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 December 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 principal 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 February
5, 2004 was 77,936,358.
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2003 AND JULY 1, 2003
December 30, July 1,
2003 2003
--------------- ---------------
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash $ 106,516 $ 130,096
Accounts receivable, net of allowance for doubtful accounts of $459,255 and
$402,804, respectively 10,197,049 5,881,603
Inventory 203,705 215,466
Costs and estimated earnings in excess of billings on uncompleted contracts 534,070 871,753
Refundable income taxes - 1,080,186
Prepaid expenses and other current assets 286,431 279,597
--------------- ---------------
Total current assets 11,327,771 8,458,701
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$5,394,764 and $5,111,516, respectively 2,460,381 2,497,435
OTHER ASSETS 99,191 98,127
--------------- ---------------
TOTAL $13,887,343 $ 11,054,263
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,267,778 $ 1,487,683
Accrued expenses 1,177,565 1,193,339
Short-term notes payable to related party 4,225,000 1,700,000
Billings in excess of cost and estimated earnings on uncompleted contracts 256,883 299,427
Accrued payroll and related fringe benefits 788,749 659,659
Current maturities of long-term debt 384,261 436,617
Income taxes payable 301,223 -
Other current liabilities 369,642 464,686
--------------- ---------------
Total current liabilities 8,771,101 6,241,411
--------------- ---------------
LONG-TERM DEBT 358,275 338,848
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK AND STOCK OPTIONS - 348,625
--------------- ---------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000
shares authorized; 1,300,000 shares outstanding at December 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 December 30, 2003 and July 1, 2003 - -
Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358
shares outstanding at December 30, 2003 and July 1, 2003. 7,794 7,794
Additional paid-in-capital 33,961,017 34,000,017
Accumulated deficit (30,510,844) (31,182,432)
--------------- ---------------
Total stockholders' equity 3,457,967 2,825,379
--------------- ---------------
TOTAL $ 13,887,343 $ 11,054,263
=============== ===============
See notes to consolidated financial statements.
2
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- --------------------------------
December 30, December 31, December 30, December 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues $ 6,523,473 $ 5,864,047 $ 11,783,399 $ 10,457,023
Cost of revenues 4,909,711 4,575,194 8,839,653 8,109,670
------------- ------------- ------------- -------------
Gross profit 1,613,762 1,288,853 2,943,746 2,347,353
------------- ------------- ------------- -------------
Operating expenses (income):
Selling, general and administrative expenses 1,204,868 1,562,774 2,406,459 2,586,558
Benefit related to variable accounting
treatment for officer options (189,533) (81,344) (348,625) (162,565)
------------- ------------- ------------- -------------
Total operating expenses 1,015,335 1,481,430 2,057,834 2,423,993
------------- ------------- ------------- -------------
Income (loss) from operations 598,427 (192,577) 885,912 (76,640)
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 31,504 27,021 59,647 35,190
Other, net - (19,130) (23,960) (23,309)
------------- ------------- ------------- -------------
Total other expense 31,504 7,891 35,687 11,881
------------- ------------- ------------- -------------
Income (loss) before provision (benefit)
for income taxes 566,923 (200,468) 850,225 (88,521)
Provision (benefit) for income taxes 104,486 (17,317) 178,637 (9,317)
------------- ------------- ------------- -------------
Net income (loss) 462,437 (183,151) 671,588 (79,204)
Dividends on preferred stock (19,500) (19,500) (39,000) (39,000)
------------- ------------- ------------- -------------
Net income (loss) attributable to common
shareholders $ 442,937 $ (202,651) $ 632,588 $ (118,204)
============= ============= ============= =============
Basic and diluted net income (loss) per common share:
Basic $.01 ($.00) $.01 ($.00)
===== ====== ===== ======
Diluted $.01 ($.00) $.01 ($.00)
===== ====== ===== ======
Weighted average number of common shares outstanding:
Basic 77,936,358 77,936,358 77,936,358 77,936,358
============= ============= ============= =============
Diluted 79,718,239 77,936,358 80,556,368 77,936,358
============= ============= ============= =============
See notes to consolidated financial statements.
