UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000,
OR
( ) 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 registrant as specified in its charter)
Delaware 11-2844247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
(Address of principle executive offices) (Zip Code)
(631) 434-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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
----
The number of shares of Common Stock, par value $.0001, outstanding on December
11, 2000 was 38,456,254.
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Financial Statements
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND APRIL 30, 2000
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 200,875 $ 816,560
Accounts receivable, net of allowance for doubtful accounts of $315,042 and $266,042, respectively 3,135,892 3,422,469
Inventories 108,360 168,151
Costs and estimated earnings in excess of billings on uncompleted contracts 681,171 150,829
Prepaid expenses and other current assets 51,606 135,384
------------ ------------
Total current assets 4,177,904 4,693,393
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $ 4,078,047
and $3,657,682, respectively 1,531,870 1,749,928
GOODWILL, net of accumulated amortization of $60,121 and $55,387, respectively 61,905 66,639
OTHER ASSETS 171,822 189,244
------------ ------------
TOTAL $ 5,943,501 $ 6,699,204
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
CURRENT LIABILITIES:
Accounts payable $ 1,375,479 $ 1,735,529
Accrued expenses 1,555,143 1,252,853
Short-term notes payable 1,000,000 500,000
Billings in excess of cost and estimated earnings on uncompleted contracts 200,692 302,854
Accrued payroll and related fringes 355,531 475,931
Sales tax payable 123,509 269,518
Current portion of long-term debt 119,079 136,153
Obligations of unconsolidated subsidiary, net 210,007 210,007
Income taxes payable 183,223 194,684
Other current liabilities 38,857 89,483
------------ ------------
Total current liabilities 5,161,520 5,167,012
------------ ------------
LONG-TERM DEBT 51,875 95,005
------------ ------------
CONVERTIBLE NOTES 2,780,000 2,780,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK 74,083 102,167
------------ ------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000 shares
authorized; 1,300,000 shares outstanding at October 31, 2000 and April 30, 2000 1,300,000 1,300,000
------------ ------------
STOCKHOLDERS' DEFICIT:
Series B preferred stock, $.01 par value; 50,000 shares authorized; 9,346 shares outstanding
at October 31, 2000 and April 30, 2000 93 93
Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0 shares outstanding - -
Common stock, $.0001 par value; 100,000,000 shares authorized; 38,456,254 shares outstanding at
October 31, 2000 and April 30, 2000 3,846 3,846
Additional paid-in-capital 31,765,949 31,804,950
Accumulated deficit (35,193,865) (34,553,869)
------------ ------------
Total stockholders' deficit (3,423,977) (2,744,980)
------------ ------------
TOTAL $ 5,943,501 $ 6,699,204
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,500,952 $ 3,420,785 $ 6,319,754 $ 5,981,795
Cost of revenues 2,751,873 2,915,169 4,968,641 4,682,361
------------- ------------- ------------- -------------
Gross profit 749,079 505,616 1,351,113 1,299,434
Selling, general and administrative expenses 708,452 1,702,586 1,859,551 2,353,928
------------- ------------- ------------- -------------
Income (loss) from operations 40,627 (1,196,970) (508,438) (1,054,494)
------------- ------------- ------------- -------------
Other (expense) income:
Interest expense (87,145) (364,760) (171,004) (547,213)
Other, net 3,925 10,690 39,446 10,871
------------- ------------- ------------- -------------
Total other expense (83,220) (354,070) (131,558) (536,342)
------------- ------------- ------------- -------------
Loss before provision for income taxes and
extraordinary item (42,593) (1,551,040) (639,996) (1,590,836)
------------- ------------- ------------- -------------
Provision for income taxes - - - -
------------- ------------- ------------- -------------
Net loss before extraordinary item (45,593) (1,551,040) (639,996) (1,590,836)
Extraordinary item - loss on extinguishment of debt - (100,000) - (100,000)
------------- ------------- ------------- -------------
Net loss (42,593) (1,651,040) (639,996) (1,690,836)
Dividends on Series A Redeemable Preferred Stock (19,500) (19,500) (39,000) (39,000)
------------- ------------- ------------- -------------
Net loss attributable to common
shareholders $ (62,093) $ (1,670,540) $ (678,996) $ (1,729,836)
============= ============= ============= =============
Basic and diluted net loss per common share:
Before extraordinary item $ .00 $ (.09) $ (.02) $ (.10)
Extraordinary item - (.01) - (.01)
------------- ------------- ------------- -------------
Basic and diluted net loss $ .00 $ (.10) $ (.02) $ (.11)
============= ============= ============= =============
Weighted average number of common shares
outstanding: basic and diluted 38,456,254 16,453,166 38,456,254 15,558,485
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended
October 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (639,996) $(1,690,836)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 425,099 473,998
Provision for doubtful accounts 49,000 110,000
