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 28, 2004,
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: 000-17072
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
November 4, 2004 was 77,936,358.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 2004 AND JUNE 29, 2004
September 28, June 29,
2004 2004
--------------- ---------------
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash $ 204,452 $ 63,562
Accounts receivable, net of allowance for doubtful accounts
of $848,472 and $689,140, respectively 7,492,789 6,652,806
Inventory 140,722 151,270
Costs and estimated earnings in excess of billings on uncompleted contracts 275,972 608,047
Refundable income taxes - 641,795
Prepaid expenses and other current assets 276,351 257,565
------------- -------------
Total current assets 8,390,286 8,375,045
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$5,873,657 and $5,707,705, respectively 2,647,522 2,757,463
OTHER ASSETS 204,657 198,657
------------- -------------
TOTAL $ 11,242,465 $ 11,331,165
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,617,558 $ 2,309,328
Accrued expenses 1,944,408 1,101,701
Short-term notes payable to related party 5,000,000 5,000,000
Billings in excess of cost and estimated earnings on uncompleted contracts 53,022 239,511
Accrued payroll and related fringe benefits 958,573 924,725
Current maturities of long-term debt 258,620 307,224
Other current liabilities 948,107 596,527
------------- -------------
Total current liabilities 10,780,288 10,479,016
------------- -------------
LONG-TERM DEBT 298,177 340,104
------------- -------------
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000
shares authorized; 1,300,000 shares outstanding at September 28, 2004
and June 29, 2004 1,300,000 1,300,000
------------- -------------
STOCKHOLDERS' DEFICIT:
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 28, 2004 and June 29, 2004 - -
Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358 shares
outstanding at September 28, 2004 and June 29, 2004. 7,794 7,794
Additional paid-in-capital 33,902,517 33,922,017
Accumulated deficit (35,046,311) (34,717,766)
------------- -------------
Total stockholders' deficit (1,136,000) (787,955)
TOTAL $ 11,242,465 $ 11,331,165
============= =============
See notes to consolidated financial statements.
2
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended
---------------------------------
September 28, September 30,
2004 2003
---- ----
Revenues $ 5,478,506 $ 5,259,926
Cost of revenues 4,362,123 3,929,942
------------ ------------
Gross profit 1,116,383 1,329,984
------------ ------------
Operating expenses (income):
Selling, general and administrative expenses 1,232,034 1,201,591
Benefit related to variable accounting
treatment for officer options - (159,092)
------------ ------------
Total operating expenses 1,232,034 1,042,499
------------ ------------
(Loss) income from operations (115,651) 287,485
------------ ------------
Other expense (income):
Interest expense 211,104 28,143
Other, net (799) (23,960)
------------ ------------
Total other expense 210,305 4,183
(Loss) income before provision for income taxes (325,956) 283,302
Provision for income taxes 2,589 74,151
------------ ------------
Net (loss) income (328,545) 209,151
Dividends on preferred stock 19,500 19,500
------------ ------------
Net (loss) income attributable to
common shareholders $ (348,045) $ 189,651
============ ============
Basic and diluted net (loss) 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 77,936,358 81,137,932
============ ============
See notes to consolidated financial statements.
3
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED)
Additional
Number of Par Paid-in Accumulated
Shares Value Capital Deficit Total
------ ----- ------- ------- -----
Balance at June 30, 2004 77,936,358 $7,794 $33,922,017 $(34,717,766) $ (787,955)
Dividends on Series A preferred stock (19,500) (19,500)
Net loss - - - (328,545) (328,545)
----------- ------- ------------ ----=-------- ------------
Balance at September 28, 2004 77,936,358 $7,794 $33,902,517 $(35,046,311) $(1,136,000)
=========== ======= ============ ============= ============
See notes to consolidated financial statements.
