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, 2000
( ) 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)
(631) 434-1300
(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 38,456,254
(Title of Each Class) (Outstanding at March 10, 2000)
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,
2000 April 30,
(Unaudited) 1999
----------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 753,285 $ 46,336
Accounts receivable, net of allowance for doubtful
accounts of $210,000 and $100,000, respectively 2,458,026 2,249,198
Due from officer - 100,000
Inventories 179,298 129,620
Costs and estimated earnings in excess of billings
on uncompleted contracts 85,507 157,000
Prepaid and other current assets 304,417 379,970
------------- ------------
Total current assets 3,780,533 3,062,124
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$3,465,701 and $2,798,662, respectively 1,887,715 2,333,530
OTHER ASSETS
Goodwill, net of accumulated amortization of $53,020
and $45,994, respectively 69,006 76,032
Notes receivable, net of current portion of $57,141 and
$105,764, respectively 3,557 110,912
Other assets 166,097 162,524
------------- ------------
TOTAL ASSETS $ 5,906,908 $ 5,745,122
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,195,971 $ 3,558,041
Notes payable - other 216,775 -
Revolving credit note payable - 1,200,596
Billings in excess of costs and estimated earnings on
uncompleted contracts 103,704 226,000
Payroll taxes payable 83,772 107,570
Sales taxes payable 266,642 481,826
Current portion of long-term debt 269,034 1,033,502
Obligations of unconsolidated subsidiary, net 210,007 196,112
------------- ------------
Total current liabilities 4,345,905 6,803,647
OTHER LIABILITIES
Convertible notes 2,680,000 790,000
Long-term debt, net of current portion 83,547 198,732
------------- ------------
Total liabilities 7,109,452 7,792,379
------------- ------------
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' DEFICIT
Preferred Stock, 10,000,000 shares authorized - 1,300,000 Series A;
50,000 Series B; 8,650,000 not designated
Series B, par value $.01 issued and outstanding 9,346 and -0- shares,
respectively 93 -
Common Stock, $.0001 par value,
50,000,000 shares authorized; 38,456,254 and 14,135,073 shares
issued and outstanding, respectively 3,846 1,414
Additional paid-in capital 31,962,530 28,948,201
Accumulated deficit (34,469,013) (32,296,872)
------------- -----------
Total stockholders' deficit (2,502,544) (3,347,257)
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,906,908 $ 5,745,122
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(Unaudited)
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 2,493,450 $ 3,058,186
Cost of revenues 2,164,497 2,894,453
------------ ------------
Gross margin 328,953 163,733
Selling, general and administrative expenses 743,216 733,411
------------ ------------
Loss from operations (414,263) (569,678)
------------ ------------
Other income (expense):
Interest expense (114,887) (245,265)
Other, net 33,829 -
----------- -----------
Total other expense (81,058) (245,265)
----------- -----------
Loss before income tax (495,321) (814,943)
Income tax expense - 165,000
----------- -----------
Net loss (495,321) (979,943)
Dividends on Series A Convertible Preferred Stock 19,500 19,500
----------- -----------
Net loss attributable to common shareholders $ (514,821) $ (999,443)
=========== ===========
Basic and diluted net loss per common share $ (.01) $ (.07)
=========== ===========
Weighted average number of common shares outstanding:
Basic and diluted 38,453,993 13,842,010
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
(Unaudited)
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 8,461,373 $ 11,018,496
Cost of revenues 6,832,985 8,421,988
------------ ------------
Gross margin 1,628,388 2,596,508
Selling, general and administrative expenses 3,083,128 2,436,761
------------ ------------
(Loss) income from operations (1,454,740) 159,747
------------ ------------
Other income (expense):
Interest expense (662,101) (679,316)
Other, net 44,700 27,832
------------ ------------
Total other expense (617,401) (651,484)
Loss before extraordinary item and
income tax benefit (2,072,141) (491,737)
Income tax benefit - 110,000
------------ ------------
Net loss before extraordinary item (2,072,141) (381,737)
