U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2001
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(exact name of Registrant as specified in its charter)
Delaware 11-2844247
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
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(Address of principal executive offices) (Zip Code)
Registrant'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 registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter 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-K 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-K or any amendment to this
form 10-K. [ ]
Based upon the average bid and ask price on July 13, 2001 ($0.20 per share), the
aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $3,145,760.
As of July 13, 2001, the issuer had 38,481,254 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
Introductory Comment - Forward Looking Statements
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Statements contained in this Annual Report on Form 10-K include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities 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:
o the market acceptance and amount of sales of the Company's services,
o the Company's success in increasing revenues and reducing expenses,
o the frequency and magnitude of environmental disasters or disruptions
resulting in the need for the types of services the Company provides,
o the extent of the enactment, enforcement and strict interpretations
of laws relating to environmental remediation,
o the competitive environment within the industries in which the Company
operates,
o the Company's ability to raise additional capital,
o the Company's ability to attract and retain qualified personnel, and
o 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-K.
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
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GENERAL
Windswept Environmental Group, Inc. ("Windswept" or "the Company"), through its
wholly-owned subsidiaries, Trade-Winds Environmental Restoration, Inc.
("Trade-Winds"), New York Testing Laboratories, Inc. ("NYTL") and North Atlantic
Laboratories, Inc. ("NAL"), 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.
In December 1993, the Company acquired Trade-Winds, an asbestos abatement and
lead remediation company. In June 1995, the Company purchased NYTL, a testing
laboratory that offered hazardous materials testing capabilities. On February
24, 1997, the Company acquired NAL, a certified environmental training,
laboratory testing and consulting services company. As of June 30, 2001, NYTL
had ceased operations and substantially all of its fixed assets had been sold.
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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 13, 2001, the Acquisition Corp. Common Shares represented approximately
58% of the Company's 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. Spotless has
agreed to release their security interest on certain NYTL assets as of June 30,
2001. The transaction with Spotless described above is hereafter referred to as
the "Spotless Transaction".
As a result of the conversion features of the Series B Preferred and the Note,
as of July 13, 2001, 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 $259,838 accrued and unpaid interest under the Note
into Common Stock, Acquisition Corp. and Spotless would collectively own
60,222,459 shares, or approximately 79%, of the then issued and outstanding
shares of Common Stock.
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:
o Emergency Response and Catastrophe Restoration
o Site Restoration
o Mold Contamination Remediation
o Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
o Forensic Investigation
o Asbestos Abatement
o Fire and Flood Restoration
o Demolition
o Lead Abatement
o Underground Storage Tank Removal
o Soil Remediation
o Oil Spill Response - Land and Marine
o Hazardous Waste/Biohazard Clean-up
o Chemical Spill Response
o Duct Cleaning
o Indoor Air Quality Investigation
o Environmental and Health and Safety Training
o Environmental Testing
o Environmental Consulting Services
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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,
Turner Construction 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 years ended April 30, 2001 ("fiscal
2001"), April 30, 2000 ("fiscal 2000") and April 30, 1999 ("fiscal 1999")
revenues from insurance customers represented approximately 12%, 15% and 5%,
respectively, of total revenues. During fiscal 2001, one of the Company's
customers accounted for approximately 35% of its total revenues. During fiscal
2001, 2000 and 1999 another customer accounted for 11%, 15% and 10%,
respectively, of the Company's total revenues. During fiscal 2000, a different
customer accounted for approximately 12% of the Company's total revenues. While
the Company intends to increase the amount of work performed for entities other
than these customers, it expects to continue to be dependent on these customers
and/or the incurrence of large projects. 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 24 spill
response vessels with skimmer, diving and booming capabilities, 51 vehicles
(including vacuum trucks, earth moving equipment, supply trucks and drilling
vehicles) and 29 trailers equipped with various capabilities (such as a mobile
wildlife clinic). The Company has the equipment capacity to move 100,000 gallons
of environmental waste in any 24-hour period directly to a disposal facility
either in drums, roll-offs or directly in tanker trucks.
The Company has on its staff experts and licensed personnel in natural resource
restoration, spill response, hazardous material clean-up, wildlife
rehabilitation, environmental investigation and testing, construction, oil spill
response, and health and safety. The Company's staff includes three United
States Coast Guard certified captains and two certified divers. The Company
employs 14 wildlife rehabilitators, 14 certified asbestos handlers, 14
accredited lead workers, 61 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 several years. Several large companies have emerged from this transition
period but the Company believes that the industry
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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 20 environmental remediation companies of similar size and
approximately 50 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, 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 than
those available to the Company. 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.
