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 September 30, 2003,
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________.
Commission File Number: 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2844247
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
------------------------------------------- -----
(Address of principle executive offices)
(Zip Code)
(631) 434-1300
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
The number of shares of Common Stock, par value $.0001, outstanding on
October 31, 2003 was 77,936,358.
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND JULY 1, 2003
September 30, July 1,
2003 2003
-------------- --------------
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash $ 218,150 $ 130,096
Accounts receivable, net of allowance for doubtful accounts of $491,779 and
$402,804, respectively 7,937,447 5,881,603
Inventory 229,880 215,466
Costs and estimated earnings in excess of billings on uncompleted contracts 861,103 871,753
Refundable income taxes 1,080,186 1,080,186
Prepaid expenses and other current assets 161,501 279,597
-------------- --------------
Total current assets 10,488,267 8,458,701
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $5,253,912
and $5,111,516, respectively 2,339,705 2,497,435
OTHER ASSETS 98,127 98,127
-------------- --------------
TOTAL $ 12,926,099 $ 11,054,263
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,591,625 $ 1,487,683
Accrued expenses 1,387,277 1,193,339
Short-term notes payable to related party 3,535,000 1,700,000
Billings in excess of cost and estimated earnings on uncompleted contracts 219,022 299,427
Accrued payroll and related fringe benefits 667,341 659,659
Current maturities of long-term debt 382,266 436,617
Income taxes payable 74,151 -
Other current liabilities 287,130 464,686
-------------- --------------
Total current liabilities 8,143,812 6,241,411
-------------- --------------
LONG-TERM DEBT 277,724 338,848
-------------- --------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK AND STOCK OPTIONS 189,533 348,625
-------------- --------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000 shares
authorized; 1,300,000 shares outstanding at September 30, 2003 and July 1, 2003 1,300,000 1,300,000
-------------- --------------
STOCKHOLDERS' EQUITY:
Series B preferred stock, $.01 par value; 50,000 shares authorized; 0 shares outstanding - -
Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0 shares
outstanding at September 30, 2003 and July 1, 2003 - -
Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358 shares
outstanding at September 30, 2003 and July 1, 2003. 7,794 7,794
Additional paid-in-capital 33,980,517 34,000,017
Accumulated deficit (30,973,281) (31,182,432)
-------------- --------------
Total stockholders' equity 3,015,030 2,825,379
-------------- --------------
TOTAL $ 12,926,099 $ 11,054,263
============== ==============
See notes to consolidated financial statements.
2
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended
-----------------------------------
September 30, October 1,
2003 2002
-------------- --------------
Revenues $ 5,259,926 $ 4,592,976
Cost of revenues 3,929,942 3,534,476
-------------- --------------
Gross profit 1,329,984 1,058,500
-------------- --------------
Operating expenses:
Selling, general and administrative expenses 1,201,591 1,023,784
Benefit related to variable accounting
treatment for officer options (159,092) (81,221)
-------------- --------------
Total operating expenses 1,042,499 942,563
-------------- --------------
Income from operations 287,485 115,937
-------------- --------------
Other expense (income):
Interest expense 28,143 8,169
Other, net (23,960) (4,179)
-------------- --------------
Total other expense 4,183 3,990
-------------- --------------
Income before provision for income taxes 283,302 111,947
Provision for income taxes 74,151 8,000
-------------- --------------
Net income 209,151 103,947
Dividends on preferred stock 19,500 19,500
-------------- --------------
Net income attributable to common shareholders $189,651 $ 84,447
============== ==============
Basic and diluted net income per common share:
Basic $.00 $.00
==== ====
Diluted $.00 $.00
==== ====
Weighted average number of common shares outstanding:
Basic 77,936,358 77,936,358
============== ==============
Diluted 81,137,932 83,439,103
============== ==============
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, 2003 77,936,358 $ 7,794 $ 34,000,017 $ (31,182,432) $ 2,825,379
Dividends on Series A preferred stock - - (19,500) - (19,500)
Net income - - - 209,151 209,151
-------------- -------------- -------------- -------------- --------------
Balance at September 30, 2003 77,936,358 $ 7,794 $ 33,980,517 $ (30,973,281) $ 3,015,030
============== ============== ============== ============== ==============
See notes to consolidated financial statements.