Extraordinary item - loss on extinguishment of debt 100,000 -
------------ ------------
Net loss (2,172,141) (381,737)
Dividends on Series A Convertible Preferred Stock 58,500 58,500
------------ ------------
Net loss attributable to common shareholders $ (2,230,641) $ (440,237)
============ ============
Basic net loss per common share
Before extraordinary item $ (.09) $ (.03)
Extraordinary item (.00) (.00)
------------ ------------
Basic net loss per share $ (.09) $ (.03)
============ ============
Diluted net loss per common share $ (.09) $ (.03)
============ ============
Weighted average number of common shares outstanding:
Basic and diluted 23,190,321 12,779,318
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
Number of Par Number of Par Paid-in Accumulated
Shares Value Shares Value Capital Deficit Total
--------- ----- --------- ----- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1999 14,135,073 $ 1,414 $28,948,201 $(32,296,872) $(3,347,257)
Proceeds from private placements
of common and preferred stock 23,167,017 2,317 9,346 93 2,639,940 2,642,350
Exercise of stock options 20,000 2 7,498 7,500
Issuance of common stock for services 863,450 86 201,723 201,809
Issuance of common stock for employee
and director compensation 25,000 3 5,076 5,079
Compensation related to officer options 138,080 138,080
Issuance of common stock for accrued
preferred stock dividends and related
interest 225,714 22 70,514 70,536
Note conversion 20,000 2 9,998 10,000
Dividends on preferred stock - - (58,500) (58,500)
Net loss - - - (2,172,141) (2,172,141)
---------- ------- ----- ----- ----------- ------------ -----------
Balance at January 31, 2000 38,456,254 $ 3,846 9,346 $ 93 $31,962,530 $(34,469,013) $(2,502,544)
========== ======= ===== ===== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(Unaudited)
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (2,172,141) $ (381,737)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 696,949 755,568
Provision (credit) for doubtful accounts 110,000 (3,948)
Issuance of common stock and stock options for director compensation 5,078 -
Compensation related to officer options 138,080 -
Issuance of common stock and stock options for services 201,809 138,274
Issuance of common stock for dividends and
related interest on redeemable preferred stock 70,536 -
Gain on disposal of equipment - (15,332)
Deferred income taxes - (110,000)
Changes in operating assets and liabilities:
Accounts receivable (318,828) (319,454)
Due from officer 100,000 (100,000)
Inventories (49,678) 14,021
Costs and estimated earnings in excess of billings on uncompleted contracts 71,493 37,557
Prepaid and other current assets 75,553 205,304
Accounts payable and accrued expenses (362,070) 330,347
Payroll and sales taxes payable (238,982) (422,335)
Obligations of unconsolidated subsidiary 13,895 -
Billings in excess of costs and estimated earnings on uncompleted contracts (122,296) (45,779)
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,780,602) 82,486
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 107,355 42,651
Other assets (26,457) 8,103
Proceeds from insurance settlement - 20,332
Purchases of property and equipment (221,224) (293,346)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (140,326) (222,260)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt and factor advances (979,653) (2,374,317)
(Payments) proceeds of revolving bank line, net (1,200,596) 1,875,512
Proceeds from equipment term loan - 595,000
Proceeds from private placements 2,642,351 -
Proceeds from issuance of short term notes 225,829 -
Payments on short term notes (9,054) -
Proceeds from notes due affiliate 2,000,000 -
Dividends paid on redeemable preferred stock (58,500) (19,500)
Proceeds from exercise of stock options 7,500 -
Proceeds from issuance of Common Stock - 130,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,627,877 206,695
----------- -----------
NET INCREASE IN CASH 706,949 66,921
CASH - BEGINNING OF PERIOD 46,336 33,915
----------- -----------
CASH - END OF PERIOD $ 753,285 $ 100,836
=========== ===========
Cash paid during the period for:
Interest $ 767,527 $ 594,755
=========== ===========
Taxes $ - $ 2,750
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000
(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 financial statement presentation. 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, 1999.
