UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2002,
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _____.
Commission File Number: 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2844247
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
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(Address of principle executive offices) (Zip Code)
(631) 434-1300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock, par value $.0001, outstanding on
October 31, 2002 was 77,936,358.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 2002 AND JULY 2, 2002
October 1, July 2,
2002 2002
(Unaudited)
------------- -------------
ASSETS:
CURRENT ASSETS:
Cash $ 146,651 $ 399,679
Accounts receivable, net of allowance for doubtful accounts of $917,443 and $909,029, 7,407,110 7,519,203
respectively
Inventories 243,314 296,474
Costs and estimated earnings in excess of billings on uncompleted contracts 689,226 501,424
Prepaid expenses and other current assets 341,516 144,274
------------- -------------
Total current assets 8,827,817 8,861,054
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $4,681,866
and $4,550,006, respectively 1,480,132 1,144,369
OTHER ASSETS 241,595 207,115
------------- -------------
TOTAL $10,549,544 $ 10,212,538
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 951,509 $ 1,060,074
Accrued expenses 1,689,383 1,740,093
Short-term notes payable to related party 950,000 200,000
Billings in excess of cost and estimated earnings on uncompleted contracts 129,261 193,251
Accrued payroll and related fringes 728,353 551,091
Current portion of convertible notes payable to related party 50,000 100,000
Income taxes payable 8,000 450,820
Other current liabilities 325,169 239,252
------------- -------------
Total current liabilities 4,831,675 4,534,581
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LONG-TERM DEBT 100,389 63,703
------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK AND STOCK OPTIONS 860,650 941,871
------------- -------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000 shares
authorized; 1,300,000 shares outstanding at October 1, 2002 and July 2, 2002 1,300,000 1,300,000
------------- -------------
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, $.01 par value; 50,000 shares
authorized; 0 shares outstanding at October 1, 2002 and July 2, 2002, respectively - -
Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0 shares - -
outstanding
Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358 outstanding
at October 1, 2002 and July 2, 2002, respectively 7,794 7,794
Additional paid-in-capital 34,058,517 34,078,017
Accumulated deficit (30,609,481) (30,713,428)
------------- -------------
Total stockholders' equity 3,456,830 3,372,383
------------- -------------
TOTAL $ 10,549,544 $ 10,212,538
============= =============
See notes to consolidated financial statements.
2
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended
---------------------------------
October 1, October 2,
2002 2001
------------- -------------
Revenues $ 4,592,976 $ 7,735,074
Cost of revenues 3,534,476 5,320,533
------------- -------------
Gross profit 1,058,500 2,414,541
------------- -------------
Operating expenses:
Selling, general and administrative expenses 1,023,784 974,151
(Benefit) expense related to variable accounting
treatment for officer options (81,221) 240,445
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Total operating expenses 942,563 1,214,596
------------- -------------
Income from operations 115,937 1,199,945
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Other expense (income):
Interest expense 8,169 74,474
Other, net (4,179) (9,344)
------------- -------------
Total other expense 3,990 65,130
------------- -------------
Income before provision for income taxes 111,947 1,134,815
Provision for income taxes 8,000 371,662
------------- -------------
Net income 103,947 763,153
Dividends on preferred stock 19,500 19,500
------------- -------------
Net income attributable to common
shareholders $ 84,447 $ 743,653
============= =============
Basic and diluted net income per common share:
Basic $.00 $.02
============= =============
Diluted $.00 $.01
============= =============
Weighted average number of common shares outstanding:
Basic 77,936,358 38,481,254
============= =============
Diluted 83,439.103 77,068,312
============= =============
See notes to consolidated financial statements.
3
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock
------------ Additional
Number of Par Paid-in Accumulated
Shares Value Capital Deficit Total
------ ----- ------- ------- -----
Balance at July 2, 2002 77,936,358 $7,794 $34,078,017 $(30,713,428) $3,372,383
Dividends on Series A preferred stock - - (19,500) - (19,500)
Net income - - - 103,947 103,947
----------- ------- ------------ ------------- -----------
Balance at October 1, 2002 77,936,358 $7,794 $34,058,517 $(30,609,481) $3,456,830
=========== ======= ============ ============= ===========
See notes to consolidated financial statements.
