U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2000
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(name of small business issuer in its charter)
Delaware 11-2844247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (631) 434-1300
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, $.0001 par value per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No_
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $12,845,165.
Based upon the average bid and ask price on July 24, 2000 ($0.19 per share), the
aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $2,981,176.
As of July 24, 2000, the issuer had 38,456,254 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes _ No X
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PART I
Introductory Comment - Forward Looking Statements
Statements contained in this Annual Report on Form 10-KSB 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
under the "Risk Factors" section of Item 1 and in other sections
of this Annual Report on Form 10-KSB.
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.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Windswept Environmental Group, Inc. ("Windswept" or "the Company"), through its
wholly-owned subsidiaries, provides a full array of emergency response,
remediation and disaster restoration services to a broad range of clients. The
Company has expertise in areas of hazardous materials remediation, testing,
toxicology, training, wetlands restoration, wildlife and natural resources
rehabilitation, technical advisory, restoration and site renovation services.
The Company believes that it has assembled the resources, including key
environmental professionals, construction managers, and specialized equipment to
become a leader in the expanding worldwide emergency services market. The
Company further believes that few competitors provide the diverse range of
services provided by Windswept on an emergency response basis. Management
believes that its unique breadth of services and its emergency response
capability has positioned the Company for rapid growth in this expanding market.
The Company was incorporated under the laws of the state of Delaware on March
21, 1986 under the name International Bankcard Services Corporation, which was
subsequently changed to Comprehensive Environmental Systems, Inc. On March 19,
1997, the Company's name was changed to its present name. The Company's
principal executive offices are located at 100 Sweeneydale Avenue, Bay Shore,
New York, 11706. The Company's telephone number is (631) 434-1300.
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In December 1993, the Company acquired Trade-Winds Environmental Restoration,
Inc. ("Trade-Winds"), an asbestos abatement and lead remediation company. In
June 1995, the Company purchased a testing laboratory, New York Testing
Laboratories Inc. ("NYTL"), that offers hazardous materials testing
capabilities. On February 24, 1997, the Company acquired North Atlantic
Laboratories, Inc. ("NAL"), a certified environmental training, laboratory
testing and consulting services company.
On October 29, 1999, the Company entered into a subscription agreement with
Spotless Plastics (USA), Inc. ("Spotless"), a Delaware corporation, pursuant to
which the Company sold to Windswept Acquisition Corporation ("Acquisition
Corp."), a Delaware corporation and a wholly-owned subsidiary of Spotless,
22,284,683 shares (the "Acquisition Corp. Common Shares") of common stock, par
value $.0001 per share ("Common Stock"), and 9,346 shares of Series B
Convertible Preferred Stock, par value $.01 per share ("Series B Preferred"),
for an aggregate subscription price of $2,500,000 or $.07904 per share of Common
Stock and $79.04 per share of Series B Preferred. Each share of Series B
Preferred has the equivalent voting power of 1,000 shares of Common Stock. Each
share of Series B Preferred is convertible into 1,000 shares of Common Stock. As
of July 15, 2000, the Acquisition Corp. Common Shares represented approximately
58% of the outstanding Common Stock and the Acquisition Corp. Common Shares and
Series B Preferred shares collectively represented approximately 66% of the
voting power of the outstanding securities of the Company.
In addition, the Company and Trade-Winds, NAL and NYTL, 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. This
borrowing is evidenced by a secured convertible promissory note, dated October
29, 1999 (the "Note"). Outstanding principal under the Note bears interest at a
rate equal to the London Interbank Offering Rate ("LIBOR") plus an additional 1%
and is payable monthly. The Note matures on October 29, 2004, unless Spotless
elects to defer repayment until October 29, 2005. The outstanding principal
amount and all accrued and unpaid interest under the Note is convertible, at the
option of Spotless, in whole or in part, at any time, into shares of Common
Stock at the rate of one share of Common Stock for every $.07904 of principal
and accrued interest so converted (or, in the event that certain approvals have
not been obtained at the time of conversion, into shares of Series B Preferred
at the rate of one share of Series B Preferred for every $79.04 of principal and
accrued interest so converted). In connection with the Note, each of the
Obligors granted to Spotless a security interest in all of their respective
assets pursuant to a Security Agreement dated October 29, 1999.
As a result of the conversion features of the Series B Preferred and the Note,
as of July 15, 2000, if Acquisition Corp. were to convert its Series B Preferred
shares into Common Stock and Spotless were to convert all of the outstanding $2
million principal amount and $84,390 accrued and unpaid interest under the Note
into Common Stock, Acquisition Corp. and Spotless would collectively own
58,002,013 shares, or approximately 78%, of the then issued and outstanding
shares of Common Stock.
BUSINESS
Operations
In order to position itself into stronger and more profitable markets, the
Company has evolved during the past three years from an asbestos abatement
contractor to a hazardous materials clean-up and natural resource restoration
firm, and finally, to a full service emergency response provider. The Company
provides a broad range of services through vertically integrated businesses in
the service areas described below:
- Emergency Response and Catastrophe Restoration
- Site Restoration
- Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
- Forensic Investigation
- Asbestos Abatement
- Fire and Flood Restoration
- Demolition
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- Lead Abatement
- Underground Storage Tank Removal
- Soil Remediation
- Oil Spill Response - Land and Marine
- Hazardous Waste/Biohazard Clean-up
- Chemical Spill Response
- Duct Cleaning
- Indoor Air Quality Investigation
- Environmental and Health and Safety Training
- Environmental Testing
- Environmental Consulting Services
The Company has specially trained emergency response teams that respond to both
hazardous and non-hazardous spills and other emergencies on land and water on a
24 hour, seven day a week basis. The following examples are types of emergencies
for which the Company is capable of conducting response and remediation
services: explosions, fires, earthquakes, mudslides, hazardous spills,
transportation catastrophes, storms, hurricanes, tornadoes, floods, and
biological threats.
The Company believes that its comprehensive emergency response abilities have
greatly expanded its customer base to include those entities that value
immediate response, enhanced capabilities and customer service. The Company's
customers include Fortune 500TM companies, insurance companies, industrial
concerns, oil companies, banks, school districts, state, local and county
governments, commercial building owners and real estate development concerns.
Currently, the Company's customers include Keyspan Energy Corporation, Long
Island Rail Road, State Farm Insurance Company, Travelers Insurance Company and
the New York State Department of Environmental Conservation for services
including hazardous materials spill response, oil spill containment, sub-
surface investigation and site remediation.
Management expects insurance loss remediation and restoration to be an
increasingly significant portion of the Company's future revenues. In order to
address the needs of the insurance industry, the Company has dedicated itself
toward the strategic integration of all of its services. As a result, the
Company provides its insurance customers with the capability to respond to
virtually any type of insurance loss. The Company believes that it is able to
perform all the tasks necessary to rapidly restore a property to pre-loss
conditions, thus minimizing dislocation, downtime and business interruption.
The Company estimates that in excess of 50% of its revenues are derived from
previously served customers. Insurance customers represent a substantial portion
of the Company's target market; those with recurring needs for emergency
services. During the Company's fiscal year ended April 30, 2000 ("fiscal 2000"),
billings to insurance customers represented approximately 17% of total billings.
During fiscal 2000, two of the Company's customers accounted for approximately
30% of its total billings. While the Company intends to increase the amount of
work performed for entities other than these two customers, it expects to
continue to be dependent on these customers. The Company has repeat business
with many of its customers, although the level of business with a particular
customer in a succeeding period is not expected to be commensurate with the
prior period, principally because of the project nature of the Company's
services. However, because of the significant expansion of the Company's
customer base and services provided, the Company believes that the loss of any
single customer would not have a material adverse effect on the Company's
financial condition and results of operations. See "Risk Factors" section of
Item 1.
In order to provide emergency response services, it is necessary for the Company
to employ a professional staff and to maintain an inventory of vehicles,
equipment and supplies. The Company currently maintains a fleet of twenty- four
spill response vessels with skimmer, diving and booming capabilities, forty
vehicles (including vacuum trucks, earth moving equipment, supply trucks and
drilling vehicles) and twenty-nine trailers equipped with various capabilities
(such as a mobile wildlife clinic). The Company has the equipment capacity to
move 100,000 gallons of
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environmental waste in any 24-hour period directly to a disposal facility
either in drums, roll-offs or directly in tanker trucks.
The Company has on its staff experts and licensed personnel in natural resource
restoration, spill response, hazardous material clean-up, wildlife
rehabilitation, environmental investigation and testing, construction, oil spill
response, and health and safety. The Company's staff includes three United
States Coast Guard certified captains and certified divers. The Company employs
16 wildlife rehabilitators, 21 certified asbestos handlers, 14 accredited lead
workers, 17 certified hazardous material workers, and a chemical engineer, as
well as individuals with various other applicable expertise.
Competition
The environmental industry in the United States has developed rapidly since the
passage of the Resources Conservation and Recovery Act of 1976 ("RCRA") and is
highly competitive. The Company believes that the industry is going through a
rapid transition resulting from several mergers and consolidations during the
last two years. Several large companies have emerged from this transition period
but the Company believes that the industry still has numerous small and
medium-sized companies serving niche markets according to geography, industry,
media (air, water, soil, etc.), and technological specialization
(bioremediations, etc.).
The Company competes with approximately twenty environmental remediation
companies of similar size and approximately fifty construction firms of all
sizes, and believes that few of its competitors provide the full array of
services that the Company performs as an emergency response firm. The Company
differentiates itself from its competitors by providing some unique services
(such as wildlife rehabilitation, natural resource recovery, water spill
clean-up, forensic testing, biohazard clean-up) and complementary packages of
services. For example, the oil spill response service line includes the
Company's wetlands/natural resource restoration, laboratory and construction
related services. The Company further believes that the turnkey approach to the
emergency response business provides a distinct advantage over its competition.
The Company has obtained a "Class E" marine oil spill response designation from
the United States Coast Guard. This designation, which is the highest
designation that can be obtained, allows the Company to respond to contamination
containment spills, such as oil tanker disasters. The Company believes that it
is one of approximately ten companies in the Northeastern United States with
this "Class E" designation. To the best of management's knowledge, only two
companies on the east coast of the United States perform on-site natural
resource restoration/wildlife rehabilitation. The Company believes that it is
the only company in the Northeastern United States to possess both of these
critical oil spill response capabilities.
The Company believes that the principal competitive factors applicable to all
areas of its business are price, breadth of services offered, ability to collect
and transport waste products efficiently, reputation for customer service and
dependability, technical proficiency and environmental integrity, operational
experience, quality of working relations with federal, state and local
environmental regulators and proximity to customers and licensed waste disposal
sites. The Company further believes that it is, and will continue to be, able to
compete favorably on the basis of these factors. However, many of the Company's
competitors have financial and capital equipment resources that are greater.
Additionally, at any time and from time to time, the Company may face
competition from new entrants into the industry. The Company may also face
competition from technologies that may be introduced in the future, and there
can be no assurance that the Company will be successful in meeting the
challenges that may be created by competition in the future.
The Company's ability to compete effectively depends upon its success in
networking, generating leads and bidding opportunities through its marketing
efforts; the quality, safety and timely performance of its contracts; the
accuracy of its bidding; its ability to hire and train field operations and
supervisory personnel; and the ability of the Company to generate sufficient
capital to hire and retain personnel with requisite skills, meet its ongoing
obligations, and fuel growth.
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Marketing and Sales
The Company has an aggressive marketing program that is directed toward
establishing and maintaining relationships with businesses which have ongoing
needs for one or more of the Company's services. The Company strives to achieve
internal growth by expanding services to its existing customer base and by
marketing itself as a multiple-service company with immediate response
capabilities. Clients who begin by utilizing one service often use other
services provided by the Company. The Company believes that, ultimately, all of
the client's environmental, related construction and emergency response needs
can be serviced by the Company.
Consistent with this strategy, commencing in the Company's fiscal year ended
April 30, 1999 ("fiscal 1999") and continuing through fiscal 2000, the Company
consolidated the sales and marketing efforts of its subsidiary companies. This
has allowed the Company to capitalize on the synergy between service lines while
realizing a reduction in selling and overhead expenses. The business development
staff was recruited by the Company for their experience, reputation, and
customer relationships in respective areas of the Company's business lines. Once
they join the Company sales team, salespersons undergo an orientation in the
full suite of Company services.
The Company's services are principally marketed in the Northeastern United
States. Business is obtained through client referral, cross selling of services
to existing clients, sponsorship of training and development programs,
professional referrals from insurance companies, architect/engineering firms and
construction management firms for whom the Company has provided services,
competitive bidding, and advertising. In all of its marketing efforts, including
competitive bidding, the Company emphasizes its experience, industry knowledge,
safety record and reputation for timely performance of contracts.
As a result of this marketing effort, the Company was recently selected by
Travelers Insurance Company as a preferred responder on a national basis for
large scale catastrophes.
Government Regulation
The Company's operations are subject to extensive regulation supervision and
licensing by the Environmental Protection Agency ("EPA") and various other
federal, state, and local environmental authorities. These regulations directly
impact the demand for the services offered by the Company. The Company believes
that it is in substantial compliance with all federal, state, and local
regulations governing its business.
The RCRA is the principal federal statute governing hazardous waste generation,
treatment, storage, and disposal. RCRA, or EPA approved state programs, governs
any waste handling activities of substances classified as "hazardous." In 1984,
RCRA was amended to substantially expand its scope by, among other things,
providing for the listing of additional wastes as "hazardous" and also for the
regulation of hazardous wastes generated in lower quantities than had been
previously regulated. The amendments impose additional restrictions on land
disposal of certain hazardous wastes, prescribe more stringent standards for
hazardous waste and underground storage tanks ("UST"), and provide for
"corrective" action at or near sites of waste management units.
Regulation of UST legislation, in particular Subtitle I of RCRA, focuses on the
regulation of underground tanks in which liquid petroleum or hazardous
substances are stored and provides for the regulatory setting for a portion of
the Company's business. Subtitle I of RCRA requires owners of all existing
underground tanks to list the age, size, type, location, and use of each tank
with a designated state agency. The EPA has published performance standards and
financial responsibility requirements for storage tanks over a five year period.
RCRA and EPA regulations also require that all new tanks be installed in such a
manner as to have protection against spills, overflows, and corrosion. Subtitle
I of RCRA provides civil penalties of up to $15,000 per violation for each day
of non- compliance with such tank requirements and $10,000 for each tank for
which notification was not given or was falsified. RCRA also imposes substantial
monitoring obligations on parties which generate, transport, treat, store, or
dispose of hazardous waste.
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The Comprehensive Environmental Response Compensation and Liability Act of 1980
("Superfund Act") generally addresses the clean-up of inactive sites at which
hazardous waste treatment, storage, or disposal took place. The Superfund Act
assigns joint and several liability for cost of clean-up and damages to natural
resources to any person who, currently or at the time of disposal of a hazardous
substance, by contract, agreement, or otherwise, arranged for disposal or
treatment, or arranged with a transporter for transport of hazardous substances
owned or possessed by such person for disposal or treatment, and to any person
who accepts hazardous substances for transport to disposal or treatment
facilities or sites from which there is a release or threatened release of such
hazardous substances. Among other things, the Superfund Act authorizes the
federal government either to clean up these sites itself or to order persons
responsible for the situation to do so. The Superfund Act created a fund,
financed primarily from taxes on oil and certain chemicals, to be used by the
federal government to pay for these clean-up efforts. Where the federal
government expends money for remedial activities, it may seek reimbursement from
the Potentially Responsible Parties ("PRPs").
In October 1986, the Superfund Amendment and Reauthorization Act ("SARA") was
enacted. SARA has increased environmental remediation activities significantly.
SARA authorizes federal expenditures of $8.5 billion over five years, while
imposing more stringent clean-up standards and accelerated timetables. SARA also
contains provisions which expand the EPA's enforcement powers and which are
expected to encourage and facilitate settlements with PRPs. The Company believes
that, even apart from funding authorized by SARA, industry and governmental
entities will continue to try to resolve hazardous waste problems due to their
need to comply with other statutory and regulatory requirements and to avoid
liabilities to private parties.
The liabilities provided by the Superfund Act could, under certain
circumstances, apply to a broad range of the Company's possible activities,
including the generation or transportation of hazardous substances, release of
hazardous substances, designing a clean-up, removal or remedial plan and failure
to achieve required clean-up standards, leakage of removed wastes while in
transit or at the final storage site, and remedial operations on ground water.
Such liabilities can be joint and several where other parties are involved.