2. 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,
2000 the Company had a stockholders' deficit of $2,502,544 and an
accumulated deficit of $34,469,013. The Company has financed its
operations to date primarily through issuances of debt and equity
securities. At January 31, 2000 the Company had $753,285 in cash, and a
working capital deficit of $565,372. In addition, as of January 31,
2000, the Company was in arrears with respect to certain payroll and
sales tax obligations of approximately $84,000 and $267,000,
respectively. 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. These financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
On October 29, 1999 the Company consummated an equity and debt financing
transaction with Spotless Plastics (USA), Inc. (see Note 6 ) that
significantly improved the Company's liquidity and cash position.
Management believes the Company will require positive cash flow from
operations to meet its working capital needs over the next twelve months.
In the event that positive cash flow from operations is not generated, the
Company may be required to seek additional financing to meet its working
capital needs. The Company currently has no credit facility. Revenue growth
is expected in new and existing service areas. 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 project costs, including 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
performance bonds which are generally not released until completion of the
project. 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 achieving
positive cash flow from operations or obtaining additional financing. 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
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.
3. INCOME TAXES
No provision or (benefit) for income taxes was recorded for the three and
nine month periods ended January 31, 2000 due to the net losses. Any
deferred tax assets which may have arisen during the period would have
7
<PAGE>
a full valuation allowance provided against such asset.
4. EQUITY TRANSACTIONS
Stock Options
On June 28, 1999 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 options to the Chief Executive Officer. All of these
options are exercisable immediately at an exercise price of $.1875, and
expire June 27, 2004.
On July 20, 1999 the Company granted options to purchase 171,407 shares of
Common Stock to employees. All of these options are exercisable two years
after date of grant at an exercise price of $.3438, and expire July 19,
2004.
On August 18, 1999 and August 27, 1999 the Company granted options to
purchase 10,000 and 50,000 shares of Common Stock at exercise prices of
$.3906 and $.3125, respectively, to employees. These options are
exercisable two years and one year after date of grant, respectively, and
expire five years after date of grant.
On October 29,1999 options to purchase 2,000,000 shares of Common Stock,
previously granted, vested. The Company recorded compensation expense in
the amount of $138,080. Additionally, options to purchase 2,674,714 and
2,811,595 shares of Common Stock were granted to Michael O'Reilly (see Note
6).
Issuances of Common and Preferred Stock and Warrants
During the six months ended October 31, 1999 the Company issued 882,334
shares of Common Stock and warrants to purchase 200,000 additional shares
of the Company's Common Stock exercisable at $.20 per share in private
placement transactions for proceeds of $142,350. The warrants expire on
July 22, 2004.
On July 29, 1999 a former employee exercised options to purchase 7,000
common shares at an exercise price of $.375 per share.
On September 10, 1999 the Company issued 223,988 shares of common stock in
payment of dividends and accumulated interest aggregating $69,996 on its
Series A redeemable convertible preferred stock.
On October 29, 1999 the Company issued 9,346 shares of Series B preferred
stock and 22,284,683 shares of Common Stock in a transaction with Spotless
Plastics (USA), Inc. and its subsidiary for consideration of $2,500,000
(see Note 6).
On November 16, 1999 a former employee exercised options to purchase 13,000
common shares at an exercise price of $.375 per share.
Issuance of Convertible Debt
On October 29,1999 the Company borrowed $2,000,000 from Spotless Plastics
(USA), Inc. and issued a secured promissory note convertible into
25,304,352 shares of Common Stock or 25,305 shares of Series B Preferred
(see Note 6).
8
<PAGE>
5. 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. No charges have been filed against the Company or any other
current member of management as a result of the Eastern District
investigation. On November 22, 1999 the Securities and Exchange Commission
accepted the Company's settlement offer in its "Order Instituting Public
Administrative Proceedings, Making Findings, Imposing Remedial Sanctions
and Issuing Cease-and-Desist Order." Under the terms of the order the
Company neither admitted nor denied any allegations and did not incur any
monetary fines. The order requires the Company to develop and institute
certain policies, procedures and manuals that will improve its corporate
governance, including the adoption of an audit committee charter, a formal
conflict of interest policy and a formal employee handbook. The order also
requires the Company to obtain a secure off site storage facility to store
its backup data files and system software and to make certain reporting
disclosures. The Company has implemented such policies, procedures and
manuals and made such disclosures. 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 is in negotiations to settle such claims for an
amount not to exceed $25,000.
