FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Annual Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended July 2, 2002
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, $.0001 par value per share
(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. [X]
Based upon the closing sale price as reported on the OTC Electronic Bulletin
Board of the NASD on September 10, 2002 ($.18 per share), the aggregate market
value of the Common Stock held by non-affiliates of the registrant was
approximately $2,905,826.
As of September 10, 2002, the issuer had 77,936,358 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held in 2002 are
incorporated into Part III of this Form 10-K.
PART I
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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:
- the market acceptance and amount of sales of the Company's services,
- the Company's success in increasing revenues and reducing expenses,
- the frequency and magnitude of environmental disasters or disruptions
resulting in the need for the types of services the Company provides,
- the extent of the enactment, enforcement and strict interpretations
of laws relating to environmental remediation,
- the competitive environment within the industries in which the
Company operates,
- the Company's ability to raise additional capital,
- the Company's ability to attract and retain qualified personnel, and
- the other factors and information disclosed and discussed under the
"Risk Factors" section of Item 1 and in other sections of this Annual
Report on Form 10-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") 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. 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. On February 24, 1997, the Company acquired NAL, a
certified environmental training, laboratory testing and consulting services
company.
On October 29, 1999, the Company entered into a subscription agreement with
Spotless Plastics (USA), Inc. ("Spotless"), a Delaware corporation, pursuant to
which the Company sold to Windswept Acquisition Corporation ("Acquisition
Corp."), a Delaware corporation and a wholly-owned subsidiary of Spotless,
22,284,683 shares (the
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"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 had the
equivalent voting power of 1,000 shares of Common Stock. Each share of Series B
Preferred was convertible into 1,000 shares of Common Stock.
In addition, the Company, Trade-Winds and NAL, 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 was evidenced by
a secured convertible promissory note, dated October 29, 1999 (the "Note").
Outstanding principal under the Note bore interest at a rate equal to the London
Interbank Offering Rate ("LIBOR") plus an additional 1% and was payable monthly.
The Note had a maturity date of October 29, 2004, unless Spotless elected to
defer repayment until October 29, 2005. The outstanding principal amount and all
accrued and unpaid interest under the Note was 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. The transaction
with Spotless described above is hereafter referred to as the "Spotless
Transaction".
On November 16, 2001, Acquisition Corp. exercised its right to convert all 9,346
shares of the Company's Series B preferred stock. As a result of such conversion
and in accordance with the terms of the Company's Series B preferred stock,
Acquisition Corp. was issued 10,495,174 shares of the Company's common stock.
Such amount included 9,346,000 shares as a result of the 1,000:1 conversion
ratio, and an additional 1,149,174 shares that were calculated based upon a
formula that took into consideration the value of the Series B preferred stock
on the date of issuance and the number days elapsed from the date of the
issuance of the Series B preferred stock through the conversion date. The
issuance of the additional shares of common stock was recorded as a dividend of
$390,719. The dividend represents the difference between the fair market value
of the Company's common stock issued on November 16, 2001 and the fair market
value of the Company's common stock at the date the Series B preferred stock was
issued.
On November 16, 2001, Spotless exercised its right to convert all principal and
accrued and unpaid interest on the $2,000,000 Note. As a result of the
conversion of the Note and accrued and unpaid interest, the Company issued an
additional 28,555,250 shares of its common stock to Acquisition Corp. in full
satisfaction of the Note and the related accrued and unpaid interest.
After giving effect to these conversions, Spotless currently beneficially owns
61,335,107 shares, or approximately 79%, of the Company's issued and outstanding
shares of common stock.
In August 2001, the Company changed its fiscal year from the twelve months ended
April 30 to a 52-53 week fiscal year ending on the Tuesday nearest June 30. Each
fiscal year shall generally be comprised of four 13-week quarters, each
containing two four-week months followed by one five-week month. As a result of
such change in fiscal year, in October 2001, the Company filed a Transition
Report on Form 10-K for the period from May 1, 2001 through July 3, 2001 (the
"transition period"). Revenues, net loss and basic and diluted earnings per
common share in the transition period were $2,322,511, ($733,303) and $(.02),
respectively.
OPERATIONS
In order to position itself into stronger and more profitable markets, the
Company has evolved from an asbestos abatement contractor to a hazardous
materials clean-up and natural resource restoration firm, and finally, to a full
service emergency response provider. The Company provides a broad range of
services through vertically integrated businesses in the service areas described
below:
- Emergency Response and Catastrophe Restoration
- Site Restoration
- Mold Contamination Remediation
- Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
- Forensic Investigation
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- Asbestos Abatement
- Fire and Flood Restoration
- Demolition
- Lead Abatement
- Underground Storage Tank Removal
- Soil Remediation
- Oil Spill Response - Land and Marine
- Hazardous Waste/Biohazard Clean-up
- Chemical Spill Response
- Duct Cleaning
- Indoor Air Quality Investigation
- Environmental and Health and Safety Training
- Environmental Testing
- Environmental Consulting Services
The Company has specially trained emergency response teams that respond to both
hazardous and non-hazardous spills and other emergencies on land and water on a
24-hour, seven day a week basis. The following examples are types of emergencies
for which the Company is capable of conducting response and remediation
services: explosions, fires, earthquakes, mudslides, hazardous spills,
transportation catastrophes, storms, hurricanes, tornadoes, floods, and
biological threats.