Issuance of common stock and stock options for director compensation - 5,078
Compensation related to officer options and redeemable common stock (28,084) 152,096
Issuance of common stock and stock options for services - 201,809
Issuance of common stock for dividends and related interest on redeemable preferred
stock - 70,536
Changes in operating assets and liabilities:
Accounts receivable 237,577 (825,994)
Due from officer - 100,000
Inventories 59,791 (23,573)
Costs and estimated earnings in excess of billings on uncompleted contracts (530,342) 63,411
Prepaid and other current assets 83,778 (74,997)
Other assets 17,422 (43,085)
Accounts payable and accrued expenses (96,761) 612,601
Payroll and sales tax payable (266,409) 118,733
Income tax payable (11,461) -
Other current liabilities (50,626) -
Obligations of unconsolidated subsidiary - 13,895
Billings in excess of costs and estimated earnings on uncompleted contracts (102,162) (49,540)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (853,174) (785,868)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (202,307) (82,475)
Collection of notes receivable - 26,443
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (202,307) (56,032)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt and factor advances (60,204) (788,691)
Payments of revolving bank line, net - (1,200,596)
Proceeds from loans payable 500,000 229,725
Proceeds from notes due affiliate - 2,100,000
Dividends paid on redeemable preferred stock - (39,000)
Proceeds from issuance of common stock - 2,625
Proceeds from private placement of stock - 2,642,350
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 439,796 2,946,413
------------ ------------
NET (DECREASE) INCREASE IN CASH (615,685) 2,104,513
CASH - BEGINNING OF PERIOD 816,560 46,336
------------ ------------
CASH - END OF PERIOD $ 200,875 $ 2,150,849
============ ============
Cash paid during the period for:
Interest $ 42,987 $ 566,797
============ ============
Taxes $ 10,825 $ -
============ ============
Non cash financing activities:
Issuance of redeemable preferred stock dividend $ 39,000 $ -
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS FOR PRESENTATION - The accompanying unaudited consolidated
financial statements include the accounts of Windswept Environmental Group,
Inc. (the "Company") and its wholly owned subsidiaries. The unaudited
consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article 10
of Regulation S-X. 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 the Company, all
adjustments (consisting of only normal and recurring accruals) considered
necessary to present fairly the financial position of the Company and its
subsidiaries as of October 31, 2000, the results of operations for the
three and six months ended October 31, 2000 and 1999 and cash flows for the
six months ended October 31, 2000 and 1999, have been included. Certain
prior period amounts have been reclassified to conform with the October
2000 presentation.
The results for the three and six months ended October 31, 2000 and 1999
are not necessarily indicative of the results for an entire year. These
unaudited consolidated financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto included
in the Company's Form 10-KSB for the fiscal year ended April 30, 2000.
2. LIQUIDITY AND BUSINESS RISKS - As of October 31, 2000, the Company had a
stockholders' deficiency of $3,423,977 and an accumulated deficit of
$35,193,865. The Company has financed its operations to date primarily
through issuances of debt and equity securities. As of October 31, 2000,
the Company had $200,875 in cash and a working capital deficit of $983,616.
In addition, as of October 31, 2000, the Company was in arrears with
respect to certain sales tax obligations of approximately $47,000 as well
as preferred stock dividends plus interest of approximately $88,000. The
Company is also in arrears with many of its vendors. These factors raise
substantial doubt as to the Company's ability to continue as a going
concern. The Company's financial statements have been prepared assuming
that the Company will continue as a going concern. The financial statements
do not contain 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. ("Spotless") 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 in the transaction (the "Spotless Transaction"). These proceeds
were used to repay in full the Company's outstanding balance under a credit
facility and reduce certain outstanding vendor balances. The Spotless
Transaction significantly reduced the Company's cost of capital. However,
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 has no credit facility for additional borrowing,
other than with respect to its recent arrangement to secure a $1,000,000
credit facility with Spotless, as discussed below. Management continues to
pursue additional funding sources and is discussing the availability of
credit facilities with various lenders. The Company expects revenue growth
in new and existing service areas. The Company continues to strive for
improvement in its gross margin and containment of 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 obtain environmental or related construction contracts, (ii)
the ability to generate positive cash flow from operations, (iii) the
ability to raise additional capital or obtain additional financing and (iv)
economic conditions.