4
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirteen Weeks Ended
---------------- -----------------
September 28, September 30,
2004 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (328,545) $ 209,151
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization 165,952 142,396
Provision for doubtful accounts, net 159,332 88,975
Benefit related to officer options and redeemable common stock - (159,092)
Changes in operating assets and liabilities:
Accounts receivable (999,315) (2,144,819)
Inventory 10,548 (14,414)
Costs and estimated earnings in excess of billings on uncompleted contracts 332,075 10,650
Refundable income taxes 641,795 -
Prepaid expenses and other current assets (18,786) 118,096
Other assets (6,000) -
Accounts payable and accrued expenses 131,437 297,880
Accrued payroll and related fringe benefits 33,848 7,682
Other current liabilities 351,580 (85,921)
Billings in excess of costs and estimated earnings on uncompleted contracts (186,489) (80,405)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 287,432 (1,609,821)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (56,011) (2,150)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (56,011) (2,150)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (90,531) (115,475)
Payment of preferred stock dividends - (19,500)
Proceeds from short-term notes payable to a related party - 1,835,000
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (90,531) 1,700,025
------------ ------------
NET INCREASE IN CASH 140,890 88,054
CASH - BEGINNING OF PERIOD 63,562 130,096
------------ ------------
CASH - END OF PERIOD $ 204,452 $ 218,150
============ ============
Cash paid during the period for:
Interest $ 168,726 $ 12,171
============ ============
Income taxes $ - $ -
============ ============
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, Trade-Winds Environmental
Restoration, Inc. ("Trade-Winds") and North Atlantic Laboratories, Inc. 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 28,
2004, the results of operations for the thirteen weeks ended September 28,
2004 and September 30, 2003 and cash flows for the thirteen weeks ended
September 28, 2004 and September 30, 2003, have been included. Certain
prior period amounts have been reclassified to conform to the September 28,
2004 presentation.
The results for the thirteen weeks ended September 28, 2004 and September
30, 2003 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 June 29, 2004.
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
-------------------------------------
September 28, September 30,
2004 2003
--------------- ----------------
Net (loss) income attributable to
common shareholders as reported $(348,045) $189,651
Less: Stock-based employee
compensation cost determined
under the fair value method, net of
related tax effects 25,849 40,265
---------- ---------
Pro forma net (loss) income
attributable to common
shareholders $(373,894) $149,386
========== =========
Net (loss) 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 (LOSS) INCOME PER COMMON SHARE -The calculation of basic and
diluted net (loss) 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 (loss) income per share for the thirteen weeks ended September 28,
2004 and September 30, 2003, respectively:
Thirteen Weeks Ended
--------------------------------------
September 28, September 30,
2004 2003
-------------- ---------------
Numerator:
Net (loss) income attributable to
common shareholders $ (348,045) $ 189,651
=========== ============
Denominator:
Share reconciliation:
Shares used for basic (loss)
income per share 77,936,358 77,936,358
Effect of dilutive items:
Stock options - 3,201,574
Convertible securities - -
----------- ============
Shares used for dilutive (loss)
income per share 77,936,358 81,137,932
=========== ============
Net (loss) income per share:
Basic $(.00) $.00
Diluted $(.00) $.00
The dilutive net loss per share computation for the thirteen week
period ended September 28, 2004 excludes 8,075,420 shares related
to stock options because the effect of including them would be
anti-dilutive. The dilutive net income per share computation for
the thirteen week period ended September 30, 2003 excludes
approximately 8,000,000 shares related to employee stock options
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 28, 2004 and September 30, 2003
consists of the following:
Thirteen Weeks Ended
------------------------------------
September 28, September 30,
2004 2003
---------------- ----------------
Federal - current $ - $70,726
State - current 2,589 3,425
------- --------
Total $2,589 $74,151
======= ========
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.
5. CONTINGENCIES - On August 5, 2004, Trade-Winds commenced an action
in the New York State Supreme Court, County of New York, claiming
that Trade-Winds is entitled to approximately $1,255,000 of
contractual billings relating to a large roof tar removal project.
On October 22, 2004, Trade-Winds commenced an action against a
local utility in the New York State Supreme Court, County of New
York, claiming that Trade-Winds is entitled to approximately
$2,000,000 of contractual billings and related damages with
respect to its removal of sediment from an oil storage tank.
