated its factoring agreement and
transferred its receivable collateralization to BACC. The Factor was paid
$1,432,638 in full satisfaction of the Company's outstanding liability to
it. The Company received an additional advance of $210,000, for a total
initial advance of $1,642,638.
7. STATEMENTS OF CASH FLOWS
During the nine months ended January 31, 1999, the Company's non-cash
operating activities included the payment of $221,633 in current
liabilities utilizing its common stock. The Company also utilized $37,000
in common stock to satisfy a previous contractual obligation. See Note 4.
Non-cash financing activities include $172,882 of annual insurance premium
financing and $101,236 of common stock and options issued in payment of
accrued preferred dividends and related interest. Non-cash financing
representing the present value of the Oxford settlement discounted at 10%
(see Note 9), or $164,508, was transferred from accounts payable to
long-term debt.
8. COMMITMENTS AND CONTINGENCIES
Litigation
In October 1996, the United States Attorney for the Eastern District of New
York obtained a federal grand jury indictment against, among others, the
Company's former Chief Operating Officer, Leo Mangan, and former Special
Securities Counsel, James Nearen, on charges that include violations of
federal securities law, including fraudulent issuances of 700,000 shares of
the Company's common stock. Mr. Mangan and Mr. Nearen both subsequently
pleaded guilty to the charges in the Federal indictment. To date, no
charges have been filed against the Company or any other member of
management as a result of the Eastern District investigation. The Company
is awaiting the decision of the Securities and Exchange Commission as to
whether it will follow a staff recommendation that an enforcement action be
filed seeking an injunction against future violations of the securities
laws. The Company has vigorously opposed this recommendation on the grounds
that all employees accused of wrongdoing have been terminated and other
adequate remedial measures have been taken voluntarily by the Company.
The Company is a defendant in a litigation matter whereby one or more
plaintiffs claim to be entitled to additional wages while working for a
subcontractor of the Company. The amount of the claim has not been
specified. Management intends to defend the action vigorously.
The Company is a third party defendant in a litigation matter, Glenn Merto
vs. George D. Nagrodsky and Windswept Environmental Group, Inc., whereby
Mr. Merto is claiming damages in a "slip and fall" incident on the
Company's subleased premises on or about January12, 1999. Mr. Nagrodsky is
the Company's landlord. Management believes the plaintiff suffered minimal
injuries and the Company is fully insured against such loss.
One of the Company's subsidiaries is a defendant in a litigation matter,
Peggy Magidson vs. New York Testing Laboratories, Inc. et al, whereby
plaintiff charges sexual harassment by an employee of New York Testing in
the fall of 1991. The Company believes the case is without merit, and
intends to defend the action vigorously.
The Company is party to other litigation matters and claims which are
normal in the course of its operations, and while the results of litigation
and claims cannot be predicted with certainty, management believes that the
final outcome of such matters will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of
the Company.
7
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. COMMITMENTS AND CONTINGENCIES (CONT.)
Other Proceedings
In January 1996 Laboratory Testing Services, Inc. ("LTS"), a wholly-owned
subsidiary, filed a Chapter 11 petition in United States Bankruptcy Court
in the Eastern District of New York. Subsequently, this case was converted
to a Chapter 7 Bankruptcy proceeding. LTS is in process of liquidation
through these bankruptcy proceedings. Management believes that the
Company's financial condition and results of operations will not be
materially affected by this proceeding.
Sales tax examination
The Company is presently undergoing a New York State sales tax compliance
examination for the period March 1, 1994 through September 28, 1997. The
examination is still in progress and the findings are as yet inconclusive.
There has not been a deficiency assessed to date relating to this
examination.
Settlement with IRS
In June 1998, the Company reached a tentative settlement with the Internal
Revenue Service ("IRS") relating to its outstanding payroll tax liability.
The Company remitted a final payment to the IRS in December 1998.
Previously paid penalties in excess of $85,000 were abated during the
quarter ended October 31,1998 and are reflected as a reduction of selling,
general, and administrative expenses.
9. SUBSEQUENT EVENTS
On February 1, 1999 the Company and its lender, BACC, agreed to a temporary
over-advance of $325,000 ratably reduced to zero through April 16,1999. The
over-advance was necessitated when a $430,000 receivable from a Nassau
County, New York- funded project was not paid within the lender's
prescribed ninety day time line. During the over-advance period the Company
will be charged an additional 5 1/2 % above its current interest cost and
incur a $25,000 over-advance fee. The Company expects payment on the county
funded receivable in March 1999; however, no assurance can be given in this
regard.
On March 1, 1999 the Company and Oxford Health Plans, Inc. ("Oxford")
agreed to a $175,000 stipulation of settlement of certain outstanding
indebtedness for employee health insurance. The Company will pay the amount
due, without interest, beginning May 1, 1999 over a twelve month period. In
the event of default, the Company will owe Oxford $202,047 (the original
liability amount), less amounts paid under the settlement agreement, plus
interest from the date of default.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion of the fiscal nine months ended January 31, 1999 and
1998, should be read in conjunction with the Consolidated Financial Statements
contained herein, including the notes thereto.
This Item 2 and other items in this Form 10-QSB contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking statements.
