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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
PAVING STONE CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 000-30051 88-0443120
(State of incorporation) (Commission File No.) (I.R.S. Employer ID No.)
1760 N.W. 22ND COURT, POMPANO BEACH, FL 33069
(Address of principal executive offices)
(954) 971-3235
(Registrant's telephone number)
COTTAGE INVESTMENTS, INC.
(Registrant's Former Name)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.0001 PER SHARE
------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year (year ended December 31,
2002): $13,080,344.
Based on the final closing price on December 31, 2002, the aggregate market
value of the voting and non-voting common equity held by non-affiliates of the
Registrant was approximately $13,874,012.
At May 1, 2003, 28,726,082 shares of the Registrant's common stock were issued
and outstanding.
Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) [] Yes [X] No
PART I
FORWARD LOOKING STATEMENTS
THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS
REGARDING, AMONG OTHER THINGS: (A) OUR PROJECTED SALES AND PROFITABILITY, (B)
OUR GROWTH STRATEGIES, (C) ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE
FINANCING PLANS, AND (E) OUR ANTICIPATED NEEDS FOR WORKING CAPITAL. IN ADDITION,
WHEN USED IN THIS FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN
ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY
ON OUR EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY
OF WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING,
WITHOUT LIMITATION, THE RISKS OUTLINED UNDER "CERTAIN BUSINESS RISK FACTORS" AND
MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE RISKS AND
UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS FILING WILL IN FACT OCCUR.
ITEM 1. DESCRIPTION OF BUSINESS
On July 22, 1999, the Company was incorporated under the laws of the
State of Nevada under the name Power Save International, Inc. On August 26,
1999, the Company changed its name to Interactive Music, Inc.
In the Fall of 1999, the Company decided to focus on the sale of
consumer goods through the Internet. On December 15, 1999, the Company acquired
zebramart.com, Inc., a Georgia corporation, for 300,000,000 shares of common
stock in a pooling of interests transaction. On December 22, 1999, the Company
changed its name to zebramart.com, Inc.
On March 6, 2000, the Company acquired Royal Acquisitions, Inc., a
Nevada Corporation, for $200,000 and 2,000,000 restricted shares of common
stock. The transaction was recorded as a purchase.
On May 24, 2000, the Company acquired MyFavoriteShoe.com, Inc. ("MFS"),
an Internet shoe company, for 60,232,519 shares of common stock in a pooling of
interests transaction. On September 8, 2000, MFS sold its Internet shoe
operations for consideration that included cash and the assumption of certain
liabilities. Assets that were sold included inventory and various MFS records
and intellectual property.
On September 13, 2000, the Company purchased a 30% interest in Cottage
Ventures, LLC, for 30,000,000 reverse split adjusted shares of common stock. The
Company remained in the development stage since its activities from inception
were primarily start-up operations in nature, with no significant revenues
generated. The development strategy was focused on acquiring and growing
companies that had the potential to become leaders in their respective fields.
During 2001, the Company announced that it had changed its core focus
from Internet related ventures to become a communications infrastructure
company. To accomplish this end, the Company divested itself of all of its
operating subsidiaries. The Company had no business operations remaining by the
Fall of 2001.
On October 11, 2001, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") to acquire (the "Acquisition") all of the
issued and outstanding common stock of five companies in the concrete paver
installation, design and marketing industry. The five companies included The
Paving Stone Co., Inc., a Florida corporation, The Paving Stone Company of
California, Inc., a California corporation, The Paving Stone Company of Arizona,
Inc., an Arizona corporation, Paving Stone of Nevada, Inc., a Nevada
corporation, and Paving Stone Company of Atlanta, Inc., a Georgia corporation
(collectively, the "Paving Stone Companies").
Each of the entities comprising the Paving Stone Companies had
its headquarters in Pompano Beach, Florida, and was solely owned by Maurice F.
Sigouin. Mr. Sigouin founded the first of the five companies, which was The
Paving Stone Co., Inc. of Florida, in Pompano Beach, Florida in 1990. By 2001,
the five companies had seventeen offices in eight states.
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Under the Agreement, the Company was to acquire the Paving Stone
Companies for a total of 20,000,000 shares of its common stock, of which
16,040,000 shares would be issued to Mr. Sigouin, the sole shareholder of the
Paving Stone Companies; 1,320,000 shares would be issued to Jace Simmons, an
officer of the Paving Stone Companies; and 2,640,000 shares would be issued to
consultants providing services to the Paving Stone Companies before and after
the transaction. In exchange, Mr. Sigouin exchanged all of the outstanding
common shares of the five Paving Stone Companies. The Paving Stone Companies
also were required to pay cash in the amount of $30,000, which was to be used to
pay off existing liabilities of the Company.
The Acquisition was contingent a number of events, including, without
limitation, the successful completion of due diligence by both sides, the
settlement or satisfaction of all liabilities of COTF, the effectuation of a
reverse stock split of the common stock of the Company's common stock sufficient
to reduce the number of issued and outstanding shares of common stock to
approximately 2,000,000, and the receipt of all necessary approvals to amend the
Articles of Incorporation to increase the number of authorized shares of common
stock to 150,000,000, and to change the Company's name to "Paving Stone
Corporation." The Company obtained the necessary approvals, and filed an
information statement with the Securities and Exchange Commission on Schedule
14C in November 2001. On December 17, 2001, the Acquisition closed, causing a
change in control of the Company. After the Company's charter was amended to
change the Company's name to Paving Stone Corporation, the trading symbol for
the Company's common stock was changed from "COTF" to "PVNG."
In connection with the Acquisition, Daniel J. Mackell and Sean M. Daly
resigned from the Board of Directors. Mr. Sigouin was elected a director and
Chairman of the Board of Directors and Mr. Simmons was elected a director. In
August 2002, Jack Hight, John Zeeman and Richard Tilghman were appointed as
outside members of the Board of Directors, bringing the total members of the
Board of Directors to five.
The Acquisition was treated for accounting purposes as a purchase
by the Paving Stone Companies and a reverse merger and recapitalization of
Paving Stone Corporation. The Company acts as a holding company. Each of the
Paving Stone Companies is a wholly-owned, operating subsidiary of Paving Stone
Corporation.
The Paving Stone Corporation, through its subsidiaries, engages in the
business of marketing and installing concrete, interlocking pavers. It designs
and installs pavers in both commercial and residential markets. Competition is
fragmented and largely made of small local installers.
Pavers are interlocking bricks used in driveways, pool decks, gardens,
and retaining walls. Larger commercial applications include office buildings,
high-rises, hotels, ports, sports complexes, streets, and even airport runways.
Pavers are manufactured all over the country by primarily a limited number of
suppliers.
Made in a range of styles, designs and colors, pavers create
decorative, appealing, durable, and environmentally sound ground coverings.
Pavers offer many pragmatic, economic, and aesthetic benefits, especially when
compared with alternative landscape architecture products, such as concrete
pavement, clay, asphalt, stone, or traditional bricks. Able to bear tremendous
weight and pressure, pavers are strong, durable, and weather resistant. Pavers
have wide-ranging decorative uses, creating beautifully designed homes,
landscapes, and commercial areas. Environmental advantages can be obtained from
the use of pavers, as they permit water drainage and recycling. If desired,
paving systems can be installed in a manner that permits perculation of water
between pavers, allowing water to return to the ground.
The Company has won awards for the quality of its work from the
nonprofit trade organization, Interlocking Concrete Pavement Institute.
Manufacturing companies, home improvement resellers, and large, publicly held
general contractors, have recommended the Company for installation of large
commercial and individual residential projects involving interlocking pavers.
Established a decade ago with two employees, the Company has grown to
approximately sixty employees located in ten offices nationwide. The Company
operates in Alabama, Arizona, California, Georgia, Nevada, South Carolina,
Tennessee and Texas.
Beginning in December 2002, after careful evaluation of year-to-date
results, the Company decided to cease operations in Florida and New England, as
it believes these to be unprofitable markets at this time. This downsizing
occurred throughout the first quarter of 2003. The Company also consolidated its
three California expansion offices into one central office, to reduce costs.
Going forward, the Company intends to focus on our more profitable
markets around the country and intends to continue to expand in selected
areas.
The Company does not intend to send an annual report to its
shareholders for the year ended December 31, 2002. It has filed all required
reports on Forms 10-Q and 8-K for the years ended December 31, 2000, 2001 and
2002. The public may read and copy any materials filed with the Securities and
Exchange Commission at the agency's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The SEC maintains an Internet site that contains the
Company's reports, proxy and information statements, filings and other
information at http://www.sec.gov.
3
RISK FACTORS
The Company is subject to various risks which may have a material
adverse effect on its business, financial condition and results of operations,
and may result in a decline in our stock price. Certain risks are discussed
below:
THE COMPANY HAS BEEN AND CONTINUES TO BE SUBJECT TO A WORKING CAPITAL
DEFICIT AND ACCUMULATED DEFICIT.
The Company had a working capital deficit of approximately $4.9 million at
December 31, 2002. The Company had an accumulated deficit of approximately $12.2
million and approximately $5.2 million at December 31, 2002 and 2001,
respectively. The Company's ability to obtain additional funding will determine
its ability to continue as a going concern. Accordingly, the Company may
experience significant liquidity and cash flow problems if it is not able to
raise additional capital as needed and on acceptable terms. No assurances can be
given that the Company will be successful in reaching or maintaining profitable
operations.
THE COMPANY HAS BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR
INDEPENDENT AUDITORS.
The Company's independent auditors have added an explanatory paragraph
to their audit opinion issued in connection with the 2002 financial statements
which states that our Company is dependent on outside financing and has had
losses in prior years that raise substantial doubt about its ability to continue
as a going concern. The Company's financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
THE COMPANY HAS HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE
FUTURE.
The Company has historically lost money in prior years. For the year
ended December 31, 2002, the Company had a net loss of approximately $6.9
million. For the year ended December 31, 2001, the Company sustained losses of
approximately $5.7 million. Future losses are likely to occur. The Company's
independent auditors have noted that our Company may not have significant cash
or other material assets to cover its operating costs and to allow it to
continue as a going concern. The Company's ability to obtain additional funding
will determine its ability to continue as a going concern. Accordingly, the
Company may experience significant liquidity and cash flow problems if it is not
able to raise additional capital as needed and on acceptable terms. No
assurances can be given that the Company will be successful in reaching or
maintaining profitable operations.
THE COMPANY FACES THE RISK OF DEFAULT OF DEBT OBLIGATIONS AND NEGATIVE
IMPACTS OF RESTRICTIVE COVENANTS.
The Company has certain debt obligations. These include a line of
credit with a major institutional lender and loans from the senior officer of
the Company, in addition to vendor financing and accounts payable. Certain debt
obligations may not permit subordination to other obligations, and other
creditors may not be subordinate to any debt or equity offered by the Company.
In the event the Company is unable to repay its debt obligations, the Company
may be forced to reduce or cease operations.
THE COMPANY'S LIMITED NATIONWIDE OPERATING HISTORY MAKES EVALUATION OF
BUSINESS AND PROSPECTS DIFFICULT.