4
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirteen Weeks Ended
--------------------------------
October 1, October 2,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 103,947 $ 763,153
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 131,860 182,989
Provision for doubtful accounts 8,414 34,679
Compensation expense (benefit) related to officer options and (81,221) 240,445
redeemable common stock
Changes in operating assets and liabilities:
Accounts receivable 103,679 (2,603,172)
Inventories 53,160 (22,339)
Costs and estimated earnings in excess of billings on uncompleted contracts (187,802) 105,570
Prepaid expenses and other current assets (197,242) 15,334
Other assets (34,480) -
Accounts payable and accrued expenses (159,275) 442,345
Accrued payroll and related fringes 177,262 438,533
Income taxes payable (442,820) 365,965
Other current liabilities 45,364 262,045
Billings in excess of costs and estimated earnings on uncompleted contracts (63,990) (135,048)
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (543,144) 90,499
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (467,623) (148,668)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (467,623) (148,668)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (26,753) (26,511)
Proceeds from long-term debt 103,992 38,898
Repayment of convertible notes to related party (50,000) -
Payment of preferred dividends (19,500) -
Proceeds from short-term notes payable 875,000 500,000
Repayments of short-term notes payable (125,000) -
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 757,739 512,387
------------- -------------
NET (DECREASE) INCREASE IN CASH (253,028) 454,218
CASH - BEGINNING OF PERIOD 399,679 323,732
------------- -------------
CASH - END OF PERIOD $ 146,651 $ 777,950
============= =============
Cash paid during the period for:
Interest $ 12,148 $ 51,452
============= =============
Taxes $ 641,966 $ 4,417
============= =============
Non cash financing activities:
Issuance of preferred stock dividend $ - $ 19,500
============== =============
See notes to consolidated financial statements.
5
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS FOR PRESENTATION - The accompanying unaudited consolidated financial
statements include the accounts of Windswept Environmental Group, Inc.
(the "Company") and its wholly-owned subsidiaries. The unaudited
consolidated financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the
United States of America, for interim financial statements and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
the Company, all adjustments (consisting of only normal and recurring
accruals) considered necessary to present fairly the financial position
of the Company and its subsidiaries on a consolidated basis as of
October 1, 2002, the results of operations for the thirteen weeks
ended October 1, 2002 and October 2, 2001 and cash flows for the thirteen
weeks ended October 1, 2002 and October 2, 2001, have been included.
The results for the thirteen weeks ended October 1, 2002 and October
2, 2001 are not necessarily indicative of the results for an entire year.
These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
and notes thereto included in the Company's Form 10-K for the year ended
July 2, 2002.
2. LIQUIDITY AND BUSINESS RISKS - As of October 1, 2002, the Company had a
cash balance of $146,551, working capital of $3,996,142 and stockholders'
equity of $3,456,830. Historically, the Company has financed its operations
primarily through issuance of debt and equity securities, through
short-term borrowings from its majority shareholder, Spotless Plastics
(USA), Inc. ("Spotless") and through cash generated from operations. In the
opinion of management, the Company expects to have sufficient working
capital 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
or otherwise. Spotless is under no legal obligation to provide such funds.
The Company currently has no credit facility for additional borrowing.
During the thirteen weeks ended October 1, 2002, in order to address the
Company's cash flow and operational concerns, including funding the payment
of income taxes and start up costs relating to a large mold remediation
project in Hawaii, the Company borrowed $875,000 from Spotless. During the
thirteen weeks ended October 1, 2002, the Company repaid $125,000 to
Spotless. All 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 and are payable on demand. As of October 1, 2002, the
Company owed Spotless $950,000 on such short-term loans to fund working
capital. Subsequent to October 1, 2002, the Company borrowed an additional
$300,000 from Spotless to fund working 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.
6
3. PROVISION FOR INCOME TAXES - The provision for income taxes for the
thirteen weeks ended October 1, 2002 and October 2, 2001, respectively
consists of the following:
Thirteen Weeks Ended
--------------------
October 1, October 2,
2002 2001
---- ----
Federal - current $ 6,000 $ 262,331
State - current 2,000 109,331
---------- ----------
Total $ 8,000 $ 371,662
========== ==========
The effective rate for income taxes differs from the statutory rates
primarily as a result of the utilization of federal and state net operating
loss carryforwards of approximately $68,000 in the thirteen weeks ended
October 1, 2002 and the nondeductible nature of the expense (benefit)
related to the variable accounting treatment of officer options for which
there is a 100% valuation allowance. The Company has a 100% valuation
allowance against deferred tax assets because management believes that it
is more likely than not that such deferred tax assets will not be realized.
At October 1, 2002, the Company had approximately $1,056,000 in net
operating loss carryforwards for tax purposes that expire at various dates
through 2020. Due to Spotless' acquisition of greater than 50% ownership in
October 1999, the Company is limited to utilizing $68,000 of net operating
loss carryforwards per annum.