The Company believes that its comprehensive emergency response abilities have
greatly expanded its customer base to include those entities that value
immediate response, enhanced capabilities and customer service. The Company's
customers include Fortune 500 (TM) 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, Bank of
New York, State Farm Insurance Company, Travelers Insurance Company, and the New
York State Department of Environmental Conservation for services including
hazardous materials spill response, oil spill containment, sub-surface
investigation and site remediation.
Management expects insurance loss remediation and restoration to be an
increasingly significant portion of the Company's future revenues. In order to
address the needs of the insurance industry, the Company has dedicated itself
toward the strategic integration of all of its services. As a result, the
Company provides its insurance customers with the capability to respond to
virtually any type of insurance loss. The Company believes that it is able to
perform all the tasks necessary to rapidly restore a property to pre-loss
conditions, thus minimizing dislocation, downtime and business interruption.
The Company estimates that in excess of 24% 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 fiscal year ended July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal years ended April 30, 2001 and 2000,
revenues from insurance customers represented approximately 9%, 8%, 12% and 15%,
respectively, of total revenues. During the fiscal year ended July 2, 2002, the
period from May 1, 2001 through July 3, 2001 and the fiscal years ended April
30, 2001 and 2000 the Company recognized net sales to significant customers as
set forth below:
May 1,
2001
through
July 2, July 3, April 30, April 30,
Major Customers 2002 2001 2001 2000
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Customer A 0% 13% 36% 0%
Customer B 34% 0% 0% 0%
Customer C 0% 5% 11% 15%
Customer D 7% 14% 5% 12%
While the Company intends to increase the amount of work performed for entities
other than these customers, it
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expects to continue to be dependent on a few customers and/or the
incurrence of large projects. 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 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,
unless the revenues generated from any such customer, including the Bank of New
York (listed as "Customer B" in the foregoing table), were not replaced by
revenues generated by other customers. 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, 58 vehicles
(including vacuum trucks, earth moving equipment, supply trucks and drilling
vehicles) and 31 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 four certified divers. The Company
employs 3 wildlife rehabilitators, 7 certified asbestos handlers, 27 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 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 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
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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, 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.
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.
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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 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.
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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 relationships with various sureties and the issuance of
bonds is dependent on the sureties' 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. No assurance
can be given that the Company will be able to obtain the required surety bonds.
Any failure of the Company to obtain these bonds could materially and adversely
affect certain components of the Company's operations.
EMPLOYEES/TECHNICAL STAFF
As of August 31, 2002, the Company employed a core group of approximately 101
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 62 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 has an agreement that expires in November 2002 with several
local unions that supply labor for bonded contract work. 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 3 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
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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 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.
THE COMPANY IS DEPENDENT ON THE INCURRENCE OF LARGE PROJECTS FROM A SMALL NUMBER
OF CUSTOMERS. Because of the nature of the Company's services, the Company must
generate most of its revenues from new customers. The Company cannot anticipate
whether it will be able to replace such revenues with revenues from new projects
in future periods. The inability of the Company to replace the revenues
generated as a result of large projects performed in the fiscal year ended July
2, 2002, particularly the catastrophe response projects in the vicinity of the
World Trade Center following the terrorist attack on September 11, 2001, which
accounted for approximately 52% of the Company's revenues during such fiscal
year, would have a materially adverse impact on the Company.
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.
9
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 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
10
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.
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
11
approximately 79% of the Company's Common Stock and holds approximately 77%
of its voting power. 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"). 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 September 10, 2002, the Company had 77,936,358 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. Future loses could adversely affect the market value
of the Common Stock. The Company incurred net losses of approximately $720,000
for the period from May 1, 2001 through July 3, 2001, approximately $2.3 million
and approximately $1.3 million in the fiscal years ended April 30, 2000 and
1999, respectively. As of July 2, 2002, the Company had an accumulated deficit
of $30,713,428. 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
$3.5 million and approximately $1.1 million in the fiscal years ended July 2,
2002 and April 30, 2001, respectively, it may not incur profits at any time in
the future.