The Company has been in business for more than a decade, but has only a
limited operating history on a nationwide basis. This limits the amount of
information upon which investors can evaluate the Company's business and
prospects. The Company also has limited experience operating outside of its
initial, core markets in Florida, which make the experience to date a poor
indicator of future performance or the ability to evaluate expansion
opportunities or new markets. The Company cannot give assurance that it will
generate sufficient revenues to fund its operations or that it will be
profitable at such level of operations. The Company's business and prospects
must be considered in light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets.
THE COMPANY WILL NEED ADDITIONAL FINANCING FOR FUTURE CAPITAL NEEDS,
WHICH MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL.
The Company's capital requirements in connection with conducting its
business, as well as its growth and marketing activities, are significant. To
date, the Company has experienced cash flow difficulties. These result primarily
from the industry wide practice of long delays in receiving payment from general
contractors who contract with installers as subcontractors on commercial or
residential home building projects.
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If financing does not become available on favorable terms, then the
Company will not have adequate funds to fulfill its long-term strategic plans.
The Company may conduct placements of its securities to fund its business plan,
including the satisfaction of outstanding debt and establishing a merger and
acquisition program. There can be no assurance that any offerings will be
successful or that the Company may not in the future require additional funding
to continue operations. As a result, the Company may be required to modify its
strategic plan, curtail operations, limit expansion, or obtain funds by entering
into unfavorable arrangements with collaborative partners or others that may
require it to relinquish rights, including, without limitation, to certain
assets or to control over the Company's management or stock. Furthermore,
additional financing efforts may result in dilution of equity positions or
subordination of debt positions and increased numbers of creditors in the event
of liquidation. The Company cannot grant assurance that it will have access to
the capital markets in the future, or that financing will be available to it on
acceptable terms to satisfy its cash requirements. If it cannot obtain necessary
capital, its business and financial condition will be materially and adversely
affected.
THE COMPANY MAY NOT BE ABLE TO MANAGE ITS EXPANSION GROWTH PLAN.
For the Company to meet its strategic and business plans, it would need
to experience growth in the size and geographic scope of its operations and
business and would need to develop a substantially larger customer base. These
activities can be expected to place a significant strain on the Company's
current management, operations and capital resources. The Company's growth will
require it to attract, motivate and retain highly skilled managerial, sales and
marketing personnel, or to outsource such needs. It will also require the
Company to enhance its financial and managerial controls and reporting systems.
There is no assurance that the Company will be able to manage its growth
effectively or be able to attract and retain the necessary personnel to meet its
business challenges.
THE COMPANY MAY NOT BE ABLE TO MANAGE ITS EXPANDING OPERATIONS
EFFECTIVELY.
The Company has recently experienced, and hopes to continue to
experience, rapid geographic expansion. However, it has limited experience in
deploying its services in new geographic or vertical markets to date. The
Company can give no assurance that it will have the ability to manage a
substantially larger number of customers, employees and operations in
geographically expansive areas and vertically differentiated industries or that
it will be able to maintain adequate operational controls or experience positive
financial results. In addition, rapid growth is likely to place a strain on
managerial, operational and financial resources.
To attempt to accommodate this growth, the Company must accomplish the
following, among other things: implement new or upgraded operating and financial
systems, procedures and controls in multiple locations; expand customer service,
billing and other related support systems; devise and implement new advertising
and marketing campaigns; and obtain sufficient resources and additional capital.
This is not a comprehensive list. The Company may not succeed with these
efforts. Its failure to accomplish these goals in an efficient manner could
cause expenses to grow and revenues to decline or grow more slowly than
expected, and could otherwise have a material adverse effect on the Company's
business, financial condition and results of operations.
THE COMPANY MAY HAVE DIFFICULTY IDENTIFYING AND FINANCING SUITABLE
ACQUISITIONS, MERGERS, JOINT VENTURES, STRATEGIC ALLIANCES, OR OTHER BUSINESS
COMBINATIONS, WHICH MAY ADVERSELY AFFECT OPERATING AND FINANCIAL RESULTS.
As part of its business strategy, the Company reviews potential
business combinations, acquisitions, mergers, joint ventures and strategic
alliances, which may complement or expand existing business, increase revenues,
create operational efficiencies, or open new markets for sale of the Company's
products and services. To date, the Company has not entered into any business
combinations (other than the acquisition, in which the five operating
subsidiaries were acquired in December 2001). Therefore, the Company lacks
experience in conducting business combinations, including, without limitation,
mergers and acquisitions.
Furthermore, the Company may not be able to identify appropriate
business combinations, acquisitions, mergers, joint ventures, or strategic
alliances. It also may not be able to finance proposed transactions successfully
once identified. There can be no assurance that the Company will have the
experience or capability to assess potential acquisition or merger candidates
properly, negotiate effectively with acquisition or merger targets, complete any
proposed business combinations, or integrate acquisition or merger candidates
effectively. Any failure to identify, finance, close or successfully integrate
future transactions may impede the Company's growth and have a material adverse
effect on the Company's business, financial condition and results of operations.
Any acquisitions, if completed, will likely encounter the risks
commonly experienced during business combinations, such as: difficulty in
5
integrating operations and personnel, potential business disruption; assumption
of unexpected liabilities; the imposition and maintenance of common standards,
controls, procedures and policies; and the impairment of relationships with
employees and customers as a result of difficulties arising out of integration.
Furthermore, the value of any business acquired may be less than the amount paid
for it if, for example, there is a decline in the position of that business in
the relevant market in which it operates or there is a decline in that market
generally.
The Company may encounter difficulties in implementing its business
strategy of growth through expansion and business combinations. It also seeks to
continue to shift its mix of products and services from commercial installation
of pavers in Florida to the installation of pavers in other geographic regions
and marketplaces, with a greater concentration on residential services. In
addition, the Company may eventually engage in a vertical integration within its
industry. Implementation of this strategy will depend in large part on the
Company's ability to finance and manage growth, identify and integrate new
markets and acquisition targets properly, and market the Company's products and
services successfully. It will need to: establish a significant customer base
and maintain favorable relationships with those customers, obtain adequate
financing on favorable terms; establish and maintain appropriate procedures,
policies, and systems; hire or engage, train, and retain skilled employees and
laborers; and foresee and implement strategies to deal effectively with
competition. If the Company is unable to achieve any or all of these goals, it
will not be able to implement its business strategy, which would have a material
adverse effect on its results of operations and financial condition.
THE COMPANY DEPENDS HEAVILY ON ITS KEY PERSONNEL, AND THE INABILITY TO
RETAIN THEM WILL ADVERSELY AFFECT THE BUSINESS OF THE COMPANY.
The Company's success depends on the continued availability of its
senior management team, particularly Maurice Sigouin, the Company's Founder,
President, Chief Executive Officer, and Chairman of the Board of Directors. The
Company has an employment agreement with Mr. Sigouin. The loss of Mr. Sigouin or
any other key employees would have a material adverse effect on the Company's
business and prospects. During the pendency of any search to replace key
employees, the Company will likely suffer operationally and financially. The
Company does not maintain reserves to protect against any financial loss in the
event of the loss of a key employee. Furthermore, the Company does not maintain
key man life insurance with respect to any of its executive employees.
THE COMPANY MAY NOT BE ABLE TO ATTRACT A SUFFICIENT NUMBER OF
PROFICIENT PAVER INSTALLERS AND OTHER SKILLED LABORERS.
For the Company to meet is strategic and business plans, it will need
to experience growth in the size and geographic scope of its operations and
business. The Company's growth will require it to attract, motivate and retain
highly skilled laborers to install pavers, or to engage sufficient outside
contractors to meet these needs. Many competitors have faced and continue to
experience a lack of sufficient skilled laborers. The Company cannot grant
assurance that it will have access to sufficient skilled laborers in a timely
fashion, or at an acceptable price, if at all. While the Company has not
experienced any such difficulties to date, the lack of sufficient skilled labor
would impede the ability of the Company to conduct operations and generate
revenues.
THE COMPANY MAY BE UNABLE TO OBTAIN PRODUCT FOR INSTALLATION WORK FROM
SUPPLIERS, CAUSING AN INABILITY TO PRODUCE REVENUE AND POTENTIAL CLIENT
LITIGATION.
The Company requires a high volume of quality products that are
procured from, and assembled by, third party suppliers. The Company's reliance
on suppliers, as well as industry supply conditions generally, involves risks,
including the possibility of defective product, shortage of product, increases
in costs and reduced control over delivery schedules, any or all of which could
adversely affect the Company's financial results. Freight costs for heavy paver
materials also impact the choice of supplier. Occasionally, products may be
subject to allocations and the Company may experience difficulty in obtaining
sufficient quantities of such products. In some cases, alternative sources of
supply may not be readily available. Where alternative sources are not
available, qualification of the alternative suppliers and establishment of
reliable supplies could result in delays. The lack of availability of timely and
reliable supply of products from these sources could adversely affect the
Company's business. In other cases, the Company may establish a working
relationship with a single source, even when multiple suppliers are available,
if it believes it is advantageous to do so due to performance, quality, support,
delivery, capacity, location, or price considerations. The Company, where
applicable, relies on one supplier of certain product lines, based upon location
and contractual obligations.
Based on these factors, there can be no assurance that all necessary
products will be readily available or available at suitable prices. The Company
can provide no assurance it will not suffer any business disruption from an
inability to obtain necessary supplies in a cost efficient and timely manner.
The interruption in supply availability could have a material adverse effect on
the Company's reputation, financial condition and operations.
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THE COMPANY MAY NOT BE ABLE TO COLLECT ACCOUNTS RECEIVABLE OR MAY
RETAIN INADEQUATE RESERVES FOR BAD DEBT.
The Company faces a risk that it will be unable to collect accounts
receivable from its clients. Certain receivables from general contractors on
commercial projects occasionally become difficult to collect due to industry
wide delays that filter down to the subcontractor level. The Company faces the
risk that its reserves for bad debt will not be sufficient, which would
negatively impact its financial condition. In the past, the Company has
experienced a need to adjust bad debt reserves and institute collection and
reserve policies. There can be no assurance that the Company will be able to
collect its accounts receivable or predict accurately the levels of
uncollectible receivables to permit it to reserve adequately, which could have a
material adverse impact on the financial statements and condition of the
Company.
THE COMPANY AND ITS SHAREHOLDERS FACE RISKS ASSOCIATED WITH
CONCENTRATION OF OWNERSHIP BY MANAGEMENT.
Control of the common stock of the Company and associated voting rights
are concentrated in the hands of Maurice Sigouin, the Chairman of the Board of
Directors, Chief Executive Officer, and President of the Company. Management and
the majority of the directors of the Company may face the risk of having a
conflict of interest. There can be no assurance that shareholders of the Company
will not be negatively affected by the concentration of ownership of the
Company's common stock by the management and directors of the Company.
THE COMPANY HAS NOT AND MAY NOT PAY DIVIDENDS TO SHAREHOLDERS.
The Company has not paid dividends to shareholders in the past. The
Company intends to retain future earnings, if any, for corporate purposes, and
does not anticipate declaring or paying any cash dividends in the foreseeable
future. Accordingly, there is no assurance that any dividends will ever be paid
by the Company.
THE COMPANY COULD FACE CLAIMS OF PRODUCT LIABILITY, PERSONAL INJURY OR
OTHER LEGAL CLAIMS.