5
<PAGE>
In March and April 2000, the Company borrowed an aggregate of $500,000 from
Spotless for working capital requirements. In September 2000, the Company
borrowed an additional $500,000 from Spotless for working capital
requirements. These borrowings bear interest at a rate equal to the London
Interbank Offering Rate ("LIBOR") plus an additional 1%.
As of November 3, 2000, the Company's wholly owned subsidiary, Trade-Winds
Environmental Restoration, Inc. ("Trade-Winds") entered into a time and
materials contract with a customer to provide mold remediation services on
a building under construction. This contract was amended as of November
30, 2000. The Company anticipates it will derive revenues of approximately
$6,000,000 under the contract. In order to finance the additional outlay of
payroll required to perform this contract, the Company entered into an
agreement with Spotless, dated November 4, 2000, to borrow an additional
amount of up to $1,000,000 under a secured line of credit agreement.
Amounts borrowed under this loan facility bear interest at the rate of 10%
per annum. All loans thereunder are evidenced by a promissory note and are
secured by the accounts receivables of the Company arising from the
contract and all equipment purchased by the Company or Trade-Winds for use
under the contract as set forth in the Security Agreement, dated November
4, 2000, between the Company and Spotless. As of December 11, 2000, the
Company has borrowed $625,000 under this secured line of credit.
3. PROVISION FOR INCOME TAXES - No provision or benefit for income taxes was
recorded for the three and six months ended October 31, 2000 due to a net
loss being incurred. Any deferred tax assets that may have arisen during
the period would have a full valuation allowance provided against such
asset.
4. LOSS PER COMMON SHARE - The calculation of basic and diluted loss per
common share was calculated for all periods in accordance with the
requirements of Statement of Financial Accounting Standards No. 128,
"Earnings per Share". The number of shares used in computing basic and
diluted loss per share was 38,456,254 and 16,453,166 shares for the three
and six months ended October 31, 2000 and 1999, respectively.
5. REVENUE RECOGNITION - In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to
adopt SAB 101 no later than the fourth quarter of fiscal 2001. The Company
believes that SAB 101 will not affect its results of operations and
financial position.
6. CONTINGENCIES - On November 22, 1999, the SEC accepted the Company's
settlement offer in its "Order Instituting Public Administrative
Proceedings, Making Findings, Imposing Remedial Sanctions and Issuing
Cease-and-Desist Order" (the "Order"). Under the terms of the Order, the
Company neither admitted nor denied any allegations and did not incur any
monetary fines in connection with an investigation of the Company by the
SEC which stemmed from the prior convictions of two of the Company's former
officers for violations of, among other things, the federal securities
laws. The Order required the Company to develop and institute certain
policies, procedures and manuals that improved 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 required 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, obtained
an off site storage facility and made such disclosures.
In April 1999, an action was commenced in the New York State Supreme Court,
County of Suffolk, under the caption EDWARD TARNAWSKI V. TRADE-WINDS
ENVIRONMENTAL RESTORATION, INC., COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.,
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND MICHAEL O'REILLY. This is an action
for an alleged breach of employment contract in which the plaintiff claims
damages of
6
<PAGE>
approximately $150,000 for lost wages and commissions. The Company believes
that the action is without merit and that any verdict in favor of the
plaintiff would not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
In November 1997, the Company's Trade-Winds subsidiary was named as a third
party defendant in an action commenced in the New York State Supreme Court,
County of New York, under the caption NICOLAI GRIB AND VLADISLAV KAZAROV V.
TRADE-WINDS ENVIRONMENTAL RESTORATION, INC. AND GULF INSURANCE COMPANY, by
a class of plaintiffs claiming to be entitled to additional wages while
working for a subcontractor of Trade-Winds. The Company believes that a
verdict in favor of the plaintiff would not have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
The Company is a 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 Company's consolidated financial position, results of
operations and cash flows.