MARKETING AND SALES
The Company has an aggressive marketing program that is directed toward
establishing and maintaining relationships with businesses that 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
a client's environmental, related construction and emergency response needs can
be serviced by the Company.
Consistent with this strategy, commencing in fiscal 1999 and continuing through
fiscal 2000 and fiscal 2001, 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.
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As a result of this marketing effort, in fiscal 2000, the Company was 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 Resource Conservation and Recovery Act ("RCRA") is the principal federal
statute governing hazardous waste generation, treatment, storage, and disposal.
RCRA, or EPA approved state programs, govern 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 imposed
additional restrictions on land disposal of certain hazardous wastes, prescribe
more stringent standards for hazardous waste and underground storage tanks
("UST"), and provided 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 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.
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 increased environmental remediation activities significantly. SARA
imposed 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
6
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.
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
watercraft.
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.
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EMPLOYEES/TECHNICAL STAFF
As of June 30, 2001, the Company employed 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 Company to meet peak workloads. The
Company has never had a work stoppage and believes that it has good relations
with its employees.
PERMITS AND LICENSES
The Federal Government and certain states in the 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 14 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.
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-K before
making any investment decision involving the Company's securities.
Factors Affecting Future Operating Results
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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
8
liability upon present and former owner and operators of facilities that
release hazardous substances into the 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
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. It is
possible that in future quarters, the
9
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 is increasingly pursuing large, multi-year contracts as a method of
achieving more predictable revenues, more consistent utilization of equipment
and personnel, and greater leverage of sales and marketing costs. These larger
projects pose 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 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 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,
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
substantial portion 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 46% of its revenues in fiscal 2001.
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 and/or the incurrence of large projects for the
foreseeable future.
10
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 the Company's 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 79% 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.
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 13, 2001, the Company had 38,481,254 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 IN PRIOR YEARS AND MAY
INCUR LOSSES IN THE FUTURE. These loses could adversely affect the market value
of the Common Stock. The Company incurred net losses of approximately $2.3
million in fiscal 2000 and approximately $1.3 million in fiscal 1999. As of
April 30, 2001, the Company had an accumulated deficit of $33,487,992. Even
though the Company has taken steps in an effort to reduce costs and expenses and
to increase revenues, and had net income of approximately $1.1 million in fiscal
11
2001, it may not incur profits 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:
o future announcements of new competing technologies and procedures;
o changing policies and regulations of the federal state, and local
governments;
o fluctuations in the Company's financial results;
o liquidity of the market for the Company's securities;
o public perception of the Company and its entry into new markets; and
o 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.
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
The Company holds a six-year lease expiring in 2007 for its 50,000 square foot
facility located at 100 Sweeneydale Avenue, Bay Shore, New York 11706, which
contains an option to purchase such facility. The lease provides for a current
annual rent of $323,399 and is subject to a 4% annual escalation. The option to
purchase expires on April 30, 2002. This facility houses all the operations of
the Company, other than an oil spill response center located in Brooklyn, New
York.
The Company has a month-to-month lease that provides for 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.
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 required the Company
to develop and institute certain policies, procedures and manuals to 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 required the Company to obtain a secure off site storage facility to store
its backup data files and system software and to make certain reporting
disclosures. The Company has implemented such policies, procedures and manuals,
obtained an off site storage facility and made such disclosures.
In 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
12
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.
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 SECURITY HOLDERS
-----------------------------------------------------------
The 2001 Annual Meeting of Stockholders of the Company was held on March 5,
2001, the results of which are disclosed in Item 4 of the Company's quarterly
report on Form 10-Q for the period ended January 31, 2001 as filed with the SEC
on March 19, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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 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
---------------------------
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
FISCAL 2001
-----------
Quarter Ended HIGH LOW
------------- ---- ---
July 31, 2000 $.20 $.11
October 31, 2000 .19 .09
January 31, 2001 .27 .08
April 30, 2001 $.34 $.15
The Company has approximately 705 common stockholders of record as of July 6,
2001. 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.