Forward-looking statements included in this Form 10-QSB involve known and
unknown risks, uncertainties and other factors which could cause actual results,
performance (financial and operating) or achievements expressed or implied by
such forward looking statements not to occur or be realized. Such forward
looking statements generally are based upon the best estimates by the Company of
future results, performance or achievement, based upon current conditions and
the most recent results of operations. Forward looking statements may be
identified by the use of forward looking terminology such as "may", "will",
"expect", "believe", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. Potential risks and
uncertainties include, among other things, such factors as the amount of the
Company's revenues, the Company's ability to increase its gross margins, the
success of the Company in limiting or reducing its expenses, the frequency and
magnitude of environmental disasters or disruptions, the effects of new laws or
regulations relating to environmental remediation, the Company's ability to
raise capital, the competitive environment within the Company's industry,
dependence on key personnel, economic conditions, and the other factors and
information disclosed and discussed in other sections in this Form 10-QSB, and
in the Company's annual report on Form 10-KSB for the year ended April 30, 1998.
Readers of this Form 10-QSB should carefully consider such risks, uncertainties
and other information, disclosures and discussions which contain cautionary
statements identifying important factors that could cause actual results to
differ materially from those provided in the forward looking statements.
RESULTS OF OPERATIONS
Net loss and net loss per share for the quarter and nine month period ended
January 31,1999 was ($979,943) and ($.07) and ($381,737) and ($.03),
respectively, compared to a net loss and loss per share for the quarter and
nine-month period ended January 31, 1998 of ($796,948) and ($.08) and
($2,936,639) and ($.30), respectively.
Revenues for the quarter ended January 31, 1999 increased by $217,510, or 8%, to
$3,058,186 from $2,840,676. Revenues for the first nine months of fiscal 1999
increased by $1,281,085, or 13%, to $11,018,496 from $9,737,411. The increase in
revenues was primarily reflected in the results of the Company's Trade-Winds
subsidiary, where construction / renovation revenues increased 95%, or
approximately $1,352,000. This is attributable to certain residential
construction projects the Company has undertaken on the eastern end of Long
Island, as well as a Nassau County funded cancer rehabilitation center. The
revenues of the other Company subsidiaries, North Atlantic Laboratories, Inc.
("NAL") and New York Testing Laboratories, Inc.("NYTL"), declined approximately
$170,000 compared to the prior periods, with declines in revenues of 12% for
NAL, to $1,101,615 from $1,251,193, and 4% for NYTL, to $528,198 from $548,640
over the nine month period. The decline in NAL revenues reflect a decline in
sampling and analysis testing revenues. The decline in NYTL revenues reflect
delays in new municipal contracts for lead testing by our consulting clientele.
Gross margins for the quarter and nine month period ended January 31, 1999 were
5% and 24%, respectively, compared to 6% and 8% for the quarter and nine months
ended January 31, 1998, respectively. The increased margins for the nine - month
period were attributable primarily to management efforts during the past year to
provide a broader and more profitable mix of services at its Trade-Winds
subsidiary. In addition, management has turned down work where competitive
factors would lead to projected project losses. Margins at the Company's
Trade-Winds subsidiary increased to 20% from 3% over the comparative prior nine
month period. Margins declined from 30% at October 31,1998 to 24% at January
31,1999. The decline in margin was attributable to a number of factors primarily
as follows: a.) The Company was involved in a highly technical fuel tank
replacement project at JFK Airport. The Company incurred significant cost
overruns which had not been previously budgeted for partially due to unplanned
equipment retrieval delays; b) projects during the quarter were at a lower
margin than previous quarter's projects; and c.) various asbestos and
construction projects which began in earlier quarters experienced margin
adjustments as costs exceeded original estimates. The gross margins in the
period ended January 31, 1998 were a result of the recognition of losses in that
period related to certain longer-term contracts with projected losses, the
effect of higher labor and benefit (including worker's compensation insurance)
costs due to unionization in June 1996, and cost overruns on certain fixed price
contracts during the quarter ended July 31, 1997.
Selling, general and administrative expenses for the quarter ended January 31,
1999 declined by $236,730, or 24%, to $733,411 from $970,141 in the quarter
ended January 31, 1998. Selling, general and administrative expenses for the
nine month period ended January 31, 1999 declined by $798,493, or 25%, to
$2,436,761 from $3,235,254 in the nine month period ended January 31, 1998. The
decline for the nine-month period was primarily related to approximate
reductions as follows: bad debt expense, $84,000 (due to improved internal
controls and management collection efforts); legal expenses, $50,000 (due to a
reduction in SEC investigation and compliance
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
RESULTS OF OPERATIONS (cont.)
and other non-operational type legal matters), health insurance, $42,000 (due to
mandatory contributions required of employees since the third quarter of fiscal
1998), goodwill amortization expense of $111,000 (due to the impairment loss
recorded in the fourth quarter of fiscal1998), fines and penalties, $128,000
(reduced due to the settlement agreement with the Internal Revenue Service),
sales and office salaries and related taxes, $300,000 (due to the staff
reductions in February and September 1998), consulting expenses of $43,000 (due
to a reduction in laboratory consulting and an assessment of the wildlife
consulting business fees), and $35,000 in advertising due to a reduction in
yellow page geographic coverage. The decline in selling, general and
administrative expenses for the quarter ended January 31, 1999 was primarily due
to a $25,000 reduction in consulting expenses related to wildlife rehabilitation
business, $36,000 in amortization expense related to the absence of the North
Atlantic goodwill charge, and sales and office salaries and related taxes
amounting to $155,000 due to the staff reductions in February and September
1998.