In conducting its business, the Company faces the typical risks
involved in construction-oriented businesses. These risks include, but are not
limited to, the potential for product damage, personal injury, automobile
accidents, breaches of contract, and other legal issues. The Company maintains
product liability and automobile insurance. There can be no assurance that the
Company will be able to obtain or maintain insurance on acceptable terms such
that any insurance will provide adequate coverage against potential liabilities.
A loss of insurance coverage or the assertion of a product liability claim would
likely materially adversely affect the Company's business, financial condition
and results of operations.
COMPETITION COULD IMPAIR THE COMPANY'S FINANCIAL CONDITION AND
OPERATIONS.
Competition in the construction industry is intense. Within the paver
installation business, the Company has experienced intense competition,
affecting margins negatively. Competition may become more intense as a result of
the introduction of new competitors, consolidation, price discounting, and
possibly weakening demand. Furthermore, to compete successfully, the Company
must attract and retain a sufficient number of management, sales and technical
personnel with high levels of relevant skills and meaningful experience. There
can be no assurance that the Company will be able to attract and retain
sufficient numbers of personnel as the need for such employees increases with
the Company's anticipated growth, or maintain or improve its current position
with respect to any of these or other competitive factors.
In addition, many potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. No
assurance can be made that current and/or future competitors will not provide
products or services that could be more attractive to consumers than those
provided by the Company or that the Company we will be able to respond
adequately to competitive challenges. If the Company is unable to respond
adequately to competitive challenges or establish a sustainable competitive
advantage, it may lose market share or be forced to lower prices to unprofitable
levels.
NEW LAWS AND REGULATIONS COULD NEGATIVELY IMPACT THE INDUSTRY, CAUSING
INCREASED COSTS AND DECREASED OPPORTUNITIES TO EARN REVENUE.
The Company may face limits on its ability to conduct its business due
to legal and regulatory constraints. These include, without limitation,
securities, environmental, labor, and antitrust regulation. The impact of
regulatory scrutiny or constraints could negatively impair existing or future
business.
7
THE COMPANY'S STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY
FLUCTUATE SIGNIFICANTLY.
The market price for the Company's common stock may fluctuate
significantly in response to a variety of influences, including, without
limitation: variations in quarterly operating results; changes in financial
estimates by securities analysts; changes in market valuation of competitors or
perceived competitors; changes in market valuation of companies in the concrete
paver or architectural landscape and design industries; announcements of
significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments; additions or departures of key personnel; sales of the
Company's securities, including short sales, or termination of stock transfer
restrictions; and fluctuations in trading volume, which are particularly common
among companies listed on the Over-the-Counter Bulletin Board. These factors
have a negative impact on the liquidity and sales price of the Company's common
stock. The Company cannot grant any assurance that its common stock will not
suffer extreme price fluctuations, or steep declines in liquidity or stock
price, nor can there be assurance that the Company's stock will achieve the
necessary volume or liquidity to permit ready sales at acceptable price levels.
SALES OF THE COMPANY'S COMMON STOCK IN THE PUBLIC MARKET COULD IMPAIR
THE ABILITY TO COMPLETE SUCCESSFUL FINANCING EFFORTS.
The sale of shares of the Company's common stock in the public market
could cause a reduction in the market price of its common stock. In addition,
there is a limited trading market for the Company's common stock, and the
Company has traded under the current name only since December 17, 2001. Eventual
sales by stockholders of the Company's common stock in the public market once
transfer restrictions are lifted could materially adversely affect the
prevailing market price for the Company's common stock. The sale or availability
for sale of substantial amounts of the Company's common stock could adversely
affect the market demand and price for the common stock. In addition to the
number of shares of common stock currently outstanding, which may be available
for future resale, the existence of a substantial number of derivative
securities, such as options or warrants, may also adversely affect the market
demand and price for the Company's common stock.
AN INVESTMENT IN THE COMPANY IS SPECULATIVE AND INVESTORS COULD LOSE
THEIR ENTIRE INVESTMENT IN THE COMPANY.
An investment in the Company must be considered to be speculative in
nature. The Company cannot give assurance that investors will realize a return
on their investment or that its stockholders will not lose a portion or all of
their investments in the Company. In the event that the Company is forced to
dissolve or commence insolvency proceedings, any proceeds from the liquidation
of assets will be distributed to stockholders only after the satisfaction of the
claims of creditors. The ability to recover all or any portion of an investment
in the Company's capital stock would depend upon the amount of the dissolution
proceeds.
THE COMPANY'S COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY IT
MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY
REQUIREMENTS.
The Company's common stock is deemed to be "penny stock" as that term
is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934.
Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system (Nasdaq listed stock must still have a price of not
less than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0
million for the last three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
8
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for the Company's common stock by
reducing the number of potential investors. This may make it more difficult for
investors in our common stock to sell shares to third parties or to otherwise
dispose of them. This could cause the Company's stock price to decline.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's main office is located in Pompano Beach, Florida. The
office is occupied pursuant to a lease with monthly lease payments of
approximately $7,000. The Company is party to an additional nine leases for
office space in each of the primary branch locations in which it conducts
operations.
ITEM 3. LEGAL PROCEEDINGS
The officers and directors of the Company believe that, to the best of
their knowledge, neither the Company nor any of its officers and/or directors
are parties to any legal proceeding or litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company has been traded in the Over-the-Counter
Bulletin Board ("OTCBB") market since September 1999 and is quoted on the OTCBB
maintained by the National Quotation Bureau, Inc. under the symbol "PVNG". The
high and low sales prices of the common stock, as traded in the OTCBB market, on
December 31, 2002, were both approximately $0.53. The quarterly range of high
and low prices for the past three years were as follows:
CALENDAR YEAR HIGH BID LOW BID
--------------------------- -------------- --------------
ENDED DECEMBER 31, 2001*
1st Quarter 3.99 0.93
2nd Quarter 1.20 0.27
3rd Quarter 3.86 0.28
4th Quarter 8.65 0.93
ENDED DECEMBER 31, 2002
1st Quarter 1.20 0.20
2nd Quarter 0.60 0.20
3rd Quarter 0.88 0.18
4th Quarter 0.95 0.51
*Adjusted for 133:1 reverse stock split effected at the close of business on
December 17, 2001.
These prices are based upon quotations between dealers, without
adjustments for retail mark-ups, markdowns or commissions, and therefore may not
represent actual transactions.
The Company paid no dividends on its common stock as of December 31,
2002. The Company intends to retain earnings and does not intend to pay a
dividend on its common stock for the foreseeable future. On December 17, 2001,
the Company effected a reverse stock split in which every one hundred and
thirty-three (133) shares of common stock was to be exchanged for one (1) share
of common stock of the Company. Any fractional shares were to be rounded up to
the nearest whole share.
Between June 2000 and October 2000, the Company sold in private sales a
total of 5,452,598 shares of common stock for total cash consideration of
$327,500. In the fourth quarter of 2000, the Company sold 1,021,034 shares of
common stock for the settlement of debts and the purchase of debts of our
subsidiaries totaling $207,800. The Company believed that the stock was exempt
from registration under the Securities Act of 1933, as amended.
Between June 2000 and October 2000, the Company sold in private sales a
total of 5,452,598 shares of the common stock for total cash consideration of
$327,500. In the fourth quarter of 2000, the Company sold 1,021,034 shares of
common stock for the settlement of debts and the purchase of debts of our
subsidiaries totaling $207,800. The Company believed that the stock was exempt
from registration under the Securities Act of 1933, as amended.
During the first quarter of 2001, the Company issued 8,760,000
pre-split shares of common stock to purchase $306,929.10 in debt of
MyFavoriteShoe.com. The Company also issued 119,953 pre-split shares to settle a
dispute with a former consultant. During the second quarter of 2001, the Company
issued 5,338,933 pre-split shares of common stock to settle accounts payable of
$32,034. On September 30, 2001 the Company sold 1,700,000 pre-split shares of
common stock to Stony Point Capital, LLC, a party unrelated to the Company, for
$50.00 and advisory services. On October 17, 2001, the Company issued 10,107,500
pre-split shares of common stock to Joseph J.T. Carter in a conversion of a
convertible note for $9,000. Between November 2001 and December 2001, the
Company sold 26,343,483 pre-split shares of common stock for the settlement of
debts and the purchase of debts totaling $271,852. The Company believed that the
stock was exempt from registration under the Securities Act of 1933, as amended.
10
On April 12, 2002, the Company sold four million (4,000,000) shares of
common stock and warrants to purchase one and one half million shares
(1,500,000) of common stock, to an investor, in exchange for consideration
equivalent to one million dollars ($1,000,000 U.S.D.) The Company believes that
the sale of the common stock was exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder by
the Securities and Exchange Commission.
From January to June 2002, the Company issued 456,500 shares of common
stock to a consultant. These shares were valued at $292,800.
On July 15, 2002, the Company issued 35,000 shares as employee bonuses,
and cancelled 500 of these shares on September 19, 2002. These shares were
valued at $0.21 per share for a total of $7,244.
On November 6, 2002, the Company issued 1,000,000 commitment shares to
an underwriter pursuant to a stock purchase agreement dated November 4, 2002.
These shares were valued at $0.68 per share for a total of $680,000.
Subsequent to the fiscal year ended December 31, 2002, the following
shares were issued:
o From January 21st through January 28, 2003, 260,000 shares
were issued to consultants for services performed. These
shares were valued at $135,500.
o From February 28th through April 1, 2003, 1,888,700 shares
were issued pursuant to shares registered in an S-8 for an
Employee common stock Plan and a Director common stock Plan.
These shares were valued at $585,870.
o From March 20, 2003 to March 27, 2003, 400,000 shares were
issued to outside vendors. These shares were valued at
$74,000.
ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the related notes appearing in Item 8.