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
litigation and claims cannot be predicted with certainty, management
believes that the final outcome of such matters will not have a materially
adverse effect on the consolidated financial position, results of
operations and cash flows of the Company.
Other Proceedings
In January 1996 Laboratory Testing Services, Inc. ("LTS"), a wholly-owned
subsidiary of the Company, 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.
6. SALE OF CONTROLLING INTEREST AND REFINANCING
On October 26, 1999 the Board of Directors of Windswept Environmental
Group, Inc. ("the "Company") created a class of 50,000 shares of preferred
stock, par value $.01 per share, designated as the Series B Convertible
Preferred Stock (the "Series B Preferred"). Each share of Series B
Preferred has a liquidation preference of $79.04, is initially convertible
into 1,000 shares of Common Stock, par value $.0001 per share, of the
Company (the "Common Stock") (subject to adjustment) and is entitled to
cast 1,000 votes, together with the Common Stock and the Series A Preferred
Stock, par value $.01 per share, on any matters subject to a vote of the
holders of the Common Stock.
On October 29, 1999 the Company entered into a subscription agreement with
Spotless Plastics (USA), Inc., a Delaware corporation ("Spotless" or
"Affiliate"), pursuant to which the Company sold to Windswept Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of
Spotless ("Acquisition Corp."), 22,284,683 shares of Common Stock, and
9,346 shares of Series B Preferred, for an aggregate
9
<PAGE>
subscription price of $2,500,000 (the "Purchase Price") or $.07904 per
share of Common Stock and $79.04 per share of Series B Preferred. At
October 31, 1999 Acquisition Corp's Common Stock holdings equate to 58%
of the Company's issued and outstanding common shares. If Acquisition
Corp. were to convert the shares of Series B Preferred stock to Common
Stock, it would hold 66.2% of the Company's issued and outstanding common
shares.
In addition, the Company and Trade-Winds Environmental Restoration, Inc.,
North Atlantic Laboratories, Inc. and New York Testing Laboratories, Inc.,
each of which is a wholly-owned subsidiary of the Company, as joint and
several obligors (collectively, the "Obligors"), borrowed $2,000,000 from
Spotless (the "Loan") pursuant to a secured convertible promissory note
dated October 29, 1999 (the "Note") which bears interest at a rate equal to
LIBOR plus one percent (1%). The Note matures on October 29, 2004, and is
convertible into either 25,304,352 shares of Common Stock or 25,305 shares
of Series B Preferred shares at Spotless' option. Additionally Spotless has
the right to defer the maturity date of the note for one year. At October
31, 1999 the common shares issuable upon conversion of the Note would
represent 39.7% of the Company's issued and outstanding common shares. In
connection with the note, each of the Obligors granted Spotless a security
interest in substantially all of their respective assets pursuant to a
Security Agreement dated October 29, 1999.
Upon the occurrence of the change in control of the Company described
above, options to purchase 2,000,000 shares of Common Stock exercisable at
$.01 per share granted to Michael O'Reilly on September 12, 1996 vested and
became exercisable over a five-year period. The Company recorded
compensation expense in the amount of $138,080 due to this change in
control.
The Board of Directors has approved an amendment to the Company's
certificate of incorporation increasing the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 (the "Amendment"). The
Amendment is expected to become effective promptly after the Company's
compliance with Section 14(c) of the Exchange Act and the rules and
regulations thereunder, approval by the stockholders of the Company and
filing with the Secretary of State of the State of Delaware.