4. INCOME PER COMMON SHARE - The calculation of basic and diluted income per
common share was calculated for all periods in accordance with the
requirements of Statement of Financial Accounting Standards No. 128,
"Earnings per Share".
The following table sets forth the computation of the basic and diluted net
income per share for the thirteen weeks ended October 1, 2002 and October
2, 2001:
Thirteen Weeks Ended
-------------------------------
October 1, October 2,
2002 2001
---- ----
Numerator:
Net income attributable to
common shareholders $ 84,447 $ 743,653
Add interest on convertible notes,
net of tax 2,340 31,992
------------ ------------
$ 86,787 $ 775,645
============ ============
Denominator:
Share reconciliation:
Shares used for basic income
per share 77,936,358 38,481,254
Effect of dilutive items:
Stock options 4,945,632 2,764,966
Convertible securities 557,113 35,822,092
------------ ------------
Shares used for dilutive income
per share 83,439,103 77,068,312
============ ============
Net income per share:
Basic $.00 $.02
Diluted $.00 $.01
7
Included in convertible securities are the assumed conversion of
convertible notes in the thirteen weeks ended October 1, 2002 and
convertible notes and preferred stock in the thirteen weeks ended October
2, 2001. For the 2002 period, 1,300,000 shares of common stock issuable
upon exercise of the Series A Redeemable Convertible Preferred Stock was
excluded from diluted earnings per share because the effect would be
anti-dilutive.
5. CONTINGENCIES - On October 12, 2001, Trade-Winds Environmental Restoration,
Inc. ("Trade-Winds"), a wholly-owned subsidiary of the Company, 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.
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 that 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.
6. RELATED PARTY TRANSACTIONS - On November 16, 2001, the Company exchanged
$1,700,000 of short-term notes payable for a demand promissory note payable
to Spotless that is secured by the Company's assets and the assets of its
subsidiaries, pursuant to amendments to existing security agreements
between each of the Company and its subsidiaries and Spotless. The
promissory note had an original principal amount of $1,700,000 and accrues
interest at the rate of LIBOR plus one percent (1%) per annum. Spotless
may, but is under no obligation to, lend additional amounts to the Company
under this secured promissory note. As of October 1, 2002, the Company owed
Spotless $950,000 under this promissory note. Subsequent to October 1,
2002, the Company borrowed an additional $300,000 from Spotless.
In the thirteen weeks ended October 1, 2002, the Company repaid $50,000
principal amount of 12% convertible notes to a director of the Company.
This repayment was voluntary and was funded through cash generated from
operations and did not require any borrowings.
7. RECENT ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and
other intangible assets. Under SFAS No. 142, goodwill and some intangible
assets will no longer be amortized, but rather reviewed for impairment on a
periodic basis. This Statement was required to be adopted by the Company
for the fiscal year beginning July 2, 2002 and applied to all goodwill and
other intangible assets recognized in its financial statements at that
date. Impairment losses for goodwill and certain intangible assets that
arose due to the initial application of this Statement should be reported
as resulting from a change in accounting principle. The adoption of SFAS
No. 142 did not have a material impact on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life
of the related
8
asset. Upon settlement of the liability, an entity either settles the
obligation for ts recorded amount or incurs a gain or loss upon
settlement. The standard is effective for fiscal years beginning after June
15, 2002. The adoption of SFAS 143 did not have a material impact on the
Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 requires that long-lived
assets be measured at the lower of carrying amount or fair value less cost
to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have
not yet occurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can
be distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction. The
provisions of SFAS No. 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of SFAS
144 did not have a material impact on the Company's consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 rescinds SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement,
SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". SFAS 145 also rescinds SFAS 44, "Accounting for Intangible
Assets of Motor Carriers". SFAS 145 amends SFAS 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Certain provisions
of this statement related to the classification of gains and losses from
the extinguishment of debt are required to be adopted by the Company
beginning with the year ended July 1, 2003. All other provisions are
required to be adopted after May 15, 2002 and early application is
encouraged. The adoption of SFAS No. 145 is not expected to have a material
impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring").