SELECTED FINANCIAL DATA
-----------------------
RESULTS FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
(ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL)
- ----------------------------------- -------------- ---------------- ----------------- -------------- ------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net Sales $13,080,344 $8,114,553 $3,435,249 $8,874 N/A
Cost of Sales 10,075,109 5,912,677 2,429,973 8,205 N/A
Gross Profit 3,005,235 2,201,876 1,005,276 669 N/A
Operating Expenses 5,987,272 7,637,034 898,522 2,830,623 N/A
Interest Expense (200,552) (171,860) (101,397) (26,674) N/A
Other Expense (58,773) -- (905) -- N/A
(Loss)Income from Continuing
Expenses (3,272,157) (5,607,018) 4,452 (2,850,093) N/A
Discontinued Operations (3,661,205) (93,662) 220,448 -- N/A
Net (Loss)Income (6,933,362) (5,700,680) 224,900 (2,850,093) N/A
11
RESULTS FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
(ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL)
- ----------------------------------- -------------- ---------------- ----------------- -------------- ------------
(LOSS) PER SHARE DATA:
(Loss)Income from Continuing
Operations $(0.13) $(0.35) $0.00 $(0.02) N/A
(Loss)Income from Discontinued
Operations (0.15) (0.00) (0.01) -- N/A
Weighted Average Shares Outstanding
(Basic and Diluted) 24,915,135 16,268,686 16,040,000 99,066,558 N/A
CONSOLIDATED BALANCE SHEET DATA:
Total Assets 4,088,860 6,940,390 N/A
Long-Term Liabilities 904,861 140,354 N/A
SELECTED QUARTERLY FINANCIAL DATA
Year ended December31 First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------------- ---------------- --------------- -------------- ------------- -------------
2002
Net sales $ 2,533,872 $ 4,084,667 $ 4,019,566 $ 2,442,239 $ 13,080,344
Gross profit 763,415 1,417,663 557,637 266,520 3,005,235
Earnings before income
taxes -266,716 599,763 -891,009 -2,683,400 -3,241,362
Net earnings -266,716 599,763 -891,009 -2,714,195 -3,272,157
Earnings per share
Basic $ -.01 $ .01 $ -.03 $ -.10 $ -.13
---------------- --------------- -------------- ------------- -------------
Diluted $ -.01 $ .01 $ -.03 $ -.10 $ -.13
---------------- --------------- -------------- ------------- -------------
2001
Net sales $ 1,141,087 $ 2,041,754 $ 2,217,961 $ 2,713,751 $ 8,114,553
Gross profit 180,023 661,076 586,607 774,170 2,201,876
Earnings before income
taxes -204,294 -98,083 -157,060 -5,147,581 -5,607,018
Net earnings -204,294 -98,083 -157,060 -5,147,581 -5,607,018
Earnings per share
Basic $ -.01 $ -.01 $ -.01 $ -.32 $ -.35
---------------- --------------- -------------- ------------- -------------
Diluted $ -.01 $ -.01 $ -.01 $ -.32 $ -.35
---------------- --------------- -------------- ------------- -------------
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as foreign currency exchange, interest rates and a
decline in the stock market. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The Company has
limited exposure to market risks related to changes in interest rates and
foreign currency exchange rates. The Company does not currently invest in equity
instruments of public or private companies for business or strategic purposes.
The Company generally conducts business, including sales to foreign
customers, in U.S. dollars and, as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10 percent change in foreign
exchange rates would not have a material impact on the Company's financial
condition or results of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Selected Consolidated Financial Data and the Consolidated Financial
Statements and Notes thereto included elsewhere herein.
We began in 1990 in our first office in Florida, and by mid 2002, grew
to multiple offices in several states. Our objective, especially during the last
few years of this growth period, was to expand aggressively outside of Florida
and create a national footprint. By 2002, we had successfully achieved this
objective and became an authorized installer for a national retailer in certain
markets.
Beginning in December 2002, after careful evaluation of year-to-date
results, we decided to cease operations in Florida and New England, as we
believe these to be unprofitable markets at this time. This downsizing occurred
throughout the first quarter of 2003. We also consolidated our three California
expansion offices into one central office, to reduce costs. Losses from these
markets in 2002 exceeded $5 million.
Going forward, we intend to focus on our more profitable markets
around the country and intend to continue to expand in selected areas. We
remain an authorized installer for a national retailer in certain areas, and
currently operate 10 offices in 8 states.
The following explanations reflect continuing operations.
12
FINANCIAL CONDITION
Total assets as of December 31, 2002 were $1,575,240 a decrease of
25.9%, or $551,727, from total assets of $2,126,967 at December 31, 2001. The
decrease is primarily attributable to a reduction in net receivables of $542,583
as a result of stronger collections efforts in all of our offices.
Current liabilities increased by $1,390,523 from $3,784,251 at December
31, 2001 to $5,174,774 at December 31, 2002. The increase is primarily
attributable to increased accounts payable and accrued expenses of $1,261,997
and increased billings in excess of costs on uncompleted contracts of $174,435.
These increases were due to the continued growth and expansion in California,
Arizona and Nevada.
Stockholder's equity decreased from $14,368 at December 31, 2001 to
$(5,663,225) at December 31, 2002, a decrease of $5,677,593. The decrease is
primarily attributable to a net operating loss including discontinued operations
of $6,933,362 in 2002.
RESULTS OF OPERATIONS
Net sales for the year ended December 31, 2002 was $13.1 million as
compared to $8.1 million for the year ended December 31, 2001, an increase of
$5.0 million or 61.2%. This increase was primarily attributable to the Company's
growth and expansion in California, Arizona and Nevada.
Net sales for the year ended December 31, 2001 was $8.1 million as
compared to $3.4 million for the year ended December 31, 2000, an increase of
$4.7 million or 136%. The increase was due to expansion and growth in Arizona,
Nevada and Georgia.
Cost of sales for the year ended December 31, 2002 was $10.1 million as
compared to $5.9 million for the year ended December 31, 2001, an increase of
$4.2 million or 70.4%. This increase is primarily attributable to the Company's
increased selling efforts and expansion in California, Arizona and Nevada. Gross
margins decreased from 27% to 23% largely due to increased labor and materials
in California and Georgia.
Cost of sales for the year ended December 31, 2001 was $5.9
million as compared to $2.4 million for the year ended December 31, 2000, an
increase of $3.5 million or 143%. The increase parallels the revenue increase.
Selling, general and administrative expresses for the year ended
December 31, 2002 was $5.7 million as compared to $2.5 million for the year
ended December 31, 2001, an increase of $3.2 million or 134%. This increase is
primarily attributable to the Company's growth and expansion in California,
Arizona and Nevada. This included increases in personnel, facilities and vehicle
expenses.
Selling, general and administrative expenses for the year ended
December 31, 2001 was $2.4 million as compared to $0.9 million for the year
ended December 31, 2000, an increase of $1.5 million or 173%. The increase is
due to expansion and growth in Arizona, Nevada and Georgia including increased
personnel, vehicle and facility expenses.
We incurred a net loss from continuing operations of $3.3 million
for the year ended December 31, 2002 as compared to a net loss of $5.6 million
for the year ended December 31, 2001, a decrease of $2.3 million or 41.6%. This
decrease was primarily attributable to a one-time charge of $5,187,600 in 2001
pertaining to stock to be issued to advisors and a director. This was offset by
increased losses in the expansion markets of California, Nevada and
Georgia/Mid-Atlantic.
We incurred a net loss from continuing operations of $5,607,018 for the
twelve months ended December 31, 2001, compared with net income of $4,452 for
the twelve months ended December 31, 2000. The decrease of $5,611,470 was
primarily due to the one time non-cash charge of $5,187,600 described above.
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002
Our total assets at December 31, 2002 were $4,088,860 compared with
$6,940,390 at December 31, 2001, a decrease of $2,851,530 or 41.6%. These
balances include net assets from discontinued operations of $2,513,620 at
December 31, 2002 and $4,813,423 at December 31,2001, a decrease of $2,299,803
or 47.8%, primarily the result of a reduction in our Florida business. Our total
assets excluding discontinued operations were $1,575,240 and $2,126,967,
respectively, at December 31, 2002 and December 31, 2001, a decrease of $551,727
or 25.9%. This decrease was primarily due to a reduction in accounts receivable
of $542,583, which was a result of increased collections efforts. Total assets
at December 31, 2002 were comprised mainly of $1,261,801 of accounts receivable,
$159,335 of cost in excess of billings on uncompleted contracts and $108,111 of
property and equipment. Total assets at December 31, 2001 were comprised
principally of $1,804,384 of accounts receivable, $151,929 of cost in excess of
billings on uncompleted contracts and $73,039 of property and equipment. Total
current assets at December 31, 2002 and December 31, 2001 amounted to $3,955,133
and $6,841,551, respectively, while total current liabilities for those same
periods amounted to $8,847,224 and $6,785,668 respectively, creating a working
capital deficit of $4,892,091 at December 31, 2002 and a working capital surplus
of $55,883 at December 31, 2001. The working capital deficit at December 31,
2002 is principally attributable to operating losses in 2002. Total liabilities
at December 31, 2002 and December 31, 2001 were $9,752,085 and $6,926,022,
respectively, representing an increase of 2,826,063 or 40.8%. This increase is
primarily due to increased accounts payable and accrued expenses as described
above of $1,261,997, increased borrowings under a line of credit of $262,317 and
13
borrowings under a note payable from a related party of $700,000. In addition,
net liabilities from discontinued operations increased by $671,033, primarily
the result of accrued liabilities resulting from discontinued operations.
Shareholders' equity (capital deficit) at December 31, 2002 and December 31,
2001 was ($5,663,225) and $14,368, respectively, representing a decrease of
$5,677,593. The decrease is due to current year losses.
During 2002, we relied principally upon the proceeds of a $1,000,000
private equity financing, proceeds from a $700,000 note payable to a related
party and increased borrowings of $262,317 under a line of credit to fund our
working capital requirements and capital expenditures. Our Company's net cash
used in operating activities for the year ended December 31, 2002 was
$1,583,086, compared to cash used in operating activities of $531,700 for the
year ended December 31, 2001, an increase of $1,051,386. This increase resulted
from operating losses incurred in 2002.
Our Company's net investing activities for the year ended December 31,
2002 used cash of $3,094.
Our Company's net cash provided by financing activities for the year
ended December 31, 2002 was $1,567,080 compared to $609,603 for the year ended
December 31, 2001, an increase of $957,477 or 157.1%. The primary sources of
financing in 2002 were proceeds from the sale of common stock of $1,000,000,
proceeds from a note payable from a related party of $700,000 and proceeds from
a line of credit of $262,317. These were offset by payments on a shareholder
loan, payments on notes payable and capital lease payments all totaling
$395,237.
Our Company has no assured available financial resources to meet its
December 31, 2002 working capital deficit of $4,892,091 and future operating
costs. If our Company is unable to fund its working capital deficit and future
operating costs through operating activities, the Company may be required to
change its proposed business plan and decrease its planned operations, which
could have a material adverse effect upon its business, financial condition, or
results of operations.
To improve our cash flow, beginning in December 2002, we discontinued
our operations in Florida and New England, and consolidated our three California
offices into one central office. These markets accounted for over $5 million of
losses in 2002. In addition, we substantially reduced administrative costs at
our headquarters through the elimination of several personnel. We continue our
efforts to raise capital through the sale of stock and are currently in
discussions with several institutions.
On November 4, 2002, we entered into a common stock purchase agreement
with a private equity fund to sell up to $15 million of common stock over a
period of 30 months, after an applicable registration statement became
effective. In the agreement, the equity fund had the option to terminate the
agreement if the applicable registration statement had not become effective as
of February 1, 2003. In April 2003, the equity fund exercised its option and
terminated the agreement. We currently are in discussions with other funds to
set up a similar financing instrument.
Going Concern Qualification
Our auditors stated in their report to our financial statements for the
years ended December 31, 2002, and 2001, that our losses in 2002 and our working
capital and stockholder deficiency at December 31, 2002 raise substantial doubt
about our ability to continue as a going concern. For the years ended December
31, 2002 and 2001, we incurred losses of $6,933,362 and $5,700,680,
respectively, and had an accumulated deficit of $12,161,817 and $5,228,455,
respectively. We believe that our ongoing operations will generate adequate cash
flow to continue in the paver installation business. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
CRITICAL ACCOUTING POLICIES AND ESTIMATES
We have identified critical accounting policies that, as a result of judgements,
uncertainties, uniqueness and complexities of the underlying accounting
standards and operation involved, could result in material changes to our
consolidated financial position or results of operations under different
conditions or using different assumptions. The most critical accounting policies
and estimates are:
- - Estimated allowance for uncollectible accounts receivable;
- - Estimates regarding percentage of completion on uncompleted contracts
Details regarding our use of these policies and the related estimates are
described in the accompanying consolidated financial statements as of December
31, 2002 and 2001 for the years ended December 31, 2002, 2001 and 2000. During
the year ended December 31, 2002, there have been no material changes to our
critical accounting policies that impacted our consolidated financial condition
or results of operations.