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 - As of September 28, 2004, the Company owed
Spotless Plastics (USA), Inc.("Spotless"), a company that owns 79% of
the common stock of the Company, $5,000,000, which bears interest at
the rate of LIBOR (1.97% at September 28, 2004) plus 1% per annum
and is payable on demand. The Company has increased its liquidity by
entering into an Account Receivable Finance Agreement ("ARFA")
dated as of February 5, 2004 with Spotless pursuant to which Spotless
may purchase certain of the Company's accounts receivable without
recourse for cash, subject to certain terms and conditions. The
Company accounts for its transfers of accounts receivable
to Spotless as sales under Statement of Financial Standards
No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Under the ARFA, Spotless
may, but is not obligated to, purchase one or more of the Company's
accounts receivable that are approved by Spotless in its sole
discretion, in respect of the particular debtor, invoices and
related credit. As part of the agreement, Spotless may 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 arm's
length, as may be adjusted by Spotless in its sole discretion. In
addition, the Company pays varying monthly discount fees on any
purchased accounts receivable based upon invoice prices. All
discounts and fees under the ARFA are characterized as interest
expense in the consolidated statements of operations. Further,
the Company (a) manages any accounts receivable that it sells to
Spotless while remitting to Spotless any proceeds received and
(b) bears any related litigation costs. For the thirteen weeks
ended September 28, 2004, the Company sold approximately $972,000
of accounts receivable to Spotless and incurred approximately $146,000
of discounts and fees associated with these sales.
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
8
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 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 April 2003, the Company commenced a remediation project in New York City
for a local utility to remove sediment from an oil storage tank. During the
course of the project, the sediment in the tank was found to be
substantially different than the sediment that the customer represented to
be in the tank prior to the inception of the project. The Company continued
to work on the project so as not to default on the terms which it
understood to exist with the customer. The additional costs incurred to
remove this matter in the amount of approximately $1,600,000 were billed to
the customer. However, the collectibility of such monies cannot be assured.
Accordingly, the Company has not recognized the revenue associated with
this claim. The project has been substantially completed and the customer
has refused to acknowledge its liability for the additional charges billed
by the Company. The Company has retained legal counsel to review its claim
with the customer and believes that additional monies billed will be
collected. As of June 29, 2004, the Company had recognized revenue of
approximately $1,700,000 with respect to original scope of this project. As
of August 30, 2004, all amounts due under the original contract have been
paid to the Company.
The Company has encountered slow collections of certain of its accounts
receivable, and its liquidity has been severely adversely affected by its
unrecouped costs incurred in connection with the aforementioned oil storage
tank project. Accordingly, the Company has needed to borrow increased
amounts from Spotless. As a result of the additional borrowings, the amount
outstanding from Spotless was $5,000,000 as of September 28, 2004. The
Company has considered various alternatives to increase its liquidity. In
this connection, the Company increased its liquidity by entering into the
ARFA, dated as of February 5, 2004, with Spotless pursuant to which
Spotless has purchased certain of the Company's accounts receivable without
recourse for cash, subject to certain terms and conditions. Through
September 24, 2004, the date of the last accounts receivable purchase,
Spotless had purchased an aggregate amount of our accounts receivable
equaling $4,991,252 for an aggregate purchase price of $4,080,050.
Spotless has informed the Company in a letter dated September 29, 2004,
that, at this time, it intends to provide only an additional $150,000 in
financing to the Company pursuant to the ARFA. Spotless has also indicated
that it does not intend to provide any additional debt or equity financing
to the Company. The Company is assessing the impact, if any, of Spotless'
recent expression of intent. The Company's board of directors has appointed
a special committee consisting of independent director Anthony P. Towell to
investigate its alternatives.
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 further difficulty collecting its accounts receivable or
experience significant growth. 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 in addition to the
financing contemplated by the ARFA. Spotless is under no contractual
obligation to provide any funds, and it has indicated that, at the present
time, it does not intend to provide any additional debt or equity financing
to the Company outside the ARFA. Currently, the Company has no credit
facility for additional borrowing.