3
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock
------------
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 - - (39,000) - (39,000)
stock
Net income - - - 671,588 671,588
----------- ------- ------------ ------------- -----------
Balance at December 30, 2003 77,936,358 $7,794 $33,961,017 $(30,510,844) $3,457,967
=========== ======= ============ ============= ==========
See notes to consolidated financial statements.
4
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Twenty-Six Weeks Ended
-----------------------------------
December 30, December 31,
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 671,588 $ (79,204)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 283,248 269,690
Provision for doubtful accounts, net 56,451 105,029
Benefit related to officer options and redeemable common stock (348,625) (162,565)
Changes in operating assets and liabilities:
Accounts receivable (4,371,897) 238,873
Inventory 11,761 69,147
Costs and estimated earnings in excess of billings on uncompleted
contracts 337,683 3,259
Refundable income taxes 1,080,186 -
Prepaid expenses and other current assets (6,834) (360,108)
Other assets (1,064) (28,013)
Accounts payable and accrued expenses (235,679) (57,665)
Accrued payroll and related fringe benefits 129,090 12,047
Income taxes payable 301,223 (450,820)
Other current liabilities (77,560) 294,218
Billings in excess of costs and estimated earnings on uncompleted
contracts (42,544) (145,724)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (2,212,973) (291,836)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (263,678) (1,027,871)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (263,678) (1,027,871)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (193,027) (63,022)
Proceeds from long-term debt 160,098 391,830
Repayment of convertible note to related party - (100,000)
Payment of preferred stock dividends (39,000) (39,000)
Proceeds from short-term notes payable to a related party 2,525,000 1,425,000
Repayments of short-term notes payable to a related party - (422,957)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,453,071 1,191,851
-------------- --------------
NET DECREASE IN CASH (23,580) (127,856)
CASH - BEGINNING OF PERIOD 130,096 399,679
-------------- --------------
CASH - END OF PERIOD $ 106,516 $ 271,823
============== ==============
Cash paid during the period for:
Interest $ 19,159 $ 24,506
============== ==============
Income taxes $ - $ 651,621
============== ==============
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 December 30,
2003, the results of operations for the thirteen and twenty-six weeks ended
December 30, 2003 and December 31, 2002 and cash flows for the twenty-six
weeks ended December 30, 2003 and December 31, 2002, have been included.
Certain prior period amounts have been reclassified to conform to the
December 30, 2003 presentation.
The results for the thirteen and twenty-six weeks ended December 30, 2003
and December 31, 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. 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 Twenty-Six Weeks Ended
-------------------------------- ---------------------------------
December 30, December 31, December 30, December 31,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net income (loss)
attributable to common
shareholders as reported $ 442,937 $ (202,651) $ 632,588 $ (118,204)
Less: Stock-based
employee compensation
cost determined under
the fair value method,
net of related tax effects 41,342 59,780 82,683 119,561
-------------- -------------- -------------- --------------
Pro forma net income (loss)
attributable to common
shareholders $ 401,595 $ (262,431) $ 549,905 $ (237,765)
============== ============== ============== ==============
Net income (loss) per share:
Basic - as reported $.01 ($.00) $.01 ($.00)
===== ====== ===== ======
Basic - pro forma $.01 ($.00) $.01 ($.00)
===== ====== ===== ======
Diluted - as reported $.01 ($.00) $.01 ($.00)
===== ====== ===== ======
Diluted - pro forma $.01 ($.00) $.01 ($.00)
===== ====== ===== ======
3. NET INCOME (LOSS) PER COMMON SHARE - The calculation of basic and
diluted net income (loss) 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 (loss) per share for the thirteen and twenty-six
weeks ended December 30, 2003 and December 31, 2002, respectively:
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------------- -----------------------------------
December 30, December 31, December 30, December 31,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Numerator:
Net income (loss)
attributable to
common shareholders $ 442,937 $ (202,651) $ 632,588 $ (118,204)
Add interest on
convertible notes,
net of tax - - - -
-------------- -------------- -------------- --------------
$ 442,937 $ (202,651) $ 632,588 $ (118,204)
============== ============== ============== ==============
Denominator:
Share reconciliation:
Shares used for basic
income (loss) per
share 77,936,358 77,936,358 77,936,358 77,936,358
Effect of dilutive
items:
Stock options 1,781,881 - 2,620,010 -
Convertible securities -
-------------- -------------- -------------- --------------
Shares used for
dilutive income
(loss) per share 79,718,239 77,936,358 80,556,368 77,936,358
============== ============== ============== ==============
Net income (loss) per
share:
Basic $.01 ($.00) $.01 ($.00)
Diluted $.01 ($.00) $.01 ($.00)
7
The dilutive net income per share computation for the thirteen
week and twenty-six week periods ended December 30, 2003 excludes
3,910,309 and 3,710,309 shares, respectively, related to stock
options and warrants because the effect of including them would be
anti-dilutive. The dilutive net loss per share computation for the
thirteen and twenty-six week periods ended December 31, 2002
excludes approximately 4,805,000 and 4,874,000 shares,
respectively, related to employee stock options and warrants and
approximately 260,000 and 418,000 shares, respectively, related to
convertible notes 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.