ITEM 8. FINANCIAL STATEMENTS
The financial statements and audit report of the Company's independent
auditors are attached as an exhibit to this Report (see Item 13). In addition,
the managements' discussion and analysis discusses the financial condition of
the Company (see Item 6).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 17, 2001, after the Acquisition (see Item 2), the Board of
Directors of the Company dismissed the Company's independent auditors, Tauber &
Balser, P.C. ("Tauber"). Tauber did not have any disagreement with the Company
which caused the dismissal of Tauber or the change in independent auditors.
14
Tauber's report on the financial statement of the Company for either of the past
two years did not contain any adverse opinion or any disclaimer of opinion, nor
was any such report qualified or modified as to uncertainty, audit scope, or
accounting principles, except that the reports for the years ended December 31,
2000 and December 31, 1999 each contained a qualification as to the Company's
ability to continue as a going concern. Such qualification had no bearing on the
decision of the Board of Directors of the Company's to dismiss Tauber as its
independent auditor on December 17, 2001. During the Company's two most recent
fiscal years and the subsequent interim period preceding the dismissal of Tauber
as independent auditors, there were no disagreements with Tauber on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope; accordingly, there was no disagreement, which, if not resolved
to the satisfaction of the former accountant, would have caused it to make
reference to the subject matter of the disagreements in connection with its
audit report for such periods, or which would have caused the Board of Directors
of the Company to discuss any disagreements with the former auditors.
The newly elected Board of Directors of the Company, upon the
Acquisition (see Item 1), recommended the retention of the new auditors. The new
auditors, Weinberg & Company, P.A. ("Weinberg"), were engaged on December 18,
2001. Weinberg had previously been the auditors of the Paving Stone Companies
(see Item 1), which are now the subsidiaries of Paving Stone Corporation, for
the years ended December 31, 1999 and December 31, 2000. The new auditors are
authorized to discuss any matters with the old auditors, without any limitation
whatsoever, and the Company has authorized the former auditors to respond fully
to any inquiry of the successor auditors. The Board of Directors of the Company
does not have an audit committee. The Board of Directors of the Company
recommended and approved the decision to dismiss Tauber as independent auditors
of the Company and to engage Weinberg as independent auditors of the Company.
During the Company's two most recent fiscal years and any subsequent
interim period preceding the dismissal of Tauber as independent auditors, at no
point did the former auditors advise the Company that (a) the internal controls
necessary for the Company to develop reliable financial statements did not
exist; (b) information had come to the auditors' attention that led it to no
longer be able to rely on management's representations, or that has made it
unwilling to be associated with the financial statements prepared by management;
(c) (1) of the need to expand significantly the scope of its audit, or that
information has come to the auditor's attention during the time period covered
by Item 304(a)(1)(iv), that if further investigated may (i) materially impact
the fairness or reliability of either: a previously issued audit report or the
underlying financial statements; or the financial statements issued or to be
issued covering the fiscal period(s) subsequent to the date of the most recent
financial statements covered by an audit report (including information that may
prevent it from rendering an unqualified audit report on those financial
statements), or (ii) cause it to be unwilling to rely on management's
representations or be associated with the Company's financial statements, and
(2) due to the auditors' dismissal, or for any other reason, the auditor did not
so expand the scope of its audit or conduct such further investigation; or (d)
(i) information had come to the auditors' attention that it has concluded
materially impacts the fairness or reliability of either (i) a previously issued
audit report or the underlying financial statements, or (ii) the financial
statements issued or to be issued covering the fiscal period(s) subsequent to
the date of the most recent financial statements covered by an audit report
(including information that, unless resolved to the accountant's satisfaction,
would prevent it from rendering an unqualified audit report on those financial
statements), and (2) due to the auditors' dismissal, or for any other reason,
the issue has not been resolved to the auditors' satisfaction prior to its
dismissal.
15
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Upon consummation of the Acquisition on December 17, 2001 (see Item 1
above), all of the directors of the Company resigned. The resignations did not
result from any disagreement with PVNG or its management. In accordance with the
Acquisition Agreement (see Item 1 above), Maurice F. Sigouin was appointed
Chairman of the Board of Directors, and Jace Simmons was appointed a director.
On August 27, 2002, Jack Hight, John Zeeman and Richard Tilghman were appointed
as outside directors.
Terms for the following directors of the Company last until the
Company's next stockholders' meeting and until their successors are elected and
qualify, subject to their prior death, resignation or removal. Officers serve at
the discretion of the Board of Directors. Below is a description of the
Company's directors and officers.
MAURICE F. SIGOUIN, 52, was the sole shareholder and founder of the
Paving Stone Companies, where he served as their Chief Executive Officer,
President, and Chairman of the Board of Directors. Born in Montreal, Canada, in
1951, Mr. Sigouin graduated from the University of Quebec at Montreal in 1972
with a degree in Physical Education. Since 1975, Mr. Sigouin has been employed
in the construction industry. In 1990, Mr. Sigouin organized the Paving Stone
Company of Florida, Inc. During the 1990s, Mr. Sigouin expanded the business to
new locations in Florida, and later added additional offices in other states.
Upon consummation of the Acquisition, Mr. Sigouin was appointed to serve as
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company and received 16,040,000 shares of the common stock of the Registrant.
JACE SIMMONS, 46, served as the Vice President and Chief Financial
Officer of the Paving Stone Companies of Florida. Upon consummation of the
Acquisition, he was appointed the Executive Vice President, Chief Financial
Officer, and a Director of the Company. In 1978, Mr. Simmons graduated from the
University of Texas at Austin with a Bachelors of Business Administration in
Accounting. He earned his certified public accounting license shortly
thereafter. Upon graduating from college, Mr. Simmons joined Arthur Andersen and
Company, a then-nationally recognized, "Big 5" accounting firm. He spent five
years working as a public auditor, during which time he participated in several
SEC engagements and developed auditing and accounting expertise. From May 1983
to March 2000, Mr. Simmons served as Chief Financial Officer at three separate
divisions of Coldwell Banker Real Estate Company, a subsidiary of Cendant. From
April 2000 to May 2000, Mr. Simmons acted as an independent consultant. In June
2000, Mr. Simmons joined the Paving Stone Companies as its Chief Financial
Officer. In connection with the Acquisition, Mr. Simmons received 1,320,000
shares of common stock of the Registrant.
JOHN ZEEMAN, 74, was appointed a director on August 27, 2002. Mr.
Zeeman, one of the founding shareholders and an original member of the Board of
Directors of MCI Communications, Inc. (which later merged with WorldCom to
become MCI-WorldCom) has more than 35 years of experience in many areas of
business operations, including management, corporate finance, working with
venture capital for small and medium sized companies and the hands-on management
of small emerging companies. He currently serves on the Board of Directors of
Oncure Technologies Corp., a leading national provider of outpatient cancer
care, where he is chairman of the Audit Committee. He is also on the Board of
Directors of Priva Technologies, Inc., a developer of unique security systems
for financial transactions and on the Board of Enzybiotics Inc., a developer of
enzyme platform technology providing solutions against pathogens resistant to
antibiotics as well as against bio warfare agents. Since 1973 he has served as
chairman of Mariner Financial Corporation, Inc., a financial consulting firm
that provides strategic planning and financing through its investment banking
work. In this capacity, he has served since 1989 as chairman of the Executive
Committee of Teklicon, Inc., a high technology consulting firm company in
Mountain View, California. He has held numerous leadership positions in small
companies throughout his illustrious career.
JACK HIGHT, 77, was appointed a director on August 27, 2002. Mr. Hight
has more than 40 years experience in creating and leading information technology
companies, including some 34 years as president and chairman of four
corporations, three of which were eventually merged into companies listed on the
New York Stock Exchange. He is chairman of the board at Modus Operandi, Inc.,
and was founder and chairman of the board at Intec Systems, Inc. Mr. Hight was a
co-founder and president of Electronic Data Systems Federal Corporation, which
merged with Electronic Data Systems (EDS) in 1968. He currently is chairman of
Seisint, an information products and services company that provides real time
access to billions of data records that are used to support mission critical
business decisions. He previously served as an assistant to two U.S. Senators
and has also served as CEO, president or chairman of eight information
technology based companies, two of which merged into New York Stock Exchange
listed companies.
16
RICHARD K. TILGHMAN, 53, was appointed a director on August 27, 2002.
Mr. Tilghman, attended Boston University following his service in the U.S.
Marine Corp. He was formerly a member of the sales department of Alco Standard,
and founded a successful Sacramento, California-based copy and print company
that he operated for 13 years. Since 2000 he has focused on real estate
investments and currently operates a family-owned investment company and a yacht
charter company.
None of the Company's directors or officers have had any bankruptcy
petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within two
years prior to that time. None of the Company's directors or officers have been
convicted in any criminal proceeding, nor are they subject to any pending
criminal proceeding. None of the Company's directors or officers are subject to
any order, judgment, or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities. None of the Company's directors or
officers have been found by a court of competent jurisdiction in a civil action,
the Securities and Exchange Commission, or the Commodity Futures Trading
Commission, to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended, or vacated.
ITEM 11. EXECUTIVE COMPENSATION
The following table contains information regarding the compensation for
services rendered by the current officers and directors of the Company.
Currently, the Company has two officers and five directors.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG - TERM COMPENSATION
---------------------- ---------------------------
PAYOUTS
---------------------------
RESTRICTED
OTHER ANNUAL UNDER-LYING SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SAR'S LTIP PAYOUTS COMPENSATION
- ----------------------------- ------- ------------ --------- ----------- ---------------- ------------ ---------------
Maurice Sigouin 2002 $ 221,000 $ 0 $ 0 0 0 0
CEO, Chairman, President 2001 $ 180,000(1) $ 0 $ 44,000 (2) 0 0 0
2000 $ 180,000(1) $ 0 $ 44,000 (2) 0 0 0
Jace Simmons 2002 $ 141,550 $ 0 $ 0 0 0 0
CFO, Director 2001 $ 130,000 $ 0 $ 0 0 0 $1,729,200(11)
2000 $ 75,833 (3) $ 0 $ 0 0 0 0
Daniel J. Mackell 2002 N/A N/A N/A N/A N/A 0
Former CEO 2001 $ 0 $ 0 $ 0 (4) $ 77,500 (5) 0 0
2000 $ 0 $ 0 $ 100,000 (6) 0 4,000,000(7) 0
David W. Kenner 2002 N/A N/A N/A N/A N/A 0
Former CEO 2001 $ 0 $ 0 $ 0 $ 0 0 0
2000 $ 42,000 $ 0 $ 0 $ 0 24,970,087(7) 0
William G. Head 2002 N/A N/A N/A N/A N/A 0
Former CEO 2001 $ 0 $ 0 $ 0 0 0 0
2000 $ 60,000 $ 0 $ 0 0 125,000(8) 0
Sean W. Daly 2002 N/A N/A N/A N/A N/A 0
Former Secretary 2001 $ 0 $ 0 $ 0 0 85,500(9) 0
2000 $ 0 $ 0 $ 0 0 10,300,000(7) 0
William Stilley 2002 N/A N/A N/A N/A N/A 0
Former Interim CFO 2001 $ 24,000(10) $ 0 $ 0 0 0 0
2000 $ 30,000 $ 0 $ 0 0 0 0
(1) Prior to the Acquisition, Mr. Sigouin received wages of $36,000 per year on
a W2 and capital distributions from the "S" corporations of $144,000.