Interest expense for the quarter ended January 31, 1999 increased $154,899, or
171% , to $245,265, from $90,366 in the quarter ended January 31, 1998. Interest
expense for the nine months ended January 31, 1999 increased $87,754, or 15%, to
$679,316 from $591,562 in the nine month period ended January 31,1998. During
the nine month period ended January 31, 1998 the Company incurred $356,154 of
interest expense relating to the accretion of a discount on the $700,000 of
convertible notes issued in the fourth quarter of fiscal 1997. There was no
related accretion charge in the comparative periods for fiscal 1999. The
substantial interest expense during the nine month period ended January 31, 1999
was principally attributable to the high cost of receivable factoring in the
months of May and June 1998. The Company began its borrowing base agreement with
BACC as of July 2,1998. Only $750,000 of financing was outstanding during the
quarter and nine-month period ended January 31, 1998 at favorable interest rates
approximating 11% versus approximately $2,500,000 of outstanding financing
during the quarter and nine month period ended January 31, 1999 at rates
approximating 18%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. As of January 31, 1999 the Company has a
stockholders' deficit of $2,672,688 and an accumulated deficit of $31,371,133.
The Company has financed its operations to date primarily through issuances of
debt and equity securities. At January 31, 1999, the Company had $100,836 in
cash, and a working capital deficit of $2,898,538. The working capital deficit
has increased primarily due to the net loss incurred in the quarter. In
addition, as of January 31, 1999, the Company was in arrears with respect to
certain sales tax obligations of approximately $254,000. 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.
In June 1998, the Company entered into a revolving credit facility to obtain a
revolving credit line of $2,445,000, secured by certain of the Company's assets.
The revolving credit line was increased by $650,000 to $3,095,000 in October
1998. Nine-month results reflect management's efforts to improve the Company's
gross margins and control its selling, general, and administrative expenses.
Revenue growth is expected to continue and further expense reductions are
planned; however, no assurance can be given in this regard. The Company is
currently engaged in various discussions with potential investors regarding
possible equity transactions. There can be no assurance, however, that changes
in the Company's plans or other events affecting the Company's operations will
not result in accelerated or unexpected cash requirements, or that it will be
successful in obtaining the additional financing to meet its obligations as they
become due. The Company's future cash requirements are expected to depend on
numerous factors, including, but not limited to: (i) the ability to successfully
bid on environmental or construction contracts (ii) the ability to generate
positive cash flow from operations, and the extent thereof, (iii) the ability to
raise additional capital or obtain additional financing, and (iv) economic
conditions.
On February 1, 1999 the Company and its lender, BACC, agreed to a temporary
over-advance of $325,000 ratably reduced to zero through April 16,1999. The
over-advance was necessitated when a $430,000 receivable from a Nassau County,
New York- funded project was not paid within the lender's prescribed ninety day
time line. During the over-advance period the Company will be charged an
additional 5 1/2 % above its current interest cost and incur a $25,000
over-advance fee. The Company expects payment on the county funded receivable in
March 1999; however, no assurance can be given in this regard.
The Company believes that its current resources together with anticipated
continued positive cash flow from operations, if any, and the LSA, should
provide sufficient cash to meet the Company's needs for approximately the next
twelve months.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
THE YEAR 2000
The Company has taken actions to make its systems, services, and infrastructure
Year 2000 ("Y2K") 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 or navigational systems
on our fleet of floating vessels, and although we have not completed the
process, it has not indicated any necessary changes to date. We expect to
complete this process by August 1999. We have inquired of our vendors in the
laboratory and consulting division regarding making our all our equipment Y2K
compliant. We now estimate 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 inquiries and been advised that its banks' and primary
lender's systems are Y2K compliant. The Company being an emergency response
provider keeps a full inventory of supplies and other materials on hand at all
times. In addition, we are not dependent on a single source of supply from any
of our vendors presently. Our inquiries of our largest vendors have led to
indications that they are, or expect to be, Y2K compliant by December 1999.
The Company has numerous customer relationships and our customers today will not
necessarily be the same as those in the Year 2000 due to the service nature of
our business. Our inquiries to our largest and most likely rotational clients
indicate that they are in the process of becoming Y2K compliant, and many
believe that they already are 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.
he Company has a full-time in-house computer consultant devoted to assessing
The Company has a full-time in-house computer consultant devoted to assessing
and analyzing Y2K issues, and arranging for their final resolution, although at
this time, we believe we have inventoried and resolved the most significant
issues. The Company may inevitably be prone to some form of Y2K impact that is
at this time unforeseen. Due to the nature of our business, primarily labor
based, with minimal equipment usage, management has assessed that the risks are
not likely to be material. Further, we believe that our contingency plan is in
place due to the fact that our internal systems are Y2K compliant and we
maintain a large supply of materials and supplies necessary to support our
emergency response readiness.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the Condensed Consolidated Financial Statements.