SFAS 146 requires recognition of a liability for a cost associated with an
exit or disposal activity when the liability is incurred, as opposed to
when the entity commits to an exit plan under EITF 94-3. This statement is
effective for exit or disposal activities initiated after December 31,
2002. The adoption of SFAS 146 is not expected to have a material impact on
the Company's consolidated financial statements
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements - Statements contained in this Quarterly Report
on Form 10-Q include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause the actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, not to occur or be
realized. Such forward-looking statements generally are based upon the Company's
best estimates of future results, performance or achievement, based upon current
conditions and the most recent results of operations. Forward-looking statements
may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "believe," "estimate," "anticipate," "continue" or similar
terms, variations of those terms or the negative of those terms. Potential risks
and uncertainties include, among other things, such factors as:
- the market acceptance and amount of sales of the Company's
services,
- the Company's success in increasing revenues and reducing
expenses,
- the frequency and magnitude of environmental disasters or
disruptions resulting in the need for the types of services the
Company provides,
- the ability of the Company to be retained for large projects,
- the extent of the enactment, enforcement and strict
interpretations of laws relating to environmental remediation,
- the competitive environment within the industries in which
the Company operates,
- the Company's ability to raise additional capital,
- the Company's ability to attract and retain qualified personnel,
and
- the other factors and information disclosed and discussed in
other sections of this Quarterly Report on Form 10-Q and in the
Company's Annual Report on Form 10-K for the fiscal year ended
July 2, 2002.
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.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing in Item 1.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results
of operations are based upon the Company's unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
unaudited 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 unaudited financial statements
are accounting for contracts, allowance for doubtful accounts and the valuation
allowance against 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
10
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 also consults 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 October 1, 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
THIRTEEN WEEKS ENDED OCTOBER 1, 2002 AND OCTOBER 2, 2001
Revenue
Total revenues for the thirteen weeks ended October 1, 2002 (the "2002
period") decreased by $3,142,098, or approximately 41%, to $4,592,976 from
$7,735,074 for the thirteen weeks ended October 2, 2001 (the "2001 period"). The
decrease in revenues of $3,142,098 was primarily attributable to approximately
$2,500,000 related to non-recurring remediation work performed in the 2001
period in the vicinity of the World Trade Center as a result of the terrorist
attack on September 11, 2001 and a decrease in the 2002 period of approximately
$450,000 related to insurance renovation and reconstruction due to mild weather
conditions in the northeastern United States.
Cost of Revenues
Cost of revenues decreased $1,786,057 to $3,534,476 in the 2002 period as
compared to $5,320,533 in the 2001 period. This 34% decrease was primarily
attributable to the labor costs of approximately $1,469,000 which was required
in the 2001 period associated with non-recurring remediation work performed in
the vicinity of the World Trade Center, decreases in materials and supplies of
approximately $83,000 and a decrease in workers compensation of approximately
$235,000 as a result of a policy audit. Gross profit decreased $1,356,041 to
$1,058,500, or 23% of total revenue, for the 2002 period from $2,414,541, or 31%
of total revenue, for the 2001 period. The decrease in gross profit was
primarily attributable to the absence of World Trade Center related work, which
produced higher margins in the 2001 period. The Company's cost of revenues
consists primarily of labor and labor related costs, insurance, benefits,
bonding and job related insurance, repairs, maintenance, equipment rental,
materials and supplies, disposal costs and depreciation of capital equipment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $49,633 to
$1,023,784 for the 2002 period from $974,151 for the 2001 period, and
constituted approximately 22% and 13% of revenues in the 2002 and 2001 periods,
respectively. The increase of $49,633 was primarily attributable to increases in
sales and marketing expenses.
(Benefit) Expense Related to Variable Accounting Treatment for Officer Options
11
Under the terms of an employment agreement with the Company and a separate
agreement with Spotless, the Company's President and Chief Executive Officer may
sell to the Company, or in certain circumstances to Spotless, 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 upon the occurrence of certain events. The benefit related to variable
accounting treatment for officer options was $81,221 in the 2002 period compared
to an expense of $240,445 in the 2001 period. This was due to a decrease in the
market price of the Company's common stock that was partially offset by an
increase in the number of vested options outstanding. 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 $66,305, or 89%, to $8,169 in the 2002 period
from $74,474 in the 2001 period. The decrease in interest expense was primarily
attributable to reductions in convertible debt of $2,050,000 and reductions of
short-term debt to Spotless of $500,000.
Provision for Income Taxes
The provision for income taxes decreased by $363,662 to $8,000 for the 2002
period from $371,662 for the 2001 period. The decrease was primarily
attributable to decreased taxable income in the 2002 period.
Net Income
Net income decreased by $659,206 to $103,947 in the 2002 period from
$763,153 in the 2001 period. The decrease was the result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS
As of October 1, 2002, the Company had a cash balance of $146,551, working
capital of $3,996,142 and stockholders' equity of $3,456,830. Historically, the
Company has financed its operations 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 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.