(2) Mr. Sigouin received reimbursement of certain expenses, including
automobile expenditures and travel related expenses.
(3) Mr. Simmons joined the Company in June 2000.
17
(4) Mr. Mackell served as Chief Executive Officer of the Registrant prior
to the Acquisition (see Item 1). Mr. Mackell forgave his deferred cash
salary of $100,000 for the year ended December 31, 2001 prior to the
Acquisition.
(5) Mr. Mackell was awarded 77,500 shares of common stock on or about
December 14, 2001 prior to the Acquisition (see Item 1). This amount
takes into account the 133:1 reverse stock split effected on December
17, 2001.
(6) This constitutes deferred salary for a partial year of employment.
(7) These options were subsequently canceled. The amount of shares
exercisable takes into account the 2:1 reverse stock split that
occurred on August 16, 2000, but not the 133:1 reverse stock split that
became effective on December 17, 2001.
(8) These subsequently expired unexecuted. The amount of shares exercisable
takes into account the 2:1 reverse stock split that occurred on August
16, 2000, but not the 133:1 reverse stock split that became effective
on December 17, 2001.
(9) Tower Hill Holdings, Inc., a corporation for which Mr. Daly serves as
President, was awarded 85,500 shares of common stock on or about
December 14, 2001 prior to the Acquisition (see Item 1). This amount
takes into account the 133:1 reverse stock split effected on December
17, 2001.
(10) Mr. Stilley served as Interim Chief Financial Officer of the Company
until he resigned on May 1, 2001. A corporation that is wholly owned by
Mr. Stilley and his wife was engaged by the Company to provide
consulting services between May 1, 2001 and December 17, 2001.
(11) Restricted stock issued as a result of the acquisition.
The Company has entered into employment agreements with each of the
officers of the Company. The agreements call for the payment of set salaries, in
addition to cash bonuses and certain benefits, as well as options to purchase
additional shares of the common stock of the Company.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS/SAR'S OPTIONS/SAR'S
NAME EXERCISE REALIZED ($) AT FISCAL YEAR END(1) AT FISCAL YEAR END(2)
Maurice Sigouin -0- -0- Exercisable: 0 $ 0
-0- -0- Unexercisable: 0 0
Jace Simmons -0- -0- Exercisable: 0 $ 0
-0- -0- Unexercisable: 0 0
- ---------------------------------
(1) These grants represent options to purchase common stock. No SAR's have
been granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common
stock underlying the options and the exercise price of the options as
of December 31, 2002.
The following table contains information regarding grants of stock
options made during the year ended December 31, 2002 to our Company's executive
officers.
OPTION/SAR GRANTS TABLE
% TOTAL
NO. OF SECURITIES OPTIONS/SAR'S
UNDERLYING GRANTED TO
OPTIONS/SAR'S EMPLOYEES IN EXERCISE OR BASE PRICE
NAME GRANTED (#) FISCAL YEAR (%) ($ PER SHARE) EXPIRATION DATE
Maurice Sigouin 0 0% $ 0 N/A
----- ----- ----- -----
Jace Simmons 0 0% $ 0 N/A
----- ----- ----- -----
18
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange commission initial reports of ownership and reports of changes in
ownership of Common Stock and other of our equity securities. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish us copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required during the fiscal year ended December 31, 2002, all Section 16(a)
filing requirements applicable to our officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of May 1, 2003, as to (i) each
person (or group of affiliated persons) known by us to own beneficially more
than 5% of our outstanding common stock, (ii) each of our directors, (iii) each
of our executive officers, and (iv) all directors and executive officers of our
Company as a group.
For the purpose of this table, beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. The number
of shares beneficially owned by a person includes shares of common stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of May 1, 2003. Shares issuable pursuant to such options are
deemed outstanding for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for the purposes of computing the
percentage ownership of each other person.
AMOUNT AND
NAME AND ADDRESS OF NATURE OF
TITLE BENEFICIAL OWNER BENEFICIAL OWNER PERCENT OF CLASS
- ------------------- ------------------------- ---------------------- ----------------
Common Stock Maurice F. Sigouin 16,040,000 61.27
1760 N.W. 22nd Court,
Pompano Beach, FL 33069
Common Stock Paver Installation LP 4,000,000 14.7
Common Stock Jace Simmons 1,320,000 5.0
1760 N.W. 22nd Court,
Pompano Beach, FL 33069
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) The Company is party to two lease agreements for offices
located in Pompano Beach, Florida and Vero Beach, Florida with Paving Stone
Properties, Inc., of which Maurice F. Sigouin is the sole shareholder. In
addition, the Company is a co-borrower with Paving Stone Properties, Inc., on a
loan secured by the real property constituting the aforementioned offices in
Pompano Beach and Vero Beach.
(b) REPORTS ON FORM 8-K.
During the first quarter of 2002, the Company filed with the Securities
and Exchange Commission the following current reports on Form 8-K regarding
events that occurred during the fiscal year ended December 31, 2001:
Form 8-K, filed on January 4, 2002, regarding the change in control and
change of outside auditors in connection with the Acquisition (see Item 1
above).
19
Form 8-K/A, filed on January 22, 2002, regarding the change in control
and change of outside auditors in connection with the Acquisition (see Item 1
above).
Form 8-K/A2, filed on March 28, 2002, regarding the change in control
and change of outside auditors in connection with the Acquisition (see Item 1
above).
During the fourth quarter of 2002, the Company filed with the
Securities and Exchange Commission the following current reports on Form 8-K:
Form 8-K, filed on November 8, 2002, regarding a $15 million common
stock purchase agreement dated November 5, 2002.
Form 8-K, filed on December 31, 2002, regarding a clarification with
respect to statements made in a telephone conference call about the common stock
purchase agreement dated November 5, 2002.
ITEM 14. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL
CONTROLS. Within the 90 days prior to the date of this Annual Report on Form
10-K, the Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" (Disclosure Controls), and its "internal
controls and procedures for financial reporting" (Internal Controls). This
evaluation (the Controls Evaluation) was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Rules adopted by the SEC require that in this
section of the Quarterly Report we present the conclusions of the CEO and the
CFO about the effectiveness of our Disclosure Controls and Internal Controls
based on and as of the date of the Controls Evaluation.
CEO AND CFO CERTIFICATIONS. Appearing immediately following the
Signatures section of this Annual Report there are two separate forms of
"Certifications" of the CEO and the CFO. The first form of Certification is
required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certification). This section of the Annual Report which you are
currently reading is the information concerning the Controls Evaluation referred
to in the Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (Exchange Act), such as this Annual Report, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
20
SCOPE OF THE CONTROLS EVALUATION. The CEO/CFO evaluation of our
Disclosure Controls and our Internal Controls included a review of the controls'
objectives and design, the controls' implementation by the Company and the
effect of the controls on the information generated for use in this Annual
Report. In the course of the Controls Evaluation, we sought to identify data
errors, controls problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our Quarterly Reports on
Form 10-QSB and Annual Report on Form 10-K. Our Internal Controls are also
evaluated on an ongoing basis by our independent auditors in connection with
their audit and review activities. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and our Internal Controls and
to make modifications as necessary; our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant.
Among other matters, we sought in our evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in the
Company's Internal Controls, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in the Company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of the Quarterly Report. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Controls Evaluation, and in
each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Annual Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CONCLUSIONS. Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that material information relating to Intel and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit 2 Acquisition Agreement (see Item 1): See Report on Form
8-K, filed with the Securities and Exchange Commission on
October 17, 2001 and exhibits thereto, which are
incorporated herein by reference.
Exhibit 16 Letter regarding change in accountants (see Item 8): See
Reports on Forms 8-K, 8-K/A, and 8-K/A2, filed with the
Securities and Exchange Commission on January 4, January 22,
and March 28, 2002, respectively, and exhibits thereto,
which are incorporated herein by reference. Forms 10Q dated
M ay, 15, 2002, August 14, 2002, and November 14, 2002.
Exhibit 22 Report on matters submitted to vote (see Item 4): See Form
14C, filed with the Securities and Exchange Commission
October 25, 2001, and amendments thereto, filed on November
15, 19, 21 and 26, 2001, which are incorporated herein by
reference.
Exhibit 99 Audit Report and Financial Statements, annexed hereto.
21
ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees paid to Weinberg & Co. P.A. for audit services in 2002 were $89,754.
There were no other services provided by this firm.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PAVING STONE CORPORATION
Dated: May 6, 2003 By: /S/ MAURICE F. SIGOUIN
---------------------------
Maurice F. Sigouin, Chairman of
the Board of Directors, Chief
Executive Officer and President
Dated: May 6, 2003 By: /S/ JACE SIMMONS
----------------------
Jace Simmons, Executive Vice
President-Finance, Chief Financial
Officer, and Director
23
CERTIFICATION
PURSUANT TO SECTION 302
I, Maurice P. Sigouin, certify that:
1. I have reviewed this Annual Report on Form 10-K of Paving Stone
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 6, 2003 By: /S/ MAURICE P. SIGOUIN
----------------------------
Chief Executive Officer
A-1
CERTIFICATION
PURSUANT TO SECTION 302
I, Jace Simmons, certify that:
1. I have reviewed this Annual Report on Form 10-K of Paving Stone
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 6, 2003 By: /S/ JACE SIMMONS
-----------------------
Chief Financial Officer
B-1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Paving Stone Corporation (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
/S/ MAURICE P. SIGOUIN
------------------------
Maurice P. Sigouin
Chief Executive Officer
C-1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Paving Stone Corporation (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
/S/ JACE SIMMONS
------------------------
Jace Simmons
Chief Financial Officer
D-1
PAVING STONE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
PAVING STONE CORPORATION AND SUBSIDIARIES
CONTENTS
--------
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
PAGE 3 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(CONSOLIDATED) AND 2000 (COMBINED)
PAGES 4 - 5 STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001 (CONSOLIDATED) AND 2000 (COMBINED)
PAGES 6 - 7 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(CONSOLIDATED) AND 2000 (COMBINED)
PAGES 8 - 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001
INDEPENDENT AUDITORS' REPORT
----------------------------
TO THE BOARD OF DIRECTORS OF:
PAVING STONE CORPORATION AND SUBSIDIARIES
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF THE PAVING STONE
COMPANY AND SUBSIDIARIES AS OF DECEMBER 31, 2002 AND 2001 AND THE RELATED
STATEMENTS OF INCOME, CHANGES IN STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 2002 AND 2001 (CONSOLIDATED) AND 2000 (COMBINED). THESE
FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDIT.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH AUDITING STANDARDS GENERALLY ACCEPTED
IN THE UNITED STATES OF AMERICA. THESE STANDARDS REQUIRE THAT WE PLAN AND
PERFORM THE AUDITS TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL
STATEMENTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A
TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL
STATEMENTS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND
SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL
FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A
REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY IN ALL
MATERIAL RESPECTS, THE FINANCIAL POSITION OF PAVING STONE CORPORATION AND
SUBSIDIARIES AS OF DECEMBER 31, 2002 AND 2001, AND THE RESULTS OF THEIR
OPERATIONS AND THEIR CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(CONSOLIDATED) AND 2000 (COMBINED), IN CONFORMITY WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA.