4. PROVISION (BENEFIT) FOR INCOME TAXES - The provision (benefit) for
income taxes for the thirteen and twenty-six weeks ended December
30, 2003 and December 31, 2002 consists of the following:
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------------- ----------------------------------
December 31, December 30, December 31, December 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Federal - current $ 101,061 $ (21,413) $ 171,787 $ (15,413)
State - current 3,425 4,096 6,850 6,096
-------------- -------------- -------------- --------------
Total $ 104,486 $ (17,317) $ 178,637 $ (9,317)
============== ============== ============== ==============
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 December 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 -The Company is a party to 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 (1.4% at
December 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 December 30, 2003, the
Company owed Spotless $4,225,000 under this promissory note.
Subsequent to December 30, 2003, the Company borrowed an additional
$685,000 and as of February 3, 2004, the Company owed Spotless
$4,910,000 on such short-term loans to fund working capital.
7. SUBSEQUENT EVENT - In recent months, as the Company's business has
expanded and it has encountered slower collections of certain of its
accounts receivable, the Company has needed to borrow increased
amounts from Spotless under the promissory note dated November 16,
2001 that accrues interest at the rate of LIBOR plus one percent
per annum. As a result of the additional borrowings, the amount
outstanding under the promissory note was $4,225,000 as of December
30, 2003 and $4,910,000 as of February 3, 2004. This left the
Company with a small amount of additional borrowing capacity under
present financing arrangements. The Company has considered various
alternatives to increase its liquidity. In this connection, the
Company has increased its liquidity by
8
entering an Account Receivable Finance Agreement dated as of
February 5, 2004 with Spotless pursuant to which Spotless may
purchase certain of the Company's accounts receivable for cash,
subject to certain terms and conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, through its wholly-owned subsidiaries, provides a full array
of emergency response, remediation and disaster restoration services to a
broad range of clients. The Company has expertise in areas of hazardous
materials remediation, microbial remediation, testing, toxicology,
training, wetlands restoration, wildlife and natural resources
rehabilitation, technical advisory, restoration and site renovation
services.
The Company's revenues are derived primarily from providing emergency
response, remediation and disaster restoration services, and its 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. The Company's selling, general, and administrative
expenses primarily consist of expenses related to provisions for doubtful
accounts, legal fees, sales salaries, marketing, consulting, insurance and
travel and entertainment.
In recent months, as the Company's business has expanded and it has
encountered slower collections of certain of its accounts receivable, the
Company has needed to borrow increased amounts from Spotless under the
promissory note dated November 16, 2001 that accrues interest at the rate
of LIBOR plus one percent per annum. As a result of the additional
borrowings, the amount outstanding under the promissory note was $4,225,000
as of December 30, 2003 and $4,910,000 as of February 3, 2004. This left
the Company with a small amount of additional borrowing capacity under
present financing arrangements. The Company has considered various
alternatives to increase its liquidity. In this connection, the Company has
increased its liquidity by entering an Account Receivable Finance
Agreement, dated as of February 5, 2004, with Spotless pursuant to which
Spotless may purchase certain of the Company's accounts receivable for
cash, subject to certain terms and conditions. Under the Account Receivable
Finance Agreement, Spotless may, but is not obligated to, purchase one or
more of the Company's accounts receivable, which are approved by Spotless,
in its sole discretion, in respect of the particular debtor, invoices and
related credit. As part of the agreement, Spotless would purchase any
accounts receivable at a 15% discount to invoice prices, which the Company
believes is at least as favorable to it as would be available from an
unaffiliated third-party, based upon a good-faith estimate of an applicable
discount negotiated at arms length. In addition, the Company would pay varying
monthly discount fees on any purchased accounts receivable based upon invoice
prices. Further, the Company will (a) manage any accounts receivable that it
sells to Spotless while remitting to Spotless any proceeds received and (b)
bear any related litigation costs.