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 the
process of liquidation through these bankruptcy proceedings. Management
believes that the Company's financial condition, results of operations and
cash flows will not be materially affected by this proceeding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements - Statements contained in this Quarterly Report on
Form 10-Q include "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause the actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, not to occur or be
realized. Such forward-looking statements generally are based upon the Company's
best estimates 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 market acceptance and amount of sales of the Company's services,
- the Company's success in increasing revenues and reducing expenses,
- the frequency and magnitude of environmental disasters or disruptions
resulting in the need for the types of services the Company provides,
- the extent of the enactment, enforcement and strict interpretations of
laws relating to environmental remediation,
- the competitive environment within the industries in which the Company
operates,
- the Company's ability to raise additional capital,
- the Company's ability to attract and retain qualified personnel, and
- the other factors and information disclosed and discussed in other
sections of this Quarterly Report on Form 10-Q and in the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 2000.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
7
<PAGE>
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing in Item 1.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
Revenue
Total revenues for the three months ended October 31, 2000 ("the 2000 period")
increased by $80,167, or approximately 2%, to $3,500,952 from $3,420,785 for the
three months ended October 31, 1999 ("the 1999 period"). Revenues in the
Company's Trade-Winds subsidiary increased $48,267 to $3,086,200 in the 2000
period from $3,037,933 in the 1999 period. The increase in Trade-Winds revenue
of $48,267 was primarily attributable to increases in revenues from
environmental remediation/compliance projects of approximately $92,000,
construction projects of approximately $167,000 and asbestos projects of
approximately $310,000, which were partially offset by decreases in emergency
spill response projects of approximately $218,000, fire proofing projects of
approximately $231,000 and oil tank compliance projects of approximately
$41,000. Revenues in the Company's North Atlantic Laboratories, Inc. ("NAL") and
New York Testing Laboratories, Inc. ("NYT") subsidiaries increased $18,155 and
$13,745 to $210,638 and $204,114, respectively, in the 2000 period from $192,483
and $190,369, respectively, in the 1999 period.
Cost of Revenues
Cost of revenues decreased to $2,751,873 in the 2000 period as compared to
$2,915,169 in the 1999 period. The decrease of $163,296, or 6%, was primarily
attributable to higher labor costs during the 1999 period resulting from a
change in the composition of a contract performed in that period, $100,000 from
the reversal of a previously provided reserve which was no longer necessary in
the 2000 period and $120,000 from the net estimated profitability on contracts
which were at or near completion at the end of the 2000 period. The Company's
cost of revenues consists primarily of labor and labor related costs, insurance,
benefits, bonding and job related insurance, repairs, maintenance, equipment
rental, materials and supplies, disposal costs and depreciation of capital
equipment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $994,134, or 58%, to
$708,452 in the 2000 period from $1,702,586 in the 1999 period, and constituted
approximately 20% and 50% of revenues in the 2000 and 1999 periods,
respectively. The decrease of $994,134 was primarily a result of decreases in
each of the following items: bad debt expense of $110,000, a provision for
litigated and disputed items of $160,000, state and local taxes, penalties and
interest of approximately $230,000, accounting fees of $26,000, legal and
consulting fees related to the Spotless Transaction of approximately $182,000,
the reduction of compensation expense related to the treatment of
a put option for shares of common stock and stock options held by an
officer of the Company of approximately $339,000, and compensation to an
officer of the Company of $100,000. These decreases were partially offset by
increases in marketing costs of approximately $17,000 and sales salaries of
approximately $82,000.
Interest Expense
Interest expense decreased by $277,615, or 76%, in the 2000 period to $87,145
from $364,760 in the 1999 period. The decrease in interest expense was
attributable to replacing a secured credit facility with a lending institution
with proceeds from the Spotless Transaction. The current debt facility with
Spotless carries a significantly lower interest rate.
8
<PAGE>
SIX MONTHS ENDED OCTOBER 31, 2000 AND 1999
Revenue
Total revenues for the six months ended October 31, 2000 ("the year to date
2000 period") increased by $337,959, or approximately 6%, to $6,319,754 from
$5,981,795 for the six months ended October 31, 1999 ("the year to date 1999
period"). Revenues in the Company's Trade-Winds subsidiary increased $111,236 to
$5,407,793 in the year to date 2000 period from $5,296,557 in the year to date
1999 period. The increase in Trade-Winds revenue of $111,236 was primarily
attributable to increases in revenues from environmental remediation/compliance
projects of approximately $666,000, construction projects of approximately
$511,000 and asbestos projects of approximately $105,000, which were partially
offset by decreases in emergency spill response projects of approximately
$734,000, fire proofing projects of approximately $231,000 and oil tank
compliance projects of approximately $263,000. Revenues in the Company's NAL and
NYT subsidiaries increased $174,336 and $52,387 to $487,315 and $424,646,
respectively, in the year to date 2000 period from $312,979 and $372,259,
respectively, in the year to date 1999 period.