THE ACCOMPANYING FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT THE
COMPANY WILL CONTINUE AS A GOING CONCERN. AS DISCUSSED IN NOTE 16 TO THE
FINANCIAL STATEMENTS, THE COMPANY HAS A NET LOSS OF $6,933,362, A NEGATIVE CASH
FLOW FROM OPERATIONS OF $1,583,086 A WORKING CAPITAL DEFICIENCY OF $4,892,091
AND A STOCKHOLDERS' DEFICIENCY OF $5,663,225. THESE FACTORS RAISE SUBSTANTIAL
DOUBT ABOUT ITS ABILITY TO CONTINUE AS A GOING CONCERN. MANAGEMENT'S PLANS
CONCERNING THIS MATTER ARE ALSO DESCRIBED IN NOTE 16. THE ACCOMPANYING FINANCIAL
STATEMENTS DO NOT INCLUDE ANY ADJUSTMENTS THAT MIGHT RESULT FROM THE OUTCOME OF
THIS UNCERTAINTY.
WEINBERG & COMPANY, P.A.
BOCA RATON, FLORIDA
PAVING STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
ASSETS
--------
2002 2001
------------------ -----------------
CURRENT ASSETS
CASH $ 15,639 $ 34,739
ACCOUNTS RECEIVABLE - NET OF ALLOWANCES 1,261,801 1,804,384
COSTS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS 159,335 151,929
PREPAID EXPENSES 4,738 37,076
NET ASSETS OF DISCONTINUED OPERATIONS 2,513,620 4,813,423
------------------ -----------------
TOTAL CURRENT ASSETS 3,955,133 6,841,551
------------------ -----------------
PROPERTY AND EQUIPMENT - NET 108,111 73,039
------------------ -----------------
OTHER ASSETS
SECURITY DEPOSITS AND OTHER ASSETS - NET OF AMORTIZATION 23,225 19,800
OTHER LOANS / ADVANCES RECEIVABLE 2,391 6,000
------------------ -----------------
TOTAL OTHER ASSETS 25,616 25,800
------------------ -----------------
TOTAL ASSETS $ 4,088,860 $ 6,940,390
================== =================
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
-------------------------------------------------
CURRENT LIABILITIES
CASH OVERDRAFT $ 78,393 $ 60,221
LINES OF CREDIT 2,502,588 2,240,271
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,235,023 973,026
ACCRUED STOCK COMPENSATION 102,123 -
CUSTOMER DEPOSITS PAYABLE - 38,047
BILLINGS IN EXCESS OF COST ON UNCOMPLETED CONTRACTS 218,317 43,882
NOTE AND CAPITAL LEASE OBLIGATION PAYABLE - CURRENT PORTION 38,330 33,111
NOTES PAYABLE - STOCKHOLDER - 395,693
NET LIABILITIES OF DISCONTINUED OPERATIONS 3,672,450 3,001,417
------------------ -----------------
TOTAL CURRENT LIABILITIES 8,847,224 6,785,668
------------------ -----------------
LONG TERM LIABILITIES
NOTE AND CAPITAL LEASE OBLIGATION PAYABLE 61,814 76,001
NOTES PAYABLE - STOCKHOLDER 143,047 64,353
NOTE PAYABLE - RELATED PARTY 700,000 -
------------------ -----------------
TOTAL LONG-TERM LIABILITIES 904,861 140,354
------------------ -----------------
TOTAL LIABILITIES 9,752,085 6,926,022
------------------ -----------------
STOCKHOLDERS' (DEFICIENCY) EQUITY
COMMON STOCK, $.00001 PAR VALUE, 150,000,000 SHARES AUTHORIZED, 26,177,382, AND
2,260,083 SHARES ISSUED AND OUTSTANDING, RESPECTIVELY 262 23
COMMON STOCK TO BE ISSUED, 779,300 AND 19,742,099 SHARES, RESPECTIVELY 8 197
ADDITIONAL PAID-IN CAPITAL 6,498,322 5,242,603
ACCUMULATED DEFICIT (12,161,817) (5,228,455)
------------------ -----------------
TOTAL STOCKHOLDERS' (DEFICIENCY) EQUITY (5,663,225) 14,368
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 4,088,860 $ 6,940,390
- -------------------------------------------------------
================== =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
PAVING STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001 (CONSOLIDATED) AND 2000 (COMBINED)
2002 2001 2000
(CONSOLIDATED) (CONSOLIDATED) (COMBINED)
------------------- ------------- -------------
NET SALES $ 13,080,344 $ 8,114,553 $ 3,435,249
COST OF SALES 10,075,109 5,912,677 2,429,973
------------------- ------------- -------------
GROSS PROFIT 3,005,235 2,201,876 1,005,276
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 5,731,503 2,449,434 898,522
STOCK ISSUED FOR SERVICES 980,044 5,187,600 -
STOCK NOT ISSUED IN SETTLEMENT OF CONSULTING AGREEMENT (724,275) - -
------------------- ------------- -------------
TOTAL OPERATING EXPENSES 5,987,272 7,637,034 898,522
------------------- ------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (2,982,037) (5,435,158) 106,754
------------------- ------------- -------------
OTHER EXPENSES
INTEREST EXPENSE (200,552) (171,860) (101,397)
OTHER EXPENSE (58,773) - (905)
------------------- ------------- -------------
TOTAL OTHER EXPENSE (259,325) (171,860) (102,302)
------------------- ------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (3,241,362) (5,607,018) 4,452
INCOME TAX EXPENSE (30,795) - -
------------------- ------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (3,272,157) (5,607,018) 4,452
DISCONTINUED OPERATIONS
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (3,661,205) (93,662) 220,448
------------------- ------------- -------------
NET (LOSS) INCOME $ (6,933,362) $ (5,700,680) $ 224,900
- -----------------
=================== ============= ============
NET (LOSS) INCOME PER SHARE: - BASIC AND DILUTED
(LOSS) FROM CONTINUING OPERATIONS $ (0.13) $ (0.35) $ 0.00
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (0.15) (0.00) 0.01
------------------- ------------- -------------
$ (0.28) $ (0.35) $ 0.01
=================== ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE PERIOD - BASIC AND DILUTED 24,915,135 16,268,686 16,040,000
=================== ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
PAVING STONE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (CONSOLIDATED) AND 2000
(COMBINED)
COMMON COMMON COMMON COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
STOCK STOCK STOCK TO BE ISSUED PAID-IN SUBSCRIPTION EARNINGS EQUITY
OUTSTANDING TO BE ISSUED PAR PAR CAPITAL RECEIVABLE (DEFICIT) (DEFICIENCY)
------------- ------------- -------- --------- ------------- ------------ ------------ ----------
BALANCE, DECEMBER 31, 1999 - 16,040,000 $ - $ 160 $ 50,739 $ (1,203) $ 798,045 $ 847,741
IN-KIND CONTRIBUTION OF SERVICES - - - - 49,596 - - 49,596
DISTRIBUTIONS TO STOCKHOLDERS - - - - - - (196,528) (196,528)
NET INCOME, 2000 - - - - - - 224,900 224,900
------------- ------------- ------ ------- ------------ --------- ------------ ----------
BALANCE, DECEMBER 31, 2000 - 16,040,000 - 160 100,335 (1,203) 826,417 925,709
CASH PAID FOR SUBSCRIPTION
RECEIVABLE - - - - - 1,203 - 1,203
STOCK ISSUED FOR
REORGANIZATION OF
COTTAGE INVESTMENT, INC. 1,883,146 235,599 19 2 (45,293) - - (45,272)
STOCK ISSUED FOR SERVICES 376,937 3,466,500 4 35 5,187,561 - - 5,187,600
DISTRIBUTIONS TO STOCKHOLDERS - - - - - - (354,192) (354,192)
NET LOSS, 2001 - - - - - - (5,700,680) (5,700,680)
------------- ------------- ------ ------- ------------ --------- ------------ ----------
BALANCE, DECEMBER 31, 2001 2,260,083 19,742,099 23 197 5,242,603 - (5,228,455) 14,368
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
PAVING STONE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (CONSOLIDATED) AND 2000
(COMBINED)
7
Common Common
Common Stock To Stock Additional Retained Stockholders'
Stock Common Stock Common Be Issued Paid-In Subscription Earnings Equity
Outstanding To Be Issued Stock Par Par Capital Receivable (Deficit) (Deficiency)
------------- -------------- ----- -------- ----------- ------------ ----------- -----------
Stock issued 18,426,299 (18,426,299) 184 (184) - - - -
Stock issued for services 456,500 - 4 - 292,796 - - 292,800
Stock issued to employees
for services 34,500 - 1 - 7,243 - - 7,244
Stock not issued in
settlement of
consulting agreement - (536,500) - (5) (724,270) - - (724,275)
Stock issued for stock advisory
services 1,000,000 - 10 - 679,990 - - 680,000
Stock and warrants issued
for cash 4,000,000 - 40 - 999,960 - - 1,000,000
Net Loss, 2002 - - - - - - (6,933,362) (6,933,362)
------------- -------------- ----- ------- ---------- ----- ------------ -----------
BALANCE, DECEMBER 31, 2002 26,177,382 779,300 $ 262 $ 8 $6,498,322 $ - $ (12,161,817) $(5,663,225)
- --------------------------
============= ============== ===== ======== =========== ===== ============= ============
See accompanying notes to consolidated financial statements.
5
PAVING STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001 (CONSOLIDATED) AND 2000 (COMBINED)
2002 2001 2000
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations $ (3,272,157) $ (5,607,018) 4,452
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
(Loss) income from discontinued operations (3,661,205) (93,662) 220,448
Depreciation and amortization 124,054 80,545 39,754
Provision for doubtful accounts 342,850 57,845 -
Contributed capital - - 49,596
Collection on accounts previously written off - - (16,704)
Stock issued for services 980,044 5,187,600 -
Stock not issued in settlement of consulting agreement (724,275) - -
Loss on disposal of property and equipment 21,018 - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,968,584 (789,810) (1,626,635)
Inventories 19,565 17,899 (54,964)
Prepaid expense 56,840 (77,707) (6,238)
Rebate receivable 330,438 (33,364) (189,725)
Security deposits and other assets (13,472) (32,084) (25,099)
Costs in excess of billings on uncompleted contracts 56,373 (281,389) 12,586
Increase (decrease) in:
Accounts payable and accrued expenses 1,497,688 483,088 487,711
Cash overdraft (381) 326,236 -
Billings in excess of cost on uncompleted contracts 774,591 161,980 (25,770)
Customer deposits payable (83,641) 68,141 (54,397)
------------------ ------------------ ------------------
Net Cash Used In Operating Activities (1,583,086) (531,700) (1,184,985)
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 37,755 - -
Repayment from (advances to) related party 18,736 (18,736) 92,323
Purchase of property and equipment (72,014) (67,126) (101,296)
Other loans / advances receivable 12,429 - (2,000)
------------------ ------------------ ------------------
Net Cash Used In Investing Activities (3,094) (85,862) (10,973)
------------------ ------------------ ------------------
See accompanying notes to consolidated financial statements.