13
(b) Recent Sales of Unregistered Securities
There were no sales or issuances by the Company of the Company's equity
securities occurring during fiscal 2001, except to the extent previously
disclosed in the Company's Quarterly Reports on Form 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
Fiscal Year Ended April 30,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------------------------
Consolidated Operations Data:
Revenues $22,022,766 $12,845,165 $13,926,812 $11,968,774 $15,275,209
Net income (loss) 1,065,877 (2,256,997) (1,307,476) (5,609,795) (4,613,750)
Net income (loss) per common share-basic 0.03 (0.09) (0.11) (0.55) (0.51)
Net income (loss) per common share-diluted $ 0.01 $ (0.09) $ (0.11) (0.55) $ (0.51)
Weighted average common shares outstanding:
Basic 38,459,953 26,927,083 13,064,314 10,404,111 9,026,797
Diluted 76,244,295 26,927,083 13,064,314 10,404,111 9,026,797
Consolidated Balance Sheet Data:
Total assets $ 8,806,398 6,699,204 5,745,122 6,354,689 $ 8,385,390
Long-term debt and other liabilities 457,084 197,172 198,732 264,604 454,560
Convertible notes 2,780,000 2,780,000 790,000 800,000 800,000
Redeemable convertible preferred stock 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Stockholders' equity (deficit) $(1,753,853) $(2,744,980) $(3,347,257) $(2,936,730) $ 1,929,409
The Company did not pay any cash dividends on its common stock during any of the
periods set forth in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion and
analysis information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
This discussion contains forward-looking statements that are subject to a number
of known and unknown risks, that in addition to general, economic, competitive
and other business conditions, could cause actual results, performance and
achievements to differ materially from those described or implied in the
forward-looking statements.
The Company is subject to significant external factors that could significantly
impact its business. These factors could cause future results to differ
materially from historical trends.
RESULTS OF OPERATIONS
Fiscal Year Ending April 30, 2001 Compared to Fiscal Year Ending April 30, 2000
-------------------------------------------------------------------------------
Revenues
--------
Revenues increased to $22,022,766 in fiscal 2001 compared to $12,845,165 in
fiscal 2000. This increase of $9,177,601, or 71.4%, was primarily the result of
revenue increases in the Company's Trade-Winds subsidiary of
14
$9,007,157 to $20,440,646 in fiscal 2001 from $11,433,489 in fiscal 2000,
and the Company's NAL subsidiary, the revenues of which increased by $259,123 to
$845,609 in fiscal 2001 from $586,486 in fiscal 2000. These increases were
partially offset by revenue decreases in the Company's NYTL subsidiary of
$88,679 to $736,510 in fiscal 2001 from $825,189 in fiscal 2000.
The increase in Trade-Winds revenue of $9,007,157 was primarily attributable to
a large mold remediation project that accounted for revenues of $7,734,631. The
remaining Trade-Winds revenue increase was primarily attributable to increases
in emergency spill response revenues of approximately $990,022, environmental
remediation projects of $389,763, insurance construction/renovation projects of
$268,086 and waste disposal of $124,694. The increases were partially offset by
decreases in oil tank projects of $316,205 and fireproofing projects of
$240,031. The increase in NAL revenues of $259,123 is primarily attributable to
new management and expanded marketing efforts. The decrease in NYTL revenues is
primarily attributable to management turnover. Due to the instability of NYTL
management and the resulting incurred losses, the Company determined that NYTL's
services could be better supplied by outsourcing. Accordingly, as of June 30,
2001, NYTL has ceased operations and substantially all of its fixed assets were
sold.
Gross Profit/Cost of Revenues
-----------------------------
Cost of revenues increased to $15,336,191 in fiscal 2001 compared to $10,179,948
in fiscal 2000. This increase of $5,156,243, or 50.7%, was primarily the result
of the direct costs incurred on a large mold remediation project of $3,196,520,
an increase in the number of project managers of approximately $329,000 and
increases in NYTL direct costs of $111,921. The remaining increase is due to the
direct costs associated with the other increases 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 69.6% in fiscal 2001 as
compared to 79.3% in fiscal 2000. Accordingly, gross profit as a percentage of
revenues increased to 30.4% in fiscal 2001 from 20.7 % in fiscal 2000. Gross
profit in fiscal 2001 was positively impacted by a large mold remediation
project that generated gross profits of $4,538,111 or 58.7% that was partially
offset by increases in project managers costs.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the year increased by $338,491,
or 8.2%, to $4,466,052 in fiscal 2001 from $4,127,561 in fiscal 2000, and
constituted approximately 20.3% and 32.1% of revenues in fiscal years 2001 and
2000, respectively.