THE MARKET PRICE OF THE COMMON STOCK HAS FLUCTUATED CONSIDERABLY AND WILL
PROBABLY CONTINUE TO DO SO. The stock markets have experienced extreme price and
volume fluctuations, and the market price for the Common Stock has been
historically volatile. The market prices of the Common Stock could be subject to
wide fluctuations in the future as well in response to a variety of events or
factors, some of which may be beyond its control. These could include, without
limitation:
- future announcements of new competing technologies and procedures;
- changing policies and regulations of the federal state, and local
governments;
- fluctuations in the Company's financial results;
- liquidity of the market for the Company's securities;
- public perception of the Company and its entry into new markets; and
- general conditions in the Company's industry and the economy.
THE COMPANY'S CHARTER CONTAINS AUTHORIZED, UNISSUED PREFERRED STOCK THAT MAY
INHIBIT A CHANGE OF CONTROL OF THE COMPANY UNDER CIRCUMSTANCES THAT COULD
OTHERWISE GIVE ITS STOCKHOLDERS THE OPPORTUNITY TO REALIZE A PREMIUM OVER
PREVAILING MARKET PRICES OF THE COMPANY'S SECURITIES. The Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and By-laws contain provisions that could make it more difficult for a third
party to acquire the Company under circumstances that could give stockholders an
opportunity to realize a premium over then-prevailing market prices of its
securities. The Company's Certificate of Incorporation authorizes the Company's
Board of Directors to issue preferred stock without stockholder approval and
upon terms as the Board may determine. The rights of holders of common stock are
subject to, and may be adversely affected by, the rights of future holders of
preferred stock. Section 203 of the Delaware General Corporation Law makes it
more difficult for an "interested stockholder" (generally, a 15% stockholder) to
effect various business combinations with a corporation for a three-year period
after the stockholder becomes an "interested stockholder." In general, these
provisions may discourage a third party from attempting to acquire the Company
and, therefore, may inhibit a change of control of the Company.
12
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company holds a five-year lease expiring in 2007 for its 50,000 square foot
facility located at 100 Sweeneydale Avenue, Bay Shore, New York 11706. The lease
provides for a current annual rent of $338,576 and is subject to a 4% annual
escalation. 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 October 12, 2001, Trade-Winds commenced an action in the New York State
Supreme Court, County of New York, claiming that Trade-Winds is entitled to
approximately $1,060,000 of contractual billings relating to a large mold
remediation project. In addition to denying an obligation to pay the amount
claimed, the defendants have asserted a counterclaim against Trade-Winds for
$389,439. The parties engaged in court-ordered mediation without successful
resolution and are currently engaged in discovery. The court has ordered that
the record of this action be sealed.
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 that stemmed from
the prior convictions of two of the Company's former officers for violations of,
among other things, the federal securities laws. The Order 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 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 statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None
13
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 closing sale prices, for
the fiscal year ended July 2, 2002, the period from May 1, 2001 through July 3,
2001 and for the fiscal years ended April 30, 2001 and 2000, 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 YEAR ENDED APRIL 30, 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 YEAR ENDED APRIL 30, 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
TRANSITION PERIOD FROM MAY 1, 2001 THROUGH JULY 3, 2001
May 1, 2001
through HIGH LOW
---- ---
July 3, 2001 $.21 $.16
FISCAL YEAR ENDED JULY 2, 2002
Quarter Ended HIGH LOW
------------- ---- ---
October 2, 2001 $.29 $.16
January 1, 2002 .57 .24
April 2, 2002 .44 .23
July 2, 2002 $.29 $.19
The Company had approximately 722 common stockholders of record as of September
10, 2002. There have been no dividends declared or paid on the Common Stock
during the fiscal year ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 or in the fiscal years ended April 30, 2001 and 2000 and the
Company has no current intentions to declare or pay dividends on the Common
Stock. Under its Series A Convertible Preferred Stock Agreement, no common stock
dividends may be paid until all preferred dividends are paid in full. Subject to
the foregoing, the Company currently intends to retain any future earnings for
reinvestment in its business. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
the Company's financial condition, results of operations, capital requirements
and other relevant factors.
(b) Recent Sales of Unregistered Securities
There were no sales or issuances of the Company's unregistered equity securities
occurring during the fiscal year ended July 2, 2002, except to the extent
previously disclosed in the Company's Quarterly Reports on Form 10-Q.
