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 March 30, 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: 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
May 5, 2004 was 77,936,358.
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 30, 2004 AND JULY 1, 2003
March 30, July 1,
2004 2003
-------------- --------------
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash $ 235,186 $ 130,096
Accounts receivable, net of allowance for doubtful accounts of $463,698 and $402,804, 8,159,175 5,881,603
respectively
Inventory 165,083 215,466
Costs and estimated earnings in excess of billings on uncompleted contracts 436,287 871,753
Refundable income taxes 750,000 1,080,186
Prepaid expenses and other current assets 283,766 279,597
-------------- --------------
Total current assets 10,029,497 8,458,701
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $5,553,586
and $5,111,516, respectively 2,752,582 2,497,435
OTHER ASSETS 186,657 98,127
-------------- --------------
TOTAL $ 12,968,736 $ 11,054,263
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,855,809 $ 1,487,683
Accrued expenses 1,240,986 1,193,339
Short-term notes payable to related party 5,000,000 1,700,000
Billings in excess of cost and estimated earnings on uncompleted contracts 220,743 299,427
Accrued payroll and related fringe benefits 1,086,607 659,659
Current maturities of long-term debt 359,600 436,617
Other current liabilities 525,984 464,686
-------------- --------------
Total current liabilities 10,289,729 6,241,411
LONG-TERM DEBT 404,628 338,848
-------------- --------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK AND STOCK OPTIONS 103,896 348,625
-------------- --------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000 shares
authorized; 1,300,000 shares outstanding at March 30, 2004 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 March 30, 2004 and July 1, 2003 - -
Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358 shares
outstanding at March 30, 2004 and July 1, 2003. 7,794 7,794
Additional paid-in-capital 33,941,517 34,000,017
Accumulated deficit (33,078,828) (31,182,432)
-------------- --------------
Total stockholders' equity 870,483 2,825,379
-------------- --------------
TOTAL $ 12,968,736 $ 11,054,263
============== ==============
See notes to consolidated financial statements.
2
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- ---------------------------------
March 30, April 1, March 30, April 1,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues $ 3,026,183 $ 3,648,548 $ 14,809,582 $ 14,105,571
Cost of revenues 4,650,312 3,204,889 13,489,965 11,314,559
-------------- -------------- -------------- --------------
Gross (loss) profit (1,624,129) 443,659 1,319,617 2,791,012
-------------- -------------- -------------- --------------
Operating expenses (income):
Selling, general and administrative expenses 1,521,322 1,463,083 3,927,781 4,049,641
Expense (benefit) related to variable accounting
treatment for officer options 103,896 (270,409) (244,729) (432,974)
-------------- -------------- -------------- --------------
Total operating expenses 1,625,218 1,192,674 3,683,052 3,616,667
-------------- -------------- -------------- --------------
Loss from operations (3,249,347) (749,015) (2,363,435) (825,655)
-------------- -------------- -------------- --------------
Other expense (income):
Interest expense 252,681 16,100 312,328 51,290
Other, net (5,407) (116) (29,367) (23,425)
-------------- -------------- -------------- --------------
Total other expense 247,274 15,984 282,961 27,865
-------------- -------------- -------------- --------------
Loss before benefit for income taxes (3,496,621) (764,999) (2,646,396) (853,520)
Benefit for income taxes (928,637) (365,534) (750,000) (374,851)
-------------- -------------- -------------- --------------
Net loss (2,567,984) (399,465) (1,896,396) (478,669)
Dividends on preferred stock (19,500) (19,500) (58,500) (58,500)
-------------- -------------- -------------- --------------
Net loss attributable to common shareholders $ (2,587,484) $ (418,965) $ (1,954,896) $ (537,169)
============== ============== ============== ==============
Basic and diluted net loss per common share:
Basic ($.03) ($.01) ($.03) ($.01)
====== ====== ====== ======
Diluted ($.03) ($.01) ($.03) ($.01)
====== ====== ====== ======
Weighted average number of common shares outstanding:
Basic 77,936,358 77,936,358 77,936,358 77,936,358
========== ========== ========== ==========
Diluted 77,936,358 77,936,358 77,936,358 77,936,358
========== ========== ========== ==========
See notes to consolidated financial statements.
3
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock Addtional
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 (58,500) (58,500)
stock
Net loss - - - (1,896,396) (1,896,396)
----------- ------- ------------ ------------- -----------
Balance at March 30, 2004 77,936,358 $7,794 $33,941,517 $(33,078,828) $ 870,483
=========== ======= ============ ============= ===========
See notes to consolidated financial statements.