ABILITY TO CONTINUE AS A GOING CONCERN
The Company's accompanying consolidated financial statements have been
prepared assuming that it will continue as a going concern. They do not
include any adjustments that might result should the Company be unable to
continue as a going concern, and no assurance can be given that it will
continue as a going concern.
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
9
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 28, 2004. 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 SEPTEMBER 28, 2004 AND SEPTEMBER 30, 2003
Revenue
Total revenues for the thirteen weeks ended September 28, 2004 increased by
$218,580, or 4%, to $5,478,506 from $5,259,926 for the thirteen weeks ended
September 30, 2003. This increase was primarily attributable to increased
emergency response work associated with hurricanes in Florida.
Cost of Revenues
Cost of revenues increased $432,181 or 11%, to $4,362,123 for the thirteen
weeks ended September 28, 2004 as compared to $3,929,942 for the thirteen
weeks ended September 30, 2003, primarily due to cost overruns incurred on
a fixed price contract of approximately $200,000 and due an increased
volume of remediation activity. Gross profit decreased $213,601 to
$1,116,383 for the thirteen weeks ended September 28, 2004 from $1,329,984
for the thirteen weeks ended September 30, 2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $30,443, or 3%,
to $1,232,034 for the thirteen weeks ended September 28, 2004 from
$1,201,591 for the thirteen weeks ended September 30, 2003 and constituted
approximately 23% of revenues in each period. This increase was primarily
attributable to increases in legal expenses of approximately $108,000, bad
debt expense of approximately $75,000 and consulting expenses of
approximately $50,000, offset by decreases in sales salaries, sales travel
and entertainment, marketing and other
10
salaries of approximately $183,000. All of these decreases were a result of
management reductions in staff and discretionary spending.
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. There was no
benefit or expense required to be recorded in the thirteen weeks ended
September 28, 2004 due to the low market price of the Company's common
stock. The benefit in the thirteen weeks ended September 30, 2003 was due
to a decrease in the market price of the Company's common stock and/or a
change 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 $182,961 to $211,104 for the thirteen weeks
ended September 28, 2004 from $28,143 for the thirteen weeks ended
September 30, 2003. The increase in interest expense was primarily
attributable to the discount recorded when Spotless purchased accounts
receivable from the Company under the ARFA and greater amounts of debt
outstanding resulting from increased borrowings from Spotless for working
capital.
Provision for Income Taxes
The provision for income taxes for the thirteen weeks ended September 28,
2004 was $2,589 compared to $74,151 for the thirteen weeks ended September
30, 2003.
Net Loss
A net loss of $(328,545) was incurred for the thirteen weeks ended
September 28, 2004 as compared to net income of $283,302 incurred for the
thirteen weeks ended September 30, 2003. The change was the result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 2004, the Company had a cash balance of $204,452,
working capital deficit of $(2,390,002) and stockholders' deficit of
$(1,136,000). As of June 29, 2004, the Company had cash balances of
$63,562, working capital deficit of $(2,103,971) and stockholders' deficit
of $(787,955). 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.
Spotless has informed the Company in a letter dated September 29, 2004,
that, at this time, it intends to provide only an additional $150,000 in
financing to the Company pursuant to the ARFA. Spotless has also indicated
that it does not intend to provide any additional debt or equity financing
to the Company. The Company is assessing the impact, if any, of Spotless'
recent expression of intent. The Company's board of directors has appointed
a special committee consisting of independent director Anthony P. Towell to
investigate its alternatives.
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 further difficulty collecting its accounts receivable or
experience significant growth. 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 in addition to the
financing contemplated by the ARFA. Spotless is under no contractual
obligation to provide any funds, and it has indicated that, at the present
time, it does not intend to provide any additional debt or equity financing
to the Company outside the ARFA. Currently, the Company has no credit
facility for additional borrowing.