In addition, on October 29, 1999, the Company entered into an Employment
Agreement with Michael O'Reilly. This agreement is for a term of five
years, calls for a base salary of $260,000 per year and a bonus equal to
2.5% of the Company's pre-tax income (as that term is defined in the
Employment Agreement). Upon the termination of Mr. O'Reilly's employment by
the Company (other than termination for cause, death or disability or his
resignation without good reason, as defined in the Employment Agreement),
Mr. O'Reilly will be entitled to sell, in a single transaction, any or all
of shares of Common Stock held by him as of October 29, 1999 and all shares
of Common Stock underlying options to purchase shares of Common Stock of
the Company held by him as of October 29, 1999 (collectively, the "O'Reilly
Shares"), to the extent vested and exercisable, back to the Company (or
pursuant to the Letter Agreement [as defined below], to Spotless to the
extent that the Company's capital would be impaired by such a repurchase)
at a mutually agreeable price. If the parties are not able to agree upon a
purchase price, then the purchase price will be determined based upon a
procedure using the appraised value of the Company at the time such
obligation to purchase arises. Similarly, pursuant to a letter agreement,
dated as of October 29, 1999, by and between Michael O'Reilly and Spotless
(the "Letter Agreement"), Michael O'Reilly has the right, upon receipt of
notice that Spotless and any of its affiliates has acquired a beneficial
ownership of more than seventy-five percent (75%) of the outstanding shares
of Common Stock (on a fully diluted basis), to require Spotless to
purchase, in a single transaction, the O'Reilly Shares. The purchase price
applicable to any such purchase shall be at a price mutually agreed upon.
If the parties are not able to agree upon a purchase price, then the
purchase price will be determined based upon a procedure using the
appraised value of the Company at the time such obligation to purchase
arises. As a condition precedent to requiring the Company or Spotless, as
the case may be, to repurchase the O'Reilly Shares, Michael O'Reilly must
forfeit the Conversion Date Option (as defined below), except to the extent
that the Conversion Date Option is at that time vested and exercisable.
The Company has granted to Mr. O'Reilly an option to purchase 2,674,714
shares of Common Stock, which vests and becomes exercisable, to the extent
of one third of the option grant, on each of the first, second and third
anniversaries of October 29, 1999. The Company has also granted to Mr.
O'Reilly an option to purchase
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<PAGE>
2,811,595 shares of Common Stock (the "Conversion Date Option") which
are exercisable on or after October 29, 2006; provided, that the
exercisability of such option will be accelerated if and to the extent that
Spotless converts or exchanges the Note. These options are exerciseable
at $.07904 per share of Common Stock, representing the fair market value of
the stock on the date of grant.
On October 29, 1999 the Company used some of the proceeds from the equity
and debt financing with Spotless to repay the revolving credit note and
term loan with Business Alliance Capital Corporation ("BACC"). The related
security agreement with BACC was simultaneously terminated. The prepayment
penalty of $100,000 paid to BACC is presented as an extraordinary item in
the Consolidated Statements of Operations.
In September 1999, the Company borrowed $100,000 from Spotless Plastics
(USA), Inc. The borrowings bore interest at a rate of 6% and were repaid
with accrued interest in November 1999.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the three and nine month periods ended January 31,
2000 and 1999, 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 improve it's gross margin and limit
or reduce 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, 1999. 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 before extraordinary item for the three and nine
month periods ended January 31, 2000 was ($495,321) and ($0.01) and ($2,072,141)
and ($.09), respectively, compared to a net loss and loss per share before
extraordinary item for the three and nine month periods ended January 31, 1999
of ($979,943) and ( $.07) and ($381,737) and ($.03), respectively. Extraordinary
item and extraordinary item per share for the nine month period ended January
31, 2000 was a loss of $100,000and ($.00).
Three Months Ended January 31, 2000 and 1999
Revenues for the quarter ended January 31, 2000 decreased by $564,736, or 18.5%,
to $2,493,450 from $3,058,186 for the quarter ended January 31. 1999. The
decrease in revenues for the quarter ended January 31, 2000 was primarily
attributable to the Company's Trade-Winds Environmental Restoration Inc.
subsidiary, where revenues decreased in construction and renovation by
approximately $436,000 and revenues decreased in fireproofing by approximately
$131,000. Such decline in revenues is principally attributable to limited
working capital resources necessary to adequately support an increase in the
volume or scope of contracts the Company was able to participate in during the
quarter, and the inability of the Company to focus personnel on the development
of revenue caused by the demand on key Company personnel's time needed to
complete the negotiation of equity and debt investment with Spotless Plastics
(USA), Inc. during the previous quarter.
Gross margins for the three months ended January 31, 2000 increased to 13.2%
from 5.4% for the three months ended January 31, 1999. Substantially all of the
increase in gross margins is attributable to lower material costs associated
with the lower construction and renovation revenue, as well as the mix of labor
costs for services.