4
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirty-Nine Weeks Ended
--------------------------------
March 30, April 1,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,896,396) $ (478,669)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 442,070 409,491
Provision for doubtful accounts, net 60,894 196,913
Benefit related to officer options and redeemable common stock (244,729) (432,974)
Changes in operating assets and liabilities:
Accounts receivable (2,338,466) 874,261
Inventory 50,383 56,542
Costs and estimated earnings in excess of billings on uncompleted contracts 435,466 30,347
Refundable income taxes 330,186 (380,947)
Prepaid expenses and other current assets (4,169) (92,518)
Other assets (88,530) (57,690)
Accounts payable and accrued expenses 396,273 (170,818)
Accrued payroll and related fringe benefits 426,948 165,013
Other current liabilities 78,781 (493,960)
Billings in excess of costs and estimated earnings on uncompleted contracts (78,684) (8,735)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (2,429,973) (383,744)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (714,701) (1,078,497)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (714,701) (1,078,497)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (323,769) (112,194)
Proceeds from long-term debt 312,533 391,831
Repayment of convertible note to related party - (100,000)
Payment of preferred stock dividends (39,000) (58,500)
Proceeds from short-term notes payable to a related party 3,300,000 1,825,000
Repayments of short-term notes payable to a related party - (825,000)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,249,764 1,121,137
-------------- --------------
NET INCREASE (DECREASE) IN CASH 105,090 (341,104)
CASH - BEGINNING OF PERIOD 130,096 399,679
-------------- --------------
CASH - END OF PERIOD $ 235,186 $ 58,575
============== ==============
Cash paid during the period for:
Interest $34,168 $50,203
======== =========
Income taxes $- $232,731
======== =========
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 March 30, 2004, the results of operations for
the thirteen and thirty-nine weeks ended March 30, 2004 and April 1, 2003
and cash flows for the thirty-nine weeks ended March 30, 2004 and April 1,
2003, have been included. Certain prior period amounts have been
reclassified to conform to the March 30, 2004 presentation.
The results for the thirteen and thirty-nine weeks ended March 30, 2004 and
April 1, 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 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.
6
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:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- --------------------------------
March 30, April 1, March 30, April 1,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net loss attributable to
common shareholders as
reported $(2,587,484) $(418,965) $(1,954,896) $(537,169)
Less: Stock-based
employee compensation
cost determined under
the fair value method,
net of related tax effects 41,433 59,780 124,116 179,341
-------------- -------------- -------------- --------------
Pro forma net loss
attributable to common
shareholders $ (2,628,917) $ (478,745) $ (2,079,012) $ (716,510)
============== ============== ============== ==============
Net loss per share:
Basic - as reported ($.03) ($.01) ($.03) ($.01)
====== ====== ====== ======
Basic - pro forma ($.03) ($.01) ($.03) ($.01)
====== ====== ====== ======
Diluted - as reported ($.03) ($.01) ($.03) ($.01)
====== ====== ====== ======
Diluted - pro forma ($.03) ($.01) ($.03) ($.01)
====== ====== ====== ======
7
3. NET LOSS PER COMMON SHARE -The calculation of basic and diluted net
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 loss per share for the thirteen and thirty-nine weeks ended March
30, 2004 and April 1, 2003, respectively:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------------- --------------------------------
March 30, April 1, March 30, April 1,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Numerator:
Net loss attributable
to common
shareholders $(2,587,484) $(418,965) $(1,954,896) $(537,169)
============ ========== ============ ==========
Denominator:
Share reconciliation:
Shares used for basic
loss per share 77,936,358 77,936,358 77,936,358 77,936,358
Effect of dilutive
items:
Stock options - - - -
Convertible securities - - - -
-------------- -------------- -------------- --------------
Shares used for
dilutive loss per
share 77,936,358 77,936,358 77,936,358 77,936,358
============== ============= ============== ==============
Net loss per share:
Basic ($.03) ($.01) ($.03) ($.01)
Diluted ($.03) ($.01) ($.03) ($.01)
The dilutive net loss per share computation for the thirteen week and
thirty-nine week periods ended March 30, 2004 excludes 9,246,618 and
3,560,309 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 April 1, 2003 excludes approximately 4,369,000 and 4,680,000 shares,
respectively, related to employee stock options and approximately 418,000
shares for the thirty-nine week period ended April 1, 2003 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. BENEFIT FOR INCOME TAXES - The benefit for income taxes for the thirteen
and thirty-nine weeks ended March 30, 2004 and April 1, 2003 consists of
the following:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- --------------------------------
March 30, April 1, March 30, April 1,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Federal - current $(932,062) $(365,534) $(760,275) $(380,947)
State - current 3,425 10,275 6,096
-------------- -------------- -------------- --------------
Total $(928,637) $(365,534) $(750,000) $(374,851)
============== ============== ============== ==============
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 March 30, 2004, 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
8
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 - As of March 30, 2004, the Company owed
Spotless $5,000,000, which bears interest at the rate of LIBOR (1.5% at
March 30, 2004) plus 1% per annum and is payable on demand. The Company has
increased its liquidity by entering into 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 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 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 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 Account Receivable
Finance Agreement 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 both the
thirteen-weeks and thirty-nine weeks ended March 30, 2004, the Company sold
approximately $1,179,000 of accounts receivable to Spotless and incurred
approximately $208,000 of discounts and fees associated with these sales.