The increase of $338,491 in fiscal 2001 as compared to fiscal 2000 was primarily
the result of increases of $225,098 in office salaries, $206,338 in legal fees
and settlements, $163,685 in marketing expenses, $140,715 in sales salaries and
$99,042 in the provision for doubtful accounts. These increases were partially
offset by decreases of $254,304 in a provision for delinquent income taxes,
$150,000 in the provision for litigation and $48,940 in accounting fees.
Expense Related to Variable Accounting Treatment for Officer Options
--------------------------------------------------------------------
Under the terms of an employment agreement (see Item 11 "Executive Compensation
- Employment Agreement"), the Company's President and Chief Executive Officer
may sell to the Company all shares of common stock of the Company held by him
and all shares of common stock underlying vested options to purchase shares of
common stock of the Company held by him. Expense related to variable accounting
treatment for officer options increased by $225,913 to $328,080 in fiscal 2001
from $102,167 in fiscal 2000. This was due to an increase in the market price of
the Company's Common Stock to $.19 per share on April 30, 2001 from $.125 per
share on April 30, 2000. Due to the terms of the options, changes in the market
price of the Company's Common Stock, in either direction, result in a
corresponding expense or income.
Interest Expense
----------------
Interest expense decreased by $371,958 in fiscal 2001 to $339,015 from $710,973
in fiscal 2000. The decrease in interest expense was attributable to replacing a
secured credit facility with a lending institution with proceeds from
15
the Spotless Transaction in fiscal 2000. The resulting debt facility with
Spotless carries a significantly lower interest rate than the previous facility.
Other Income
------------
Other income decreased $60,038 to $58,449 in fiscal 2001 from $118,487 in fiscal
2000. The decrease was primarily attributable to less savings realized through
negotiations with vendors to reduce trade payables balances.
Provision for Income Taxes
--------------------------
The provision for income taxes reflects an effective rate of 33.9% in fiscal
2001. No income taxes were provided in fiscal 2000 due to the incurrence of a
taxable loss. The book benefit for taxable losses generated in fiscal 2000 was
offset by recording a full valuation allowance. 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 accounting principles generally
accepted in the United States of America.
Net Income
----------
Net income and basic net income attributable to common stockholders per share
for fiscal 2001 were $1,065,877 and $.03, respectively. This compares to a net
loss and basic net loss attributable to common stockholders per share of
($2,256,997) and ($.09), respectively for fiscal 2000.
The Company reported losses from operations in each of the first two quarters of
fiscal 2001. The Company's performance improved in the third and fourth quarter
of fiscal 2001 primarily due to a large mold remediation project.
Fiscal Year Ending April 30, 2000 Compared to Fiscal 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 (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 that increased the
overhead allocation to the project.
16
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the year increased by $765,532,
or 22.8%, to $4,127,561 in fiscal 2000 from $3,362,029 in fiscal 1999, and
constituted approximately 32.1% and 24.1% of revenues in fiscal years 2000 and
1999, respectively.
The increase of $765,532 in fiscal 2000 as compared to fiscal 1999 was primarily
the result of increases of approximately $277,000 in the provision for doubtful
accounts, $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.
Expense Related to Variable Accounting Treatment for Officer Options
--------------------------------------------------------------------
Expense related to variable accounting treatment for officer options increased
by $102,167 in fiscal 2000. This was due to the market price of the Company's
Common Stock, $.125 per share on April 30, 2000. Due to the terms of the
options, changes in the market price of the Company's Common Stock, in either
direction, will result in a corresponding expense or income to the Company.
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 than the previous facility.
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.
Net Loss
--------
Net loss and basic net loss attributable to common stockholders per share for
fiscal 2000 were ($2,256,997) and ($.09), respectively. This compares to a net
loss and basic 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, 2001, 2000 and 1999, the Company had a stockholders' deficit of
$1,753,853, $2,744,980 and $3,347,257, respectively, and an accumulated deficit
of $33,487,992, $34,553,869 and $32,296,872, respectively. The Company has
financed its operations to date primarily through issuance of debt and equity
securities. As of April 30, 2001, 2000 and 1999, the Company had $616,088,
$816,560 and $46,336 in cash. As of April 30, 2001, the Company had working
capital of $552,850. As of April 30, 2000 and 1999, the Company had a working
capital deficit of $473,619 and $3,741,523, respectively. In addition, as of
April 30, 2001, the Company was in arrears with respect to preferred stock
dividends plus interest of approximately $137,000. The Company also has $680,000
of convertible notes that will be due in full on March 15, 2002. In the opinion
of management, the Company will have sufficient working capital to fund current
operations and repay the convertible notes and any related accrued interest on
March 15, 2002, however, market conditions and their effect on the Company's
liquidity may restrict the
17
Company's use of cash which may result in the Company not making payment on
the convertible notes when they become due on March 15, 2002. In the event that
sufficient positive cash flow from operations is not generated, the Company may
need to seek additional financing from Spotless to satisfy the convertible notes
when they become due, although Spotless is under no legal obligation to provide
such funds. The Company currently has no credit facility for additional
borrowing.