Selling, general and administrative expenses for the quarter ended January 31,
2000 increased by approximately $10,000 or 1.4%. Selling, general and
administrative expenses as a percentage of sales increased in the quarter ended
January 31, 2000 to 29.8% from 24% for the comparable prior year period
primarily as a result of lower revenues for the quarter ended January 31, 2000.
12
<PAGE>
Interest expense for the three months ended January 31, 2000 decreased by
$130,378, or 53.2%, to $114,887 from $245,265 for the three months ended January
31, 1999. The decrease in interest expense is attributable to lower average loan
balances and lower interest rates from the Company's principal lender compared
to the prior year's comparable quarter. The Company anticipates maintaining the
significantly lower interest costs in future periods as a result of the equity
and debt transaction with Spotless Plastics (USA), Inc.
Nine Months Ended January 31, 2000 and 1999
Revenues for the first nine months of fiscal year 2000 decreased by $2,537,123,
or 23.2%, to $8,461,373 from $11,018,496 for the first nine months of fiscal
year 1999. The decrease in revenues for the nine months ended January 31, 2000
was primarily attributable to the Company's Trade-Winds Environmental
Restoration Inc. subsidiary, where revenues decreased in construction and
renovation by approximately $1,670,000. During this period revenue from asbestos
and lead abatement declined by approximately $1,889,000, which was partially
offset by increases in emergency response and other services. The Company's cash
flow difficulties and interest cost considerations, prior to the transaction
with Spotless Plastics (USA), Inc., limited its ability to fund additional
construction and abatement projects. Additionally, the revenues for the
Company's North Atlantic Laboratory subsidiary decreased by approximately
$643,000 due to a loss of key personnel and the non-renewal of a major contract.
Gross margins for the nine months ended January 31, 2000 decreased to 19.2% from
23.6% for the nine months ended January 31, 1999. Approximately 2% of the
decrease in gross margins is attributable to disproportionately higher labor
costs during the nine months ended January 31, 2000 resulting from the change in
the composition of the contracts performed during the period. Labor costs vary
with the mix of services provided. The decline in gross margins is also
attributable to certain indirect costs remaining constant despite lower
revenues.
Selling, general and administrative expenses for the nine months ended January
31, 200 increased by $646,367, or 26.5%, to $3,083,128 from $2,436,761 for the
nine months ended January 31, 1999. The increase was primarily attributable to
the following items: bad debt expense of $110,000, a provision for litigated and
disputed items of $160,000, accounting fees of $67,000, and state and local
taxes, penalties and interest of approximately $230,000, legal and consulting
fees related to the equity and debt financing with Spotless Plastics (USA), Inc.
of $182,381, the compensatory effect of the vesting of options previously
granted to Mr. Michael O'Reilly of $138,080 and compensation authorized by the
Board of Directors to Mr. O'Reilly for his role as Chairman of the Board of
Directors of $100,000. This increase was offset by a reduction in the sales
force and advertising costs which decreased costs in the nine months by
approximately $383,000 and $71,000, respectively.
Interest expense for the nine months ended January 31, 2000 was $662,101 as
compared to $679,316 for the nine months ended January 31, 1999. The decrease in
interest expense is attributable the savings in the third quarter of the current
year due mostly to the debt and equity transaction with Spotless Plastics (USA),
Inc. The Company anticipates significantly lower interest costs in future
periods as a result of this transaction.
The extraordinary item - loss on the extinguishment of debt of $100,000 in the
six months ended October 31, 1999 is due to a prepayment penalty paid to
Business Alliance Capital Corporation, the Company's former principal lender.
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, 2000 the Company has a
stockholders' deficit of $2,502,544 and an accumulated deficit of $34,469,013.