7. OIL STORAGE TANK PROJECT- 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 and was found to be substantiallly 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 March
30, 2004, the Company has recognized revenue of approximately $1,600,000
with respect to the original scope of this project, of which approximately
$728,000 is still due to the Company. The Company believes that its claim
for additional compensation has legal merit and, if negotiations with the
customer do not yield satisfactory results, the Company intends to pursue
legal action against the customer for the additional costs incurred plus a
reasonable profit margin.
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
9
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, the Company has encountered slower collections of
certain of its accounts receivable, and its liquidity has been severely
adversely affected by its unrecouped costs incurred in connection with an
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 was $5,000,000 as of March 30, 2004. The Company has
considered various alternatives to increase its liquidity, including a
preliminary proposal made by Spotless in January 2004 to convert a
significant portion of its outstanding debt into shares of the Company's
common stock, which could have allowed Spotless to loan additional funds to
the Company and to increase its ownership of the Company's common stock to
over 90% and, if it so desired and with the consent of the Company's Series
A Redeemable Convertible Preferred Stockholders, (a) effect a short-form
merger and (b) terminate the public registration of the Company's common
stock with the SEC under the Securities Exchange Act of 1934 because the
common stock would no longer be held by at least 300 stockholders of
record. In this connection, the Company 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 without recourse 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 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 Account Receivable Finance Agreement 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 both the thirteen-weeks and thirty-nine weeks ended
March 30, 2004, the Company sold approximately $1,179,000 of accounts
receivable to Spotless and incurred approximately $208,000 of discounts and
fees associated with these sales.
10
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results
of operations are based upon the Company's unaudited consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these unaudited financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Management believes that the critical accounting policies and areas that
require the most significant judgments and estimates to be used in the
preparation of the unaudited financial statements are accounting for
contracts, allowance for doubtful accounts and the valuation allowance
against deferred tax assets.
Contract Accounting - Revenue derived from services provided to customers
over periods of less than one month is recognized at the completion of the
related contracts. Revenue from firm fixed price contracts that extend over
periods of one month or more is recognized using the
percentage-of-completion method, measured by the percentage of costs
incurred to date compared to estimated total costs for each contract.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability, the effect of contract penalty
provisions and final contract settlements may result in revisions to
estimates of costs and income and are recognized in the period in which the
revisions are determined. Revenues from time and material contracts that
extend over a period of more than one month are recognized as services are
performed.
Allowance for Doubtful Accounts - The Company maintains an allowance for
doubtful trade accounts receivable for estimated losses resulting from the
inability of its customers to make required payments. In determining
collectibility, the Company reviews available customer financial
information including public filings and credit reports and also consults
legal counsel to assist in determining collectibility. When it is deemed
probable that a specific customer account is uncollectible, that balance is
included in the reserve calculation. Actual results could differ from these
estimates under different assumptions.
Deferred Tax Asset Valuation Allowance - The Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. Due to the Company's prior history of
losses, the Company has recorded a full valuation allowance against its net
deferred tax assets as of March 30, 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 MARCH 30, 2004 AND APRIL 1, 2003
Revenue
Total revenues for the thirteen weeks ended March 30, 2004 decreased by
$622,365, or 17%, to $3,026,183 from $3,648,548 for the thirteen weeks
ended April 1, 2003. This decrease was primarily attributable to decreases
of approximately $252,000 related to a nonrecurring mold remediation
project in Mexico and approximately $386,000 related to the loss of
business from an insurance company.