4
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirteen Weeks Ended
---------------------------------
September 30, October 1,
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 209,151 $ 103,947
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 142,396 131,860
Provision for doubtful accounts, net 88,975 8,414
Benefit related to officer options and redeemable common stock (159,092) (81,221)
Changes in operating assets and liabilities:
Accounts receivable (2,144,819) 103,679
Inventory (14,414) 53,160
Costs and estimated earnings in excess of billings on uncompleted contracts 10,650 (187,802)
Prepaid expenses and other current assets 118,096 (197,242)
Other assets - (34,480)
Accounts payable and accrued expenses 297,880 (159,275)
Accrued payroll and related fringe benefits 7,682 177,262
Income taxes payable 74,151 (442,820)
Other current liabilities (160,072) 45,364
Billings in excess of costs and estimated earnings on uncompleted contracts (80,405) (63,990)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (1,609,821) (543,144)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,150) (467,623)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (2,150) (467,623)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (115,475) (26,753)
Proceeds from long-term debt - 103,992
Repayment of convertible note to related party - (50,000)
Payment of preferred stock dividends (19,500) (19,500)
Proceeds from short-term notes payable 1,835,000 875,000
Repayments of short-term notes payable - (125,000)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,700,025 757,739
-------------- --------------
NET INCREASE (DECREASE) IN CASH 88,054 (253,028)
CASH - BEGINNING OF PERIOD 130,096 399,679
-------------- --------------
CASH - END OF PERIOD $ 218,150 $ 146,651
============== ==============
Cash paid during the period for:
Interest $ 12,171 $ 12,148
============== ==============
Income taxes $ - $ 641,966
============== ==============
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 ("generally accepted accounting
principles") for interim financial statements and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of the Company, all adjustments (consisting of only normal
and recurring accruals) considered necessary to present fairly the
financial position of the Company and its subsidiaries on a
consolidated basis as of September 30, 2003, the results of operations
for the thirteen ended September 30, 2003 and October 1, 2002 and cash
flows for the thirteen weeks ended September 30, 2003 and October 1,
2002, have been included. Certain prior period amounts have been
reclassified to conform to the September 30, 2003 presentation.
The results for the thirteen weeks ended September 30, 2003 and
October 1, 2002 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 fiscal year ended July 1, 2003.
2. STOCK OPTIONS - In December 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS)" No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure - an amendment of FASB Statement No. 123 (" SFAS 148").
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and does not permit
the use of the original SFAS No. 123 prospective method of transition
in fiscal years beginning after December 15, 2003. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results, regardless of
whether, when, or how an entity adopts the preferable, fair value based
method of accounting. SFAS No. 148 improves the prominence and clarity
of the pro forma disclosures required by SFAS No. 123 by prescribing a
specific tabular format and by requiring disclosure in the "Summary of
Significant Accounting Policies" or its equivalent and improves the
timeliness of those disclosures by requiring their inclusion in
financial reports for interim periods. The Company has adopted the
disclosure requirements of SFAS No. 148 for the quarter ended September
30, 2003. The Company will continue to account for stock-based employee
compensation under APB Opinion No. 25 and its related interpretations.
The following table illustrates the effect on net income and net
income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation
for all periods:
6
Thirteen Weeks Ended
---------------------------
September 30, October 1,
2003 2002
------------ ------------
Net income attributable to common
shareholders as reported $ 189,651 $ 84,447
Less: Stock-based employee
compensation cost determined under
the fair value method, net of related
tax effects 40,265 58,732
------------ ------------
Pro forma net income attributable to
common shareholders $ 149,386 $ 25,715
============ ============
Net income per share:
Basic - as reported $.00 $.00
==== ====
Basic - pro forma $.00 $.00
==== ====
Diluted - as reported $.00 $.00
==== ====
Diluted - pro forma $.00 $.00
==== ====
3. NET INCOME PER COMMON SHARE - The calculation of basic and diluted
net 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
September 30, 2003 and October 1, 2002, respectively:
Thirteen Weeks Ended
----------------------------------
September 30, October 1,
2003 2002
-------------- --------------
Numerator:
Net income attributable to
common shareholders $ 189,651 $ 84,447
Add interest on convertible notes,
net of tax - 2,340
-------------- --------------
$ 189,651 $ 86,787
============== ==============
Denominator:
Share reconciliation:
Shares used for basic
income per share 77,936,358 77,936,358
Effect of dilutive items:
Stock options 3,201,574 4,945,632
Convertible securities - 557,113
-------------- --------------
Shares used for dilutive
income per share 81,137,932 83,439,103
============== ==============
Net income per share:
Basic $.00 $.00
Diluted $.00 $.00
The dilutive income per share computation for the thirteen week
periods ended September 30, 2003 and October 1, 2002 excludes
approximately 8,000,000 and 8,244,000 shares, respectively,
related to stock options and warrants because the effect of
including them would be anti-dilutive. For all periods presented,
1,300,000 shares of common stock issuable upon the exercise of the
Series A Redeemable Convertible Preferred Stock were excluded from
diluted earnings per share because the effect of including them
would be anti-dilutive.