Item 2. Changes in Securities
In October and November 1998 the Company issued 224,964 and 21,000 shares of
Common Stock, respectively, in payment of all accrued dividends and interest on
its Series A Preferred Stock through October 31, 1998. In November 1998 the
Company issued 133,333 shares of Common Stock to its Chief Executive Officer. In
December 1998 the Company issued 16,000 shares of its Common Stock related to a
legal settlement. In January 1999, the Company issued 57,692 and 30,240 shares
of its Common Stock, respectively, for legal services. In February 1999 the
Company and its general counsel agreed to a two - year retainer agreement for
legal services. Under the agreement, general counsel received 333,333 shares of
Common stock for the term of the agreement for legal services . In addition, the
Company issued 26,829 and 88,427 shares of its common stock ,respectively, for
consulting and legal services in February 1999. These transactions were
non-public offerings exempt from registration under the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities
On February 1, 1999 the Company and its lender, BACC, agreed to a temporary
over-advance of $325,000 ratably reduced to zero through April 16,1999. The
over-advance was necessitated when a $430,000 receivable from a Nassau County,
New York - funded project was not paid within the lender's prescribed ninety day
time line. During the over-advance period the Company will be charged an
additional 5 1/2 % above its current interest cost and incur a $25,000
over-advance fee. The Company expects payment on the county funded receivable in
March 1999; however, no assurance can be given in this regard.
Item 4. Submission of Matters to a Vote of Security Holders
None
11
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 10.20- Extension Revolving Credit Master Promissory Note
dated January 19, 1999.
10.21- Loan and Security Agreement dated as of June 1,
1999, as modified from time to time, dated
February 1,1999.
10.22- Equipment lease agreement between Michael O'Reilly
and Trade-Winds Environmental Restoration, Inc.
dated December 16, 19998
27- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 15, 1999
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By:/s/ Michael O'Reilly
------------------------------------------
MICHAEL O'REILLY, Chairman and
Chief Executive Officer
By:/s/ Alan W. Schoenbart
------------------------------------------
ALAN W. SCHOENBART,
Chief Financial Officer
EXTENSION
REVOLVING CREDIT MASTER
PROMISSORY NOTE
$2,500,000.00 Princeton, New Jersey
as of January 19, 1999
FOR VALUE RECEIVED, the undersigned WINDSWEPT ENVIRONMENTAL GROUP, INC.,
TRADE-WINDS ENVIRONMENTAL RESTORATION, INC., NORTH ATLANTIC LABORATORIES, INC.
and NEW YORK TESTING LABORATORIES, INC. (individually and collectively
"Borrower") jointly and severally promise to pay to the order of BUSINESS
ALLIANCE CAPITAL CORPORATION (herein called "BACC") at 300 Alexander Park,
Princeton, New Jersey, 08543, or such other address as BACC may notify Borrower,
such sum up to Two Million Five Hundred Thousand and 00/100 ($2,500,000.00)
Dollars, together with interest as hereinafter provided, as may be outstanding
on Advances by BACC to Borrower under Paragraph 2.1 of the Loan and Security
Agreement dated June 1, 1998 between BACC and Borrower (said Agreement as
amended or modified from time to time the "Loan Agreement"). Capitalized terms
not otherwise defined herein have the meanings set forth in the Loan Agreement.
The Loan Agreement is incorporated herein as though fully set forth and Borrower
acknowledges its reading and execution. The principal amount due hereunder shall
be paid to BACC on December 1, 2000 or as may otherwise be provided for in the
Loan Agreement.
On the first day of each month hereafter, Borrower shall pay BACC accrued
interest, computed on the basis of a 360 day year, for the actual number of days
elapsed, on the daily unpaid balance of the Advances, at the per annum rate of
three (3%) percentage points above the Prime Rate, in effect from time to time.
If there is a change in the Prime Rate, the rate of interest on the Advances
shall be changed accordingly as of the date of the change in the Prime Rate,
without notice to Borrower.
To secure the payment of this Note and the Obligations, Borrower has
granted to BACC a continuing security interest in and lien on the Collateral. In
addition to all remedies provided by law upon default on payment of this Note,
or upon an Event of Default, BACC may, at its option:
(1) Declare this Note and the Obligations immediately due and payable;
(2) Collect interest on this Note at the default rate set forth in the
Loan Agreement from the date of such Event of Default, and if this Note is
referred to an attorney for collection, collect reasonable attorneys' fees;
and
(3) Exercise any and all remedies provided for in the Loan Agreement.
-1-
<PAGE>
This Note represents an extension of that certain Modified and Restated
Revolving Credit Master Promissory Note of Borrower to BACC in the principal sum
of $2,500,000.00 dated as of October 19, 1998 and is not intended to be novation
of said note or the loans evidenced thereby.
BORROWER WAIVES PRESENTMENT FOR PAYMENT, PROTEST AND NOTICE OF PROTEST FOR
NON-PAYMENT OF THIS NOTE AND TRIAL BY JURY IN ANY ACTION UNDER OR RELATING TO
THIS NOTE AND THE ADVANCES EVIDENCED HEREBY.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
----------------------------------
Name: Michael O' Reilly
Title: President
TRADE-WIND ENVIRONMENTAL
RESTORATION, INC.
By: /s/ Michael O'Reilly
----------------------------------
Name: Michael O' Reilly
Title: President
NORTH ATLANTIC LABORATORIES, INC.