14
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Period from
Fiscal Year May 1, 2001 Fiscal Years Ended April 30,
Ended through ----------------------------------------------------------
July 2, 2002 July 3, 2001 2001 2000 1999 1998
---------------------------------------------------------------------------------------
Consolidated Operations Data:
Revenues $32,903,740 $ 2,322,511 $22,022,766 $12,845,165 $ 13,926,812 $ 11,968,774
Net income (loss) 3,494,867 (720,303) 1,065,877 (2,256,997) (1,307,476) (5,609,795)
Net income (loss) per common
share-basic 0.05 (0.02) 0.03 (0.09) (0.11) (0.55)
Net income (loss) per common $ 0.04 $ (0.02) $ 0.01 $ (0.09) $ (0.11) $ (0.55)
share-diluted
Weighted average common shares outstanding:
Basic 63,300,953 38,481,254 38,459,953 26,927,083 13,064,314 10,404,111
Diluted 85,455,580 38,481,254 76,244,295 26,927,083 13,064,314 10,404,111
Consolidated Balance Sheet
Data:
Total assets $10,212,538 $ 8,192,568 $ 8,806,398 $ 6,699,204 $ 5,745,122 $ 6,354,689
Long-term debt and other 1,005,574 400,308 457,084 197,172 198,732 264,604
Convertible notes 100,000 2,780,000 2,780,000 2,780,000 790,000 800,000
Redeemable convertible preferred stock 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Stockholders' equity (deficit) $ 3,372,383 $(2,487,156) $(1,753,853) $(2,744,980) $ (3,347,257) $ (2,936,730)
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, as more fully discussed in "Part I - Introductory
Comment - Forward Looking Statements" in this Annual Report on Form 10-K.
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.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's audited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
audited consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Management believes that the critical
accounting policies and areas that require the most significant judgments and
estimates to be used in the preparation of the audited consolidated financial
15
statements are accounting for contracts, allowance for doubtful accounts and the
valuation allowance related to deferred tax assets.
Contract Accounting - Revenue derived from services provided to customers over
periods of less than one month is recognized at the completion of the related
contracts. Revenue from firm fixed price contracts that extend over periods of
one month or more is recognized using the percentage-of-completion method,
measured by the percentage of costs incurred to date compared to estimated total
costs for each contract. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability, the effect of contract
penalty provisions and final contract settlements may result in revisions to
estimates of costs and income and are recognized in the period in which the
revisions are determined. Revenues from time and material contracts that extend
over a period of more than one month are recognized as services are performed.
Allowance for Doubtful Accounts - The Company maintains an allowance for
doubtful trade accounts receivable for estimated losses resulting from the
inability of its customers to make required payments. In determining
collectibility, the Company reviews available customer financial information
including public filings and credit reports and will also consult legal counsel
to assist in determining collectibility. When it is deemed probable that a
specific customer account is uncollectible, that balance is included in the
reserve calculation. Actual results could differ from these estimates under
different assumptions.
Deferred Tax Asset Valuation Allowance - The Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. Due to the Company's prior history of losses, the
Company has recorded a full valuation allowance against its net deferred tax
assets as of July 2, 2002. The Company currently provides for income taxes only
to the extent that it expects to pay cash taxes for current income. Should the
Company be profitable in the future at levels which cause management to conclude
that is more likely than not that it will realize all or a portion of the
deferred tax assets, the Company would record the estimated net realizable value
of the deferred tax assets at that time and would then provide for income taxes
at its combined federal and state effective rates.
RESULTS OF OPERATIONS
Fiscal Year Ended July 2, 2002 Compared to Fiscal Year Ended April 30, 2001
- ---------------------------------------------------------------------------
Revenues
- --------
Revenues increased to $32,903,740 in the fiscal year ended July 2, 2002 ("fiscal
2002") compared to $22,022,766 in the fiscal year ended April 30, 2001 ("fiscal
2001"). This increase of $10,880,974, or 49.4%, was primarily the result of
revenue increases in the Company's Trade-Winds subsidiary of $11,791,033 to
$32,231,680 in fiscal 2002 from $20,440,647 in fiscal 2001. This increase was
partially offset by revenue decreases in the Company's NAL subsidiary of
$173,550 to $672,060 in fiscal 2002 from $845,610 in fiscal 2001. In addition,
revenues decreased by $736,509 due to the discontinuance of unprofitable
operations of another of the Company's subsidiaries.
The increase in Trade-Winds revenue of $11,791,033 was primarily attributable to
catastrophe response projects in the vicinity of the World Trade Center
terrorist attack that accounted for revenues of $17,002,928, remediation
services of $1,820,158 performed at the site of a chemical explosion, mold
remediation services of $1,801,428 performed in Houston, Texas as a result of
tropical storm flooding and increases in emergency spill response and insurance
related projects of $582,917 and $349,073, respectively. Due to the nature of
the Company's business, it cannot anticipate whether it will be able to replace
revenues from large projects with revenues from new projects in future periods.
The increases were partially offset by decreases of $7,511,729 in a large
non-recurring mold remediation project, environmental remediation projects of
$1,508,966, oil tank projects of $470,269 and hazardous waste disposal services
of $205,651. The decrease in NAL revenues of $173,550 is primarily attributable
to the loss of key management and other personnel.