While the Company's working capital has improved during fiscal 2001, primarily
through borrowings from Spotless and cash generated from a large mold
remediation project, the above 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 Auditors, 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 2001, in order to address cash flow and operational concerns, the
Company borrowed and repaid an additional $1,000,000 from Spotless. In fiscal
2001, the Company also borrowed an additional $450,000 from Spotless on an
existing short-term note payable. The increased borrowings from Spotless and the
cash generated by a large mold remediation project significantly improved the
Company's liquidity. 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. Management continues to pursue additional funding
sources. The Company anticipates revenue growth in new and existing service
areas and continues to bid on large projects, 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.
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.
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. During fiscal 2001, the Company borrowed $450,000 from Spotless
for working capital requirements and an additional $1,000,000 from Spotless for
working capital requirements related to a large mold remediation project. The
Company repaid this $1,000,000 plus interest to Spotless in fiscal 2001. A
balance of $950,000 in loans from Spotless was outstanding as of April 30, 2001.
In June 2001, the Company borrowed an additional $250,000 from Spotless for
working capital requirements. All borrowings bear interest at LIBOR plus 1
percent. As of April 30, 2001, interest of $18,156 was accrued on these
borrowings.
Cash Flow
---------
Net cash used in operating activities was $136,364 and $2,055,433 in fiscal 2001
and 2000, respectively, as compared to net cash generated by operating
activities of $601,368 in fiscal 1999. Accounts receivable increased $2,164,282
or 58.9% to $5,852,793 in fiscal 2001, reflecting the increase in sales relative
to a large mold remediation project. Accounts receivable increased $1,339,313 or
57.0% to $3,688,511 in fiscal 2000, reflecting the increase in sales during the
fourth quarter of fiscal 2000. Accounts receivable declined $335,177 or 12.0% to
$2,349,198 in fiscal 1999, reflecting improved collection procedures and
controls implemented during fiscal 1999. Accounts payable and accrued expenses
increased by $40,006 or 1.2% to $3,026,377 in fiscal 2001. Accounts payable and
accrued expenses decreased by $425,325 or 10.4% to $2,988,382 in fiscal 2000
primarily as a result of the reductions in outstanding obligations made possible
by improved working capital as a result of the Spotless
18
Transaction.
Cash used for capital expenditures was $381,729, $275,417 and $379,367 in fiscal
2001, 2000 and 1999, respectively.
In fiscal 2000, 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. During fiscal 2001, the Company borrowed $450,000 from Spotless for
working capital requirements and an additional $1,000,000 from Spotless for
working capital requirements related to a large mold remediation project. The
Company repaid this $1,000,000 plus interest to Spotless in fiscal 2001. A
$950,000 balance in loans from Spotless was outstanding as of April 30, 2001. In
June 2001, the Company borrowed an additional $250,000 from Spotless for working
capital requirements. In fiscal 2000 and 1999, the Company received proceeds of
$142,350 and $130,000, respectively, from the sale of Common Stock.
EFFECT OF INFLATION
Inflation has not had a material impact on the Company's operations over the
past three years.
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 and mold abatement and construction, as well as the timing of
catastrophes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Equity Price Risk - The Company's primary market risk exposure relates to the
variable accounting treatment related to a put option for shares of common stock
and common stock options held by an officer of the Company. Under the terms of
an employment agreement (see Item 11 "Executive Compensation - Employment
Agreement"), the officer may sell to the Company all shares of common stock of
the Company held by him and all shares of common stock underlying vested options
to purchase shares of common stock of the Company held by him. As of April 30,
2001, such shares and vested options to purchase shares aggregated 4,418,905
shares. Each $.01 increase or decrease in market price of the Company's stock
impacts earnings by approximately $44,000.
Interest Rate Sensitivity - The Company's exposure to market risk for changes in
interest rate primarily relates to its debt obligations to Spotless. The
interest rate on the Note and other borrowings from Spotless is LIBOR plus 1%.