By: /s/ Michael O'Reilly
----------------------------------
Name: Michael O' Reilly
Title: Vice President
NEW YORK TESTING LABORATORIES, INC.
By: /s/ Micael O'Reilly
----------------------------------
Name: Michael O' Reilly
Title: Vice PresPresident
-2-
as of February 1, 1999
Windswept Environmental Group, Inc.
Trade-Winds Environmental Restoration, Inc.
North Atlantic Laboratories, Inc.
New York Testing Laboratories, Inc.
100 Sweeneydale Avenue
Bay Shore, New York 11706
Re: Loan and Security Agreement dated as of June 1, 1998 as modified from time
to time (the "Loan Agreement")
Gentlemen:
This is to confirm our approval of your request for a temporary overadvance
under, and certain other modifications to the terms and conditions of, the
$2,500,000.00 revolving credit facility provided for in the Loan Agreement.
Accordingly we have agreed to the following modifications to the Loan Agreement:
A. The definition of Permitted Overadvance Amount is modified to read as
follows:
Permitted Overadvance Amount means from (a) February 1, 1999 through March
4, 1999 $325,000.00, (b) from March 5, 1999 through March 11, 1999
$275,000.00; (c) from March 12, 1999 through March 18, 1999 $225,000.00,
(d) from March 19, 1999 through March 25, 1999 $175,000.00, (e) from March
26, 1999 through April 1, 1999 $125,000.00; (f) from April 2, 1999 through
April 8, 1999 $75,000.00; (g) from April 9, 1990 through April 15, 1999
$25,000.00, and (h) from April 16 on $zero.
B. The definition of Eligible Accounts is hereby modified to add the
following sentence at the end of said definition:
Notwithstanding the foregoing provisions, Accounts owing from Friends of
Long Island Heritage will, through April 15, 1999, be considered Eligible
Accounts even though such Accounts remain outstanding for more than ninety
(90) days from the invoice date, provided such Accounts otherwise
constitute an Eligible Account.
C. Paragraphs 2.1(A), 2.3, 2.5(A) and 2.9 of the Loan Agreement are hereby
modified to read as follows:
2.1 Revolving Advances; Advance Limit. (A) Upon the request of Borrower,
made at any time or from time to time during the Term and so long as no
Event of Default has occurred and is continuing, BACC may, in its sole and
absolute discretion, make Advances in an amount up to eighty percent (80%)
of the aggregate outstanding amount of Eligible Accounts (the "Borrowing
Base") plus the Permitted Overadvance Amount; provided, however, that in no
event shall the aggregate amount of the outstanding Advances be greater
than, at any time, the amount of Two Million Five Hundred Thousand and
00/100 Dollars ($2,500,000.00) (the Advance Limit);
2.3 Overadvances. All Advances shall be added to and be deemed part of the
Obligations when made. If, at any time and for any reason, the aggregate
amount of the outstanding Advances under paragraph 2.1(A) hereof exceeds
the lesser of the Borrowing Base plus the Permitted Overadvance Amount or
the Advance Limit contained in Section 2.1(A) (an Overadvance) then
Borrower shall, upon demand by BACC, immediately pay to BACC, in cash, the
amount of such Overadvance. Without affecting Borrower's obligation to
immediately repay to BACC the amount of each Overadvance, Borrower shall
pay BACC a fee (the Overadvance Fee) in an amount equal to Three percent
(3%) per annum on the amount of the Advances under paragraph 2.1(A) hereof
in excess of the lesser of the Borrowing Base plus the Permitted
Overadvance Amount or the Advance Limit for each day any such Advance in
excess of the lesser of the Borrowing Base plus the Permitted Overadvance
Amount or the Advance Limit exists. All
1
<PAGE>
such fees shall be computed on the basis of a three hundred and sixty (360)
day year for the actual number of days elapsed.
2.5 Interest.
A. The aggregate outstanding balances of the Obligations shall accrue
interest (a) from February 1, 1999 at the per annum rate of eight
percentage points (8%) above the Prime Rate until such time as the
outstanding Advances under the revolving credit facility provided for in
paragraph 2.1(A) hereof are not in excess of the Borrowing Base and (b)
thereafter at the per annum rate of three percentage points (3%) above the
Prime Rate. The Obligations shall bear interest from and after written
notice by BACC to Borrower of the occurrence of an Event of Default, and
without constituting a waiver of any such Event of Default, at the per
annum rate of Eight percentage points (8%) above the Prime Rate. All
interest payable under the Loan Documents shall be computed on the basis of
a three hundred sixty (360) day year for the actual number of days elapsed
on the Daily Balance. Interest as provided for herein shall continue to
accrue until the Obligations are paid in full.
2.9 Servicing Fee. Borrower shall pay BACC a servicing fee in an amount
equal to one percent (1%) of the daily average outstanding balance of the
Advances during each month on or before the first (1st) day of each
calendar month in respect of BACC's services for the preceding calendar
month, during the Term, including each Renewal Term, or so long as the
Obligations are outstanding.