Gross Profit/Cost of Revenues
- -----------------------------
Cost of revenues increased to $20,755,677 in fiscal 2002 compared to $15,336,191
in fiscal 2001. This increase of $5,419,486, or 35.3%, was primarily the result
of the costs incurred on catastrophe response projects in the vicinity of the
World Trade Center. Direct field labor, other job related costs, union benefits,
equipment rental, workers
16
compensation insurance, subcontractor costs and disposal costs increased
$2,634,137, $712,490, $547,272, $408,263, $375,647, $257,236 and $176,054,
respectively, as a result of the World Trade Center work. In addition, project
manager salaries increased $640,735 due to an increase in the number and
compensation of those employees. These increases were partially offset by a
decrease in materials and supplies of $364,143. 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 63.1% in fiscal 2002 as
compared to 69.6% in fiscal 2001. Accordingly, gross profit as a percentage of
revenues increased to 36.9% in fiscal 2002 from 30.4% in fiscal 2001. Gross
profit in fiscal 2002 was positively impacted by the World Trade Center projects
that generated gross profits of $10,202,000 or 40.0% that was partially offset
by the increase in project manager salaries.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for fiscal 2002 increased by
$880,342 to $5,346,394 in fiscal 2002 from $4,466,052 in fiscal 2001 and
constituted approximately 16.2% and 20.3% of revenues in fiscal 2002 and 2001,
respectively. The increase was primarily attributable to increases in the
provision for doubtful accounts, marketing expenses, office salaries, sales
salaries and officer salaries of $390,438, $338,129, $66,429, $56,608 and
$56,221, respectively. The increases were partially offset by a decrease in
legal fees, depreciation and bank charges of $120,091, $25,753 and $25,614,
respectively.
Expense Related to Variable Accounting Treatment for Officer Options
- --------------------------------------------------------------------
Under the terms of an 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. The expense related
to variable accounting treatment for officer options increased by $227,732 to
$555,812 in fiscal 2002 from $328,080 in fiscal 2001. This was due to a change
in the market price of the Company's Common Stock. 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 benefit.
Interest Expense
- ----------------
Interest expense decreased by $115,769 in fiscal 2002 to $223,246 from $339,015
in fiscal 2001. The decrease in interest expense was primarily attributable to
lower levels of debt and reductions in the LIBOR rate.
Provision for Income Taxes
- --------------------------
The provision for income taxes reflects an effective rate of 42.1% and 33.9% in
fiscal 2002 and 2001, respectively. The book benefit for taxable losses
generated in prior periods 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 2002 were $3,494,867 and $.05, respectively. This compares to net
income and basic net income attributable to common stockholders per share of
$1,065,877 and $.03, respectively for fiscal 2001.
Period from May 1, 2001 Through July 3, 2001 Compared to Period from May 1, 2000
Through June 30, 2000
- --------------------------------------------------------------------------------
On July 27, 2001, the Board of Directors voted to change the Company's fiscal
year to a 52-53 week fiscal year ending on the Tuesday nearest June 30. Each
fiscal year shall generally be comprised of four 13-week quarters, each
containing two four-week months followed by one five-week month.
17
Unaudited consolidated statement of operations data for the period from May 1,
2000 through June 30, 2000 is as follows:
Revenues $2,003,331
Gross Profit $ 256,794
Provision for income taxes $ -
Net loss $ (653,344)
Net loss per share $ (.02)
Revenues
- --------
Revenues increased to $2,322,511 in the period from May 1, 2001 through July 3,
2001 (the "2001 transition period") compared to $2,003,331 in the period from
May 1, 2000 through June 30, 2000 (unaudited) (the "2000 transition period").
This increase of $319,180, or 15.9%, was primarily the result of revenue
increases in the Company's Trade-Winds subsidiary of $491,174 to $2,211,276 in
the 2001 transition period from $1,720,102 in the 2000 transition period. This
increase was partially offset by revenue decreases of $121,104 to $25,613 in the
2001 transition period from $146,717 in the 2000 transition period resulting
from the discontinuance of unprofitable operations in another of the Company's
subsidiaries.
The increase in Trade-Winds revenue of $491,174 in the 2001 transition period
was primarily attributable to a large mold remediation project that accounted
for revenues of approximately $308,000 and a pond rehabilitation project that
accounted for revenues of approximately $166,000.