The Oil Pollution Act of 1990, which resulted from the Exxon Valdez oil spill
and the subsequent damage to Prince William Sound, requires all entities engaged
in the transport and storage of petroleum to maintain a written contingency plan
to react to such types of events. Under the contingency plan, the petroleum
products storage or transportation company must retain an Oil Spill Response
Organization ("OSRO") and a natural resources/wildlife rehabilitator. OSRO'S are
certified by the United States Coast Guard and receive designations based upon
level of capability. In the event of an incident, the OSRO on standby must
respond by being on site with containment capability within two to six hours of
notification.
Asbestos abatement firms are subject to federal, state and local regulators,
including the Occupational Safety and Health Administration ("OSHA"), the EPA
and the Department of Transportation ("DOT"). EPA regulations establish
standards for the control of asbestos fiber and airborne lead emissions into the
environment during removal and demolition projects. OSHA regulations establish
maximum airborne asbestos fiber, airborne lead and heavy metal exposure levels
applicable to asbestos and demolition employees and set standards for employee
protection during the demolition, removal or encapsulation of asbestos, as well
as storage, transportation and final disposition of asbestos and demolition
debris. DOT regulations, in addition to the regulations imposed by the Superfund
Act, cover the management of the transportation of asbestos and demolition
debris and establish certain certification labeling and packaging requirements.
Government regulations have heightened public awareness of the danger of
asbestos contamination, creating pressure on both private and public building
owners to abate this hazard, even in the absence of specific regulations
requiring corrective action.
In 1992, in an effort to protect families from exposure to the hazards of lead
based paint, Congress amended the Toxic Substances Control Act to add Title X,
titled "Lead Exposure Reduction." Since May 1993, OSHA has had standards for
lead exposure in the construction industry that requires testing before, during
and after construction or renovation. OSHA estimates that 1,000,000 workers fall
under its Lead Based Paint Hazard Reduction Act.
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The Company's operations also are subject to other federal laws protecting the
environment, including the Clean Water Act and Toxic Substances Control Act. In
addition, many states also have enacted statutes regulating the handling of
hazardous substances, some of which are broader and more stringent than the
federal laws and regulations.
Compliance/Health and Safety
The Company regards compliance with applicable environmental regulations and the
health and safety of its workforce as critical components of its overall
operations. A substantial portion of the Company's equipment is OSHA approved
and is operated pursuant to a written corporate health and safety plan.
Additionally, all members of the Company's on-site work force are trained in all
relevant aspects of OSHA requirements. This includes medical surveillance as
required by these regulations. Management believes that all requisite health and
safety programs are in place and comply with the regulations in all material
respects.
Among its many services, the Company provides training programs on environmental
and safety hazards in the environmental, industrial and construction industry
trades. The training program is designed for use by supervisors, foremen,
project safety and health trainers, construction workers and laborers. The
training program includes the following topics: sources of exposure; health
effects; personal protective equipment and the medical surveillance required by
OSHA; and engineering controls and remediation procedures.
Insurance and Surety Bonds
The Company maintains comprehensive general liability insurance written on an
occurrence basis. The Company also carries comprehensive auto, professional and
pollution liability as well as worker's compensation and disability coverage.
Basic limits of liability are $9,000,000. In addition, the Company carries all
risk property insurance on all furniture, fixtures, equipment, machinery and
water craft.
Certain of the Company's remediation and abatement contracts require performance
and payment bonds. The continuance of relationships with its various sureties
and the issuance of bonds is dependent on the sureties' continued willingness to
write bonds for the various types of work the Company performs, their assessment
of the Company's performance record and their view of the credit worthiness of
the Company. At present, the Company believes that surety bonds for a number of
the Company's service lines are available only from a limited number of
sureties. While the Company has no reason to believe that it will not continue
to be able to obtain the required surety bonds, no assurance can be given in
this regard. Any failure of the Company to obtain these bonds could materially
and adversely affect certain components of the Company's operations.
Employees/Technical Staff
As of June 30, 2000, the Company employs a core group of approximately 125
persons including executive officers, project managers, specialists,
supervisors, field staff, marketing and clerical personnel. The Company attempts
to provide year-round employment for its core field staff by cross training. The
Company believes a stable work force results in increased productivity at the
work site and that its reputation for steady employment permits it to pay
reasonable hourly rates. The Company promotes qualified field workers to
supervisory positions and supervisors into production management and other staff
positions, when applicable.
The Company employs laborers for field operations based upon the current
workload. Approximately 75 field staff and supervisors are employed on a steady
basis, with additional labor hired on an as-needed basis to supplement the work
force. The Company had an agreement that expired in May 2000 with several local
unions that supply labor for bonded contract work. The Company is currently in
negotiations with these unions to extend the term of the agreement. The Company
believes that failure to reach agreement with the unions would not have a
material adverse effect on its operations, primarily because the availability of
a pool of skilled temporary labor allows the
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Company to meet peak work loads. The Company has never had a work stoppage and
believes that it has goodrelations with its employees.
Permits and Licenses
The Federal Government and certain states in the areas in which the Company
operates require that asbestos and lead abatement firms be licensed. Licensing
generally requires that workers and supervisors receive training from state
certified organizations and pass required tests. Certain states also require
that Wildlife Rehabilitators be licensed. The Company has approximately 16 such
licensed individuals on staff.
While the Company believes that it is in substantial compliance with all of its
licensing and permit requirements, and the Company, or its personnel, maintains
the required licenses and permits in all locations for which it conducts any
applicable operations, the Company may need additional licenses or permits in
areas into which it plans to expand its operations. In addition, the Company may
be required to obtain additional permits or licenses if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or enforced differently than in the past. There can be no assurance
that the Company will be able to continue to comply will all of the permit and
licensing requirements applicable to its business. The Company believes that the
types of licenses the Company possesses have reciprocity in most of the states
due to their adherence to Federal standards, but no assurances can be given in
that regard.
Patents, Trademarks, Licenses and Copyrights
The Company does not own any patents or registered trademarks or trade names.
The Company has common law trademark protection for certain of its trade names
and service marks. The Company has copyrights for certain of its promotional and
employee training materials. The Company does not believe that intellectual
property is a competitive factor in its industry.
Suppliers
The Company purchases its supplies and materials used in its business from a
number of vendors. One of these vendors, Innovative Recycling Technology, Inc.,
represented greater than 5% of the Company's purchases in fiscal 2000. No vendor
individually represented greater than 5% of the Company's purchases in fiscal
1999.
RISK FACTORS
The Company's operations, as well as an investment in its securities, involve
numerous risks and uncertainties. The reader should carefully consider the risk
factors discussed below and elsewhere in this Annual Report on Form 10- KSB
before making any investment decision involving the Company's securities.
FACTORS AFFECTING FUTURE OPERATING RESULTS
DUE TO THE NATURE OF THE COMPANY'S BUSINESS AND THE INTENSE REGULATORY CLIMATE
IN WHICH IT OPERATES, THE COMPANY'S SERVICES ARE SUBJECT TO EXTENSIVE FEDERAL,
STATE AND LOCAL LAWS AND REGULATIONS THAT ARE CONSTANTLY CHANGING. These
regulations impose stringent guidelines on companies that handle hazardous
materials as well as other companies involved in various aspects of the
environmental remediation services industry. Failure to comply with applicable
federal, state and local regulations could result in substantial costs to the
Company, the imposition of penalties or in claims not covered by insurance, any
of which could have a material adverse effect on the Company's business.
In addition to the burdens imposed on operations by various environmental
regulations, federal law imposes strict liability upon present and former owner
and operators of facilities that release hazardous substances into the
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environment and the generators and transporters of such substances, as well as
persons arranging for the disposal of such substances. All such persons may be
liable for the costs of waste site investigation, waste site clean up, natural
resource damages and related penalties and fines. Such costs can be substantial.
ENVIRONMENTAL REMEDIATION OPERATIONS MAY EXPOSE THE COMPANY'S EMPLOYEES AND
OTHERS TO DANGEROUS AND POTENTIALLY TOXIC QUANTITIES OF HAZARDOUS PRODUCTS. Such
products can cause cancer and other debilitating diseases. Although the Company
takes extensive precautions to minimize worker exposure and has not experienced
any such claims from workers or others, there can be no assurance that, in the
future, it will avoid liability to persons who contract diseases that may be
related to such exposure. Such persons potentially include employees, persons
occupying or visiting facilities in which contaminants are being, or have been,
removed or stored, persons in surrounding areas, and persons engaged in the
transportation and disposal of waste material. In addition, the Company is
subject to general risks inherent in the construction industry. It may also be
exposed to liability from the acts of its subcontractors or other contractors on
a work site.
THE FAILURE TO OBTAIN AND MAINTAIN REQUIRED GOVERNMENTAL LICENSES, PERMITS AND
APPROVALS COULD HAVE A SUBSTANTIAL ADVERSE AFFECT ON THE COMPANY'S OPERATIONS.
The remediation industry is highly regulated. The Company is required to have
federal, state and local governmental licenses, permits and approvals for its
facilities and services. There can be no assurance as to the successful outcome
of any pending application or demonstration testing for any such license, permit
or approval. In addition, the Company's existing licenses, permits and approvals
are subject to revocation or modification under a variety of circumstances.
Failure to obtain timely, or to comply with the conditions of, applicable
licenses, permits or approvals could adversely affect the Company's business,
financial condition and results of operations. As the Company's business expands
and as new procedures and technologies are introduced, it may be required to
obtain additional operating licenses, permits or approvals. It may be required
to obtain additional operating licenses, permits or approvals if new
environmental legislation or regulations are enacted or promulgated or existing
legislation or regulations are amended, reinterpreted or enforced differently
than in the past. Any new requirements that raise compliance standards may
require the Company to modify its procedures and technologies to conform to more
stringent regulatory requirements. There can be no assurance that the Company
will be able to continue to comply with all of the environmental and other
regulatory requirements applicable to its business.
THE COMPANY IS DEPENDENT ON THE SUCCESSFUL DEVELOPMENTAL AND COMMERCIAL
ACCEPTANCE OF ITS PROCEDURES AND TECHNOLOGIES. The Company is constantly
developing, refining and implementing its procedures and technologies for
environmental remediation. Its operations and future growth are dependent, in
part, upon the acceptance and implementation of these procedures and
technologies. There can be no assurance that successful development of future
procedures and technologies will occur or, even if successfully developed, that
the Company will be able to successfully commercialize such procedures and
technologies. The successful commercialization of the Company's procedures and
technologies may depend in part on ongoing comparisons with other competing
procedures and technologies and more traditional treatment, storage and disposal
alternatives, as well as the continuing high cost and limited availability of
commercial disposal options. There can be no assurance that the Company's
procedures and technologies will prove to be commercially viable or
cost-effective or, if commercially viable and cost-effective, that the Company
will be successful in timely securing the requisite regulatory licenses, permits
and approvals for any such technologies or that such technologies will be
selected for use in future projects. The Company's inability to develop,
commercialize or secure the requisite licenses, permits and approvals for its
procedures and technologies on a timely basis could have a material adverse
effect on its business, financial condition and results of operations.
A SUBSTANTIAL PORTION OF THE COMPANY'S REVENUES IS GENERATED AS A RESULT OF
REQUIREMENTS ARISING UNDER FEDERAL AND STATE LAWS, REGULATIONS AND PROGRAMS
RELATED TO PROTECTION OF THE ENVIRONMENT. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
Company's services. The level of enforcement activities by federal, state and
local environmental protection agencies and changes in such laws and regulations
also affect the demand for such services. If the requirements of compliance with
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<PAGE>
environmental laws and regulations were to be modified in the future, the demand
for the Company's services, and its business, financial condition and results of
operations, could be materially adversely affected.
THE COMPANY IS SUBJECT TO QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The
Company's revenue is dependent on its contracts and the timing and performance
requirements of each contract. Its revenue is also affected by the timing of its
clients' planned remediation activities and need for its services. Due to this
variation in demand, the Company's quarterly results fluctuate. Accordingly,
specific quarterly or interim results should not be considered indicative of
results to be expected for any future quarter or for the full year. Accordingly,
it is possible that in future quarters, the operating results will not meet the
expectations of securities analysts and investors. In such event, the price of
the Company's common stock could be materially adversely affected.
THE COMPANY'S OPERATIONS ARE AFFECTED BY WEATHER CONDITIONS. While the Company
provides its services on a year-round basis, the services it performs outdoors
or outside of a sealed environment may be adversely affected by inclement
weather conditions. Extended periods of rain, cold weather or other inclement
weather conditions may result in delays in commencing or completing projects, in
whole or in part. Any such delays may adversely affect the Company's operations
and financial results and may adversely affect the performance of other projects
due to scheduling and staffing conflicts.
THE COMPANY MUST CORRECTLY MANAGE ITS GROWTH. The Company is currently pursuing
a business plan intended to further expand its business. Any future growth may
place significant demands on the Company's operational, managerial and financial
resources. There can be no assurance that its current management and systems
will be adequate to address any future expansion of its business. In such event,
any inability to manage the Company's growth effectively could have a material
adverse effect on its business, financial condition and results of operations.
THE COMPANY'S ABILITY TO PERFORM UNDER ITS CONTRACTS AND TO SUCCESSFULLY BID FOR
FUTURE CONTRACTS IS DEPENDENT UPON THE CONSISTENT PERFORMANCE OF EQUIPMENT AND
FACILITIES IN CONFORMITY WITH SAFETY AND OTHER REQUIREMENTS OF THE LICENSES AND
PERMITS UNDER WHICH IT OPERATES. The Company's equipment and facilities are
subject to frequent routine inspections by the regulatory authorities issuing
such licenses and permits. In the event any of the key equipment and facilities
were to be shut down for any appreciable period of time, either due to equipment
breakdown or as the result of regulatory action in response to an alleged safety
or other violation of the terms of the licenses under which the Company
operates, its business, financial condition and results of operations could be
materially adversely affected.
The Company is increasingly pursuing large, multi-year contracts as a method of
achieving more predictable revenue, more consistent utilization of equipment and
personnel, and greater leverage of sales and marketing costs. These larger
projects impose significant risks if actual costs are higher than those
estimated at the time of bid. A loss on one or more of such larger contracts
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the failure to obtain, or a
delay in obtaining, targeted large, multi-year contracts could result in
significantly less revenue for the Company than anticipated.
THE ENVIRONMENTAL REMEDIATION INDUSTRY IS HIGHLY COMPETITIVE AND THE COMPANY
FACES SUBSTANTIAL COMPETITION FROM OTHER COMPANIES. Many of the Company's
competitors have greater financial, managerial, technical and marketing
resources than the Company has. To the extent that competitors possess or
develop superior or more cost effective environmental remediation solutions or
field service capabilities, or otherwise possess or acquire competitive
advantages compared to the Company, its ability to compete effectively could be
materially adversely affected.
THE COMPANY'S FUTURE SUCCESS DEPENDS ON ITS CONTINUING ABILITY TO ATTRACT,
RETAIN AND MOTIVATE HIGHLY QUALIFIED MANAGERIAL, TECHNICAL AND MARKETING
PERSONNEL. The Company is highly dependent upon the continuing contributions of
key managerial, technical and marketing personnel. Employees may voluntarily
terminate their employment with the Company at any time, and competition for
qualified technical personnel, in particular, is intense. The loss of the
services of any of its key managerial, technical or marketing personnel,
11
<PAGE>
especially Michael O'Reilly, its chief executive officer, could materially
adversely affect the Company's business, financial condition and results of
operations.
THE COMPANY SOMETIMES HAS A CONCENTRATION OF CREDIT RISK. The Company contracts
with a limited number of customers that are involved in a wide range of
industries. A small number of customers may therefore be responsible for a
majority of revenues at any time. While management assesses the credit risk
associated with each proposed customer prior to the execution of a definitive
contract, no assurances can be given that such assessments will be correct and
that the Company will not incur substantial, noncollectible accounts receivable.
THE LOSS OF ANY MAJOR CUSTOMER COULD HAVE A MATERIALLY ADVERSE IMPACT ON THE
COMPANY. The Company is dependent upon its relationships and contracts with two
customers that accounted for approximately 30% of its revenues in fiscal 2000.
While the Company intends to increase the amount of work performed for entities
other than these two customers, it expects to continue to be significantly
dependent on these customers for the foreseeable future.
IN ORDER TO SUCCESSFULLY BID ON AND SECURE CONTRACTS TO PERFORM ENVIRONMENTAL
REMEDIATION SERVICES OF THE NATURE OFFERED BY THE COMPANY TO ITS CUSTOMERS, IT
OFTEN MUST PROVIDE SURETY BONDS WITH RESPECT TO EACH PROSPECTIVE AND, UPON
SUCCESSFUL BID, ACTUAL PROJECTS. The number and size of contracts that the
Company can perform is directly dependent upon its ability to obtain bonding.