7
4. PROVISION FOR INCOME TAXES - The provision for income taxes for the
thirteen weeks ended September 30, 2003 and October 1, 2002 consists of
the following:
Thirteen Weeks Ended
--------------------
September 30, October 1,
2003 2002
---- ----
Federal - current $ 70,726 $ 6,000
State - current 3,425 2,000
------------ ------------
Total $ 74,151 $ 8,000
============ ============
The effective rate for income taxes differs from the statutory
rate primarily as a result of the 100% valuation allowance against
deferred tax assets. 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 September 30, 2003, the Company had approximately
$1,022,000 in net operating loss carryforwards for tax purposes
that expire at various dates through 2019. Due to the acquisition
of greater than 50% ownership in October 1999 by Windswept
Acquisition Corporation, a wholly-owned subsidiary of Spotless
Plastics (USA), Inc. ("Spotless"), the Company is limited to
utilizing $68,000 of net operating loss carryforwards per annum.
5. CONTINGENCIES - 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 has settled this dispute
in fiscal 2003 for approximately $500,000. The Company paid
$250,000 of this settlement in August 2003. The remaining $250,000
is included in accrued expenses and is expected to be paid in
November 2003.
The Company is a party to other litigation matters and claims that
are in the ordinary 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 material 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 (1.1% at September 30, 2003) 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 September 30,
2003, the Company owed Spotless $3,535,000 under this promissory note.
Subsequent to September 30, 2003, the Company borrowed an additional
$240,000 and as of October 31, 2003, the Company owed Spotless
$3,775,000 on such short-term loans to fund working capital.
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:
8
o the market acceptance and amount of sales of the Company's services,
o the Company's success in increasing revenues and reducing expenses,
o the frequency and magnitude of environmental disasters or
disruptions resulting in the need for the types of services the
Company provides,
o the extent of the enactment, enforcement and strict interpretations
of laws relating to environmental remediation,
o the competitive environment within the industries in which
the Company operates,
o the Company's ability to raise additional capital,
o the Company's ability to attract and retain qualified personnel, and
o the other factors and information disclosed and discussed in other
sections of this Quarterly Report on Form 10-Q and in the Company's
Report on Form 10-K for the fiscal year ended July 1, 2003.
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 and with the consolidated financial statements
included in the Company's annual report on Form 10-K.
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
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 September 30, 2003. 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
9
conclude that it 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 SEPTEMBER 30, 2003 AND OCTOBER 1, 2002
Revenue
Total revenues for the thirteen weeks ended September 30, 2003 increased by
$666,950, or 15%, to $5,259,926 from $4,592,976 for the thirteen weeks
ended October 1, 2002. This increase in revenues of $666,950 was primarily
attributable to increases of approximately $876,000 related to emergency
response work performed in Virginia and Maryland resulting from Hurricane
Isabel and $867,000 related to emergency spills and soil remediation, which
was partially offset by decreases of approximately $844,000 related to a
nonrecurring mold remediation project in Hawaii and $237,000 related to
insurance reconstruction.
Cost of Revenues
Cost of revenues increased $395,466 or 11% to $3,929,942 for the thirteen
weeks ended September 30, 2003 as compared to $3,534,476 for the thirteen
weeks ended October 1, 2002. Gross profit increased $271,484 to $1,329,984,
or 25% of total revenue, for the thirteen weeks ended September 30, 2003
from $1,058,500, or 23% of total revenue, for the thirteen weeks ended
October 1, 2002, due primarily to the increased sales volume. 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 $177,807 or 17%
to $1,201,591 for the thirteen weeks ended September 30, 2003 from
$1,023,784 for the thirteen weeks ended October 1, 2002 and constituted
approximately 23% and 22% of revenues in these periods, respectively. This
increase was primarily attributable to increases in the provision for
doubtful accounts of approximately $90,000, consulting fees of
approximately $44,000 and sales department travel and entertainment of
approximately $32,000.
Benefit Related to Variable Accounting Treatment for Officer Options
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
$159,092 for the thirteen weeks ended September 30, 2003 compared to
$81,221 for the thirteen weeks ended October 1, 2002. This benefit was due
to a decrease in the market price of the Company's common stock and/or an
increase in the number of options outstanding that are vested. 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 increased by $19,974, or 245%, to $28,143 for the thirteen
weeks ended September 30, 2003 from $8,169 for the thirteen weeks ended
October 1, 2002. The increase in interest expense was primarily
attributable to greater amounts of debt outstanding resulting from
increased borrowings from Spotless for working capital.