The Company has financed its operations to date primarily through issuances of
debt and equity securities. At January 31, 2000 the Company had $753,285 in
cash, and a working capital deficit of $565,372. In addition, as of January 31,
2000, the Company was in arrears with respect to certain payroll and sales tax
obligations of approximately $84,000 and $267,000. The Company has paid down
these arrears by $10,000 and $283,000 respectively, during the quarter. The
Company expects to continue to pay down these arrears in the future from
available working capital. 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. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
13
<PAGE>
On October 29, 1999, the Company consummated an equity and debt financing
transaction with Spotless Plastics (USA), Inc. that significantly improved the
Company's liquidity and cash position. The Company received $2,500,000 in
exchange for equity and $2,000,000 of debt financing. Management believes the
Company will require positive cash flow from operations to meet its working
capital needs over the next twelve months. In the event that positive cash flow
from operations is not generated, the Company may be required to seek additional
financing to meet its working capital needs. The Company currently has no credit
facility for additional borrowing. Revenue growth is expected in new and
existing service areas. 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 project costs, including
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 performance bonds which are generally not released until completion of the
project. 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 achieving positive cash flow from
operations or obtaining additional financing. 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 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.
In September 1999, the Company borrowed $100,000 from Spotless Plastics (USA),
Inc. The borrowings bore interest at a rate of 6% and was repaid with accrued
interest in November 1999.
CASH FLOW
Net cash used by operating activities was $1,780,602 for the nine months ended
January 31, 2000. The amount used by operating activities is primarily
attributable to the net loss after adjusting for noncash items; increases and
decreases in the assets and liabilities used approximately $831,000 of cash. The
major components of this amount was used to decrease accounts payable and
accrued expenses by $362,070 and a $238,982 decrease in payroll and sales tax
payable resulting from the settlement of outstanding sales tax issues. Cash used
in investing activities for the nine months ended January 31, 2000 was $140,326.
This was primarily due to capital expenditures of $221,000 and an increase to
other assets of $26,000, offset by the collection of a note receivable of
$107,000. The net cash provided by financing activities for the nine months
ended January 31, 2000 was $2,627,877. Of this amount, $1,968,000 was provided
from the transaction with Spotless Plastics (USA), Inc., described above, after
paying off the indebtedness to the Company's previous lender of approximately
$2,622,000 and repayment of a short-term $100,000 loan to Spotless Plastics
(USA), Inc.
THE YEAR 2000
The Company has incurred costs of approximately $25,000 relating to actions
taken to make its systems, services and infrastructure Year 2000 compliant,
which the Company paid out of its working capital. To date, the Company has not
experienced any material difficulties relating to Year 2000 computer problems,
and does not anticipate any such material difficulties in the future. The
Company intends to continue to monitor this situation.
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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 to the Condensed Consolidated Financial Statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Dan Rosenberg is no longer the Company's Chief Financial Officer and
has been temporarily replaced by Charles L. Kelly, Chief Financial Officer and
Vice President of Finance and Administration of Spotless Plastics (USA), Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K (Date of Report: December 1, 1999) filed
with the SEC on December 8, 1999.
15
<PAGE>
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 there unto duly authorized.
Dated: March 15, 2000
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
MICHAEL O'REILLY,
Chairman and Chief Executive Officer
By: /s/ Charles L. Kelly
CHARLES L. KELLY
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JANUARY 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Apr-30-2000
<PERIOD-START> May-1-1999
<PERIOD-END> Jan-31-2000
<CASH> 753,285
<SECURITIES> 0
<RECEIVABLES> 3,175,192
<ALLOWANCES> 210,000
<INVENTORY> 179,298
<CURRENT-ASSETS> 3,780,533
<PP&E> 5,353,416
<DEPRECIATION> 3,465,701
<TOTAL-ASSETS> 5,906,908
<CURRENT-LIABILITIES> 4,345,905
<BONDS> 0
1,300,000
93
<COMMON> 3,846
<OTHER-SE> (2,506,483)
<TOTAL-LIABILITY-AND-EQUITY> 5,906,908
<SALES> 8,461,373
<TOTAL-REVENUES> 8,461,373
<CGS> 6,832,986
<TOTAL-COSTS> 7,008,401
<OTHER-EXPENSES> (10,871)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 662,101
<INCOME-PRETAX> (2,072,141)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,072,141)
<DISCONTINUED> 0
<EXTRAORDINARY> 100,000
<CHANGES> 0
<NET-INCOME> (2,172,141)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