This ability to obtain bonding, in turn, is dependent, in material part, upon
the Company's net worth and working capital. There can be no assurance that the
Company will have adequate bonding capacity to bid on all of the projects which
it would otherwise bid upon were it to have such bonding capacity or that it
will in fact be successful in obtaining additional contracts on which it may
bid.
COST OVERRUNS ON PROJECTS CALLING FOR FIXED PRICE PAYMENTS COULD HAVE MATERIALLY
ADVERSE EFFECTS ON THE COMPANY. Cost overruns on projects covered by such
contracts, due to such things as unanticipated price increases, unanticipated
problems, inefficient project management, inaccurate estimation of labor or
material costs or disputes over the terms and specifications of contract
performance, could have a material adverse effect on the Company and its
operations. There can be no assurance that cost overruns will not occur in the
future and have a material adverse effect on the Company. In addition, in order
to remain competitive in the future, the Company may have to agree to enter into
more fixed price and per unit contracts than in the past.
THE COMPANY CANNOT GIVE ANY ASSURANCE THAT IT WILL BE ABLE TO SECURE ADDITIONAL
FINANCING TO MEET ITS FUTURE CAPITAL NEEDS. The Company's long term capital
requirements will depend on many factors, including, but not limited to, cash
flow from operations, the level of capital expenditures, working capital
requirements and the growth of its business. Historically, the Company has
relied upon commercial borrowings, debt and equity securities offerings and
borrowings from shareholders and affiliates of shareholders to fund its
operations and capital needs. The Company may need to incur additional
indebtedness to fund the capital needs related to its growth. To the extent
additional debt financing cannot be raised on acceptable terms, the Company may
need to raise additional funds through public or private equity financings. No
assurance can be given that additional debt or equity financing will be
available or that, if either or such financing is available, the terms of such
financing will be favorable to the Company or to its stockholders without
substantial dilution of their ownership and rights. If adequate funds are not
available, the Company may be required to curtail its future operations
significantly or to forego market expansion opportunities.
FACTORS AFFECTING OUR SECURITIES
THE COMPANY IS CONTROLLED BY ONE MAJOR STOCKHOLDER. Currently, one major
stockholder owns an aggregate of approximately 58% of the Company's Common Stock
and holds approximately 77% of its voting power. If this major stockholder
converted all of its convertible preferred stock and its convertible note, it
would own approximately 78% of the then outstanding Common Stock. Accordingly,
such major stockholder is able to control the Board of Directors and thereby
determine the corporate policy and the direction of the Company's operations.
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<PAGE>
THE COMPANY DOES NOT ANTICIPATE PAYING ANY CASH DIVIDENDS FOR THE FORESEEABLE
FUTURE. The Company expects that future earnings, if any, will be used to
finance growth. The payment of any future cash dividends by the Company will be
dependent upon the earnings of the Company, its financial requirements and other
relevant factors. Further, prior to paying any dividends on the Common Stock,
the Company is required to pay quarterly dividends on the Series A Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Series A
Preferred"). The Company is currently in arrears on such dividend payments.
Upon conversion of the Series A Preferred into Common Stock, dividends on the
Series A Preferred shall no longer accrue and all accrued and unpaid dividends,
and any accrued and unpaid interest thereon, as of the date of such conversion,
shall be paid in cash.
FUTURE SALES OF SUBSTANTIAL AMOUNTS OF THE COMPANY'S COMMON STOCK IN THE PUBLIC
MARKET COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF ITS COMMON STOCK. As
of July 15, 2000, the Company had 38,456,254 shares of Common Stock outstanding.
The existence of a large number of shares eligible for sale could have an
adverse effect on the market price of the Company's Common Stock and its ability
to raise additional equity capital on terms beneficial to it.
THE COMPANY HAS EXPERIENCED SIGNIFICANT OPERATING LOSSES AND MAY CONTINUE TO
INCUR LOSSES IN THE FUTURE. These loses could adversely affect the market value
of the Common Stock. The Company had net operating losses of approximately $2.26
million in fiscal 2000 and $1.31 million in fiscal 1999. As of April 30, 2000,
the Company had an accumulated deficit of $34,553,869. Even though the Company
has taken steps in an effort to reduce costs and expenses and to increase
revenues, it may not become profitable at any time in the foreseeable future.
THE MARKET PRICE OF THE COMMON STOCK HAS FLUCTUATED CONSIDERABLY AND WILL
PROBABLY CONTINUE TO DO SO. The stock markets have experienced extreme price and
volume fluctuations, and the market price for the Common Stock has been
historically volatile. The market prices of the Common Stock could be subject to
wide fluctuations in the future as well in response to a variety of events or
factors, some of which may be beyond its control. These could include, without
limitation:
- future announcements of new competing technologies and procedures;
- changing policies and regulations of the federal state, and local
governments;
- the status of patent protection and other intellectual property rights;
- quarterly fluctuations in the Company's financial results;
- liquidity of the market for the Company's securities;
- public perception of the Company and its entry into new markets; and
- general conditions in the Company's industry and the economy.
THE COMPANY'S CHARTER CONTAINS AUTHORIZED, UNISSUED PREFERRED STOCK THAT
MAY INHIBIT A CHANGE OF CONTROL OF THE COMPANY UNDER CIRCUMSTANCES THAT COULD
OTHERWISE GIVE ITS STOCKHOLDERS THE OPPORTUNITY TO REALIZE A PREMIUM OVER
PREVAILING MARKET PRICES OF THE COMPANY'S SECURITIES. The Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and By-laws contain provisions that could make it more difficult for a third
party to acquire the Company under circumstances that could give stockholders an
opportunity to realize a premium over then-prevailing market prices of its
securities. The Company's Certificate of Incorporation authorizes the Company's
Board of Directors to issue preferred stock without stockholder approval and
upon terms as the Board may determine. The rights of holders of common stock are
subject to, and may be adversely affected by, the rights of future holders of
preferred stock. Section 203 of the Delaware General Corporation Law makes it
more difficult for an "interested stockholder" (generally, a 15% stockholder) to
effect various business combinations with a corporation for a three-year period
after the stockholder becomes an "interested stockholder." In general, these
provisions may discourage a third party from attempting to acquire the Company
and, therefore, may inhibit a change of control of the Company.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company holds a five year lease expiring in 2002 containing an option to buy
for its 50,000 square foot facility located at 100 Sweeneydale Avenue, Bay
Shore, New York 11706. Monthly rentals are $23,958, $24,916, $25,913 and $26,950
for the fiscal years 1999, 2000, 2001 and 2002, respectively. The option
purchase price increases annually. This facility houses all the operations of
the Company, other than its oil spill response center located in Brooklyn, New
York.
In May 1998, the Company signed a three-year lease expiring April 30, 2001, at a
monthly rental of $1,000, for a facility located at 1100 Grand Street in
Brooklyn, New York.
Management considers the Company's facilities sufficient for its present and
currently anticipated future operations, and believes that these properties are
adequately covered by insurance.
The Company does not currently have any policy imposing limitations, whether by
quantity or type, with respect to investments in real estate or interests in
real estate, investments in real estate mortgages or the securities of or
interests in persons primarily engaged in real estate activities. Additionally,
there is no policy currently in effect regarding investments in real estate for
possible capital gain or income. The Company does not anticipate that the
creation of any policy regarding real estate investments, and changes to any
such policy once created, will require a vote of holders of the Company's
securities.
ITEM 3. LEGAL PROCEEDINGS
On November 22, 1999, the Securities and Exchange Commission ("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 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,
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 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
will not have a material adverse effect on the Company's consolidated financial
statements.
In November 1997, Trade-Winds 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 will
not have a material adverse effect on the Company's consolidated financial
statements.
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.
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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 and results of operations will not be materially
affected by this proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company's Board of Directors and Acquisition Corp., the majority stockholder
of the Company, have 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 shall become
effective upon its filing with the Office of the Secretary of the State of
Delaware, and such filing shall be made not less than twenty (20) days after the
Company sends an Information Statement describing the Amendment (the
"Information Statement") to its stockholders in compliance with the proxy rules
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
On October 26, 1999, as a result of the equity and debt transaction between the
Company and Spotless, the Board of Directors of the Company, pursuant to the
By-laws of the Company, increased the size of the Board of Directors from five
directors to nine directors. In addition, JoAnn O'Reilly resigned as a director
of the Company effective October 26, 1999 and four nominees of Spotless, Brian
S. Blythe, Ronald B. Evans, Peter A. Wilson and Charles L. Kelly, have been
appointed to the Board of Directors of the Company. A fifth nominee of Spotless,
John J. Bongiorno, has been appointed to the Board of Directors of the Company,
effective as of the date which is ten (10) days after the filing with the SEC
and transmission to the stockholders of the Company of the Information Statement
pursuant to Section 14(f) of the Exchange Act, and Rule 14f-1 promulgated
thereunder. The continuing directors are Michael O'Reilly, Kevin Phillips,
Anthony Towell and Samuel Sadove.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Since October 22, 1996, the Company's common stock has been traded on the OTC
Electronic Bulletin Board of the NASD, under the symbol "WEGI." The following
table sets forth the range of quarterly high and low sale (bid) prices, for the
last two fiscal years, as provided by Standard and Poor's ComStock. These
quotations represent inter-dealer prices, do not reflect retail mark-up,
mark-down, or commission and may not represent actual transactions.
Price Range of Common Stock
---------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
FISCAL 1999
-----------
Quarter Ended HIGH LOW
------------- ---- ---
July 31, 1998 $.58 $.33
October 31, 1998 .45 .31
January 31, 1999 .44 .23
April 30, 1999 .50 .20
FISCAL 2000
-----------
Quarter Ended HIGH LOW
------------- ---- ---
July 31, 1999 $.41 $.16
October 31, 1999 .41 .27
January 31, 2000 .36 .14
April 30, 2000 .23 .08
</TABLE>
As of July 24, 2000, the closing bid price on the NASD's OTC Electronic Bulletin
Board was $0.19. The Company has approximately 697 common stockholders of record
as of April 30, 2000. There have been no dividends declared or paid on the
Common Stock in the past two fiscal years and the Company has no current
intentions to declare or pay dividends on the Common Stock. Under its Series A
Convertible Preferred Stock Agreement, no common stock dividends may be paid
until all preferred dividends are paid in full. Subject to the foregoing, the
Company currently intends to retain any future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and other
relevant factors.
(b) Recent Sales of Unregistered Securities
The information set forth below is a list of all sales and issuances by the
Company of the Company's equity securities occurring during the past three
fiscal years, except to the extent previously disclosed in the Company's
Quarterly Reports on Form 10-QSB.
Fiscal 2000:
At various dates in fiscal 2000, the Company issued 863,450 shares of Common
Stock valued at $201,809 for services rendered by outside vendors to the Company
during fiscal 2000 and fiscal 1999.
In October 1999, the Company issued 225,714 shares of Common Stock to two
individuals, one of whom was an outside director of the Company, valued at
$70,536 to pay dividends and interest due on Series A Preferred.
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In October 1999, a note holder converted a note payable with a value of $10,000
into 20,000 shares of Common Stock.
Fiscal 1999:
In May 1998, a note holder converted a note payable with a value of $10,000 into
20,000 shares of Common Stock.
In May 1998, the Company issued 25,000 shares of Common Stock valued at $11,400
as consideration for director compensation provided during fiscal 1998.
In June 1998 and February 1999, the Company issued a total of 343,333 shares of
Common Stock valued at $105,600 for certain legal services rendered during
fiscal 1999.
In June 1998, the Company issued 100,000 shares of Common Stock valued at
$37,000 as consideration for employee compensation provided during fiscal 1998.
In November 1998, the Company issued 133,333 shares of Common Stock valued at
$50,000 as part of bonus compensation to its President and Chief Executive
Officer.
Fiscal 1998:
The Company issued 437,318 shares of common stock valued at $94,245 for legal
services and to settle legal obligations during fiscal 1998. The Company issued
104,000 shares of common stock valued at $78,742 as consideration for director
and certain employee compensation provided during fiscal 1998.
All of the foregoing securities were restricted as to their resale or offered
and sold to persons under circumstances not involving a public offering.
Accordingly, the Company did not register such securities under the Securities
Act of 1933, as amended, in reliance upon the exemption provided by Section 4(2)
of such Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
RESULTS OF OPERATIONS
Year Ending April 30, 2000 Compared to Year Ending April 30, 1999
Revenues
Revenues decreased to $12,845,165 in fiscal 2000 compared to $13,926,812 in
fiscal 1999. This decrease of $1,081,647, or 7.8%, was primarily the result of
revenue decreases in the Company's Trade-Winds subsidiary of $549,170 to
$11,433,489 in fiscal 2000 from $11,982,659 in fiscal 1999, and the Company's
NAL subsidiary, the revenues of which decreased by $636,457 to $586,486 in
fiscal 2000 from $1,222,943 in fiscal 1999.
The decrease in Trade-Winds revenue of $549,170 was primarily attributable to
reductions in asbestos and construction /renovation projects of approximately
$2,100,000 and $1,100,000, respectively, which were partially offset by
increases in emergency response and environmental remediation/compliance
projects of approximately $1,500,000 and $1,200,000, respectively. During fiscal
2000, the Company experienced cash flow constraints, high interest costs and the
inability of key personnel to focus on the development of revenue prior to and
during the negotiation and due diligence phases of the debt and equity
transaction with Spotless (the "Spotless Transaction")
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<PAGE>
(See Item 1-"Description of Business") which limited its ability
to fund and procure additional construction and abatement projects. The decrease
in NAL revenues of $636,457 is primarily attributable to the loss of key
management and sales personnel.
Gross Profit/Cost of Revenues
Cost of revenues decreased to $10,179,948 in fiscal 2000 compared to $10,930,054
in fiscal 1999. This decrease of $750,106, or 6.9%, was a result of the decrease
in revenues. The Company's cost of revenues consists primarily of labor and
labor related costs, including salaries to laborers, supervisors and foremen,
payroll taxes, training, insurance and benefits. Additionally, cost of revenues
include bonding and job related insurance cost, repairs, maintenance and rental
of job equipment, job materials and supplies, testing and sampling, and
transportation, disposal, and depreciation of capital equipment.
Cost of revenues as a percentage of revenues was 79.3% in fiscal 2000 as
compared to 78.5% in fiscal 1999. Accordingly, gross profit as a percentage of
revenues decreased to 20.7% in fiscal 2000 from 21.5 % in fiscal 1999. Gross
profit in fiscal 2000 was adversely affected by a loss of approximately $532,000
related to one large construction project. The loss was mainly attributable to a
significant amount of change orders to the original contract which increased the
overhead allocation to the project. Management expects to complete this project
during fiscal 2001 and does not expect additional material losses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year increased by $867,699,
or 25.8%, to $4,229,728 in fiscal 2000 from $3,362,029 in fiscal 1999, and
constituted approximately 32.9% and 24.1% of revenues in fiscal years 2000 and
1999, respectively.
The increase of $867,699 in fiscal 2000 as compared to fiscal 1999 was primarily
the result of increases of approximately $277,000 in the provision for doubtful
accounts, $102,000 in compensation expense related to a put option for shares of
Common Stock and stock options held by an officer of the Company, $221,000 in
office salaries, $260,000 in legal costs and litigation reserves, $118,000 in
consulting fees and $254,000 provision for delinquent income taxes partially
offset by decreases in sales salaries of $441,000.
Interest Expense
Interest expense decreased by $259,296 or 26.7% in fiscal 2000 to $710,973 from
$970,269 in fiscal 1999. The decrease in interest expense was attributable to
replacing a secured credit facility with a lending institution with proceeds
from the Spotless Transaction. The resulting debt facility with Spotless carries
a significantly lower interest rate.
Other Income
Other income increased $90,423 to $118,487 in fiscal 2000 from $28,064 in fiscal
1999. The increase was primarily attributable to savings realized through
negotiations with vendors to reduce trade payables balances.
Extraordinary Item
The extraordinary item in fiscal 2000 is a result of a prepayment penalty paid
to Business Alliance Capital Corporation, the Company's former principal lender,
of $100,000, net of taxes. Such borrowing was repaid as a result of cash
received from the Spotless Transaction.
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Net Loss
Net loss and net loss attributable to common stockholders per share for fiscal
2000 were ($2,256,997) and ($ 0.09), respectively. This compares to a net loss
and net loss attributable to common stockholders per share of ($1,307,476) and
($.11), respectively for fiscal 1999.