Cost of Revenues
Cost of revenues increased to $4,968,641 in the year to date 2000 period as
compared to $4,682,361 in the year to date 1999 period. The increase of
$286,280, or 6%, was primarily attributable to the increase in sales volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $494,377, or 21%,
to $1,859,551 in the year to date 2000 period from $2,353,928 in the year to
date 1999 period, and constituted approximately 29% and 39% of revenues in the
year to date 2000 and year to date 1999 periods, respectively. The decrease of
$494,377 was primarily a result of decreases in each of the following items: bad
debt expense of approximately $79,000, a provision for litigated and disputed
items of $160,000, state and local taxes, penalties and interest of
approximately $230,000, legal and consulting fees related to the Spotless
Transaction of approximately $182,000, the rduction of compensation expense
related to the treatment of a put option for shares of common stock
and stock options held by an officer of the Company of approximately $180,000,
and compensation to an officer of the Company of $100,000. These decreases were
partially offset by increases in marketing costs of approximately $158,000,
administrative salaries of approximately $107,000 and sales salaries of
approximately $51,000.
Interest Expense
Interest expense decreased by $376,209, or 69%, in the year to date 2000 period
to $171,004 from $547,213 in the year to date 1999 period. The decrease in
interest expense was attributable to replacing a secured credit facility with a
lending institution with proceeds from the Spotless Transaction. The current
debt facility with Spotless carries a significantly lower interest rate.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, the Company had a stockholders' deficiency of $3,423,977
and an accumulated deficit of $35,193,865. The Company has financed its
operations to date primarily through issuances of debt and equity securities. As
of October 31, 2000, the Company had $200,875 in cash and a working capital
deficit of $983,616. In addition, as of October 31, 2000, the Company was in
arrears with respect to certain sales tax obligations of approximately $47,000
as well as preferred stock dividends plus interest of approximately $88,000. The
Company is also in arrears with many of its vendors. These factors raise
substantial doubt as to the Company's ability to continue as a going concern.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The financial statements do not contain any
adjustments that might result from the outcome of this uncertainty.
9
<PAGE>
On October 29, 1999, the Company consummated an equity and debt financing
transaction with Spotless 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 in the Spotless Transaction. These proceeds were
used to repay in full the Company's outstanding balance under a credit facility
and reduce certain outstanding vendor balances. The Spotless Transaction
significantly reduced the Company's cost of capital. However, 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 has no
credit facility for additional borrowing, other than with respect to its recent
arrangement to secure a $1,000,000 credit facility with Spotless, as discussed
below. Management continues to pursue additional funding sources and is
discussing the availability of credit facilities with various lenders. The
Company expects revenue growth in new and existing service areas. The Company
continues to strive for improvement in its gross margin and containment of 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 obtain environmental or related construction
contracts, (ii) the ability to generate positive cash flow from operations,
(iii) the ability to raise additional capital or obtain additional financing and
(iv) economic conditions.
In March and April 2000, the Company borrowed an aggregate of $500,000 from
Spotless for working capital requirements. In September 2000, the Company
borrowed an additional $500,000 from Spotless for working capital requirements.
These borrowings bear interest at a rate equal to LIBOR plus an additional 1%.
As of November 3, 2000, the Company's Trade-Winds subsidiary entered into a time
and materials contract with a customer to provide mold remediation services on a
building under construction. This contract was amended as of November 30, 2000.
The Company anticipates it will derive revenues of approximately $6,000,000
under the contract. In order to finance the additional outlay of payroll
required to perform this contract, the Company entered into an agreement with
Spotless, dated November 4, 2000, to borrow an additional amount of up to
$1,000,000 under a secured line of credit agreement. Amounts borrowed under
this loan facility bear interest at the rate of 10% per annum. All loans
thereunder are evidenced by a promissory note and are secured by the accounts
receivables of the Company arising from the contract and all equipment
purchased by the Company or Trade-Winds for use under the contract as set
forth in the Security Agreement, dated November 4, 2000, between the Company
and Spotless. As of December 11, 2000, the Company has borrowed $625,000
under this secured line of credit.
CASH FLOW
Cash decreased by $615,685 to $200,875 during the year to date 2000 period
primarily as a result of the net loss incurred after adjusting for non-cash
items, reductions in outstanding vendor obligations, and purchases of fixed
assets of approximately $202,000.
INFLATION
The Company believes that inflation has generally not had a material impact on
its operations.