D. Paragraph 2.5 of the Loan Agreement is hereby modified to add a
subparagraph 2.5(d) as follows:
(d) Notwithstanding the foregoing, for purposes of this Agreement, it is
the intention of Borrower and BACC that "interest" shall mean, and be
limited to, any payment to BACC which compensates it for extending credit
to Borrower, for making available to Borrower a line of credit during the
term of this Agreement and for any default or breach by Borrower of a
condition upon which credit was extended. Borrower and BACC agree that, for
the sole purpose of calculating the "interest" paid by Borrower to BACC, it
is the intention of Borrower and BACC that interest shall mean and include,
and be expressly limited to, any interest accrued on the aggregate
outstanding balance of the Obligations during the term hereof pursuant to
Sections 2.5(A) and 2.5(B); and any Overadvance Fee, Origination or
facility Fee, and late fees charged to Borrower during the term hereof.
Borrower and BACC further agree that it is their intention that the
following fees shall not constitute "interest": any Servicing Fee, any
attorney fees incurred by BACC, any premiums or commissions attributable to
insurance guaranteeing repayment, finders' fees, credit report fees,
appraisal fees or fees for document preparation or notarization. To the
extent, however, that New Jersey law excludes from the calculation of
"interest" any fees defined herein as interest, or includes as interest any
fees or other sums which are intended not to constitute interest New Jersey
law shall supersede and prevail and all such interest shall be subject to
paragraph 2.5(C) above.
E. Article 6 of the Loan Agreement is hereby modified to add paragraph 6.16
as follows:
6.16 Year 2000 Compatibility. Borrower agrees to take such actions as are
necessary to assure that it's computer based hardware and software will
operate prior to, on and after January 1, 2000 and will accurately process
data including dates on and after January 1, 2000 and are otherwise year
2000 compatible. Borrower will, from time to time, at the request of BACC,
furnish to BACC evidence of Borrowers compliance with the foregoing.
In consideration of our entering into this letter modification agreement,
you shall (a) pay to us, contemporaneous with you acceptance hereof, a facility
fee of $25,000.00 and (b) furnish to us, at your expense, an updated appraisal
of you machinery and equipment by an appraiser satisfactory to BACC.
2
<PAGE>
Our approval shall not constitute a waiver of any Events of Default, if any
so exist, or any future violation of any provisions of the Loan Agreement or any
other Loan Documents. By your execution hereof Borrower agrees to pay all costs
and expenses, including reasonable attorneys fees and disbursements, incurred by
BACC in connection with the preparation of this letter agreement and the other
documents created in connection herewith. Capitalized terms not defined herein
but defined in the Loan Agreement shall have the same meaning ascribed to such
terms in the Loan Agreement. Your execution shall also act as your
representation that the execution of this letter agreement has been authorized
by all required corporate action, that this letter agreement constitutes the
valid and binding obligation of the Borrower, is enforceable in accordance with
its terms and that no material adverse change in the financial condition of the
Borrower has occurred and the Borrower's reaffirmation of its grant to BACC of a
lien on the Collateral.
Except as herein set forth, the Loan Agreement and all other Loan Documents
shall remain in full force and effect. Our agreement as aforesaid is subject to
your written agreement with the terms hereof by signing and returning a copy
hereof where so indicated below and by the written consent of guarantor where so
indicated below.
BUSINESS ALLIANCE CAPITAL CORP.
By: /s/ William Siebold
------------------------------
Name: William Siebold
Title: Senior Vice President
Agreed to:
Windswept Environmental Group, Inc.
By: /s/ Michael O'Reilly
-------------------------------------
Name: Michael O' Reilly
Title: President
Trade-Winds Environmental Restoration, Inc.
By: /s/ Michael O'Reilly
-------------------------------------
Name: Michael O' Reilly
Title: President
North Atlantic Laboratories, Inc.
By: /s/ Michael O'Reilly
-------------------------------------
Name: Michael O' Reilly
Title: Vice President
New York Testing Laboratories, Inc.
By: /s/ Michael O'Reilly
-------------------------------------
Name: Michael O'Reilly
Title: Vice President
3
<PAGE>
The undersigned, guarantor of the Liabilities of the Borrower to BACC,
hereby consents to the above letter and agrees that same shall not affect his
Individual Guaranty dated as of June 1, 1998, which guaranty remains in full
force and effect.
/s/ Michael O'Reilly
---------------------------
Michael O'Reilly
EQUIPMENT LEASE
AGREEMENT, dated the 16th day of December, 1998, by and between MICHAEL
O'REILLY, residing at 35 Tuthill Point Road, East Moriches, New York 1194,
hereinafter referred to as "Lessor", and TRADE-WINDS ENVIRONMENTAL RESTORATION,
INC., a domestic corporation, with offices at 100 Sweeneydale Avenue, Bay Shore,
New York 11706, hereinafter referred to as "Lessee".
WITNESSETH:
WHEREAS, the Lessor is the owner of a 1985 42' custom Topaz powerboat named
"DORADO" (Diesel-DL704502) ID #TPP80074A686; and
WHEREAS, the Lessee is desirous of leasing the above described boat and the
equipment attached thereto and more specifically described on Schedule "A"
annexed to this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Lease. Lessee hereby leases from Lessor, and Lessor leases to Lessee,
the personal property described (herein called "equipment").