The Company reported losses from operations for each quarter of fiscal 2000. The
Company's performance improved in the fourth quarter of fiscal 2000 due to an
increase in insurance related projects and improved working capital as a result
of the Spotless Transaction.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2000, the Company has a stockholders' deficit of $2,744,980 and
an accumulated deficit of $34,553,869. The Company has financed its operations
to date primarily through issuance of debt and equity securities. As of April
30, 2000, the Company had $816,560 in cash and a working capital deficit of
$473,619. In addition, as of April 30, 2000, the Company was in arrears with
respect to certain sales tax obligations of $181,000 as well as preferred stock
dividends plus interest of approximately $50,000. 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. As indicated in the report
of the Company's Independent Accountants, the Company's financial statements
have been prepared assuming that the Company will continue as a going concern.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
During fiscal 2000, in order to address the Company's cash flow and operational
concerns, management pursued various options including, but not limited to,
refinancing the Company's credit facility and securing capital through an equity
infusion. 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 which enabled it to repay in full its
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 currently has no credit facility for additional
borrowing. Management continues to pursue additional funding sources and is
discussing the availability of credit facilities with various lenders. Revenue
growth is expected in new and existing service areas and the Company is
currently bidding on projects totaling approximately $20,000,000, though there
can be no assurance that any of the Company's bids will be accepted. 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
obtain 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 Enterprises,
Inc., an affiliate of Spotless. The borrowing bore interest at a rate of 6% and
was repaid with accrued interest in November 1999. In March and April
2000, the Company borrowed a total of $500,000 from Spotless for working
capital requirements. These borrowings bear interest at LIBOR plus 1 percent. As
of April 30, 2000, interest of $3,275 was accrued on these borrowings.
19
<PAGE>
Cash Flow
Net cash used in operating activities was $2,055,433 in fiscal 2000 as compared
to net cash generated by operating activities of $601,368 in fiscal 1999.
Accounts receivable increased $1,339,313 or 57.0% to $3,688,511, reflecting the
increase in sales during the fourth quarter of fiscal 2000. Accounts payable and
accrued expenses decreased by $425,325 or 10.4% to $2,988,382 primarily as a
result of the reductions in outstanding obligations made possible by improved
working capital as a result of the Spotless Transaction.
Cash used for capital expenditures was $275,417 in fiscal 2000 and $379,367 in
fiscal 1999.
The Company received cash from Spotless of $2,500,000 in exchange for equity and
$2,000,000 in exchange for debt. The proceeds were used to repay in full the
Company's outstanding balance under a credit facility and to reduce certain
outstanding vendor obligations. In March and April 2000, the Company borrowed an
additional $500,000 from Spotless to meet working capital needs. In fiscal 2000,
the Company received proceeds of $142,350 from the sale of Common Stock.
THE YEAR 2000
The Company has incurred costs of approximately $25,000 relating to actions
taken to make its systems, service 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 will 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.
ITEM 7. FINANCIAL STATEMENTS
Set forth below is a list of the financial statements of the Company included in
this Annual Report on Form 10- KSB.
Item Page*
---- -----
Reports of Independent Certified Public Accountants F-2 to F-3
Consolidated Balance Sheet as of April 30, 2000 F-4
Consolidated Statements of Operations for the fiscal years ended
April 30, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Deficiency for the
fiscal years ended April 30, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8 to F-19
----------
* Page F-1 follows page 33 to this Annual Report on Form 10-KSB.
20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 1, 1999, the Company's Board of Directors appointed Deloitte and
Touche LLP as its independent accountants, replacing BDO Seidman, LLP (the
"Former Accountants").
During the Company's two most recent fiscal years, there were no disagreements
with the Former Accountants on any matter of accounting principle or practices,
financial statement disclosure, auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the Former Accountants,
would have caused them to reference to the subject matter of the disagreement in
their report. None of the Former Accountants' reports on the Company's financial
statements for either of the past two years contained an adverse opinion or
disclaimer of opinion. However, the Former Accountants' report on the Company's
financial statements for the fiscal year ended April 30, 1999 contained a
qualification relating to the Company's ability to continue as a going concern.
A letter from the Former Accountants addressed to the Securities and Exchange
Commission in accordance with Item 304(a)(3) of Regulation S-B, stating that
they agree with the Registrant's response to Item 4 of the Registrant's Current
Report on Form 8-K, dated December 1, 1999, is filed as an exhibit hereto.
21
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors of the Company hold office until the next annual meeting of
stockholders and until their successors have been elected and shall qualify, or
until their death, resignation or removal from office. The officers of the
Company are elected by the Board of Directors at the first meeting after each
annual meeting of the Company's stockholders and from time to time, and hold
office until their successors are chosen and qualified, or until their death,
resignation or removal from office. The current executive officers and directors
of the Company, and their ages, positions and offices held are as follows:
Name Age Position with the Company
---- --- -------------------------
Michael O'Reilly 50 Director, President
and Chief Executive Officer
Charles L. Kelly, Jr. 41 Director and Chief Financial Officer
Peter A. Wilson 55 Chairman of the Board
Brian S. Blythe 60 Director
Ronald B. Evans 61 Director
Samuel Sadove 46 Director
Anthony Towell 69 Director and Secretary
Dr. Kevin Phillips 52 Director
The following is a brief summary of the business experience and background of
the current executive officers and directors of the Company, based upon
information provided to the Company by such persons:
Michael O'Reilly has been a director, President and Chief Executive Officer of
the Company since 1996, and has been President of Trade-Winds Environmental
Restoration, Inc., a subsidiary of the Company, since 1993. From 1996 to 1999,
he was Chairman of the Board of Directors of the Company. Prior to joining the
Company, Mr. O'Reilly was Vice President and COO of North Shore Environmental
Solutions, Inc., an environmental remediation firm which provided a wide array
of services, including asbestos, hazardous materials and lead removal. He has
seventeen years experience as an executive in the environmental industry.
Charles L. Kelly, Jr. has been a director of the Company since October 1999
and has been serving as Chief Financial Officer since April 2000. Since April
1995, Mr. Kelly has been the Vice President of Finance and Administration of
Spotless Plastics (USA), Inc. Prior to that, Mr. Kelly held senior financial
positions at Luitpold Pharmaceuticals, Inc., IMC Magnetics Corp. and was a
senior audit manager at PricewaterhouseCoopers, LLP.
Peter A. Wilson has been the Chairman of the Board of Directors of the
Company since October 1999. Mr. Wilson is the President and CEO of Spotless
Plastics (USA), Inc. and is the Executive Director Plastics Division of Spotless
Group Limited, an Australian company which indirectly owns Spotless Plastics
(USA), Inc. Mr. Wilson held various senior executive positions within Spotless
Group Limited since 1976 and has been a member of Spotless Group Limited Board
of Directors since 1984.
Brian S. Blythe has been a director of the Company since October 1999. Since
1992, Mr. Blythe has been the Chairman of the Board of Directors of Spotless
Group Limited. Between 1972 and 1992, Mr. Blythe has held numerous executive
positions with Spotless Group Limited including Managing Director of Spotless
Group Limited and Managing Director of Spotless Services Limited. Mr. Blythe is
also a director of Joe White Maltings Limited and was a Member of the Police
Board of Victoria, Australia between 1993 and 1998.
22
<PAGE>
Ronald B. Evans has been a director of the Company since October 1999.
Since 1978, Mr. Evans has been Executive Director of Spotless Group Limited.
Between 1969 and 1999, Mr. Evans has held numerous executive positions at
Spotless Group Limited. Since 1998, he has been the Chairman of the Australian
Football League.
Samuel Sadove, Ph.D, has been a director of the Company since 1996. Dr.
Sadove is a marine biologist who was the director of the Okeanos Ocean Research
Foundation, Inc. since founding the organization in 1980 until 1996. He is an
adjunct Professor at Long Island University, Southhampton College. Dr. Sadove
received an honorary Ph.D in Marine Sciences from Universite d'Aux Marseille.
Dr. Sadove is a member of the Technical Advisory Board of the Peconic National
Estuary Program, the U.S. Department of State's Habitat Working Group, and the
Board of Trustees of The Coastal Research and Education Society of Long Island.
Anthony Towell has been a director of the Company since November 1996. For more
than five years he has been the Vice President, Co-Chairman, and a Director of
Worksafe Industries, Inc., a publicly traded manufacturing company specializing
in industrial safety. He had held senior executive positions during an over 25
year career with the Royal Dutch Shell Group. Mr. Towell is also a Director and
CEO of Gulf West Oil.
Dr. Kevin Phillips has been a director since March 1998. Over the past five
years, Dr. Phillips has been a Partner, Principal and director of FPM Group
Ltd., formerly known as Fanning, Phillips & Molnar, an engineering firm located
on Long Island, New York. Dr. Phillips has a M.S. Degree in Hydrodynamics from
the Massachusetts Institute of Technology and a Ph.D. in Environmental
Engineering from the Polytechnic Institute of New York. He is a licensed
Professional Engineer in eight states, including New York, New Jersey, and
Connecticut, with over 20 years experience in geohydrology and environmental
engineering.
Directors receive no cash compensation for their services as directors, but are
reimbursed for expenses actually incurred in connection with attending meetings
of the Board of Directors. In June 1999, each of the directors received grants
of 5,000 shares of Common Stock as compensation for serving on the Board in
fiscal 1999. In June 1999, non-qualified options to purchase an aggregate of
500,000 shares of Common Stock at an exercise price of $.1875 per share were
granted to non-employee directors of the Company. During fiscal 2000, the Board
of Directors met or acted by written consent seven times. All current directors
attended not less than 75% of such meetings (or executed such written consents)
of the Board and committees on which they serve.
The Board of Directors has an Audit Committee comprised of Messrs. Towell,
Phillips and Sadove. The Audit Committee recommends engagement of the Company's
independent certified public accountants and is primarily responsible for
reviewing and approving the scope of the audit and other services performed by
the Company's independent certified public accountants. The Audit Committee also
reviews and evaluates the Company's accounting principles and practices, systems
of internal controls, quality of financial reporting and financial staff, as
well as any reports or recommendations issued by the independent accountants.
The Board of Directors has a Compensation Committee comprised of Messrs. Towell
and Sadove. The Compensation Committee generally reviews and approves executive
compensation and administers the Company's stock plans. The Board of Directors
has no Nominating Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who beneficially own more than ten percent of a registered
class of the Company's equity securities ("Reporting Persons") to file reports
of beneficial ownership and changes in beneficial ownership on Forms 3, 4 and 5
with the SEC and the National Association of Securities Dealers (the "NASD").
These Reporting Persons are required by SEC regulation to furnish the Company
with copies of all Forms 3, 4 and 5 that they file with the SEC and NASD. Based
solely upon the Company's review of the copies of all Forms 3, 4 and 5 and
amendments to these forms, the Company believes that all Reporting Persons
complied on a timely basis with all filing requirements applicable to them with
respect to transactions since fiscal 1997, except that the following Reporting
Persons failed to report certain transactions on a timely basis with respect to
transactions that occurred prior to fiscal 2000: (a) Samuel S.
23
<PAGE>
Sadove failed to timely file his Form 5 for fiscal 1998 with respect to a grant
by the Company on May 13, 1997 of 1,000 shares of Common Stock as compensation
for director services and (b) Anthony P. Towell failed to file his (i) Form 5
for fiscal 1997 with respect to a grant by the Company on May 2, 1996 of 3,533
shares of Common Stock as compensation for director services, (ii) Form 5 for
fiscal 1998 with respect to (A) grants by the Company on each of July 30, 1997
and November 11, 1997 of 1,000 and 4,533 shares of Common Stock, respectively,
as compensation for director services and (B) the reduction of the conversion
price on December 31, 1997 of a certain convertible promissory note dated
October 15, 1996 pursuant to which an additional 266,667 shares of Common
Stock became subject to issuance under the note, and (iii) Form 5 for fiscal
1999 with respect to a grant by the Company on May 26, 1998 of 5,000 shares of
Common Stock as compensation for director services.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid by the
Company during the last three fiscal years to the Company's Chief Executive
Officer and President (a "Named Executive Officer"). No other executive officer
during fiscal 2000 received compensation for services rendered to the Company
during fiscal 2000 of $100,000 or more.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- Awards
------
Other Restricted Securities
Fiscal Annual Stock Underlying
Name and Principal Position(s) Year Salary Bonus($) Compensation (4) Awards($) Options
------------------------------ ------ ------ -------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael O'Reilly, 2000 $260,000 $55,000 (1) - $50,000 (1) 5,736,309 (2)
Chief Executive Officer 1999 259,615 3,846 - 2,400 (1) 250,000 (3)
and President 1998 220,000 72,765 - 938 (1) 200,000 (3)
</TABLE>
-------------------------------------
[FN]
(1) Mr. O'Reilly received an aggregate of $50,000 and 133,333 shares of Common
Stock in fiscal 1999, the fair value of which shares was $50,000 on the
date of grant, representing a bonus based upon a calculation of net
profits at the end of the second quarter of fiscal 1999. Due to subsequent
losses incurred by the Company in the third and fourth quarters, the bonus
was due back to the Company and, accordingly, recorded as a loan
receivable from officer. In fiscal 2000, the Company forgave the loan.
He received 5,000 shares of Common Stock in fiscal 1999 for service on the
Board of Directors in fiscal 1998, the fair value of which shares was
$2,400 on the date of the grant. He received 1,000 shares of Common Stock
in fiscal 1998 for director services rendered in fiscal 1997, the fair
value of which was $938 on the date of grant. All of these shares were
fully vested on the date of grant. The aggregate value of
Mr. O'Reilly's restricted stock holdings as of April 30, 2000 was
$22,167. None of the shares are entitled to dividends.
(2) On June 28, 1999, Mr. O'Reilly was granted an option to purchase
250,000 shares of Common Stock at an exercise price of $.1875 per share,
the fair market value on the date of grant. Such option is fully vested. On
October 29, 1999, Mr. O'Reilly was granted an option to purchase 2,674,714
shares of Common Stock at an exercise price of $.07904 per share, the fair
market value at the date of grant. Such option vests, to the extent of one
third of the option grant, on each of the first, second and third
anniversaries of October 29, 1999. Additionally, on October 29, 1999, Mr.
O'Reilly was granted an option to purchase 2,811,595 shares of Common Stock
at an exercise price of $.07904 per share, the fair market value at the
date of grant. Such option vests upon the earlier of (i) the conversion of
the Note dated October 29, 1999 issued to Spotless or (ii) October 29,
2006.
24
<PAGE>
(3) On December 29, 1997, Mr. O'Reilly was granted an option to purchase
200,000 shares of Common Stock at an exercise price of $.22 per share, the
fair market value on the date of grant. On August 18, 1998, Mr. O'Reilly
was granted an option to purchase 250,000 shares of Common Stock at an
exercise price of $ 0.34 per share, the fair market value on the date of
the grant. Each of these options is fully vested.
(4) The value of all perquisites provided did not exceed the lesser of
$50,000 or 10% of the officer's salary and bonus.
</FN>
OPTION/STOCK APPRECIATION RIGHTS ("SAR") GRANTS IN LAST FISCAL YEAR
The following table sets forth (a) the number of shares underlying options
granted to each Named Executive Officer during fiscal 2000, (b) the percentage
the grant represents of the total number of options granted to all Company
employees during fiscal 2000, (c) the per share exercise price of each option,
and (d) the expiration date of each option.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SAR's
Underlying Granted to Exercise
Options/SAR's Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date
---- ----------- ----------- --------- ----
<S> <C> <C> <C> <C>
Michael O'Reilly 250,000 4.2% $0.1875 June 27, 2004
Michael O'Reilly 5,486,309 91.9% $0.07904 October 1, 2009
</TABLE>
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option Values
Set forth in the table below is information, with respect to each Named
Executive Officer, as to the (a) number of shares acquired during fiscal 2000
upon each exercise of options granted to such individuals, (b) the aggregate
value realized upon each exercise (i.e. the difference between the market value
of the shares at exercise and their exercise price), (c) the total number of
unexercised options held on April 30, 2000, separately identified between those
exercisable and those not exercisable, and (d) the aggregate value of
in-the-money, unexercised options held on April 30, 2000, separately identified
between those exercisable and those not exercisable.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year-End In-the-Money Options
Shares Acquired Value (#) Exercisable/ at Fiscal Year-End ($)
Name on Exercise (#) Realized ($) Unexercisable Exercisable/Unexercisable (2)
---- --------------- ------------ -------------------------- -----------------------------
<S> <C> <C> <C> <C>
Michael O'Reilly -0- -0- 3,350,000/5,486,309 (1) $230,000/$252,151
<FN>
(1) In October 1999, in connection with the change in control of the
Company, pursuant to the provisions of Mr. O'Reilly's Employment Agreement,
dated November 1, 1996, his option to purchase 2,000,000 shares of Common
Stock, previously granted, vested. In connection with the Spotless
Transaction, Mr. O'Reilly was granted an option to purchase 2,674,714
shares of Common Stock at $.07904 per share that 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 "Closing Date Option").