Provision for Income Taxes
The provision for income taxes increased by $66,151 to $74,151 for the
thirteen weeks ended September 30, 2003 from $8,000 for the thirteen weeks
ended October 1, 2002. The increase was primarily attributable to the
increase in net income for the thirteen weeks ended September 30, 2003.
10
Net Income
Net income increased by $105,204 to $209,151 for the thirteen weeks ended
September 30, 2003 from $103,947 for the thirteen weeks ended October 1,
2002. The increase was the result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had a cash balance of $218,150,
working capital of $2,344,455 and stockholders' equity of $3,015,030. As of
July 1, 2003, the Company had cash balances of $130,096, working capital of
$2,217,290 and stockholders' equity of $2,825,379. At 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 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.
Net cash used in operating activities was $1,609,821 for the thirteen weeks
ended September 30, 2003 as compared to $543,144 for the thirteen weeks
ended October 1, 2002. Accounts receivable increased by $2,144,819 for the
thirteen weeks ended September 30, 2003 as a result of increased sales and
difficulties in cash collections. Accounts receivable decreased by $103,679
for the thirteen weeks ended October 1, 2002 due to increased collection
activities. Accounts payable and accrued expenses increased by $297,880 for
the thirteen weeks ended September 30, 2003 as a result of the increased
sales volume. Accounts payable and accrued expenses decreased $159,275 for
the thirteen weeks ended October 1, 2002 due to lower sales volume. Other
current liabilities decreased by $160,073 for the thirteen weeks ended
September 30, 2003 primarily due to payments of sales tax. Prepaid and
other current assets decreased by $118,096 for the thirteen weeks ended
September 30, 2003 primarily as a result of amortization of prepaid
insurance costs. Cash used for capital expenditures was $2,150 during the
thirteen weeks ended September 30, 2003 as compared to $467,623 for the
thirteen weeks ended October 1, 2002.
Financing activities for the thirteen weeks ended September 30, 2003
provided net cash of $1,700,025. This amount includes repayments of
long-term debt of $115,475, payment of dividends on preferred stock of
$19,500 and proceeds from a short-term loan from Spotless of $1,835,000.
Financing activities for the thirteen weeks ended October 1, 2002 provided
net cash of $757,739. This amount included repayments of long-term debt of
$26,753, proceeds from long-term debt of $103,992, repayment of a
convertible note to a related party of $50,000, payment of preferred stock
dividends of $19,500, proceeds from borrowings from Spotless of $875,000
and repayments of borrowings to Spotless of $125,000.
As of September 30, 2003, the Company owed Spotless $3,535,000 under a
promissory note. Subsequent to September 30, 2003, the Company borrowed an
additional $240,000 and as of October 31, 2003, the Company owed Spotless
$3,775,000 on such short-term loans to fund working capital. All borrowings
from Spotless bear interest at the London Interbank Offering Rate ("LIBOR")
plus 1 percent, are secured by all of the Company's assets and are payable
on demand.
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
11
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 contractual obligations and commitments as of
September 30, 2003:
Total 1 Year 2-3 Years 4-5 Years
----- ------ --------- ---------
Operating Leases $1,339,616 $355,618 $754,478 $229,521
Long-term Debt 659,990 382,266 193,281 84,443
----------- --------- --------- ---------
$1,999,606 $737,884 $947,759 $313,964
=========== ========= ========= =========
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
INFLATION
Inflation has not had a material impact on the Company's operations over
the past three fiscal years or during the thirteen weeks ended September
30, 2003.
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 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 nature of Company's market risks since the Company's Annual
Report on Form 10-K for the period ended July 1, 2003.
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
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 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.
12
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 1, 2003 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
--------------------------------
b. Exhibits:
31.1 Certification of Chief Executive Officer pursuant to
Sarbanes-Oxley Section 302(a)
31.2 Certification of Chief Financial Officer pursuant to Section
302(a)
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
b. Reports on Form 8-K:
On August 25, 2003, the Company filed a Annual Report on
Form 8-K (Date of Report: August 19, 2003) with the
Commission reporting, as an item 7 and 12 disclosure, a
press release regarding the Company's results of
operations for the fiscal year ended July 1, 2003.
13
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.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
Date: November 14, 2003 By: /s/ Michael O'Reilly
----------------------------------------
MICHAEL O'REILLY,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 By: /s/ Charles L. Kelly, Jr.
----------------------------------------
CHARLES L. KELLY, JR.
Chief Financial Officer
(Principal Financial Officer)
14