At April 30, 2001, total debt owed to Spotless was $2,950,000 with additional
accrued interest of $226,827. Assuming variable rate debt at April 30, 2001, a
one point change in interest rates would impact annual net interest payments by
approximately $34,000. The Company does not use derivative financial instruments
to manage interest rate risk.
ITEM 8. FINANCIAL STATEMENTS
-----------------------------
Set forth below is a list of the financial statements of the Company included in
this Annual Report on Form 10-K.
Item Page
---- ----
Independent Auditors' Reports 36 to 37
Consolidated Balance Sheets as of April 30, 2001 and 2000 38
Consolidated Statements of Operations for the fiscal years ended
April 30, 2001, 2000 and 1999 39
Consolidated Statements of Stockholders' Deficiency for the fiscal
years ended April 30, 2001, 2000 and 1999 40
Consolidated Statements of Cash Flows for the fiscal years ended
April 30, 2001, 2000 and 1999 41
Notes to Consolidated Financial Statements 42 to 56
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On December 1, 1999, the Company's Board of Directors appointed Deloitte &
Touche, LLP (the "Accountants") as its independent accountants, replacing BDO
Seidman, LLP (the "Former Accountants").
During the Company's three most recent fiscal years, there were no disagreements
with the Former Accountants or the 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 or the Accountants, would have caused them to reference to
the subject matter of the disagreement in their report. None of the Former
Accountants' or the Accountants' reports on the Company's financial statements
for either of the past three years contained an adverse opinion or disclaimer of
opinion. However, the Former Accountants' and the Accountants' reports on the
Company's financial statements for the fiscal years ended April 30, 2001, 2000
and 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-K, 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.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
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 51 Director, President and Chief Executive Officer
Charles L. Kelly, Jr. 42 Director and Chief Financial Officer
Peter A. Wilson 56 Chairman of the Board
Brian S. Blythe 61 Director
Ronald B. Evans 62 Director
John J. Bongiorno 61 Director
Samuel Sadove 47 Director
Anthony Towell 70 Director and Secretary
Dr. Kevin Phillips 53 Director
Joseph Murphy 43 Vice President - Finance & Administration
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 that provided a wide array of
services, including asbestos, hazardous materials and lead removal. He has
eighteen 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 served 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
20
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's 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 its Spotless Services Limited subsidiary.
Mr. Blythe is also the Chairman of the Board of Directors of Taylor's Group
Limited, a New Zealand company, and was a member of the Police Board of
Victoria, Australia between 1993 and 1998.
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. Mr. Evans is also a director of Taylor's Group Limited
and is a director of Health Scope Limited, an Australian company. Since 1998, he
has been the Chairman of the Australian Football League.
John J. Bongiorno has been a director of the Company since March 2001.
Since 1986, Mr. Bongiorno has been the Director of Finance of Spotless Group
Limited. Mr. Bongiorno is also a director of Spotless Group Limited, Taylor's
Group Limited and is Chairman of the Board of Directors of National Can
Industries Limited, an Australian company.
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. Prior to
December 2000, he was a Vice President, Co-Chairman, and a Director of Worksafe
Industries, Inc., a publicly traded manufacturing company specializing in
industrial safety. He had held executive positions during a 25 year career with
the Royal Dutch Shell Group. Mr. Towell is also a director of DiaSys Corporation
and Chairman of the Board of directors 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
in 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.
Joseph Murphy has served as the Vice President - Finance & Administration since
April 2000. From 1998 to 2000, Mr. Murphy held senior financial positions
including Chief Financial Officer at Staff Builders, Inc. From 1987 to 1997, Mr.
Murphy held several senior financial positions including Chief Financial Officer
at Colorado Prime Corporation. From 1980 to 1985, Mr. Murphy worked as an
auditor for Deloitte & Touche, LLP.
Each of the non-employee directors, those directors who are not employed by the
Company or any of its parent, affiliate or subsidiary companies ("Non-Employee
Directors"), receives $5,000 annually for service on the Company's Board of
Directors. In addition, as compensation for service on the Company's Board of
Directors during fiscal 2000, each of the Non-Employee Directors was granted
options to purchase an aggregate of 100,000 shares of the Company's common stock
under the terms of the 2001 Equity Incentive Plan, at an exercise price of $.16,
the fair market value at the date of the grant. All other directors receive no
cash compensation for their services as directors. All of the Company's
directors 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.