Mr. O'Reilly was also granted an option to purchase 2,811,595 shares of
Common Stock at $.07904 per share that becomes exercisable upon the earlier
of (i) the conversion of the Note dated October 29, 1999 issued to Spotless
or (ii) October 29, 2006 (the "Conversion Date Option").
25
<PAGE>
(2) The value is calculated based on the aggregate amount of the excess of
$.125 (the closing sale price per share for the Common Stock on April 30,
2000) over the relevant exercise price(s).
</FN>
</TABLE>
Employment Agreement
On October 29, 1999, the Company entered into an Amended and Restated Employment
Agreement (the "Employment Agreement") with Michael O'Reilly. The Employment
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 a
letter agreement, dated October 29, 1999, between Michael O'Reilly and Spotless
(the "Letter Agreement"), to Spotless to the extent that the Company's capital
would be impaired by such a purchase) 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
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 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
options to purchase 2,811,595 shares of Common Stock 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 its Note.
Company Stock Plans
The Company has adopted its stock plans in order to assist it in attracting and
retaining qualified employees and consultants, and to align the interests of
such persons with those of the Company's stockholders. The following is a brief
description of the Company's stock plans:
1998 Stock Incentive Plan
The Company's 1998 Long Term Incentive Plan (the "1998 Incentive Plan") provides
for the grant of "non- qualified stock options," stock appreciation rights,
restricted stock, performance grants and other types of awards to officers, key
employees, consultants and independent contractors of the Company and its
affiliates.
The 1998 Incentive Plan, which is administered by the Compensation Committee of
the Board of Directors, currently authorizes the issuance of a maximum of
2,000,000 shares of Common Stock, which may be either newly issued shares,
treasury shares, re-acquired shares, shares purchased in the open market or any
combination thereof. Non-qualified stock options may be granted at an exercise
price of not less than 85% of such fair market value. If any award under the
1998 Incentive Plan terminates, expires unexercised or is canceled, the shares
of Common Stock that would otherwise have been issuable pursuant thereto will be
available for issuance pursuant to the grant of new awards. The Company has
issued an aggregate of 1,691,764 shares of Common Stock under the 1998 Incentive
Plan as of July 15, 2000, and 308,236 shares remain available for issuance under
the 1998 Incentive Plan. The 1998 Incentive Plan expires in August 2008.
26
<PAGE>
1997 Stock Incentive Plan
The Company's 1997 Incentive Plan (the "1997 Option Plan") provides for the
grant of "incentive stock options" within the meaning of the Section 422 of the
Internal Revenue Code of 1986, as amended, "non-qualified stock options," or
restricted stock to officers, employees, consultants and advisors of the Company
and its affiliates.
The 1997 Option Plan, which is administered by the Compensation Committee of the
Board of Directors, currently authorizes the issuance of a maximum of 1,000,000
shares of Common Stock, which may be either newly issued shares, treasury
shares, re-acquired shares, shares purchased in the open market or any
combination thereof. Incentive stock options generally may be granted at an
exercise price of not less than the fair market value of shares of Common Stock
on the date of grant. If any award under the 1997 Option Plan terminates,
expires unexercised or is canceled, the shares of Common Stock that would
otherwise have been issuable pursuant thereto will be available for issuance
pursuant to the grant of new awards. The Company has issued an aggregate of
1,000,000 shares of Common Stock under the 1997 Option Plan as of July 15, 2000,
and no shares remain available for issuance under the 1997 Option Plan. The 1997
Option Plan expires in December 2007.
Indemnification
Section 145 of the Delaware General Corporation Law provides that
indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization may be provided by such
corporation.
The Company's Certificate of Incorporation includes provisions eliminating the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty except, pursuant to the limitations of the Delaware
General Corporation Law, (i) for any breach of their fiduciary duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or any amendatory or
successor provisions thereto, or (iv) with respect to any transaction from which
the director derived an improper personal benefit. The Company's By-Laws provide
indemnification to directors, officers, employees, and agents, including against
claims brought under state or Federal Securities laws, to the full extent
allowable under Delaware law.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 15, 2000, certain information
concerning the beneficial ownership of each class of the Company's voting stock
by (i) each beneficial owner of 5% or more of the Company's voting stock, based
on reports filed with the Securities and Exchange Commission and certain other
information; (ii) each of the Company's executive officers, directors and
director nominees and (iii) all of the Company's officers, directors and
director nominees as a group:
<TABLE>
<CAPTION>
Number of Shares Beneficially Owned and Percent of Class (1)
---------------------------------------------------------------------------------------------------
Percent
of Percent Pecent % of
Name and Address of Common Common Series A of Series B of Voting Voting
Beneficial Owner Stock Stock Preferred Series A Preferred Series B Power Power
------------------- ------ ------- --------- -------- --------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spotless Group Limited (2) 58,002,722 (3) 78.2% - - 9,346 100% 58,002,722 76.9%
Michael O'Reilly (4) 3,527,333 (5) 8.4% - - - - 3,527,333 6.7%
Samuel Sadove (4) 461,000 (6) 1.2% - - - - 461,000 *
Anthony Towell (4) 1,726,712 (7) 4.3% - - - - 1,726,712 3.4%
Brian S. Blythe (8) - (9) - - - - - - -
John J. Bongiorno (8) - (10) - - - - - - -
Ronald B. Evans (8) - (11) - - - - - - -
27
<PAGE>
Charles L. Kelly, Jr. (8) - (12) - - - - - - -
Peter A. Wilson (8) - (13) - - - - - - -
Dr. Kevin Phillips (14) 1,300,839 (15) 3.3% 650,000 50% - - 1,300,839 2.6%
All directors, director
nominees and executive
officers as a group
(9 individuals) 7,015,884 (16) 15.6% 650,000 50% - - 7,015,884 12.8%
<FN>
* Less than 1 percent
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after July 15, 2000 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person. Unless otherwise
indicated in the footnotes below, the persons and entities named in the
table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) The address of Spotless Group Limited ("Spotless Group") is c/o
Spotless Plastics (USA) Inc., 150 Motor Parkway, Suite 413, Hauppauge,
New York 11788. Spotless Group directly owns 100% of the voting
stock of Spotless Plastics Pty. Ltd., a company organized under the laws
of Victoria, Australia, which in turn directly owns 100% of the voting
stock of Spotless. Spotless directly owns 100% of the voting stock of
Acquisition Corp.
(3) Includes 22,284,683 shares of Common Stock sold to Acquisition Corp.
pursuant to the Subscription Agreement, 9,346,000 shares of Common Stock
issuable upon conversion of the 9,346 shares of Series B Preferred held by
Acquisition Corp., 25,304,352 shares of Common Stock issuable upon
conversion of the outstanding principal of the Note and 1,067,687 shares of
Common Stock issuable upon conversion of the accrued and unpaid interest
related to the Note. Spotless Group, Spotless and Acquisition Corp.
may be deemed to share the voting and investment power over all of
these shares. The Company does not currently have a sufficient number
of authorized, unissued and unreserved shares of Common Stock to
issue upon conversion of the Series B Preferred or the Note. The Board of
Directors and Acquisition Corp., the majority stockholder of the Company,
have approved 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 will become effective upon its filing with
the Office of the Secretary of State of Delaware, and such filing will be
made not less than 20 days after the Company sends an Information Statement
describing the Amendment to its stockholders in compliance with the proxy
rules of the Exchange Act. See Item 4 - "Submission of Matters to a Vote of
Securityholders."
(4) The address for this person is c/o Windswept Environmental Group, Inc.,
100 Sweeneydale Ave., Bay Shore, New York 11706.
(5) Includes 177,333 shares of Common Stock directly held by Mr. O'Reilly
and options under which he may purchase 3,350,000 shares of Common Stock
which are exercisable within 60 days. Does not include 11,000 shares of
Common Stock directly held by JoAnn O'Reilly, the wife of Mr. O'Reilly,
options under which she may purchase 300,000 shares of Common Stock which
are exercisable within 60 days, as to each of which Mr. O'Reilly disclaims
beneficial ownership, and the shares of Common Stock issuable upon
conversion of the Closing Date Option and the Conversion Date Option. The
Closing Date Option and the Conversion Date Option have not yet vested and
are not exercisable within 60 days. In addition, should such options vest
and become exercisable, as discussed in footnote 3 above, the Company does
not have sufficient number of authorized, unissued and unreserved shares of
Common Stock to issue upon conversion of such options.
(6) Includes 11,000 shares of Common Stock directly by held by Mr. Sadove
and options under which he may purchase 450,000 shares of Common Stock
which are exercisable within 60 days.
28
<PAGE>
(7) Includes 24,533 shares of Common Stock directly held by Mr. Towell,
9,066 shares of Common Stock held jointly by Mr. Towell and his wife,
Jacqueline Towell, options under which he may purchase 650,000 shares of
Common Stock which are exercisable within 60 days, 666,667 shares of Common
Stock issuable upon conversion of the outstanding principal of a $100,000
demand convertible note directly held by Mr. Towell which is convertible
within 60 days and 376,447 shares of Common Stock issuable upon conversion
of accrued and unpaid interest on the convertible note.
(8) The address for this person is c/o Spotless Enterprises Inc., 150 Motor
Parkway, Suite 413, Hauppauge, New York 11788.
(9) Excludes shares beneficially held by Spotless Group. Mr. Blythe is a
director and executive officer of Spotless Group and may be deemed to share
voting or investment power with respect to these shares. Mr. Blythe
disclaims beneficial ownership of these shares.
(10) Excludes shares beneficially held by Spotless Group. Mr. Bonjiorno is a
director and executive officer of Spotless Group and may be deemed to
share voting or investment power with respect to these shares. Mr.
Bonjiorno disclaims beneficial ownership of these shares. Mr. Bonjiorno
will be appointed to the Board of Directors of the Company, effective as of
the date which is ten (10) days after the filing with the SEC and
transmission to the stockholders of the Company of the Information
Statement pursuant to Section 14(f) of the Exchange Act, and Rule 14f-1
promulgated thereunder. See Item 4. - "Submission of Matters to a Vote of
Securityholders."
(11) Excludes shares beneficially held by Spotless Group. Mr. Evans is a
director and executive officer of Spotless Group and may be deemed to
share voting or investment power with respect to these shares. Mr. Evans
disclaims beneficial ownership of these shares.
(12) Excludes shares held of record by Acquisition Corp. and beneficially held
by Spotless. Mr. Kelly is an executive officer of Acquisition Corp. and
Spotless and may be deemed to share voting or investment power with respect
to these shares. Mr. Kelly disclaims beneficial ownership of these shares.
(13) Excludes shares beneficially held by Spotless Group. Mr. Wilson is a
director and executive officer of Spotless Group and may be deemed to share
voting or investment power with respect to these shares. Mr. Wilson
disclaims beneficial ownership of these shares.
(14) The address for Dr. Phillips is c/o FPM Group Ltd., 909 Marconi Avenue,
Ronkonkoma, New York 11779.
(15) Includes 245,839 shares of Common Stock directly held by Dr. Phillips,
options under which he may purchase 405,000 shares of Common Stock that are
exercisable within 60 days and 650,000 shares of Common Stock issuable upon
conversion of 650,000 shares of Series A Preferred directly held by
Dr. Phillips.
(16) Includes options under which members of the group may purchase an
aggregate of 4,855,000 shares of Common Stock which are exercisable within
60 days, 666,667 shares of Common Stock issuable upon conversion of a
demand convertible note held by a member of the group, 376,447 shares of
Common Stock issuable upon conversion of accrued interest related to the
convertible note and 650,000 shares of Common Stock issuable upon
conversion of 650,000 shares of Series A Preferred Stock directly held by a
member of the group. Does not include (a) any shares of Common Stock
issuable upon exercise of the Closing Date Option or the Conversion Date
Option and (b) shares of Common Stock directly held by JoAnn O'Reilly and
the options under which JoAnn O'Reilly may purchase shares of Common Stock,
as to each of which Michael O'Reilly disclaims beneficial ownership.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 29, 1999, the Company entered into a subscription agreement with
Spotless pursuant to which the Company sold to Acquisition Corp. 22,284,683
shares (the "Acquisition Corp. Common Shares") of Common Stock and 9,346 shares
of Series B Preferred for an aggregate subscription price of $2,500,000 or
$.07904 per share of Common Stock and $79.04 per
29
<PAGE>
share of Series B Preferred. Each share of Series B Preferred has the equivalent
voting power of 1,000 shares of Common Stock. Each share of Series B Preferred
is convertible into 1,000 shares of Common Stock. As of July 15, 2000, the
Acquisition Corp. Common Shares represented approximately 58% of the outstanding
Common Stock and the Acquisition Corp. Common Shares and Series B Preferred
shares collectively represented approximately 66% of the voting power of the
outstanding securities of the Company.
In addition, the Company and Trade-Winds, NAL and NYTL, 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. This
borrowing is evidenced by a secured convertible promissory note, dated October
29, 1999 (the "Note"). Outstanding principal under the Note bears interest at a
rate equal to the London Interbank Offering Rate ("LIBOR") plus an additional 1%
and is payable monthly. The Note matures on October 29, 2004, unless Spotless
elects to defer repayment until October 29, 2005. The outstanding principal
amount and all accrued and unpaid interest under the Note is convertible, at the
option of Spotless, in whole or in part, at any time, into shares of Common
Stock at the rate of one share of Common Stock for every $.07904 of principal
and accrued interest so converted (or, in the event that certain approvals have
not been obtained at the time of conversion, into shares of Series B Preferred
at the rate of one share of Series B Preferred for every $79.04 of principal and
accrued interest so converted). In connection with the Note, each of the
Obligors granted to Spotless a security interest in all of their respective
assets pursuant to a Security Agreement dated October 29, 1999.
As a result of the conversion features of the Series B Preferred and the Note,
as of July 15, 2000, if Acquisition Corp. were to convert its Series B Preferred
shares into Common Stock and Spotless were to convert all of the outstanding $2
million principal amount and $84,390 accrued and unpaid interest under the Note
into Common Stock, Acquisition Corp. and Spotless would collectively own
58,002,013 shares, or approximately 78%, of the then issued and outstanding
shares of Common Stock.
In September 1999, the Company borrowed $100,000 from Spotless Enterprises,
Inc., an affiliate of Spotless. The borrowing bore interest at a rate of 6% and
was repaid with accrued interest in November 1999. In March and April 2000, the
Company borrowed a total of $500,000 from Spotless for working capital
requirements. These borrowings bear interest at LIBOR plus 1 percent. As of
April 30, 2000, interest of $3,275 was accrued on these borrowings.
During fiscal 1999, Michael O'Reilly, the Company's President and Chief
Executive Officer received an aggregate of $50,000 and 133,333 shares of Common
Stock, the fair value of which shares was $50,000 on the date of grant,
representing a bonus based upon a calculation of net profits at the end of the
second quarter of fiscal 1999. Due to subsequent losses incurred by the Company
in the third and fourth quarters, the bonus was due back to the Company and,
accordingly, recorded as a loan receivable from Mr. O'Reilly. In fiscal 2000,
the Company forgave the loan.
In fiscal 2000, the Company amended Michael O'Reilly's Employment Agreement (see
Item 10- "Executive Compensation").
In fiscal 1997, Anthony Towell, a director of the Company, loaned the Company
$100,000 and was issued a 12% convertible promissory note providing for, at the
option of Mr. Towell, the conversion of the principal and accrued and unpaid
interest at the rate of $.25 per share of Common Stock. On December 31, 1997,
the conversion price was adjusted to $0.15 per share of Common Stock. As of July
15, 2000, an aggregate of 1,043,114 shares of Common Stock are issuable upon
conversion of the principal and accrued and unpaid interest under the
convertible promissory note. The Company has included interest due of $52,653 in
accrued expenses as of April 30, 2000. Mr. Towell was also an officer and
director of Worksafe Industries, Inc., which sold approximately $3,118 and
$189,778 of material and supplies to the Company that were used on remediation
projects during fiscal 2000 and 1999, respectively.
On December 16, 1998, the Company entered into an operating lease arrangement
with its Chief Executive Officer. Under the arrangement, the Company leases a
forty-two foot fully-equipped custom Topaz boat for a period of two years.