11
Under the ARFA, Spotless may, but is not obligated to, purchase one or more
of the Company's accounts receivable that are approved by Spotless in its
sole discretion, in respect of the particular debtor, invoices and related
credit. As part of the agreement, Spotless may 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 arm's length, as may be adjusted by Spotless in its sole
discretion. In this regards, all of Spotless' purchases have been made at
15% discount except one made in April 2004 for the amount of $711,450 in
relation to an account receivable balance of $1,028,194, which constituted
a 31% discount. In addition, the Company pays varying monthly discount fees
on any purchased accounts receivable based upon invoice prices. All
discounts and fees under the ARFA are characterized as interest expense.
Through September 28, 2004, the Company has incurred approximately $911,000
of such discounts and fees. Further, the Company (a) manages any accounts
receivable that it sells to Spotless while remitting to Spotless any
proceeds received and (b) bears any related litigation costs.
As of September 28, 2004, the Company owed Spotless $5,000,000 in
short-term loans to fund working capital. During the thirteen weeks ended
September 28, 2004, the Company did not make any repayments to Spotless.
All current borrowings from Spotless bear interest at the London Interbank
Offering Rate ("LIBOR") plus 1 percent (1.97% at September 28, 2004) and
are secured by all of the Company's assets. On September 10, 2004, the
Company paid accrued interest to Spotless through August 24, 2004 of
approximately $151,000. As of September 28, 2004, interest of $11,966 was
accrued and unpaid on these borrowings.
Net cash provided by operating activities was $287,432 for the thirteen
weeks ended September 28, 2004 as compared to net cash used in operations
of $1,609,821 for the thirteen weeks ended September 30, 2003. Accounts
receivable increased by $999,315 for the thirteen weeks ended September 28,
2004 as a result of increased sales related to the hurricanes in Florida.
Accounts receivable increased by $2,144,819 for the thirteen weeks ended
September 30, 2003 due to hurricane-related work and difficulties with cash
collections. Refundable income taxes decreased by $641,795 for the thirteen
weeks ended September 28, 2004 due to the receipt of a federal income tax
refund. Accounts payable and accrued expenses increased by $131,437 for the
thirteen weeks ended September 28, 2004 as a result of an increased volume
of remediation activity. Accounts payable and accrued expenses increased
$297,880 for the thirteen weeks ended September 30, 2003 due to increased
sales volume.
Cash used for capital expenditures was $56,011 during the thirteen weeks
ended September 28, 2004 as compared to $2,150 for the thirteen weeks ended
September 30, 2003.
Financing activities for the thirteen weeks ended September 28, 2004 used
net cash of $90,531 for repayments of long-term debt. Financing activities
for the thirteen weeks ended September 30, 2003 provided net cash of
$1,700,025. This amount included repayments of long-term debt of $115,475,
proceeds from borrowings from Spotless of $1,835,000 and payments of
preferred stock dividends of $19,500.
The Company's liquidity has been severely adversely affected by its
unrecouped costs incurred in connection with an oil storage tank project.
The Company believes that it will be successful in collecting for this
project, but no assurance can be given as to the timing or amount of any
such recovery. 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, obtains
debt or equity financing from a third party or is able to sufficiently
utilize the ARFA 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. So long as the Company has sufficient working
capital, it 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 or that it
will have sufficient working capital. The Company is striving to improve
its gross margin and control its selling, general and administrative
expenses. In this regard, in recent months the Company has reduced its
expenses, including those relating to marketing, at an annualized rate of
approximately $2 million. 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:
12
(a) the ability to obtain environmental or related construction contracts,
(b) the ability to generate positive cash flow from operations, and the
extent thereof, (c) the ability to raise additional capital or obtain
additional financing, and (d) economic conditions.
The table below summarizes contractual obligations and commitments as of
September 28, 2004:
Total 1 Year 2-3 Years 4-5 Years
----- ------ --------- ---------
Operating leases $1,170,744 $447,116 $723,628 $ -
Long-term debt 556,797 258,620 266,871 31,306
----------- --------- --------- --------
$1,727,541 $705,736 $990,499 $31,306
=========== ========= ========= ========
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
28, 2004.