2. Rent. For the next twenty-four (24) months, the Lessee agrees to pay
rent subject to the schedule set forth below: the sum of TEN THOUSAND
($10,000.00) DOLLARS per month for the first six (6) months commencing December
16, 1998 and the sum of FIVE THOUSAND ($5,000.00) DOLLARS per month for the next
eighteen (18) months commencing June 16, 1999. The Lessee has the option to
extend this lease for an additional one (1) year at a monthly
<PAGE>
rental of FIVE THOUSAND ($5,000.00) DOLLARS. In order to so exercise the option,
the Lessee must notify the Lessor by November 1, 2000. The first rent payment is
due when this lease is signed by the Lessor. All rent shall be paid to Lessor at
his address set forth above, or as otherwise directed by Lessor in writing.
3. Security Deposit. The Lessor may, but shall not be obliged to, apply the
security deposit in the sum of THIRTY THOUSAND ($30,000.00) to cure any default
of Lessee hereunder, in which event the Lessee shall promptly restore the
security deposit to the full amount specified above. Upon termination of this
lease and all renewals hereof, if Lessee has fulfilled all the terms and
conditions hereof, the Lessor shall return to the Lessee any remaining balance
of the security deposit actually made by Lessee.
4. Use. The Lessee shall use the equipment in a careful manner and shall
comply with all laws relating to its possession, use or maintenance.
5. Labels. If Lessor supplies the Lessee with labels stating that the
equipment is owned by the Lessor, Lessee shall affix and keep the same upon a
prominent place on each item of equipment.
6. Repairs. The Lessee, at its expense, shall keep the equipment in good
repair and furnish all parts, mechanisms and devices required therefor.
7. Alternations. The Lessee shall not make any
- 2 -
<PAGE>
alterations, additions or improvements to the equipment without the Lessor's
prior written consent. All additions and improvements made to the equipment
shall belong to Lessor.
8. Surrender. Upon the expiration or earlier termination of this lease, the
Lessee, at its expense, shall return the equipment in good repair, ordinary wear
and tear resulting from proper use thereof alone excepted, by delivering it to
such place as Lessor may specify.
9. Loss and Damage. The Lessee shall bear the entire risk of loss, theft,
damage or destruction of the equipment from any cause whatsoever, and no loss,
theft, damage or destruction of the equipment shall relieve the Lessee of the
obligation to pay rent or of any other obligation under this lease.
In the event of damage to any item of equipment, the Lessee shall
immediately place the same in good repair. If Lessor determines that any item of
equipment is lost, stolen, destroyed or damaged beyond repair, the Lessee at the
option of the Lessor shall:
(a) replace the same with like equipment in good repair, or
(b) pay Lessor in cash all of the following: (i) all amounts then owed
by the Lessee to the Lessor under this lease; (ii) an amount equal to ten
percent (10%) of the actual cost of said item, and (iii) the unpaid balance
of the total rent for the
- 3 -
<PAGE>
initial term of this lease attributable to said item. Upon Lessor's receipt
of such payment, the Lessee shall be entitled to whatever interest the
Lessor may have in said item, in its then condition and location, without
warranty express or implied. The parties hereto agree that the sum of the
amounts numbered (ii) and (iii) will equal the fair value of said item on
the date of such loss, theft, damage or destruction and the remaining rent
payment thereunder shall be reduced by such amount as is paid under item
(iii) above prorated over the remaining term hereof.
10. Insurance; Liens. Taxes. The Lessee shall provide and maintain
insurance against loss, theft, damage or destruction of the equipment in an
amount not less than $150,000.00 and a general liability policy which shall
provide for $l,000,000.00 single limit coverage, with any loss payable to
Lessor. Each policy shall expressly provide that said insurance, as to Lessor
and its assigns, shall not be invalidated by any act, omission or neglect of
Lessee. The Lessor may apply the proceeds of said insurance to replace or repair
the equipment and/or to satisfy the Lessee's obligations hereunder. At Lessor's
request, the Lessee shall furnish proof of said insurance.
The Lessee shall keep the equipment free and clear of all levies, liens and
encumbrances. The Lessee shall pay all charges and taxes (local, state and
federal) which may now or hereafter be imposed upon the ownership, leasing,
rental, sale, purchase,
- 4 -
<PAGE>
possession or use of the equipment, excluding however, all taxes on or measured
by the Lessor's income.
If the Lessee fails to procure or maintain said insurance or to pay said
charges and taxes, the Lessor shall have the right but shall not be obligated,
to effect such insurance, or pay said charges and taxes. In that event, the
Lessee shall repay to the Lessor the cost thereof with the next payment of rent.
11. Indemnity. The Lessee shall indemnify the Lessor against, and hold the
Lessor harmless from, any and all claims, actions, proceedings, expenses,
damages and liabilities, including attorney's fee, arising in connection with
the equipment, including, without limitation, its manufacture, selection,
purchase, delivery, possession, use, operation or return and the recovery of
claims under insurance policies thereon.
12. Assignment. Without Lessor's prior written consent, the Lessee shall
not assign, transfer, pledge, hypothecate or otherwise dispose of this lease or
any interest therein.