Annual rental is approximately $60,000. The leasing arrangement was necessitated
by a Marine Assistance Contract entered into with Keyspan Energy Corporation
covering the period January 1, 1999 through December 31, 2000. The arrangement
provides the Company with its largest floating vessel capable of handling
specialty equipment and facilitating an offshore support crew. The lease carries
a one year renewal option. The Company is responsible for all taxes, insurance
and reports.
30
<PAGE>
At April 30, 2000 and 1999, Dr. Kevin Phillips, a director of the Company,
directly held 650,000 shares of Series A Preferred. The Series A
Preferred is convertible into Common Stock at the rate of one share of Common
Stock for every one share of Series A Preferred. In fiscal 2000, dividends and
interest of $35,268 were paid by the issuance of 112,857 shares of Common Stock.
In fiscal 1999, dividends and interest of $60,368 were paid to Dr. Phillips,
which amount consisted of $9,750, shares of Common Stock of 122,982 and an
option to purchase 15,000 shares of Common Stock exercisable at $.41 per share.
At April 30, 2000, accrued expenses included $24,814 of dividend arrearages owed
to Dr. Phillips. In addition, the Company's subsidiaries sold approximately
$261,203 and $7,800 of services to FPM Group Ltd., formerly known as Fanning
Phillips & Molnar, a company of which Dr. Phillips is a principal, in fiscal
2000 and 1999, respectively. As of April 30, 2000, FPM Group Ltd. owed $139,788
to the Company for such services.
Dr. Samuel Sadove, a director of the Company, performs consulting services
for the Company. The Company paid Dr. Sadove $42,400 for such services in each
of fiscal 2000 and fiscal 1999.
In fiscal 1999, the Company entered in a contract for approximately $170,000 to
construct an employee's dwelling. As of April 30, 2000, the Company recognized
losses under this contract of approximately $130,000. In fiscal 1998, the
Company entered into a contract for $1,100,000 to construct a dwelling for a
partner in the Company's former law firm. Subsequent change orders have brought
the contract value to approximately $2,111,000 at April 30, 2000. The Company
has recognized losses under this contract of approximately $532,000 as of April
30, 2000.
The Company believes that all transactions entered into by the Company with its
officers, directors and principal stockholders have been on terms no less
favorable to the Company than those available from unrelated third parties. See
Item 10 "Executive Compensation."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Set forth below are all exhibits to this Annual Report on Form 10-KSB.
3.01 Composite of Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.01 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of the
Company's Registration Statement (No. 33-14370 N.Y.) filed with the SEC
on June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13, 1998).
4.02 Certificate of Designations for Series B Preferred Stock.
(Incorporated by reference to Exhibit 3.1 of the Company's Current
Report on Form 8-K (Date of Report: October 29, 1999) filed with
the SEC on November 12, 1999).
4.03 Specimen Series B Preferred Stock Certificate. (Incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K
(Date of Report: October 29, 1999) filed with the SEC on November 12,
1999).
10.01 Form of Convertible Note Agreement. (Incorporated by reference
to Exhibit 4.04 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997, filed with the SEC on September 29,
1997).
10.02 Convertible Demand Note, dated October 15, 1996, between Trade-Winds
Environmental Restoration, Inc. and Anthony P. Towell, together with
related agreements.
10.03 Employment Agreement between the Company and Michael O'Reilly
dated November 1, 1996. (Incorporated by reference to Exhibit 10.02 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1997, filed with the SEC on September 29, 1997).
31
<PAGE>
10.04 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997,
filed with the SEC on September 29, 1997).
10.05 1997 Stock Option Plan. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (No. 333-22491) filed with
the SEC on February 27, 1997).
10.06 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 (No. 333-61905) filed
with the SEC on August 20, 1998).
10.07 Loan and Security Agreement dated June 1, 1998 between Business
Alliance Capital Corporation and the Company and Subsidiaries.
(Incorporated by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
10.08 Individual Guaranty of Michael O'Reilly to Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.14 of
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998, filed with the SEC on August 13, 1998).
10.09 Revolving Credit Master Promissory Note for $1,850,000 between
the Company and Business Alliance Capital Corporation. (Incorporated
by reference to Exhibit 10.15 of the Company's Annual Report on Form
10-KSB for the fiscal year ended April 30, 1998, filed with the SEC
on August 13, 1998).
10.10 Term Loan for $595,000 Between the Company and Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.16 of
the Company's Annual Report on Form 10-KSB for the fiscal year
ended April 30, 1998, filed with the SEC on August 13, 1998).
10.11 Origination Fee Amendment dated August 1, 1998 between the
Company and Business Alliance Capital Corporation. (Incorporated
by reference to Exhibit 10.17 of the Company's Annual Report on Form
10-KSB for the fiscal year ended April 30, 1998, filed with the SEC on
August 13, 1998).
10.12 Loan Agreement dated September 16, 1999 between Spotless Enterprises Inc.
and the Company.
10.13 Subscription Agreement dated October 29, 1999 between the
Company and Spotless Plastics (USA), Inc. (Incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K (Date
of Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.14 Convertible Promissory Note dated October 29, 1999 issued by the
Company to Spotless Plastics (USA), Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K (Date
of Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.15 Form of Security Agreement dated October 29, 1999 between each of the
Company, Trade-Winds Environmental Remediation, Inc., North Atlantic
Laboratories, Inc. and New York Testing, Inc. and Spotless Plastics
(USA), Inc. (Incorporated by reference to Exhibit 10.3 of the Company's
Current Report on Form 8-K (Date of Report: October 29, 1999) filed with
the SEC on November 12, 1999).
10.16 Amended and Restated Employment Agreement dated October 29, 1999
between the Company and Michael O'Reilly. (Incorporated by reference
to Exhibit 10.4 of the Company's Current Report on Form 8-K (Date
of Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.17 Stock Option Agreement dated October 29, 1999 between the
Company and Michael O'Reilly. (Incorporated by reference to Exhibit
10.5 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
32
<PAGE>
10.18 Stock Option Agreement dated October 29, 1999 between the
Company and Michael O'Reilly relating to options vesting upon exercise
of the convertible note. (Incorporated by reference to Exhibit 10.6
of the Company's Current Report on Form 8-K (Date of Report: October 29,
1999) filed with the SEC on November 12, 1999).
10.19 Letter Agreement dated October 29, 1999 between Michael O'Reilly
and Spotless Plastics (USA), Inc. (Incorporated by reference to
Exhibit 10.7 of the Company's Current Report on Form 8-K (Date
of Report: October 29, 1999) filed with the SEC on November 12, 1999).
16.1 Letter dated December 7, 1999 from BDO Seidman LLP to the Securities
and Exchange Commission. (Incorporated by reference to Exhibit 16 of
the Company's Current Report on Form 8-K (Date of Report: December 1,
1999) filed with the SEC on December 8, 1999).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of BDO Seidman LLP.
24.01 Powers of Attorney (set forth on the signature page of this Annual
Report on Form 10-KSB).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended April 30, 2000.
33
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
----
Reports of Independent Certified Public Accountants. . . . . . . . . F-2 to F-3
Consolidated Balance Sheet as of April 30, 2000 . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations for the
fiscal years ended April 30, 2000 and 1999 . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Stockholders' Deficiency
for the fiscal years ended April 30, 2000 and 1999 . . . . . . . . . . . .F-6
Consolidated Statements of Cash Flows for the
fiscal years ended April 30, 2000 and 1999 . . . . . . . . . . . . . . . .F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-8 to F-19
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
We have audited the accompanying consolidated balance sheet of Windswept
Environmental Group, Inc. and Subsidiaries as of April 30, 2000 and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Windswept
Environmental Group, Inc. and Subsidiaries at April 30, 2000, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3
to the consolidated financial statements, the Company has incurred recurring
losses from operations, has a stockholders' deficit and a working capital
deficiency, and is in arrears with respect to certain of its obligations.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
Jericho, New York
July 24, 2000
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows of Windswept
Environmental Group, Inc. and Subsidiaries for the year ended April 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Windswept Environmental Group, Inc. and Subsidiaries for the year ended
April 30, 1999, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has incurred recurring
losses from operations, has a stockholders' deficit and a working capital
deficiency, and is in arrears with respect to certain of its obligations,
including sales and payroll taxes. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Melville, New York
August 11, 1999
F-3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 2000
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
CURRENT ASSETS:
Cash $ 816,560
Accounts receivable, net of allowance for doubtful accounts of $266,000 3,422,469
Inventories 168,151
Costs and estimated earnings in excess of billings on uncompleted contracts 150,829
Prepaid expenses and other current assets 135,384
---------
Total current assets 4,693,393
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $3,657,682 (Note 4) 1,749,928
GOODWILL, net of accumulated amortization of $55,387 (Note 1) 66,639
OTHER ASSETS (Notes 1 and 8) 189,244
----------
TOTAL $6,699,204
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $1,735,529
Accrued expenses (Notes 5 and 15) 1,252,853
Loans payable (Note 15) 500,000
Billings in excess of costs and estimated earnings on uncompleted contracts 302,854
Accrued payroll and related fringe benefits 475,931
Sales taxes payable 269,518
Current portion of long-term debt (Note 7) 136,153
Obligations of unconsolidated subsidiary, net (Note 6) 210,007
Income taxes payable (Note 10) 194,684
Other current liabilities 89,483
----------
Total current liabilities 5,167,012
----------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 7) 95,005
----------
CONVERTIBLE NOTES (Notes 2, 8 and 15) 2,780,000
----------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 16)
REDEEMABLE COMMON STOCK (Note 12) 102,167
---------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
$.01 par value; 1,300,000 shares authorized and
outstanding at April 30, 2000 (Notes 9 and 15) 1,300,000
----------
STOCKHOLDERS' DEFICIENCY:
Series B preferred stock, $.01 par value, 50,000 shares authorized
9,346 shares outstanding at April 30, 2000 (Notes 2 and 15) 93
Non designated preferred stock, no par value; 8,650,000 shares
authorized; 0 shares outstanding --
Common stock, $.0001 par value, 50,000,000 shares authorized;
38,456,254 shares outstanding at April 30, 2000 (Notes 2 and 13) 3,846
Additional paid-in capital 31,804,950
Accumulated deficit (34,553,869)
------------
Total stockholders' deficiency (2,744,980)
------------
TOTAL $ 6,699,204
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues $12,845,165 $13,926,812
Cost of revenues 10,179,948 10,930,054
------------ ------------
Gross profit 2,665,217 2,996,758
Selling, general and administrative expenses (Note 15) 4,229,728 3,362,029
------------ ------------
Loss from operations (1,564,511) (365,271)
------------ ------------
Other income (expense):
Interest expense (Notes 2, 7, 8, 9 and 15) (710,973) (970,269)
Other, net (Note 11) 118,487 28,064
------------ ------------
Total other expense (592,486) (942,205)
------------ ------------
Loss before extraordinary item and provision for income taxes (2,156,997) (1,307,476)
Provision for income taxes (Note 10) - -
------------ ------------
Net loss before extraordinary item (2,156,997) (1,307,476)
Extraordinary item - loss on extinguishment of debt (100,000) -
------------ ------------
Net loss (2,256,997) (1,307,476)
Dividends on Series A Redeemable Convertible Preferred Stock
(Note 9) (78,000) (78,000)
------------ ------------
Net loss attributable to common shareholders $(2,334,997) $(1,385,476)
============ ============
Basic and diluted net loss per common share:
Before extraordinary item $ (.09) $ (.11)
Extraordinary item - -
------------ ------------
Basic and diluted net loss per common share $ (.09) $ (.11)
============ =============
Weighted average number of common shares outstanding:
basic and diluted 26,927,083 13,064,314
============ =============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE FISCAL YEARS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- ---------------- Additional
Number Par Number Par Paid-in Accumulated Deferred
of Shares Value of Shares Value Capital Deficit Compensation Total
--------- ----- ----------- ----- ---------- ----------- ------------ -------
<S> <C> <C> <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)
Private placements of common stock - - 735,000 73 129,927 - - 130,000
Note conversion - - 20,000 2 9,998 - - 10,000
Issuance of common stock for services - - 1,284,528 129 466,623 - - 466,752
Issuance of common stock to settle
legal obligations - - 38,874 4 13,420 - - 13,424
Issuance of common stock and options
for employee and director compensation - - 258,333 26 178,374 - - 178,400
Amortization of deferred compensation - - - - - - 75,137 75,137
Dividends on preferred stock - - - - (78,000) - - (78,000)
Issuance of common stock and options
for accrued preferred stock dividends
and related interest - - 245,964 25 101,211 - - 101,236
Net loss - - - - - (1,307,476) - (1,307,476)
----- ------ ---------- ------ ------------ ------------ -------- ------------
Balance at April 30, 1999 - - 14,135,073 1,414 28,948,201 (32,296,872) - (3,347,257)
Private placements of common and
preferred stock 9,346 93 23,167,017 2,317 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 and stock
options for director compensation - - 25,000 3 5,076 - - 5,079
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 - - - - (78,000) - - (78,000)
Net loss and comprehensive loss - - - - - (2,256,997) - (2,256,997)
----- ------ ---------- ------- ------------ ------------- -------- ------------
Balance at April 30, 2000 9,346 $ 93 38,456,254 $3,846 $31,804,950 $(34,553,869) $ - $(2,744,980)
===== ====== ========== ======== =========== ============= ======== ============
</TABLE>
[FN]
See notes to consolidated financial statements.
</FN>
F-6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,256,997) $ (1,307,476)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 868,412 929,633
Provision for doubtful accounts 208,342 (66,858)
Issuance of common stock and stock options for director compensation 5,079 178,400
Compensation related to officer options and redeemable common stock 102,167 -
Issuance of common stock for dividends and related interest on
redeemable preferred stock 70,536 101,236
Issuance of common stock and stock options for services 201,809 480,176
Obligations of unconsolidated subsidiary 13,895 -
Changes in operating assets and liabilities:
Accounts receivable (1,339,313) 335,177
Inventories (38,531) 31,646
Costs and estimated earnings in excess of billings on
uncompleted contracts 6,171 (101,648)
Loans to officer 100,000 -
Prepaid and other current assets 49,392 (29,605)
Other assets 84,190 5,118
Accounts payable and accrued expenses (425,325) 137,963
Payroll and sales tax payable (10,309) (52,394)
Income taxes payable 191,439 -
Other current liabilities 36,756 -
Billings in excess of costs and estimated earnings in
uncompleted contracts 76,854 (40,000)
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,055,433) 601,368
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (275,417) (379,367)
Loans to officer - (100,000)
Collection of note receivable 152,895 73,029
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (122,522) (406,338)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to factor, net - (1,505,968)
Proceeds of long-term debt 79,704 1,123,199
Principal payments of long-term debt (1,080,780) (1,110,936)
(Repayment) proceeds from revolving bank line, etc., net (1,200,596) 1,200,596
Proceeds from private placements of stock 2,642,351 130,000
Proceeds from loans payable 500,000 -
Proceeds from notes due affiliate 2,000,000 -
Proceeds from exercise of stock options 7,500 -
Dividends paid on redeemable preferred stock - (19,500)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,948,179 (182,609)
------------- -------------
NET INCREASE IN CASH 770,224 12,421
CASH - BEGINNING OF PERIOD 46,336 33,915
------------- -------------
CASH - END OF PERIOD $ 816,560 $ 46,336
============= =============
Cash paid during the period for:
Interest $ 752,424 $ 937,830
============= =============
Non cash financing activities:
Conversion of 10% note to 20,000 shares of common stock $ 10,000 $ 10,000
============= =============
Issuance of redeemable preferred stock dividend $ 78,000 $ 78,000
============= =============
</TABLE>
[FN]
See notes to consolidated financial statements.
</FN>
F-7
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Windswept Environmental Group, Inc. and its subsidiaries (the
"Company") provides a broad range of environmental services through
vertically integrated businesses in the areas of hazardous waste
remediation, asbestos removal, lead clean-up, emergency spill response and
laboratory testing and training. In providing a turnkey environmental
solution, the Company also provides demolition, renovation and other
general construction services. The Company provides these services to a
diversified customer base located primarily in the Northeastern United
States.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Windswept Environmental Group, Inc. and its subsidiaries,
except for a wholly-owned laboratory testing subsidiary which is in process
of liquidation through formal bankruptcy proceedings, and is accounted for
by the equity method. All intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses as well as the disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
REVENUE RECOGNITION
The majority of the Company's revenue is derived from the provision of
services over periods of less than one month. In such instances, revenue is
recognized at the completion of the related contracts.
Revenue from contracts that extend over periods of one month or more
is recognized using the percentage-of-completion method, measured by the
percentage of costs incurred to date compared to estimated total costs for
each contract. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability, the effect of
contract penalty provisions and final contract settlements may result in
revisions to estimates of costs and income and are recognized in the period
in which the revisions are determined.