Gross Profit (Loss)/Cost of Revenues
- ------------------------------------
Cost of revenues increased to $2,414,195 in the 2001 transition period compared
to $1,746,537 in the 2000 transition period. This increase of $667,658, or
38.2%, was primarily the result of the costs incurred on a pond rehabilitation
project of approximately $343,000, increased field labor costs of approximately
$200,000, due to projects nearing completion at July 3, 2001, increases in
equipment rental costs of approximately $90,000 and increased project manager
salaries of approximately $74,000, due to an increase in the number of project
managers. These increases were partially offset by a decrease in subcontracting
costs of approximately $39,000. 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 104% in the 2001 transition
period as compared to 87.2% in the 2000 transition period. Accordingly, gross
profit as a percentage of revenues decreased to (4.0)% in the 2001 transition
period from 12.8% in the 2000 transition period. The gross loss in the 2001
transition period was primarily attributable to revenue levels that were
insufficient to cover the Company's fixed costs.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the 2001 transition period
increased by $118,067 to $780,381 in the 2001 transition period from $662,314 in
the 2000 transition period and constituted approximately 33.6% and 33.1% of
revenues in the 2001 and 2000 transition periods, respectively. The increase was
primarily attributable to an increase in the provision for doubtful accounts of
approximately $189,000 that was partially offset by a decrease in marketing
expenses of approximately $54,000.
Benefit Related to Variable Accounting Treatment for Officer Options
- --------------------------------------------------------------------
Under the terms of an 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. The benefit related
to variable accounting treatment for officer options increased by $264,522 to
($44,189) in the 2001 transition period from $220,333 in the 2000 transition
period. This was due to a change in the market price of the Company's Common
Stock. 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 benefit.
18
Interest Expense
- ----------------
Interest expense decreased by $16,068 in the 2001 transition period to $46,686
from $62,754 in the 2000 transition period. The decrease in interest expense was
primarily attributable to lower levels of debt and reductions in the LIBOR rate.
Other Income
- ------------
Other income increased $118,996 to $154,259 in the 2001 transition period from
$35,263 in the 2000 transition period. The increase was primarily attributable a
gain on the sale of substantially all of an unprofitable subsidiary's fixed
assets in the 2001 transition period.
Provision for Income Taxes
- --------------------------
No income taxes were provided in either the 2001 or 2000 transition periods due
to the incurrence of taxable losses. The book benefit for taxable losses
generated in both periods 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 Loss
- --------
Net loss and basic and diluted net loss attributable to common stockholders per
share for the 2001 transition period were ($720,303) and ($.02), respectively.
This compares to a net loss and basic and diluted net loss attributable to
common stockholders per share of ($653,344) and ($.02), respectively for the
2000 transition period.
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 the
fiscal year ended April 30, 2000 ("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 $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 a subsidiary
of the Company 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.
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 a subsidiary's 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.
19
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, 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 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.
LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 2002, the Company had cash balances of $399,679, working capital
of $4,326,473 and stockholders' equity of $3,372,383. Historically, the Company
has financed its operations to date primarily through issuance of debt and
equity securities, through short-term borrowings from its majority shareholder,
Spotless and through cash generated from operations. In the opinion of
management, the Company expects to have sufficient working capital
20
to fund current operations. However, market conditions and their effect on
the Company's liquidity may restrict the Company's use of cash. In the event
that sufficient positive cash flow from operations is not generated, the Company
may need to seek additional financing from Spotless, although Spotless is under
no legal obligation to provide such funds. The Company currently has no credit
facility for additional borrowing.
After the terrorist attack on the World Trade Center on September 11, 2001, the
demand for the Company's emergency and catastrophe response services increased
dramatically. As a result of that increased demand, the Company recorded
revenues of approximately $17,003,000 for remediation services related to the
attack from September 13, 2001 through July 2, 2002. Approximately $15,200,000
of this revenue has been collected by July 2, 2002. Due to the nature of the
Company's business, it cannot anticipate whether it will be able to replace such
revenues with revenues from new projects in future periods.
As of July 2, 2002, the Company owed Spotless $200,000 on short-term loans to
fund working capital. During fiscal 2002, in order to address the Company's cash
flow and operational concerns and to fund the increased payroll that resulted
from the greater level of work related to the World Trade Center attack, the
Company borrowed $1,750,000 from Spotless. During fiscal 2002, primarily as a
result of cash collected from the World Trade Center projects, the Company
repaid $2,750,000 to Spotless. All current borrowings from Spotless bear
interest at the London Interbank Offering Rate ("LIBOR") plus 1 percent and are
secured by all of the Company's assets. As of July 2, 2002, interest of $647 was
accrued on these borrowings.
On March 15, 2002, the Company repaid $680,000 principal amount of 10%
convertible notes upon their maturity. The repayment was funded through cash
generated from operations and did not require any borrowings. Subsequent to July
2, 2002, the Company repaid $50,000 of a convertible note held by a director of
the Company.
During fiscal 2001, in order to address the Company's cash flow and operational
concerns, the Company borrowed and repaid an additional $1,000,000 from
Spotless. Subsequently in fiscal 2001, the Company also borrowed an additional
$450,000 from Spotless pursuant to 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.