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 continue as a going concern,
o the Company's ability to effectively implement and maintain its
internal controls and procedures,
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 June 29, 2004.
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.
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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 for the period ended
June 29, 2004.
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 June 29, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, an
evaluation was performed under the supervision and with the participation
of the Company's principal executive and financial officers of the
effectiveness of the design and operation of the Company's "disclosure
controls and procedures" (as defined under Rule 13a-15(e) and Rule
15d-15(e)) as of the end of the period covered by this quarterly report on
Form 10-Q. During such time, in order to address issues relating to revenue
recognition and allocation of expenses associated with the Company's
contract and billing procedures which include, but are not limited to,
direct participation by the Company's chief executive officer in customer
invoice preparation and the evaluation of the accuracy of vendor invoices,
the audit committee appointed a task force to assist management in
addressing these matters, and the Company has implemented or is in the
process of implementing the following changes to its internal controls and
procedures, among others, under the supervision of the chief executive
officer:
o authorizing the Company's in-house attorney to oversee its contract and
billing procedures;
o standardizing and consolidating the Company's form of
contracts; and
o requiring customers to agree in writing with respect to rates, including
cost estimates where appropriate, before the Company commences projects.
The Company is assigning high priority to the short-term and long-term
correction of its internal control weaknesses, and will continue to
evaluate the effectiveness of its internal controls and procedures on an
on-going basis and will take further action as might be appropriate. Other
than implementing the improvements discussed above, there were no
significant changes in internal controls or other factors that could
significantly affect these internal controls.
In connection with the foregoing, the Company's principal executive and
financial officers have concluded that, except as noted above, and subject
to the inherent limitations in all control systems, the Company's current
disclosure controls and procedures were effective as of the end of the
period covered by this quarterly report to ensure that information that is
required to be disclosed in the reports the Company files or submits 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 the Company is required
to disclose in such reports is accumulated and communicated to management,
including its principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.
PART 2 - OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On August 5, 2004, Trade-Winds commenced an action against the
New York City Economic Development Corporation (the "EDC") in
the New York State Supreme Court, County of New York, claiming
that Trade-Winds is entitled to approximately $1,255,000 of
contractual billings relating to a large roof tar removal
project. On October 15, 2004, the EDC filed a motion to
14
dismiss, denying Trade-Winds' claims. The Company is in the
process of preparing a response and intends to pursue this
case vigorously.
On October 22, 2004, Trade-Winds commenced an action against
Consolidated Edison Company in the New York State Supreme
Court, County of New York, claiming that Trade-Winds is
entitled to approximately $2,000,000 of contractual billings
and related damages with respect to its removal of sediment
from an oil storage tank.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is required to pay quarterly dividends on its
Series A Convertible Preferred Stock, par value $.01 per share
(the "Series A Preferred"), which dividends accrue from the
initial date of issuance of the Series A Preferred, are
cumulative and, if not paid when due, bear interest on the
unpaid amount of the past due dividends at the prime rate
published in The Wall Street Journal on the date the dividend
was payable, plus 3%. The Company is currently in arrears on
its Series A Preferred dividend payments and interest thereon
in the aggregate amount of approximately $60,000 due to a lack
of available cash. If the Company fails to make any four
consecutive quarterly dividend payments on the Series A
Preferred, the majority in interest of the holders of the
Series A Preferred have the right to elect an additional
director to the Company's Board of Directors, to serve as a
director until such accrued and unpaid dividends have been
paid in full. There can be no assurance when or if the Company
will make any Series A Preferred dividend payments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are included as part of this report:
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.
15
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 12, 2004 By: /s/ Michael O'Reilly
------------------------------
MICHAEL O'REILLY,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2004 By: /s/ Charles Kelly, Jr.
------------------------------
CHARLES L. KELLY, JR.
Chief Financial Officer
(Principal Financial Officer)
16