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 first quarter of fiscal 2001. The Company is currently evaluating
the impact of SAB 101 on its results of operations and financial position.
INVENTORIES
Inventories consist of materials and supplies utilized on the
Company's remediation projects and are recorded at the lower of cost
(first-in, first-out) or market.
F-8
<PAGE>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for accounts receivable based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of machinery and equipment, office
furniture and equipment, trucks and vehicles, and leasehold improvements,
are stated at cost. Depreciation is provided by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the lesser of the term of the related lease or the estimated
useful lives of the improvements. The estimated useful lives of the related
assets are generally three to ten years.
GOODWILL
The excess of the purchase price and related acquisition costs over
the fair market value of the net assets of the business acquired is
amortized on a straight line basis over periods ranging from ten to fifteen
years. Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets.
Based upon such evaluations, there has been no impairment of long-lived
assets in either fiscal 2000 or 1999. Goodwill amortization charged against
earnings was $9,393 and $9,468 in fiscal 2000 and 1999, respectively.
LOSS PER SHARE
The basic net loss per share is computed using weighted average number
of common shares outstanding for the applicable period. The diluted net
loss per share is computed using the weighted average number of common
shares plus common equivalent shares outstanding, except if the effect on
the per share amounts of including equivalents would be anti-dilutive.
INCOME TAXES
Deferred income taxes result from timing differences arising between
financial and income tax reporting due to the deductibility of certain
expenses in different periods for financial reporting and income tax
purposes. A valuation allowance is provided against net deferred tax assets
unless, in managements' judgment, it is more likely than not that such
deferred tax asset will be realized.
The Company files a consolidated Federal tax return. Accordingly,
Federal income taxes are provided on the taxable income, if any, of the
consolidated group. State income taxes are provided on a separate company
basis, if and when taxable income, after utilizing available carry forward
losses, exceeds certain levels.
DEBT ISSUANCE COSTS
The costs related to the issuance of the convertible notes (See Notes
2 and 8) totaling $203,168, have been capitalized and are included in other
assets. Debt issue costs are amortized using the straight line method over
the term of the related debt. Amortization of debt issuance costs was
$41,825 and $30,588 during the years ended April 30, 2000 and 1999,
respectively.
STOCK OPTION PLANS
The Company follows Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
requires a fair value-based method of accounting for stock compensation
plans. As permitted by SFAS 123, the Company has chosen to adopt the
disclosure requirements of SFAS 123, and continue to record stock
compensation in accordance with Accounting
F-9
<PAGE>
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, charges are made to earnings in accounting for
stock options granted to employees when the option exercise prices are
below the fair market value of common stock at the grant date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of April 30, 2000, the carrying value of cash, accounts receivable,
accounts payable, loans payable and current maturities of long-term debt
approximated fair value because of their short maturity. The carrying value
of notes receivable approximated fair value based on the discounted cash
flow method. Based on a closing market price of the Company's common stock
of $.125 at April 30, 2000, and the conversion provisions of the underlying
instruments, the fair value of the Convertible Notes was $3,545,168 and the
fair value of the Series A Redeemable Preferred Stock was $162,500. The
Company believes that an undetermined discount for lack of liquidity would
be appropriate due to the large amount of stock that would be issuable upon
conversion. The fair value of fixed-rate long-term debt, which approximates
the carrying value on the financial statements, is estimated using
discounted cash flow analysis based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
SEGMENT REPORTING
During fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which establishes standards for the way that
public enterprises report information about operating segments in financial
statements. It also establishes disclosure standards regarding products and
services, geographic areas and major customers. The Company's operations
are conducted in a single segment - environmental services.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes rulesfor the reporting of comprehensive
income and its components. Comprehensive income consists of net loss
and is presented in the Statement of Stockholders' Deficiency.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with
current year classifications.
2. SALE OF CONTROLLING INTEREST AND REFINANCING
On October 26, 1999, the Board of Directors of 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 Convertible Preferred Stock, par value $.01 per
share (the "Series A Preferred") (see Note 9), 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. ("Spotless"), a Delaware
corporation, pursuant to which the Company sold to Windswept Acquisition
Corporation ("Acquisition Corp."), a Delaware corporation and a
wholly-owned subsidiary of Spotless, 22,284,683 shares (the "Acquisition
Corp. Common Shares") of Common Stock, and 9,346 shares of Series B
Preferred, for an aggregate subscription price of $2,500,000 or
$.07904 per share of Common Stock and $79.04 per share of Series B
Preferred. As of July 15, 2000, the Acquisition Corp. Common
Shares represented approximately 58% of the outstanding Common Stock and
the Acquisition Corp. Common Shares and Series B Preferred shares
collectively represented approximately 66% of the voting power of the
outstanding securities of the Company.
F-10
<PAGE>
In addition, the Company and Trade-Winds, NAL and NYTL, 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. This
borrowing is evidenced by a secured convertible promissory note, dated
October 29, 1999 (the "Note"). Outstanding principal under the Note bears
interest at a rate equal to the London Interbank Offering Rate ("LIBOR")
plus an additional 1% and is payable monthly. The Note matures on October
29, 2004, unless Spotless elects to defer repayment until October 29, 2005.
The outstanding principal amount and all accrued and unpaid interest under
the Note is convertible, at the option of Spotless, in whole or in part, at
any time, into shares of Common Stock at the rate of one share of Common
Stock for every $.07904 of principal and accrued interest so converted (or,
in the event that certain approvals have not been obtained at the time of
conversion, into shares of Series B Preferred at the rate of one share of
Series B Preferred for every $79.04 of principal and accrued interest so
converted). In connection with the Note, each of the Obligors granted to
Spotless a security interest in all of their respective assets pursuant to
a Security Agreement dated October 29, 1999.
As a result of the conversion features of the Series B Preferred and
the Note, as of July 15, 2000, if Acquisition Corp. were to convert its
Series B Preferred shares into Common Stock and Spotless were to convert
all of the outstanding $2 million principal amount and $84,390 accrued and
unpaid interest under the Note into Common Stock, Acquisition Corp. and
Spotless would collectively own 58,002,013 shares, or approximately 78%, of
the then issued and outstanding shares of Common Stock.
See Note 15 for information regarding related party transactions.
3. LIQUIDITY AND BUSINESS RISKS
As of April 30, 2000, the Company has a stockholders' deficit of
$2,744,980 and an accumulated deficit of $34,553,869. The Company has
financed its operations to date primarily through issuance of debt and
equity securities. As of April 30, 2000, the Company had $816,560 in cash
and a working capital deficit of $473,619. In addition, as of April 30,
2000, the Company was in arrears with respect to certain sales tax
obligations of $181,000 as well as preferred stock dividends plus interest
of approximately $50,000. 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 include any adjustments that might result
from the outcome of this uncertainty.
During fiscal 2000, in order to address the Company's cash flow and
operational concerns, management pursued various options including, but not
limited to, refinancing the Company's credit facility and securing capital
through an equity infusion. On October 29, 1999, the Company consummated an
equity and debt financing transaction with Spotless (the "Spotless
Transaction") 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 which enabled it to repay in full its
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 currently has no credit facility for additional borrowing.
Management continues to pursue additional funding sources and is discussing
the availability of credit facilities with various lenders. Revenue growth
is expected in new and existing service areas and the Company is currently
bidding on projects totaling approximately $20,000,000, though there can be
no assurance that any of the Company's bids will be accepted. 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 obtain environmental or related
construction contracts, (ii) the ability to generate positive cash flow
from operations, and the extent
F-11
<PAGE>
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
Enterprises, Inc., an affiliate of Spotless. The borrowing bore interest at
a rate of 6% and was repaid with accrued interest in November 1999. In
March and April 2000, the Company borrowed a total of $500,000 from
Spotless for working capital requirements. These borrowings bear interest
at LIBOR plus 1 percent. As of April 30, 2000, interest of $3,275 was
accrued on these borrowings.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following:
<S> <C>
Machinery and equipment $ 3,517,111
Office furniture and equipment 397,117
Transportation equipment 973,027
Leasehold improvements 520,355
-------------
5,407,610
Less: accumulated depreciation and amortization 3,657,682
-------------
$ 1,749,928
=============
</TABLE>
Depreciation and amortization expense was $859,020 and $845,028 in fiscal
2000 and 1999, respectively.
The Company is obligated under various leases for machinery and
equipment that expire at various dates through 2002. The carrying amount of
machinery and equipment under capital leases included in property and
equipment was as follows as of April 30, 2000:
<TABLE>
<S> <C>
Machinery and equipment $ 693,553
Less: accumulated depreciation 494,804
-------------
$ 198,749
=============
</TABLE>
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of the following:
<S> <C>
Workers compensation premiums and insurance
adjustments $ 594,117
Interest and preferred stock dividends 196,338
Litigation reserves (See Note 16) 160,000
Professional fees 125,000
Other 177,398
-------------
$ 1,252,853
=============
</TABLE>
6. OBLIGATION OF UNCONSOLIDATED SUBSIDIARY, NET
In January 1996, Laboratory Testing Services, Inc. ("LTS"), a
wholly-owned subsidiary of the Company filed a bankruptcy petition in the
United States Bankruptcy Court in the Eastern District of New York.
Subsequently, this case was converted to a Chapter 7 Bankruptcy proceeding.
Concurrent with the bankruptcy petition, the operations of LTS were ceased.
The court appointed bankruptcy trustee has been liquidating the assets of
LTS to satisfy LTS's corporate obligations. Management believes that the
Company's financial condition and results of operations will not be
materially affected by this proceeding (See Note 16). The Company accrued
$210,007 related to this proceeding as of April 30, 2000.
F-12
<PAGE>
7. LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Vehicle installment notes with finance companies,
payable monthly with interest rates ranging from
8.45% to 11.25%, with terms expiring through
May 2002 $ 133,606
Equipment note, payable monthly with interest rate
of 9.93%, expiring July 2000 1,825
Capital lease obligations, payable monthly with
interest rates ranging from 6.05% to 12.84%,
with terms expiring through March 2003 95,727
-----------
231,158
Less: current portion 136,153
-----------
Long term debt $ 95,005
===========
</TABLE>
The vehicle installment, equipment note and capital lease obligations
are secured by the underlying vehicles and equipment.
Repayments of long-term debt as of April 30, 2000 are as follows:
<TABLE>
Years Ending April 30,
<S> <C>
2001 $ 136,153
2002 68,691
2003 26,314
-----------
$ 231,158
===========
</TABLE>
8. CONVERTIBLE NOTES
On October 29, 1999, in connection with the sale of controlling
interest of the Company (see Note 2), the Company and all of its
subsidiaries (the "Obligors") borrowed $2,000,000 from Spotless pursuant to
a secured convertible promissory note (the "Note") that bears interest at
Spotless' option at a rate equal to LIBOR plus 1 percent. 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. Additionally,
Spotless has the right to defer the maturity date of the Note for one year.
At April 30, 2000, the common shares issuable upon conversion of the Note
would represent approximately 40% of the Company's issued and outstanding
common shares. In connection with the Note, each of the Obligors granted
Spotless a security interest in all of their respective assets pursuant to
a Security Agreement dated October 29, 1999. Direct issuance costs of
$29,512 related to the Note are capitalized and included in other assets in
the accompanying consolidated balance sheet.
In March 1997, the Company completed a private offering of 10%
convertible notes to several accredited investors. The Company received
gross proceeds of $700,000 and incurred direct issuance costs of $173,656
related to the sale of the notes. The 10% convertible notes are payable in
full in March 2002. Interest is payable semi-annually. The notes may be
converted, at the option of the holder, at any time prior to maturity at a
conversion price of $.50 per share. Holders of convertible notes chose to
convert $10,000 of notes into 20,000 shares of common stock in both fiscal
2000 and fiscal 1999.
In fiscal 1997, a director of the Company loaned the Company $100,000
and was issued a 12% convertible promissory note providing for, at the
option of the note holder, the conversion of the principal and accrued and
unpaid interest at the rate of $.25 per share of Common Stock. On December
31, 1997, the conversion price was adjusted to $0.15 per share of Common
Stock. As of July 15, 2000, an aggregate of 1,043,114 shares of Common
Stock are issuable upon conversion of the principal and accrued and unpaid
interest of
F-13
<PAGE>
this convertible promissory note. The Company has included interest due
of $52,653 in accrued expenses as of April 30, 2000 (see Note 15).
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of North Atlantic Laboratories,
Inc. ("NAL") in February 1997, the Company issued 1,300,000 shares of
redeemable convertible preferred stock ("RCPS") having a liquidation value
of $1.00 per share plus accumulated dividends. The dividend rate is the
higher of (i) 6%, or (ii) the inflation rate (as defined) plus 2%. After
February 1998, the RCPS holders can convert their preferred shares to
common at a ratio of one share of preferred to one share of common stock,
subject to adjustment. The RCPS is callable by the Company in February
2002.
In March 1998, the holders of the RCPS utilized their right to elect
one member to the Board and vote together with common stockholders on the
election of additional Directors and all other Company matters. Each share
of RCPS had ten (10) votes until February 1999 and one (1) vote per share
thereafter. On March 15, 1998, one of the holders of the RCPS joined the
Board of Directors in accordance with the agreement.
Pursuant to the terms of the RCPS, the Company is prohibited, without
first obtaining the approval of at least a majority of the holders of the
RCPS, from (i) altering or changing the rights, preferences, privileges or
restrictions of shares of Cumulative Preferred Stock, (ii) increasing the
authorized number of shares or adjusting the par value of Cumulative
Preferred Stock, (iii) issuing any shares of capital stock ranking senior
as to dividends or rights upon liquidation or dissolution to the Cumulative
Preferred Stock or (iv) issuing any common stock at a price below the
conversion price, as defined, to any officer, director or 10% shareholder.
10. INCOME TAXES
No provision for income taxes was recorded during the years ended
April 30, 2000 and 1999 due to net losses incurred. At April 30, 2000, the
Company has net operating loss carryforwards for tax purposes of
approximately $20,275,000 that expires through 2020. As a result of changes
in stock ownership (see Note 2), the Company will be restricted to the
utilization of a maximum of approximately $1,800,000 of these net operating
losses.
The Company's effective tax rate in fiscal 2000 and 1999 differs from
the federal statutory rate as a result of a full valuation allowance being
provided against gross deferred tax assets.
Deferred tax assets consist of the following components at April 30, 2000:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 633,000
Reserves 218,000
Deferred compensation 42,000
Other, net 136,000
-----------
1,029,000
Less: Valuation allowance (1,029,000)
-----------
Net deferred tax asset $ -
===========
</TABLE>
At April 30, 2000, the Company has provided a full valuation allowance
against the gross deferred tax asset. Such valuation allowance was recorded
because management does not believe that the utilization of the tax
benefits from operating losses and other temporary differences are "more
likely than not" to be realized, as required by SFAS No. 109.
F-14
<PAGE>
11. OTHER INCOME
Included in other income at April 30, 2000 is approximately $100,000
of cost savings attributable to negotiations with vendors to reduce trade
payables.
12. COMMITMENTS
Future minimum lease payments under noncancelable operating leases for
office space and equipment as of April 30, 2000 are as follows:
<TABLE>
<CAPTION>
Year Ending April 30,
<S> <C>
2001 $ 367,324
2002 359,119
-----------
Total minimum lease payments $ 726,443
===========
</TABLE>
Total rental expense was $358,477 and $304,961 for the fiscal years
ended April 30, 2000 and 1999, respectively.
On October 29, 1999, the Company entered into an Amended and Restated
Employment Agreement (the "Employment Agreement") with Michael O'Reilly.
The Employment 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 a letter
agreement, dated October 29, 1999, between Michael O'Reilly and Spotless
(the "Letter Agreement"), to Spotless to the extent that the Company's
capital would be impaired by such a purchase) 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 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 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 options to purchase 2,811,595 shares of Common Stock 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 its Note.
13. STOCK ISSUANCES
During the year ended April 30, 2000, the Company issued shares of
common stock in the following transactions: (i) 22,284,683 shares in a
private placements with Spotless (See Note 2) valued at $1,761,381, (ii)
882,334 shares in a private placement valued at $142,350, (iii) 25,000
shares valued at $5,079 as compensation for directors, (iv) 863,450 shares
valued at $201,809 as consideration for various legal and other services,
(v) 225,714 shares valued at $70,536 for accrued dividends and interest on
the redeemable convertible preferred stock , (vi) 20,000 shares upon the
conversion of a convertible note in the principal amount of $10,000 and
(vii) 20,000 shares upon the exercise of stock options with an aggregate
exercise price of $7,500.