Cost of Revenues
Cost of revenues increased $1,445,423 or 45% to $4,650,312 for the thirteen
weeks ended March 30, 2004 as compared to $3,204,889 for the thirteen weeks
ended April 1, 2003, primarily due to cost overruns incurred on an oil
storage tank project (see Note 7). Gross profit decreased $2,067,788 to
$(1,624,129) for the thirteen weeks ended March 30, 2004 from $443,659,
for the thirteen weeks ended April 1, 2003, primarily due to costs incurred
on the oil tank storage project.
11
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $58,239 or 4% to
$1,521,322 for the thirteen weeks ended March 30, 2004 from $1,463,083 for
the thirteen weeks ended April 1, 2003 and constituted approximately 50%
and 40% of revenues in these periods, respectively. This increase was
primarily attributable to increases in consulting expenses of approximately
$97,000, marketing expenses of approximately $51,000, insurance expenses of
approximately 49,000 and the provision for doubtful accounts of
approximately $36,000, offset by decreases in legal expenses of
approximately $127,000, sales salaries of approximately $37,000 and
officers salaries of approximately $19,000.
(Benefit) Expense 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
expense related to variable accounting treatment for officer options was
$103,896 for the thirteen weeks ended March 30, 2004 compared to a benefit
of ($270,409) for the thirteen weeks ended April 1, 2003. The expense in
the thirteen weeks ended March 30, 2004 was due to an increase in the
market price of the Company's common stock and/or a change in the number of
options outstanding that are vested. The benefit in the thirteen weeks
ended April 1, 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 $236,581 to $252,681 for the thirteen weeks
ended March 30, 2004 from $16,100 for the thirteen weeks ended April 1,
2003. The increase in interest expense was primarily attributable to the
discount recorded when Spotless purchased accounts receivable from the
Company under the Account Receivable Finance Agreement and greater amounts
of debt outstanding resulting from increased borrowings from Spotless for
working capital.
Benefit for Income Taxes
The benefit for income taxes increased by $563,103 to $928,637 for the
thirteen weeks ended March 30, 2004 from $365,534 for the thirteen weeks
ended April 1, 2003.
Net Loss
Net loss increased by $2,168,519 to $2,567,984 for the thirteen weeks ended
March 30, 2004 from $399,465 for the thirteen weeks ended April 1, 2003.
The increase was the result of the factors discussed above.
THIRTY-NINE WEEKS ENDED MARCH 30, 2004 AND APRIL 1, 2003
Revenue
Total revenues for the thirty-nine weeks ended March 30, 2004 increased by
$704,011, or 5%, to $14,809,582 from $14,105,571 for the thirty-nine
weeks ended April 1, 2003. This increase was primarily attributable to
increases of approximately $852,000 related to an oil tank cleaning
project, approximately $1,850,000 related to several fire restoration
projects, 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 $537,000 related to several water emergency
services, approximately $162,000 related to a monitoring project of water
containments, approximately $100,000 in training revenue and approximately
$1,110,000 related to projects from a new insurance company customer, which
was partially offset by decreases of approximately $3,750,000 related to a
nonrecurring mold remediation project in Hawaii and Mexico, approximately
$1,115,000 related to the loss of business from an insurance company and
approximately $406,000 related to fewer emergency response projects for a
local utility company.
12
Cost of Revenues
Cost of revenues increased $2,175,406 or 19% to $13,489,965 for the
thirty-nine weeks ended March 30, 2004 as compared to $11,314,559 for the
thirty-nine weeks ended April 1, 2003. Gross profit decreased $1,471,395 to
$1,319,617, or 22% of total revenue, for the thirty-nine weeks ended March
30, 2004 from $2,791,012, or 20% of total revenue, for the thirty-nine
weeks ended April 1, 2003, due primarily to cost overruns incurred on an
oil storage tank project (see Note 7).
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $121,860 or 3% to
$3,927,781 for the thirty-nine weeks ended March 30, 2004 from $4,049,641
for the thirty-nine weeks ended April 1, 2003 and constituted approximately
27% and 29% of revenues in these periods, respectively. This decrease was
primarily attributable to decreases in the provision for doubtful accounts
of approximately $97,000, legal expenses of approximately $297,000 and
sales salaries of approximately $115,000, offset by increases in consulting
expenses of approximately $247,000, insurance expenses of approximately
$115,000 and miscellaneous expenses of approximately $60,000.