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
9
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 December 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 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 DECEMBER 30, 2003 AND DECEMBER 31, 2002
Revenue
Total revenues for the thirteen weeks ended December 30, 2003 increased by
$659,426, or 11%, to $6,523,473 from $5,864,047 for the thirteen weeks
ended December 31, 2002. This increase was primarily attributable to
increases of approximately $1,660,000 related to an oil tank cleaning
project, approximately $1,260,000 related to a fire restoration project and
approximately $950,000 related to projects from a new insurance company
customer, which was partially offset by decreases of approximately
$2,400,000 related to a nonrecurring mold remediation project in Hawaii,
approximately $650,000 related to the loss of business from an insurance
company and approximately $200,000 related to fewer emergency response
projects for a local utility company.
Cost of Revenues
Cost of revenues increased $334,517 or 7% to $4,909,711 for the thirteen
weeks ended December 30, 2003 as compared to $4,575,194 for the thirteen
weeks ended December 31, 2002. Gross profit increased $324,909 to
$1,613,762, or 25% of total revenue, for the thirteen weeks ended December
30, 2003 from $1,288,853, or 22% of total revenue, for the thirteen weeks
ended December 31, 2002, due primarily to the increased sales volume and
the mix of services towards higher margin projects such as emergency
response.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $357,906 or 23%
to $1,204,868 for the thirteen weeks ended December 30, 2003 from
$1,562,774 for the thirteen weeks ended December 31, 2002 and constituted
approximately 18% and 27% of revenues in these periods, respectively. This
decrease was primarily attributable to decreases in the provision for
doubtful accounts of approximately $223,000, legal expenses of
approximately $161,000, sales salaries of approximately $50,000 and
marketing expenses of approximately $50,000, offset by increases in
consulting expenses of approximately $106,000.
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
$189,533 for the thirteen weeks ended December 30, 2003 compared to $81,344
for the thirteen weeks ended December 31, 2002. This
10
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 $4,483, or 17%, to $31,504 for the thirteen
weeks ended December 30, 2003 from $27,021 for the thirteen weeks ended
December 31, 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 (Benefit) for Income Taxes
The provision (benefit) for income taxes increased by $121,151 to a
provision of $104,486 for the thirteen weeks ended December 30, 2003 from a
benefit of $17,317 for the thirteen weeks ended December 31, 2002. The
increase was primarily attributable to the increase in pretax income for
the thirteen weeks ended December 30, 2003.
Net Income (Loss)
Net income (loss) increased by $645,588 to net income of $462,437 for the
thirteen weeks ended December 30, 2003 from net loss of $183,151 for the
thirteen weeks ended December 31, 2002. The increase was the result of the
factors discussed above.
Twenty-six weeks ended December 30, 2003 and December 31, 2002
Revenue
Total revenues for the twenty-six weeks ended December 30, 2003 increased
by $1,326,376, or 13%, to $11,783,399 from $10,457,023 for the twenty-six
weeks ended December 31, 2002. This increase was primarily attributable to
increases of approximately $2,000,000 related to an oil tank cleaning
project, approximately $1,260,000 related to a fire restoration project,
approximately $923,000 related to emergency response work performed in
Virginia and Maryland resulting from Hurricane Isabel, approximately
$338,000 related to a mold remediation project in Connecticut,
approximately $100,000 for increases in insurance projects and
approximately $100,000 in training revenue, which was partially offset by
decreases of approximately $3,500,000 related to a nonrecurring mold
remediation project in Hawaii.