21
During fiscal 2001, the Board of Directors met or acted by written consent four
times. All current directors attended not less than 75% of such meetings (or
executed such written consents) of the Board with the exception of Mr. Blythe,
who attended one meeting, and Mr. Evans and Mr. Bongiorno, who became a director
in March 2001, who each did not attend any meetings.
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 auditors and is primarily responsible for reviewing and approving
the scope of the audit and other services performed by the Company's independent
auditors. 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 auditors. 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 other than the 2001 Equity Incentive Plan. 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. 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.
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, other than as set forth
below, all Reporting Persons complied on a timely basis with all filing
requirements applicable to them with respect to transactions in fiscal 2001:
Joseph Murphy, the Company's Vice President - Finance & Administration failed to
timely file a Form 3 upon becoming an executive officer of the Company in April
2000 and he failed to timely file a Form 5 upon the Company's granting of an
option to him to purchase 100,000 shares of the Company's Common Stock in
October 2000.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The following table sets forth the cash and other compensation paid by the
Company during the last three fiscal years to the Company's Chief Executive
Officer and President and for the other individual who served as an executive
officer during fiscal 2001 and received compensation for services rendered
during fiscal 2001of $100,000 or more (each a "Named Executive Officer").
Long Term Compensation
Annual Compensation Awards
---------------------------------------- -------------------------------
Other Restricted Securities
Fiscal Annual Stock Underlying
Name and Principal Position(s) Year Salary ($) Bonus ($) Compensation Awards ($) Options
------------------------------ ---- ---------- --------- ------------ ---------- -------
Michael O'Reilly, Chief
Executive Officer and President 2001 $281,500 $40,297 (1) $- $ - -
2000 260,000 55,000 (2) 50,000 (2) 5,736,309 (3)
1999 $259,615 $ 3,846 $- $ 2,400 (2) 250,000 (4)
Joseph Murphy, Vice President - 2001 $150,000 $ - $- $ - 100,000
Finance & Administration 2000 - - - - -
1999 $ - $ - $- $ - -
(1) Mr. O'Reilly, under the terms of an employment agreement, earns a bonus
equal to 2.5% of the Company's pretax income. This bonus was accrued
as of April 30, 2001 and paid in May 2001.
(2) 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
22
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. 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, 2001 was
$33,694. None of the shares are entitled to dividends.
(3) 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.
(4) 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.
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 2001, (b) the percentage
the grant represents of the total number of options granted to all Company
employees during fiscal 2001, (c) the per share exercise price of each option,
(d) the expiration date of each option and (e) the potential realizable value of
each grant.
Potential realizable value
at assumed annual rates of
stock price appreciation
Individual grants for option term
--------------------------------------------------------------- ---------------------------------------
Percent of
Number of total options/
securities SARs granted
underlying to employees Exercise
options/SARs in fiscal Price Expiration 5% 10%
Name granted (#) year ($/Sh) date ($) ($)
--------------------------------------------------------------- ---------------------------------------
Joseph Murphy 100,000 100% $ 0.1094 October 31, 2004 $ 13,309 $19,660
23
Aggregated Options/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option Values
--------------------------------------------------------
Set forth in the table below is information, with respect to each Named
Executive Officer, as to the (a) number of shares acquired during fiscal 2001
upon each exercise of options granted to such individuals, (b) the aggregate
value realized upon each exercise (i.e. the difference between the market value
of the shares at exercise and their exercise price), (c) the total number of
unexercised options held on April 30, 2001, separately identified between those
exercisable and those not exercisable, and (d) the aggregate value of
in-the-money, unexercised options held on April 30, 2001, separately identified
between those exercisable and those not exercisable.
Number of
securities Value of
underlying unexercised
unexercised in-the-money
options/SARs options/SARs
at fiscal at fiscal
year end (#) year end ($)
---------------------- --------------------
Shares acquired Value Exercisable/ Exercisable/
Name on exercise (#) realized ($) Unexercisable Unexercisable (2)
--------------------------------------------------------------------------- --------------------
Michael O'Reilly - $- 4,241,572 / 4,594,737 (1) $459,554 / $509,832
Joseph Murphy - $- 100,000 / 0 $8,060 / $0
(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").
(2) The value is calculated based on the aggregate amount of the excess of
$.19 (the closing sale price per share for the Common Stock on April
30, 2001) over the relevant exercise price(s).