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,
business is affected by the timing of large contracts in certain of its service
areas, such as asbestos abatement and construction, as well as the timing of
catastrophes.
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PART 2 - OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
Reference is hereby made to Note 6 to the Consolidated Financial
Statements in Part I - Item 1 above and to Item 3 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 2000
and to the references therein, for a discussion of all material pending
legal proceedings to which the Company or any of its subsidiaries is
party.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
The Company is required to pay quarterly dividends on its Series A
Convertible Preferred Stock, par value $.01 per share (the "Series A
Preferred"), which dividends accrue from the initial date of issuance
of the Series A Preferred, are cumulative and, if not paid when due,
bear interest on the unpaid amount of the past due dividends at the
prime rate published in The Wall Street Journal on the date the
dividend was payable, plus 3%. The Company believes, however, that it
was legally prohibited from paying dividends on its capital stock due
to the provisions of Section 170 of the Delaware General Corporation
Law ("Delaware Law"), which require a company to pay dividends on its
capital stock only out of its capital surplus or net profits in one of
the last two years. The Company is currently in arrears on its Series A
Preferred dividend payments and interest thereon in the aggregate
amount of approximately $105,000. If the Company fails to make any four
consecutive quarterly dividend payments on the Series A Preferred, the
majority in interest of the holders of the Series A Preferred have the
right to elect an additional director to the Company's Board of
Directors, to serve as a director until such accrued and unpaid
dividends have been paid in full. The Company, as per Delaware Law,
failed to pay its fourth consecutive quarterly dividend payment on
September 15, 2000 to the holders of the Series A Preferred. There can
be no assurance when or if the Company will make any Series A Preferred
dividend payments.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 29, 1999, the Company's Board of Directors and Windswept
Acquisition Corporation, a Delaware corporation and wholly owned
subsidiary of Spotless Plastics (USA), Inc. ("Spotless"), the majority
stockholder of the Company, approved an amendment (the "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 became effective upon its filing with the Office of the
Secretary of the State of Delaware on September 18, 2000, following the
distribution of an Information Statement by the Company to its
stockholders on August 29, 2000, in compliance with the proxy rules of
the Securities and Exchange Act of 1934, as amended.
On October 26, 1999, as a result of the Spotless Transaction, the
Company's Board of Directors, pursuant to the By-laws of the Company,
increased the size of the Board of Directors from five directors to
nine directors and accepted, with effect as of October 26, 1999, the
resignation of JoAnn O'Reilly as a director of the Company. The Board
of Directors appointed four nominees of Spotless, Brian S. Blythe,
Ronald B. Evans, Peter A. Wilson and Charles L. Kelly, Jr. as new
directors. A fifth nominee of Spotless, John J. Bongiorno, has been
nominated to the Board of Directors of the Company, effective upon the
election of the Board of Directors at the Company's next annual meeting
of stockholders. The continuing directors are Michael O'Reilly, Kevin
Phillips, Anthony Towell and Samuel Sadove.
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Item 5. Other Information
-----------------
On September 11, 2000, the Company's Board of Directors, pursuant to
the Bylaws of the Company, increased the size of the Board of Directors
from nine directors to eleven directors.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
10.1 Agreement, dated as of November 3, 2000, by and between Turner
Construction Company and Trade-Winds Environmental Restoration
Inc., as amended.
10.2 Loan Agreement, dated November 4, 2000, by and between the
Company and Spotless Plastics (USA), Inc.
10.3 Line of Credit Note, dated November 4, 2000, by and
between the Company and Spotless Plastics (USA), Inc.
10.4 Security Agreement, dated November 4, 2000, by and between the
Company and Spotless Plastics (USA), Inc.
27. Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the six-month period
ended October 31, 2000.
12
<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 thereunto duly authorized.
Dated: December 15, 2000
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
----------------------------------------
MICHAEL O'REILLY,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Charles L. Kelly, Jr.
----------------------------------------
CHARLES L. KELLY, JR.
Chief Financial Officer
(Principal Financial Officer)
13
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Agreement, dated as of November 3, 2000, by and between Turner
Construction Company and Trade-Winds Environmental Restoration
Inc., as amended.
10.2 Loan Agreement, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc.
10.3 Line of Credit Note, dated November 4, 2000, by and between
the Company and Spotless Plastics (USA), Inc.
10.4 Security Agreement, dated November 4, 2000, by and between the
Company and Spotless Plastics (USA), Inc.
27. Financial Data Schedule
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