Cost of Revenues
Cost of revenues increased $729,9893 or 9% to $8,839,653 for the twenty-six
weeks ended December 30, 2003 as compared to $8,109,670 for the twenty-six
weeks ended December 31, 2002. Gross profit increased $596,393 to
$2,943,746, or 25% of total revenue, for the twenty-six weeks ended
December 30, 2003 from $2,347,353, or 22% of total revenue, for the
twenty-six weeks ended December 31, 2002, due primarily to the increased
sales volume and the mix of services towards higher margin projects such as
emergency response.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $180,099 or 7% to
$2,406,459 for the twenty-six weeks ended December 30, 2003 from $2,586,558
for the twenty-six weeks ended December 31, 2002 and constituted
approximately 20% and 25% of revenues in these periods, respectively. This
decrease was primarily attributable to decreases in the provision for
doubtful accounts of approximately $133,000, legal expenses of
approximately $170,000, sales salaries of approximately $79,000 and
marketing expenses of approximately $60,000, offset by increases in
consulting expenses of approximately $150,000, insurance expenses of
approximately $65,000 and travel and entertainment expenses of
approximately $44,000.
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
11
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 $348,625 for the twenty-six weeks ended December 30, 2003
compared to $162,565 for the twenty-six weeks ended December 31, 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 $24,457, or 69%, to $59,647 for the
twenty-six weeks ended December 30, 2003 from $35,190 for the twenty-six
weeks ended December 31, 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 (Benefit) for Income Taxes
The provision (benefit) for income taxes increased by $187,954 to a
provision of $178,637 for the twenty-six weeks ended December 30, 2003 from
a benefit of $9,317 for the twenty-six weeks ended December 31, 2002. The
increase was primarily attributable to the increase in pretax income for
the twenty-six weeks ended December 30, 2003.
Net Income (Loss)
Net income (loss) increased by $750,792 to net income of $671,588 for the
twenty-six weeks ended December 30, 2003 from net loss of $79,204 for the
twenty-six weeks ended December 31, 2002. The increase was the result of
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of December 30, 2003, the Company had a cash balance of $106,516,
working capital of $2,556,670 and stockholders' equity of $3,457,967. 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 its current
operations as long as it does not encounter difficulty collecting its
accounts receivable. 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 in addition to
the financing contemplated by the Account Receivable Finance Agreement
dated as of February 5, 2004, although Spotless is under no legal
obligation to provide such additional funds. The Company currently has no
credit facility for additional borrowing. Under the Account Receivable
Finance Agreement, Spotless may, but is not obligated to, purchase one or
more of the Company's accounts receivable, which are approved by Spotless,
in its sole discretion, in respect of the particular debtor, invoices and
related credit. As part of the agreement, Spotless would purchase any
accounts receivable at a 15% discount to invoice prices, which the Company
believes is at least as favorable to it as would be available from an
unaffiliated third-party, based upon a good-faith estimate of an applicable
discount negotiated at arms length. In addition, the Company would pay varying
monthly discount fees on any purchased accounts receivable based upon invoice
prices. Further, the Company will (a) manage any accounts receivable that it
sells to Spotless while remitting to Spotless any proceeds received and (b)
bear any related litigation costs.
Net cash used in operating activities was $2,212,973 for the twenty-six
weeks ended December 30, 2003 as compared to $291,836 for the twenty-six
weeks ended December 31, 2002. Accounts receivable increased by $4,371,897
for the twenty-six weeks ended December 30, 2003 as a result of increased
sales and difficulties in cash collections. Accounts receivable decreased
by $238,873 for the twenty-six weeks ended December 31, 2002 due to
increased collection activities. Accounts payable and accrued expenses
decreased by $235,679 for the twenty-six weeks ended December 30, 2003 as a
result of payment of a legal settlement. Accounts payable
12
and accrued expenses decreased $57,665 for the twenty-six weeks ended
December 31, 2002 due to lower salesvolume. Refundable income taxes decreased
by $1,080,186 for the twenty-six weeks ended December 30, 2003 as a result of
collection of a federal income tax refund. Income taxes payable increased by
$301,223 for the twenty-six weeks ended December 30, 2003 as a result of
taxes accrued on income for the period. Income taxes payable decreased by
$450,820 for the twenty-six weeks ended December 31, 2002 as a result of
estimated tax payments.