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.
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.
Cash Flow
- ---------
Net cash provided by operating activities was $2,521,922 in fiscal 2002, as
compared to net cash used in operating activities of ($136,364) and ($1,902,538)
in fiscal 2001 and 2000, respectively. Accounts receivable increased $2,275,940
or 37.0% to $8,428,232 in fiscal 2002, reflecting the increase in sales relative
to the projects performed in the vicinity of the World Trade Center attack.
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
21
increased $1,339,313 or 57.0% to $3,688,511 in fiscal 2000, reflecting an
increase in sales during the fourth quarter of fiscal 2000. Accounts payable and
accrued expenses (excluding accrued preferred dividends) increased by $301,190
or 10.1% to $3,268,618 in fiscal 2002 primarily as a result of the additional
expenses incurred on the World Trade Center projects. Accounts payable and
accrued expenses decreased 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 Transaction.
Cash used for capital expenditures was $688,073, $381,729 and $275,417 in fiscal
2002, 2001 and 2000, respectively. During the 2001 transition period, the
Company received $249,878 for the sale of substantially all of the assets of an
unprofitable subsidiary.
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. During
the 2001 transition period, the Company borrowed $250,000 from Spotless for
working capital requirements. During fiscal 2002, in order to address cash flow
and operational concerns and to fund the increased payroll that resulted from
the greater level of work related to the World Trade Center attack, the Company
borrowed $1,750,000 from Spotless. During fiscal 2002, primarily as a result of
cash collected from the World Trade Center projects, the Company repaid
$2,750,000 to Spotless. A $200,000 balance in loans from Spotless was
outstanding as of July 2, 2002. In July 2002, the Company borrowed and
subsequently repaid an additional $125,000 from Spotless for working capital
requirements. On March 15, 2002, the Company repaid $680,000 principal amount of
10% convertible notes upon their maturity. In addition, during fiscal 2002, the
Company paid $214,500 of dividends on Series A Preferred Stock. These payments
were funded through cash generated from operations and did not require any
borrowings. In fiscal 2000, the Company received proceeds of $142,350 from the
sale of Common Stock. The Company received $83,182, $3,250 and $7,500 in
proceeds from the exercise of common stock options in fiscal 2002, 2001 and
2000, respectively.
The table below summarizes aggregate maturities of future minimum lease payments
under noncancelable operating leases as of July 2, 2002:
Total 1 Year 2-3 Years 4-5 Years Thereafter
Operating Leases $1,765,639 $338,576 $718,324 $708,739 $0
EFFECT OF INFLATION
Inflation has not had a material impact on the Company's operations during
fiscal 2002, the 2001 transition period, or during fiscal 2001 and 2000.
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, 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 July 2, 2002, such shares and vested options to purchase shares
aggregated 8,122,071 shares. Each $.01 increase or decrease in market price of
the Company's stock impacts earnings by approximately $81,000.
22
INTEREST RATE SENSITIVITY - The Company's exposure to market risk for changes in
interest rate primarily relates to its debt obligation to Spotless. The interest
rate on the borrowings from Spotless is LIBOR plus 1%. At July 2, 2002, total
debt owed to Spotless was $200,000 with additional accrued interest of $647.
Assuming variable rate debt at July 2, 2002, a one-point change in interest
rates would impact annual net interest payments by approximately $2,000. 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' Report 27
Consolidated Balance Sheets as of July 2, 2002 and July 3, 2001 28
Consolidated Statements of Operations for the fiscal year ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001,
and the fiscal years ended April 30, 2001 and 2000 29
Consolidated Statements of Stockholders' Equity for the fiscal year
ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and the fiscal years ended April 30, 2001 and 2000 30
Consolidated Statements of Cash Flows for the fiscal years ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000 31
Notes to Consolidated Financial Statements 32 to 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information under the captions "Director - Nominees", "Principal Occupations
of Directors and Executive Officers", "Directors' Compensation", "Board Meetings
and Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held in 2002 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information under the captions "Executive Compensation", "Option/Stock
Appreciation Rights ("SAR") Grants in Last Fiscal Year", "Aggregated Options/SAR
Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Employment
Agreements", "Compensation Committee Interlocks and Insider Participation",
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 2002 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information under the captions "Security Ownership" and "Equity Compensation
Plan Information" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 2002 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2002 is incorporated herein by reference.
23
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Set forth below are all exhibits to this Annual Report on Form 10-K.
3.01 Composite of Certificate of Incorporation of the Company. (Incorporated
by reference to Exhibit 3.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 2001, filed with the SEC on
March 19, 2001).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with the
SEC on June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
4.02 Specimen Series B Preferred Stock Certificate. (Incorporated by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K (Date of Report: October 29, 1999) filed with the SEC on
November 12, 1999).