The Lessor may assign this lease and/or mortgage the equipment, in whole or
in part, without notice to the Lessee; and its assignee or mortgagee may
reassign this lease and/or such mortgager without notice to the Lessee. Each
such assignee and/or mortgagee shall have all the rights but none of the
obligations of the Lessor under this lease. The Lessee shall recognize each such
assignment and/or mortgage and shall not assert against the
- 5 -
<PAGE>
assignee and/or mortgagee any defense, counterclaim, or set-off that the Lessee
may have against the Lessor. Subject to the foregoing, this lease insures to the
benefit of and is binding upon the heirs, legatees, personal representatives,
survivors and assigns of the parties hereto.
13. Charter or Other uses of Equipment. The Lessee is hereby authorized to
charter the subject equipment of this lease and to retain all of the proceeds of
said charter or charters so long as (i) Lessee is in compliance with all of the
terms and conditions of this lease; and (ii) that liability insurance with a
minimum coverage of $1,000,000.00 is purchased naming Lessor.
14. Late Charges and Interest. Should the Lessee fail to pay any part of
the rent herein reserved or any other sum required to be paid to the Lessor by
the Lessee, within ten (10) days after the due date thereof, the Lessee shall
pay unto the Lessor a late charge of five cents ($.05) for each One Dollar
($1.00) of said monthly rent or other sum which shall be delinquent.
15. Default. If the Lessee fails to pay any rent or other amount herein
provided within ten (10) days after the same is due and payable, or if the
Lessee fails to perform any other provision hereof within ten (10) days after
the Lessor shall have demanded in writing performance thereof, or if any
proceeding in bankruptcy, receivership or insolvency shall be commenced by or
- 6 -
<PAGE>
against the Lessee or its property, or if the Lessee makes any assignment for
the benefit of its creditors, the Lessor shall have the right, but shall not be
obligated, to exercise any one or more of the following remedies: (a) to sue for
and recover all rents and other amounts then due or thereafter accruing under
this lease; (b) to take possession of any or all of the equipment, wherever it
may be located, without demand or notice, without any court order or other
process of law, and without incurring any liability to the Lessee, for any
damages occasioned by such taking of possession; (c) to sell any or all of the
equipment at public or private sale for cash or on credit and to recover from
the Lessee all costs of taking possession, storing, repairing and selling the
equipment, an amount equal to ten percent (10%) of the actual cost to the lessor
of the equipment sold, and the unpaid balance of the total rent for the initial
term of this lease attributable to the equipment sold, less the net proceeds of
such sale; (d) to terminate this lease as to any or all items of equipment; (e)
in the event the Lessor elects to terminate this lease as to any or all items of
equipment, to recover from the Lessee as to each item subject to said
termination the worth at the time of such termination of the excess, if any, of
the amount of rent reserved herein for said item for the balance of the total
hereof over the then reasonable rental value of said item for the same period of
time; (f) to pursue any other remedy now or hereafter existing at
- 7 -
<PAGE>
law or in equity.
Notwithstanding any such action that the Lessor may take, including taking
possession of any or all of the equipment, the lessee shall remain liable for
the full performance of all its obligations hereunder, provided, however, that
if the lessor in writing terminates this lease, as to any item of equipment, the
Lessee shall not be liable for rent in respect of such item accruing after the
date of such termination.
In addition to the foregoing, the Lessee shall pay Lessor all costs and
expenses, including reasonable attorneys' fees, incurred by the Lessor in
exercising any of its rights or remedies hereunder.
16. Notices. Any written notice or demand under this agreement may be given
to a party by mailing it to the party at the address set forth above, or at such
address as the party may provide in writing from time to time. Notice of demand
so mailed shall be effective when deposited in the United States mail, duly
addressed and with postage prepaid.
17. Multiple Lessees. If more than one Lessee is named in this lease, the
liability of each shall be joint and several.
18. Choice of Law. The lease shall be governed by and construed in
accordance with the laws of the State of New York.
19. Ownership. The equipment is, and shall at all times remain, the
property of the Lessor; and the Lessee shall have no
- 8 -
<PAGE>
right, title or interest therein or thereto except as expressly set forth in
this lease.
20. Entire Agreement; Waiver. This instrument constitutes the entire
agreement between the Lessor and the Lessee. Waiver by the Lessor or any
provision hereof in one instance shall not constitute a waiver as to any other
instance.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the day and year first above written.
/S/ MICHAEL O'REILLY
-----------------------------------
MICHAEL O'REILLY
TRADE-WINDS ENVIRONMENTAL
RESTORATION
By: /s/ Alan W. Schoenbart
-----------------------------------
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 100,836
<SECURITIES> 0
<RECEIVABLES> 3,002,789
<ALLOWANCES> 161,870
<INVENTORY> 147,245
<CURRENT-ASSETS> 3,642,991
<PP&E> 4,996,171
<DEPRECIATION> 2,589,376
<TOTAL-ASSETS> 6,428,174
<CURRENT-LIABILITIES> 6,541,529
<BONDS> 1,259,333
1,300,000
0
<COMMON> 1,352
<OTHER-SE> (2,674,040)
<TOTAL-LIABILITY-AND-EQUITY> 6,428,174
<SALES> 11,018,496
<TOTAL-REVENUES> 11,018,496
<CGS> 8,421,988
<TOTAL-COSTS> 8,421,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 679,316
<INCOME-PRETAX> (491,737)
<INCOME-TAX> (110,000)
<INCOME-CONTINUING> (381,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381,737)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