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
24
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.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Compensation Committee (the "Committee") of the Board of Directors of the
Company is composed of Mr. Samuel Sadove and Mr. Anthony Towell, each of whom is
a non-employee director of the Company in the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934.
No member of the Committee was, during the fiscal year ended April 30, 2001, an
officer or employee of the Company or any of its subsidiaries, or was formerly
an officer of the Company or any of its subsidiaries, or had any relationship
requiring disclosure pursuant to applicable rules and regulations of the
Securities and Exchange Commission, except as disclosed under Item 13, "Certain
Relationships and Related Transactions". During the fiscal year ended April 30,
2001, no executive officer of the Company served as (i) a member of the
compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served on the
Compensation Committee of the Company, (ii) a director of another entity, one of
whose executive officers served on the Compensation Committee of the Company, or
(iii) a member of the compensation committee (or other board committee
performing equivalent functions) of another entity, one of whose executive
officers served as a director of the Company.
Compensation Committee Report on Executive Compensation
-------------------------------------------------------
General
The Committee determines the cash and other incentive compensation, if any, to
be paid to the Company's executive officers and other key employees. In
addition, the Committee administers the Company's 1998 Stock Incentive Plan and
the 1997 Incentive Plan. The Committee does not administer the Company's 2001
Equity Incentive Plan, which is administered by the Company's Board of
Directors.
Compensation Philosophy
The Committee has developed and implemented a compensation program that is
designed to attract, motivate, reward and retain the broad-based management
talent required to achieve the Company's business objectives and increase
stockholder value. There are three major components of the Company's
compensation program: base salary, short-term incentive compensation, including
annual bonuses, and long-term incentive compensation, including stock options.
These components are intended to provide management with incentives to aid the
Company in achieving both its short-term and long-term objectives. While salary
and bonus provide incentives to achieve short-term objectives, the Committee
believes that the potential for equity ownership by management addresses the
long-term objective of aligning management's and stockholders' interests in the
enhancement of stockholder value.
The Committee's executive compensation philosophy is to base management's pay,
in part, on the achievement of the Company's annual and long-term performance
goals, to provide competitive levels of compensation and to recognize individual
initiative, achievement and length of service to the Company. The Committee does
not assess these factors in a mechanical fashion, but rather relies on its
business experience in making a subjective evaluation of the appropriate level
and mix of compensation for each executive officer and key employee.
The Committee evaluates the Company's performance by reviewing period to period
changes in such quantitative measures of performance as stock price, revenue,
net income and earnings per share. The Committee also considers qualitative
performance criteria such as the development of new business strategies and
resources, improvements in customer satisfaction and cost management. During the
Company's most recently completed fiscal year, the Company increased revenues by
71.4%, it reported net income of approximately $1.1 million and income per share
of $.03. Based upon an employment agreement with Michael O'Reilly, a bonus of
approximately $40,000 was accrued which was based upon 2.5% of pretax income, as
defined. Bonuses would be considered for executives for exemplary performance of
their duties that is deemed to bring a significant benefit to the Company.
The Committee believes that it competes for executives not only with the
companies comprising the Peer Group Index described below under the heading
"Performance Graph" but also with numerous other companies in the
25
emergency response and environmental remediation industries that are
actively seeking executives having the same type of skills and experience as the
Company's executives. The Committee has not made a statistical analysis of the
compensation practices of these competitors, but tries to keep itself generally
informed of such practices. The Committee believes that, notwithstanding the
variety of compensation packages offered by these competitors which make
objective comparisons difficult, the compensation paid by the Company to its
executive officers and other key employees is above average, reflecting the
Company's relative size and desire to retain its current employees.
The Committee also considers other subjective factors bearing on the appropriate
compensation for each of its executive officers and other key employees, such as
the length of an employee's service with the Company, which the Committee
believes enhances the value of the employee to the Company. The Committee takes
note of the individual initiative demonstrated by such officers and employees in
the development and implementation of the Company's business plan. Where
appropriate, the Committee will consider the performance of specific divisions
or departments of the Company for which the employee has direct supervisory
responsibility.
When the Company identifies a talented executive, it seeks to secure his or her
employment for a long term. For this reason, the Company has entered into an
employment agreement with its chief executive officer which provides for a
specified base salary. The existence of this employment agreement establishes
certain minimum salary and benefit levels for the covered employee during the
term of such employee's agreement which may not be reduced by the Committee. The
Committee is able, however, to apply its compensation philosophy at the time
each such employment agreement is negotiated or renewed and