During the 2002 period, in order to address the Company's cash flow and
operational concerns , including funding the payment of income taxes and start
up costs relating to a large mold remediation project in Hawaii, the Company
borrowed $875,000 from Spotless. During the 2002 period, the Company repaid
$125,000 to Spotless. All 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 and are payable on demand. As of October 1, 2002, the Company
owed Spotless $950,000 on short-term loans to fund working capital. Subsequent
to October 1, 2002 the Company borrowed an additional $300,000 from Spotless.
In the 2002 period, the Company repaid $50,000 principal amount of 12%
convertible notes to a director of the Company. This repayment was voluntary and
was funded through cash generated from operations and did not require any
borrowings.
The Company expects to have 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
12
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.
The table below summarizes aggregate maturities of future minimum lease
payments under noncancelable operating leases as of October 1, 2002:
Total 1 Year 2-3 Years 4-5 Years
Operating Leases $1,681,000 $342,000 $725,000 $614,000
CASH FLOW
Net cash used in operating activities was $543,144 for the 2002 period. Net
income for the 2002 period, after adding back non-cash items, provided cash of
$163,000. Accounts receivable decreased $103,679 due to collection activities.
Accounts payable and accrued expenses decreased $159,275 due to the lower volume
and accrued payroll increased $177,262, primarily as a result of the remediation
project in Hawaii. Income taxes payable decreased $442,820 as a result of the
payment of income taxes attributable to the fiscal year ended July 2, 2002. Cash
used for capital expenditures was $467,623 for the 2002 period primarily
relating to purchases of drying equipment to enhance the Company's emergency
response capabilities.
During the 2002 period, in order to address cash flow and operational
concerns and to fund the increased payroll that resulted from the start up of a
large mold remediation project in Hawaii, the Company borrowed $875,000 from
Spotless. During the 2002 period, the Company repaid $125,000 to Spotless. A
balance of $950,000 in loans from Spotless was outstanding as of October 1,
2002. All borrowings from Spotless bear interest at LIBOR plus 1 percent and are
secured by all of the Company's assets. Subsequent to October 1, 2002, the
Company borrowed an additional $300,000 from Spotless for working capital.
During the 2002 period, the Company repaid $50,000 of convertible notes and
paid preferred stock dividends of $19,500.
INFLATION
Inflation has not had a material impact on the Company's operations over
the past three fiscal years or during the 2002 period.
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.
13
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to potential loss from market risks that may occur
as a result of changes in the market price of the Company's common stock (with
respect to the variable accounting treatment of a put option for shares of
common stock and common stock options held by an officer of the Company) and as
a result of changes in interest rates (primarily with respect to its debt
obligations to Spotless). There have been no material changes to the market risk
disclosure as reported in the Company's Annual Report on Form 10-K for the
period ended July 2, 2002.
Item 4. Controls and Procedures
Our principal executive and financial officers have concluded, based on
their evaluation as of a date within 90 days before the filing of this Form
10-Q, that our disclosure controls and procedures under Rule 13a-14 of the
Securities Exchange Act of 1934 are effective to ensure that information we are
required to disclose in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and include controls and procedures designed to
ensure that information we are required to disclose in such reports is
accumulated and communicated to management, including our principal executive
and financial officers, as appropriate to allow timely decisions regarding
required disclosure.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is hereby made to Note 5 to the Consolidated
Financial Statements in Part I - Item 1 above and to Item 3 of
the Company's Annual Report on Form 10-K for the year ended
July 2, 2002 and to the references therein, for a discussion
of all material pending legal proceedings to which the Company
or any of its subsidiaries is party.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the thirteen
week period ended October 1, 2002
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: November 15, 2002
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By /s/ Michael O'Reilly
----------------------------------------
MICHAEL O'REILLY,
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Charles L. Kelly, Jr.
----------------------------------------
CHARLES L. KELLY, JR.
Chief Financial Officer
(Principal Financial Officer)
15
CERTIFICATION
I, Michael O'Reilly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Windswept Environmental
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Michael O'Reilly
Date: November 15, 2002 -------------------------------------
Michael O'Reilly
President and Chief Executive Officer
16
CERTIFICATION
I, Charles L. Kelly Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Windswept Environmental
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Charles L. Kelly, Jr.
Date: November 15, 2002 ---------------------------------------
Charles L. Kelly, Jr.
Chief Financial Officer
17