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
$244,729 for the thirty-nine weeks ended March 30, 2004 compared to
$432,974 for the thirty-nine weeks ended April 1, 2003. This benefit 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 $261,038 to $312,328 for the thirty-nine
weeks ended March 30, 2004 from $51,290 for the thirty-nine weeks ended
April 1, 2003. The increase in interest expense was primarily attributable
to the discount recorded when Spotless purchased accounts receivable from
the Company under the Account Receivable Finance Agreement and greater
amounts of debt outstanding resulting from increased borrowings from
Spotless for working capital.
Benefit for Income Taxes
The benefit for income taxes increased by $375,149 to $750,000 for the
thirty-nine weeks ended March 30, 2004 from $374,851 for the thirty-nine
weeks ended April 1, 2003.
Net Loss
Net loss increased by $1,417,727 to $1,896,396 for the thirty-nine weeks
ended March 30, 2004 from $478,669 for the thirty-nine weeks ended April 1,
2003. The decrease was the result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of March 30, 2004, the Company had a cash balance of $235,186, working
capital of $(260,232) and stockholders' equity of $870,483. 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
13
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 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 Account Receivable Finance Agreement are
characterized as interest expense. As of March 30, 2004, the Company has
incurred $208,000 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.
Net cash used in operating activities was $2,429,973 for the thirty-nine
weeks ended March 30, 2004 as compared to $383,744 for the thirty-nine
weeks ended April 1, 2003. Accounts receivable increased by $2,338,466 for
the thirty-nine weeks ended March 30, 2004 as a result of increased sales
and difficulties in cash collections. Accounts receivable decreased by
$874,261 for the thirty-nine weeks ended April 1, 2003 due to increased
collection activities. Accounts payable and accrued expenses increased by
$396,273 for the thirty-nine weeks ended March 30, 2004 as a result of the
Company's cash collections difficulties which resulted in slower payments
to vendors. Accounts payable and accrued expenses decreased $170,818 for
the thirty-nine weeks ended April 1, 2003 due to lower sales volume.
Refundable income taxes decreased by $330,186 for the thirty-nine weeks
ended March 30, 2004 as a result of collection of a federal income tax
refund.
Cash used for capital expenditures was $714,701 during the thirty-nine
weeks ended March 30, 2004 as compared to $1,078,497 for the thirty-nine
weeks ended April 1, 2003.
Financing activities for the thirty-nine weeks ended March 30, 2004
provided net cash of $3,249,764. This amount includes repayments of
long-term debt of $323,769, proceeds from long-term debt of $312,533,
payment of preferred stock dividends of $39,000 and proceeds from
short-term loans from Spotless of $3,300,000. Financing activities for the
thirty-nine weeks ended April 1, 2003 provided net cash of $1,121,137. This
amount included repayments of long-term debt of $112,194, proceeds from
long-term debt of $391,831, repayment of a convertible note to a related
party of $100,000, payment of preferred stock dividends of $58,500,
proceeds from borrowings from Spotless of $1,825,000 and repayments of
borrowings to Spotless of $825,000.
As of March 30, 2004, the Company owed Spotless $5,000,000. 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.
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 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
14
future cash requirements are expected to depend on numerous factors,
including, but not limited to: (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
March 30, 2004:
Total 1 Year 2-3 Years 4-5 Years
----- ------ --------- ---------
Operating leases $1,390,105 $439,887 $ 917,429 $ 32,789
Long-term debt 764,228 359,600 333,101 71,527
----------- --------- ----------- ----------
$2,154,333 $799,487 $1,250,530 $ 104,316
=========== ========= =========== ==========
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 thirty-nine weeks ended March 30,
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 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.
15
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.
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, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
--------------------------------------------------------------
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
$19,500 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
16
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
31.1 Certification of Chief Executive Officer pursuant to
Sarbanes-Oxley Section 302(a)
31.2 Certification of Chief Financial Officer pursuant to
Section 302(a)
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.
b. Reports on Form 8-K:
None
17
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: May 19, 2004 By: /s/ Michael O'Reilly
------------------------------
MICHAEL O'REILLY,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 19, 2004 By: /s/ Charles L. Kelly, Jr.
------------------------------
CHARLES L. KELLY, JR.
Chief Financial Officer
(Principal Financial Officer)
18