Cash used for capital expenditures was $263,678 during the twenty-six weeks
ended December 30, 2003 as compared to $1,027,871 for the twenty-six weeks
ended December 31, 2002.
Financing activities for the twenty-six weeks ended December 30, 2003
provided net cash of $2,453,071. This amount includes repayments of
long-term debt of $193,027, proceeds from long-term debt of $160,098,
payment of dividends on preferred stock of $39,000 and proceeds from
short-term loans from Spotless of $2,525,000. Financing activities for the
twenty-six weeks ended December 31, 2002 provided net cash of $1,191,851.
This amount included repayments of long-term debt of $63,022, proceeds from
long-term debt of $391,830, repayment of a convertible note to a related
party of $100,000, payment of preferred stock dividends of $39,000,
proceeds from borrowings from Spotless of $1,425,000 and repayments of
borrowings to Spotless of $422,957.
As of December 30, 2003, the Company owed Spotless $4,225,000 under a
promissory note. Subsequent to December 30, 2003, the Company borrowed an
additional $685,000 and as of February 3, 2004, the Company owed Spotless
$4,910,000 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
unless the Company increases its borrowings from Spotless or sufficiently
utilizes its Accounts Receivable Finance Agreement with Spotless. In the
event that positive cash flow from operations is not generated, the Company
may be required to seek additional financing, from Spotless or otherwise,
to meet its working capital needs. Management continues to pursue
additional funding sources, but has been unable to attract debt or equity
capital on terms more favorable than those available from Spotless. The
Company anticipates continued 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.
The table below summarizes contractual obligations and commitments as of
December 30, 2003:
Total 1 Year 2-3 Years 4-5 Years
----- ------ ---------- ---------
Operating leases $1,252,169 $359,115 $ 761,899 $131,155
Long-term debt 742,536 384,261 268,596 89,679
----------- --------- ----------- ---------
$1,994,705 $743,376 $1,030,495 $220,834
=========== ========= =========== =========
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
13
INFLATION
Inflation has not had a material impact on the Company's operations over
the past three fiscal years or during the twenty-six weeks ended December
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.
FORWARD-LOOKING STATEMENTS
Statements contained in this 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:
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 foregoing 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.
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.
14
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive and financial officers have concluded, based on
their evaluation of, the effectiveness of our "disclosure controls and
procedures" as of the end of the period covered by this quarterly report on
Form 10-Q (as defined under Rule 13a-15(e) and Rule 15d-15(e) of the
Securities Exchange Act of 1934) were effective as of such date 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.
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
---------------------------------------------------
The 2003 Annual Meeting of Stockholders of the Company was
held on December 15, 2003, at which the following matter was
voted upon and adopted by the votes indicated:
To elect eight directors to the Board of Directors to serve
until the next annual meeting of stockholders, unless any such
director shall resign, become disqualified, disabled or
otherwise removed from office. The names of the directors and
votes cast in favor of their election and votes withheld are
as follows:
Nominee For Withheld
------- --- --------
Peter A. Wilson 75,080,291 14,295
Michael O'Reilly 75,080,791 13,795
Charles L. Kelly, Jr. 75,080,291 14,295
Brian S. Blythe 75,080,241 14,345
John J. Bongiorno 75,080,481 14,105
Ronald B. Evans 75,080,481 14,105
Anthony Towell 75,081,331 13,255
Dr. Kevin Phillips 75,081,331 13,255
ITEM 5. OTHER INFORMATION
-----------------
On February 5, 2004, the Company's board of directors approved
and recommended to its stockholders an amendment to the
Company's certificate of incorporation increasing the number
of authorized shares of its common stock from 150,000,000 to
450,000,000.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits:
10.1 Account Receivable Financing Agreement
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:
None
16
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: February 5, 2004 By: /s/ Michael O'Reilly
----------------------------------
MICHAEL O'REILLY,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 5, 2004 By: /s/ Charles L. Kelly, Jr.
---------------------------------
CHARLES L. KELLY, JR.
Chief Financial Officer
(Principal Financial Officer)
17