10.01 Form of Convertible Note Agreement. (Incorporated by reference to
Exhibit 4.04 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997, filed with the SEC on September 29,
1997).
10.02 Convertible Demand Note, dated October 15, 1996, between Trade-Winds
Environmental Restoration, Inc. and Anthony P. Towell, together with
related agreements. (Incorporated by reference to exhibit 10.04 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 2000, filed with the SEC on August 14, 2000).
10.03 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997,
filed with the SEC on September 29, 1997).
10.04 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (No. 333-22491) filed with
the SEC on February 27, 1997).
10.05 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-8 (No. 333-61905)
filed with the SEC on August 20, 1998).
10.06 Loan Agreement dated September 16, 1999 between Spotless Enterprises
Inc. and the Company (Incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-KSB for the year ended April 30,
2000, filed with the SEC on August 14, 2000).
10.07 Subscription Agreement dated October 29, 1999 between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.08 Convertible Promissory Note dated October 29, 1999 issued by the
Company to Spotless Plastics (USA), Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.09 Form of Security Agreement dated October 29, 1999 between each of the
Company, Trade-Winds Environmental Remediation, Inc., North Atlantic
Laboratories, Inc. and New York Testing, Inc. and Spotless Plastics
(USA), Inc. (Incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.10 Amended and Restated Employment Agreement dated October 29, 1999
between the Company and Michael O'Reilly. (Incorporated by reference to
Exhibit 10.4 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
24
10.11 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.12 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly relating to options vesting upon exercise of the
convertible note. (Incorporated by reference to Exhibit 10.6 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.13 Letter Agreement dated October 29, 1999 between Michael O'Reilly and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.7 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.14 Agreement, dated as of November 3, 2000, by and between Turner
Construction Company and Trade-Winds Environmental Restoration Inc., as
amended (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31, 2000,
filed with the SEC on December 15, 2001).
10.15 Loan Agreement, dated November 4, 2000, by and between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.16 Line of Credit Note, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.17 Security Agreement, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.4 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.18 2001 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 2001, filed with the SEC on March 19, 2001).
10.19 Form of Amendment No. 1 dated November 16, 2001 to Security Agreement
dated October 29, 1999 between each of the Company, Trade-Winds
Environmental Restoration, Inc., North Atlantic Laboratories, Inc. and
New York Testing Laboratories, Inc. and Spotless Plastics (USA), Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended January 1, 2002, filed with
the SEC on February 13, 2002).
10.20 Promissory Note dated November 16, 2001 issued by the Company in favor
of Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended January 1, 2002, filed with the SEC on February 13, 2002).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
99.1 Certification of Chief Executive Officer of the Company pursuant to
18 U.S.C. Section 1350.
99.1 Certification of Chief Financial Officer of the Company pursuant to
18 U.S.C. Section 1350.
(b) There were no reports on Form 8-K filed during the last quarter
covered by this Annual Report on Form 10-K.
25
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
--------
Independent Auditors' Report 27
Consolidated Balance Sheets as of July 2, 2002 and July 3, 2001 28
Consolidated Statements of Operations for the fiscal years ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000 29
Consolidated Statements of Stockholders' Equity for the fiscal
year ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and the fiscal years ended April 30, 2001 and 2000 30
Consolidated Statements of Cash Flows for the fiscal year ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000 31
Notes to Consolidated Financial Statements 32 to 47
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
Bay Shore, New York
We have audited the accompanying consolidated balance sheets of Windswept
Environmental Group, Inc. and subsidiaries (the "Company") as of July 2, 2002
and July 3, 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal year ended July 2, 2002, the
period from May 1, 2001 through July 3, 2001 and the fiscal years ended April
30, 2001 and 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of July 2, 2002 and
July 3, 2001, and the results of their operations and their cash flows for the
fiscal year ended July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche, LLP
Jericho, New York
August 13, 2002
27
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 2, July 3,
2002 2001
-------------- -------------
ASSETS:
CURRENT ASSETS:
Cash $ 399,679 $ 323,732
Accounts receivable, net of allowance for doubtful accounts of $909,029 and $570,409,
respectively 7,519,203 5,581,883
Inventory 296,474 208,064
Costs and estimated earnings in excess of billings on uncompleted contracts 501,424 686,528
Prepaid expenses and other current assets 144,274 122,172
------------ ------------
Total current assets 8,861,054 6,922,379
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $4,550,006 and
$3,887,920, respectively 1,144,369 1,118,382
OTHER ASSETS 207,115 151,807
------------ ------------
TOTAL $10,212,538 $ 8,192,568
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LIABILITIES AND STOCKHOLDERS' E