F-15
<PAGE>
During the year ended April 30, 2000, the Company issued 9,346 shares
of Series B Preferred in a private placement with Spotless (See
Note 2) valued at $738,619.
During the year ended April 30, 1999, the Company issued shares of
common stock in the following transactions: (i) 735,000 shares in several
private placements for proceeds of $130,000, (ii) 1,284,528 shares valued
at $466,752 as consideration for various legal and consulting services,
(iii) 258,333 shares valued at $98,400 as compensation for directors and
certain employee services provided, (iv) 38,874 shares valued at $13,424 to
settle legal obligations, (v) 245,964 shares valued at $92,236 for accrued
dividends and interest on the redeemable convertible preferred stock and
(vi) 20,000 shares upon the conversion of a convertible note in the
principal amount of $10,000.
All of the foregoing stock issuances were valued at fair market value at
the time of issuance.
14. STOCK OPTIONS
As of April 30, 2000 and 1999, the Company had two stock-based
compensation plans. The Company has also issued options pursuant to option
agreements not subject to any plan. In fiscal 1997, Michael O'Reilly, Chief
Executive Officer of the Company, was issued options to purchase 2,000,000
shares of Common Stock at a price of $.01 per share. These options were not
vested until the occurrence of a change in control of the Company. Such a
change in control occurred on October 29, 1999 (See Note 2). Accordingly,
the Company has recognized compensation expense in the amount of $230,000
in the financial statements for the difference between the fair market
price and the exercise price. In the case of all other options, the
exercise price of each option equals the market price of the Company's
stock on the date of the grant.
In fiscal 1997, the Board of Directors approved the Company's 1997
Stock Incentive Plan, which covered 1,000,000 shares of Company stock.
Under this plan, the Company may grant incentive stock options,
non-qualified stock options, restricted stock, stock appreciation rights,
or other awards to employees, directors, officers, and consultants. All
shares available for grant under this plan have been registered under the
Securities Act of 1933, as amended.
In December 1996, the Board of Directors repriced all options
previously issued to an exercise price of $.375 per share.
In December 1996, the Company granted 703,520 non-qualified stock
options to employees to purchase shares of the Company's common stock at an
exercise price of $.375 per share. The options may be exercised in full
after December 2, 1998 and expire on December 2, 2001.
In February 1997, in connection with the NAL acquisition (See Note 9),
the Company granted the former owners of NAL non-qualified options to
purchase 200,000 shares of the Company's common stock at an exercise price
of $.78 per share, the then fair market value of the Company's stock. These
options were exercisable commencing on the date of grant and expire
February 2002.
In August 1998, the Board of Directors approved the Company's 1998
Stock Incentive Plan, which covered 2,000,000 shares of Company stock.
Under this plan, the Company may grant incentive stock options,
non-qualified stock options, restricted stock, stock appreciation rights,
or other awards to employees, directors, officers, and consultants. All
shares available for grant under this plan have been registered under the
Securities Act of 1933, as amended.
On August 18, 1998, the Company granted 850,000 non-qualified stock
options to non-employee directors and officers of the Company at $.34 per
share. The options vest immediately and expire August 17, 2003. The Company
recorded compensation expense of $80,000 in connection with the options
granted to non-employee directors.
F-16
<PAGE>
On November 13, 1998, the Company granted 500,000 non-qualified stock
options to employees to purchase shares of the Company's common stock at an
exercise price of $.375 per share. These options may be exercised in full
after November 13, 2000 and expire November 12, 2003.
On November 13, 1998, the Company granted 50,000 non-qualified stock
options to its former chief financial officer at $.375 per share. The
options vest immediately and expire November 12, 2003.
On March 30, 1999, the Company granted 50,000 non-qualified stock
options to an employee to purchase shares of the Company's common stock at
an exercise price of $.2031 per share. These options may be exercised in
full after March 30, 2001 and expire March 29, 2004.
On April 19, 1999, the Company granted 150,000 non-qualified stock
options to its former chief financial officer to purchase shares of the
Company's common stock at an exercise price of $.2031 per share. The
options vest immediately and expire April 18, 2004.
On October 28, 1998, in connection with a payment of accrued interest
on unpaid preferred stock dividends, the Company issued 30,000 options at
an exercise price of $.41 per share. These options are exercisable
commencing on the date of grant and expire on October 27, 2003.
In June 1999, the Company issued a warrant to purchase 200,000 shares
of Common Stock at an exercise price of $.20 per share in exchange for
services rendered. The warrants expire in 2004.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss and net loss per share would be
$2,833,886, or $.11 in fiscal 2000 and $1,521,309, or $.12 in fiscal 1999,
respectively. These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period for purposes of future pro forma
disclosures, and additional options may be granted in future years. The
fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for both fiscal 2000 and 1999; expected volatility of 144.84%
for 2000 and 46.1% for 1999, no dividend yield, and expected life of two to
three years for the fiscal 2000 and 1999 options. The weighted average risk
free interest rate was 6.3% for fiscal 2000 and 5.3% for fiscal 1999.
F-17
<PAGE>
A summary of the status of the Company's outstanding stock options as
of April 30, 2000 and 1999 is presented below:
<TABLE>
<CAPTION>
Employees and Range of Option Non-Employee Range of Option
Directors Options Prices Per Share Options Prices Per Share
----------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Outstanding at April 30, 1998 4,068,662 $ .12-$.40 318,100 $ .01-$.78
Granted 1,600,000 $ .20-$.38 30,000 $.41
Forfeited (838,306) $ .12-$.38 (100,000) $.50
----------- ----------- ---------- -----------
Outstanding at April 30, 1999 4,830,356 $ .12-$.40 248,100 $ .01-$.78
Granted 2,981,407 $ .01-$.39 - -
Cancelled (80,000) $ .38 - -
Forfeited (64,313) $ .31-$.34 - -
Exercised (20,000) $ .38 - -
----------- ----------- ---------- -----------
Outstanding at April 30, 2000 7,647,450 $ .01-$.40 248,100 $ .01-$.78
=========== =========== ========== ===========
Options exercisable at April 30, 1999 3,363,194 $ .12-$.40 248,000 $ .01-$.78
=========== =========== ========== ===========
Options exercisable at April 30, 2000 6,991,560 $ .01-$.40 248,000 $ .01-$.78
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Number Remaining Number Weighted
Range of Exercise Outstanding at Contractual Life Weighted Average Exercisable Average
Prices 4/30/00 (years) Exercise Price at 4/30/00 Exercise Price
----------------- -------------- ----------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$.01-$.40 7,647,450 3.20 $.20 6,991,560 $.18
</TABLE>
15. RELATED PARTY TRANSACTIONS
On October 29, 1999, the Company consummated an equity and refinancing
transaction with Spotless (See Note 2).
In September 1999, the Company borrowed $100,000 from Spotless
Enterprises, Inc., an affiliate of Spotless. The borrowing bore interest at
a rate of 6% and was repaid with accrued interest in November 1999. In
March and April 2000, the Company borrowed a total of $500,000 from
Spotless for working capital requirements. These borrowings bear interest
at LIBOR plus 1 percent. As of April 30, 2000, interest of $3,275 was
accrued on these borrowings.
During fiscal 1999, Michael O'Reilly, the Company's President and
Chief Executive Officer, received an aggregate of $50,000 and 133,333
shares of Common Stock, the fair value of which shares was $50,000 on the
date of grant, representing a bonus based upon a calculation of net profits
at the end of the second quarter of fiscal 1999. Due to subsequent losses
incurred by the Company in the third and fourth quarters, the bonus was due
back to the Company and, accordingly, recorded as a loan receivable from
Mr. O'Reilly. In fiscal 2000, the Company forgave the loan.
In fiscal 2000, the Company amended Michael O'Reilly's Employment Agreement
(see Note 12).
On December 16, 1998, the Company entered into an operating lease
arrangement with its Chief Executive Officer. Under the arrangement, the
Company leases a forty-two foot fully-equipped custom Topaz boat for a
period of two years. Annual rental is approximately $60,000. The leasing
arrangement was necessitated by a Marine Assistance Contract the Company
entered into with Keyspan Energy Corporation covering the period January 1,
1999 through December 31, 2000. The arrangement provides the Company with
its largest floating vessel capable of handling specialty equipment and
facilitating an offshore support crew. The lease carries a one year renewal
option. The Company is responsible for all taxes, insurance and repairs.
F-18
<PAGE>
In February 1997, the Company issued 650,000 shares of RCPS to a
director of the Company and an additional 650,000 shares of RCPS to a
partner of such director (see Note 9). Dividends and interest of $35,268
and $60,368 were paid to this director in fiscal 2000 and 1999,
respectively. At April 30, 2000 accrued expenses included $24,814 of
dividend and interest arrearages owed to this director. The Company's
subsidiaries sold approximately $261,000 and $8,000 of services to a
company of which the director is a principal in fiscal 2000 and 1999,
respectively. As of April 30, 2000, that company owed $139,788 to the
Company for such services.
In fiscal 1997, a director of the Company loaned the Company $100,000
and was issued a 12% convertible promissory note providing for, at the
option of the note holder, the conversion of the principal and accrued and
unpaid interest at the rate of $.25 per share of Common Stock. On December
31, 1997, the conversion price was adjusted to $0.15 per share of Common
Stock. As of July 15, 2000, an aggregate of 1,043,114 shares of Common
Stock are issuable upon conversion of the principal and accrued and unpaid
interest of this convertible promissory note. The Company has included
interest due of $52,653 in accrued expenses as of April 30, 2000. This
director is also an officer and director of a company which sold
approximately $3,118 and $189,778 of material and supplies to the Company
that were used on remediation projects during fiscal 2000 and 1999,
respectively.
In fiscal 1999, the Company entered in a contract for approximately
$170,000 to construct an employee's dwelling. As of April 30, 2000, the
Company recognized losses under this contract of approximately $130,000. In
fiscal 1998, the Company entered into a contract for $1,100,000 to
construct a dwelling for a partner in the Company's former law firm.
Subsequent change orders have brought the contract value to approximately
$2,111,000 at April 30, 2000. The Company has recognized losses under this
contract of approximately $532,000 as of April 30, 2000.
The Company paid an outside director $42,400 for consulting services
in each of fiscal 2000 and fiscal 1999.
16. CONTINGENCIES
Litigation
On November 22, 1999, the Securities and Exchange Commission ("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 it by the
SEC that 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 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, obtained an offsite 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 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 will not have a material adverse effect on
the Company's consolidated financial statements.
In November 1997, Trade-Winds 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.
F-19
<PAGE>
TRADE-WINDS ENVIRONMENTAL RESTORATION, INC. AND GULF INSURANCE COMPANY, by
one or more plaintiffs claiming to be entitled to additional wages while
working for a subcontractor of Trade-Winds. The amount of the claim has
not been specified.
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 and results of
operations will not be materially affected by this proceeding.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 2000
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
---------------------------
MICHAEL O'REILLY, President
and Chief Executive Officer
By: /s/ Charles L. Kelly, Jr.
---------------------------
CHARLES L. KELLY, Jr.
Chief Financial Officer (Principal Accounting
Officer)
Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-KSB has been signed on August 14, 2000 by the
following persons in the capacities indicated. Each person whose signature
appears below constitutes and appoints Michael O'Reilly and Charles L. Kelly or
either of them, with full power of substitution, his/her true and lawful
attorneys-in-fact and agents to do any and all acts and things in his/her name
and on his/her behalf in his/her capacities indicated below which they or either
of them may deem necessary or advisable to enable Windswept Environmental Group,
Inc. to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Annual Report on Form 10-KSB, including specifically,
but not limited to, power and authority to sign for him/her in his/her name in
the capacities stated below, any and all amendments thereto, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
such connection, as fully to all intents and purposes he/her might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
/s/ Michael O'Reilly
---------------------------
MICHAEL O'REILLY, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Charles L. Kelly, Jr.
---------------------------
CHARLES L. KELLY, Jr.
Chief Financial Officer (Principal Accounting
Officer) and Director
/s/ Anthony Towell
---------------------------
ANTHONY TOWELL, Director
/s/ Samuel Sadove
---------------------------
SAMUEL SADOVE, Director
/s/ Peter A. Wilson
---------------------------
PETER A.WILSON, Chairman
/s/ Dr.Kevin Phillips
---------------------------
DR. KEVIN PHILLIPS, Director
/s/ Brian S. Blythe
---------------------------
BRIAN S. BLYTHE, Director
/s/ Ronald B. Evans
---------------------------
RONALD B. EVANS, Director
34
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.01 Composite of Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.01 of the Company's Annual Report
on Form 10-KSB for the fiscal year ended April 30, 1998, filed with the
SEC on August 13, 1998).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of the
Company's Registration Statement (No. 33-14370 N.Y.)filed with the SEC on
June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 of the Company's Annual Report on Form 10-KSB for the fiscal
year ended April 30, 1998, filed with the SEC on August 13, 1998).
4.02 Certificate of Designations for Series B Preferred Stock.
(Incorporated by reference to Exhibit 3.1 of the Company's Current Report
on Form 8-K (Date of Report: October 29, 1999) filed with the SEC on
November 12, 1999).
4.03 Specimen Series B Preferred Stock Certificate. (Incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K
(Date of Report: October 29, 1999) filed with the SEC on November 12,
1999).
10.01 Form of Convertible Note Agreement. (Incorporated by reference to
Exhibit 4.04 of the Company's Annual Report on Form 10-KSB for the fiscal
year ended April 30, 1997, filed with the SEC on September 29, 1997).
10.02 Convertible Demand Note, dated October 15, 1996, between Trade-Winds
Environmental Restoration, Inc. and Anthony P. Towell, together with
related agreements.
10.03 Employment Agreement between the Company and Michael O'Reilly dated
November 1, 1996. (Incorporated by reference to Exhibit 10.02 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1997, filed with the SEC on September 29, 1997).
10.04 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997,
filed with the SEC on September 29, 1997).
10.05 1997 Stock Option Plan. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (No. 333-22491) filed with
the SEC on February 27, 1997).
10.06 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-8 (No. 333-61905) filed
with the SEC on August 20, 1998).
10.07 Loan and Security Agreement dated June 1, 1998 between Business
Alliance Capital Corporation and the Company and Subsidiaries.
(Incorporated by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
10.08 Individual Guaranty of Michael O'Reilly to Business Alliance Capital
Corporation. (Incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998, filed with the SEC on August 13, 1998).
10.09 Revolving Credit Master Promissory Note for $1,850,000 between the
Company and Business Alliance Capital Corporation. (Incorporated by
reference to Exhibit 10.15 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended April 30, 1998, filed with the SEC on August
13, 1998).
35
<PAGE>
10.10 Term Loan for $595,000 Between the Company and Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998, filed with the SEC on August 13, 1998).
10.11 Origination Fee Amendment dated August 1, 1998 between the Company
and Business Alliance Capital Corporation. (Incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10- KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13, 1998).
10.12 Loan Agreement dated September 16, 1999 between Spotless Enterprises Inc.
and the Company.
10.13 Subscription Agreement dated October 29, 1999 between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K (Date of Report: October 29,
1999) filed with the SEC on November 12, 1999).
10.14 Convertible Promissory Note dated October 29, 1999 issued by the
Company to Spotless Plastics (USA), Inc. (Incorporated by reference
to Exhibit 10.2 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.15 Form of Security Agreement dated October 29, 1999 between each of the
Company, Trade-Winds Environmental Remediation, Inc., North Atlantic
Laboratories, Inc. and New York Testing, Inc. and Spotless Plastics
(USA), Inc. (Incorporated by reference to Exhibit 10.3 of the Company's
Current Report on Form 8-K (Date of Report: October 29, 1999) filed with
the SEC on November 12, 1999).
10.16 Amended and Restated Employment Agreement dated October 29, 1999
between the Company and Michael O'Reilly. (Incorporated by reference to
Exhibit 10.4 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.17 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.18 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly relating to options vesting upon exercise of the
convertible note. (Incorporated by reference to Exhibit 10.6 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.19 Letter Agreement dated October 29, 1999 between Michael O'Reilly and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit 10.7
of the Company's Current Report on Form 8-K (Date of Report: October 29,
1999) filed with the SEC on November 12, 1999).
16.1 Letter dated December 7, 1999 from BDO Seidman LLP to the Securities
and Exchange Commission. (Incorporated by reference to Exhibit 16 of the
Company's Current Report on Form 8-K (Date of Report: December 1, 1999)
filed with the SEC on December 8, 1999).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of BDO Seidman LLP.
24.01 Powers of Attorney (set forth on the signature page of this Annual Report
on Form 10-KSB).
27 Financial Data Schedule.
36