6
PAVING STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001 (CONSOLIDATED) AND 2000 (COMBINED)
2002 2001 2000
------------------ ------------------ ------------------
Proceeds from sale of common stock 1,000,000 1,203 -
Payments on capital lease obligation (66,822) (8,950) (9,234)
Payments on note payable (11,416) (8,045) -
Proceeds from note payable - related party 700,000 - -
Proceeds from (payments of) stockholder loan (316,999) 146,316 313,730
Proceeds from lines of credit 262,317 833,271 1,043,000
Distributions to stockholders - (354,192) (196,528)
------------------ ------------------ ------------------
Net Cash Provided By Financing Activities 1,567,080 609,603 1,150,968
------------------ ------------------ ------------------
NET DECREASE IN CASH (19,100) (7,959) (44,990)
CASH - BEGINNING OF YEAR 34,739 42,698 87,688
------------------ ------------------ ------------------
CASH - END OF YEAR $ 15,639 $ 34,739 $ 42,698
- ------------------
================== ================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
Cash paid for interest $ 114,909 $ 171,860 $ 101,397
================== ================== ==================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
- -------------------------------------------
Equipment acquired by capital lease $ 69,270 $ 52,669 $ 55,808
================== ================== ==================
See accompanying notes to consolidated financial statements.
7
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) DESCRIPTION OF BUSINESS
Paving Stone Corporation, formerly known as Cottage Investments, Inc.,
and Subsidiaries install interlocking pavers on driveways and patios for
residential and commercial use. Paving Stone Corporation was incorporated
in the State of Nevada on July 22, 1999.
The original structure of the business included The Paving Stone Company
which was incorporated in the state of Florida in 1990, and its five
affiliates located in Atlanta, Arizona, California, Georgia and Nevada,
all incorporated in their respective states from 1999 to 2000.
Under a share exchange agreement (the "Agreement") consummated on
December 17, 2001, Cottage Investments ("Cottage") acquired 100% of the
issued and outstanding common stock of The Paving Stone Company and its
affiliates for 16,040,000 shares of common stock of Cottage. As a result
of the exchange, The Paving Stone Company and its affiliates became
wholly owned subsidiaries of Cottage and the stockholder of The Paving
Stone Company became stockholder of approximately 73% of Cottage.
Generally accepted accounting principles require that the company whose
stockholders retain a majority interest in a business combination be
treated as the acquirer for accounting purposes. As a result, the
exchange was treated as an acquisition of Cottage by The Paving Stone
Company, and a recapitalization of The Paving Stone Company. During 2001,
Cottage Investments changed its name to Paving Stone Corporation (the
"Company").
Accordingly, the financial statements include the following:
(1) The balance sheets consists of the net assets of the acquirer at
historical cost and the net assets of the acquiree at historical
cost.
(2) The statements of operations include the operations of the
acquirer for the periods presented and the operations of the
acquiree from the date of the merger.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
(C) PRINCIPLES OF COMBINATION
The 2000 financial statements are presented on a combined basis, which
represents The Paving Stone Company and its affiliates Paving Stone
Company of Atlanta, Inc., The Paving Stone Company of Arizona, Inc.,
Paving Stone of Nevada, Inc., and The Paving Stone Company of
California, Inc., all of which were owned by one stockholder. All
significant intercompany balances and transactions were eliminated in
the combination.
8
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
(D) USE OF ESTIMATES
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reported period. Actual results could differ from
those estimates.
(E) CASH
Cash includes cash on deposit at financial institutions.
(F) INVENTORIES
Inventories consist of brick pavers. Inventories are stated at the lower
of cost or market value, as determined using the first in, first out
method.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is provided using the straight-line and
accelerated methods over the estimated useful life of the assets of three
to thirty-nine years.
(H) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment under Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Long-lived assets to be held and used are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
carrying amount of a long-lived asset is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. Long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less cost
to sell.
(I) INCOME TAXES
Prior to the recapitalization of the Company on December 17, 2001 (See
Note 1(A)), the Company and its affiliates, with the consent of their
stockholder, had elected under the Internal Revenue Code to be an S
Corporation. In lieu of corporation income taxes, the stockholder of an S
Corporation is taxed on their proportionate share of the Company's
taxable income. Therefore, no provision or liability for federal income
taxes had been included in the financial statements for the year ended
December 31, 2000 and for the period from January 1, 2001 through
December 17, 2001.
9
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
For the period subsequent to the merger, December 18, 2001 to December
31, 2001, and for the year ended December 31, 2002, the Company accounts
for income taxes under the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109,
the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(J) REVENUE AND COST RECOGNITION
The Company recognizes construction contract revenues using the
percentage-of-completion method, based primarily on labor costs incurred
to date compared with total estimated labor costs. Direct materials and
subcontractor materials, labor and equipment, are included in revenues
and cost of revenues when management believes that the Company is
responsible for the ultimate acceptability of the project. Gross margin
related to each job is recognized as services are rendered. Changes to
total estimated contract costs or losses, if any, are recognized in the
period in which they are determined. Costs recognized in excess of
amounts billed are classified as current assets under costs in excess of
billings on uncompleted contracts. Amounts billed to clients in excess of
revenues recognized to date are classified as current liabilities under
billings in excess of cost on uncompleted contracts. The Company
anticipates that substantially all incurred costs associated with
contract work in progress at December 31, 2002 will be billed and
collected by 2003. Deposits received upon signing of contracts are
recorded as customer deposits payable and are reclassified to revenue
upon completion of the job.
(K) EARNINGS (LOSS) PER SHARE
Net income (loss) per common share for the years ended December 31, 2002,
2001 and 2000 is required to be computed based on the weighted average
common stock and dilutive common stock equivalents outstanding during the
year as defined by Statement of Financial Accounting Standards, No. 128;
"Earnings Per Share". The effect of common stock equivalents was not used
in the calculation of net income (loss) per share since the effect would
be anti-dilutive.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosures of information
about the fair value of certain financial instruments for which it is
practicable to estimate that value. For purposes of this disclosure, the
fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation.
10
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
The carrying amount of the Company's financial instruments, including
cash, accounts receivable, other receivables, lines of credit, accounts
payable and accrued expenses, customer deposits, capital lease
obligation, notes payable and loans payable, approximates fair value due
to the relatively short period to maturity for these instruments.
(M) ADVERTISING COSTS
In accordance with the Accounting Standards Executive Committee Statement
of Position 93-7 ("SOP 93-7"), costs incurred for producing and
communicating advertising of the Company are charged to operations as
incurred. Advertising expenses for the period ended December 31, 2002,
2001 and 2000 were $276,232, $103,907 and $36,458, respectively.
(N) DEFERRED OFFERING COSTS
The costs related to the issuance of debt are capitalized and amortized
to interest expense over the lives of the related debt.
(O) SEGMENT ACCOUNTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", ("SFAS 131"),
requires that a public business enterprise report a measure of segment
profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed
for segments to corresponding amounts in the enterprise's general-purpose
financial statements. It requires that all public business enterprises
report information about the revenues derived from the enterprise's
products or services (or groups of similar products and services), about
the geographic segments in which the enterprise earns revenues and holds
assets, and about major customers regardless of whether that information
is used in making operating decisions. However, this Statement does not
require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable. The Company has five
geographical reportable segments and segment information is presented in
Note 15. See Note 10 for information relating to discontinued operating
segments.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds the provisions of SFAS
No. 4, which requires companies to classify certain gains and losses
from debt extinguishments as extraordinary items, eliminates the
provisions of SFAS No. 44 regarding transition to the Motor Carrier
Act of 1980 and amends the provisions of SFAS No. 13 to require that
certain lease modifications be treated as sale leaseback transactions.
The provisions of SFAS No. 145 related to classification of debt
extinguishments are effective for fiscal years beginning after May 15,
2002, with earlier application encouraged.
11
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS No. 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel.
Under SFAS No. 146, the Company will record a liability for a cost
associated with an exit or disposal activity when that liability is
incurred and can be measured at fair value. SFAS No. 146 will require the
Company to disclose information about its exit and disposal activities,
the related costs, and changes in those costs in the notes to the interim
and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS No. 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption
encouraged. Under SFAS No. 146, a company cannot restate it's previously
issued financial statements and the new statement grandfathers the
accounting for liabilities that a company had previously recorded under
Emerging Issues Task Force Issue 94-3.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock Based Compensation" and provides alternative methods for accounting
for a change by registrants to the fair value method of accounting for
stock-based compensation. Additionally, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require disclosure in the
significant accounting policy footnote of both annual and interim
financial statements of the method of accounting for stock
based-compensation and the related pro-forma disclosures when the
intrinsic value method continues to be used. The statement is effective
for fiscal years beginning after December 15, 2002, and disclosures are
effective for the first fiscal quarter beginning after December 15, 2002.
Management does not expect the impact from these pronouncements to have a
material impact on the Company's consolidated financial position or
results of operations.
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2002 and 2001 consisted of the
following:
2002 2001
---------------- ----------------
Accounts receivable $ 1,698,441 1,917,711
Less allowance for doubtful accounts (57,095) (28,154)
Less allowance for sales discounts (379,545) (85,173)
---------------- ----------------
$ 1,261,801 $ 1,804,384
================ ================
For the years ended December 31, 2002, 2001 and 2000, the Company
recorded bad debt expense of $837,022, $86,000 and $34,583, respectively.
12
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 3 REBATE RECEIVABLE
On July 8, 1998, the Company entered into a trade agreement with a
manufacturer whereby the Company shall receive a 3% rebate on pavers
supplied by the manufacturer. After the total rebate exceeds $550,000,
the rebate shall be reduced to 1%. Through December 31, 2001, the total
amount of rebates earned was $538,954 and at December 31, 2001 the
Company was owed $330,438 under this agreement.
During 2002, the manufacturer contended that the Company violated its
trade agreement by modifying the pavers in a process known as tumbling.
The Company successfully defended its position in binding arbitration and
the Company has collected full payment of all amounts previously owed and
as of December 31, 2002, the agreement was terminated.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2001 consisted of the
following:
2002 2001
---------------- --------------
Data processing equipment $ 4,607 $ 3,945
Furniture and fixtures 10,022 12,174
Leasehold improvements 8,737 3,949
Machinery and equipment 63,877 62,384
Office equipment 16,591 10,078
Vehicles 30,575 -
Less accumulated depreciation (26,298) (19,491)
---------------- --------------
$ 108,111 $ 73,039
================ ===============
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $95,626, $58,598 and $34,549, respectively.
NOTE 5 NOTE AND CAPITAL LEASE OBLIGATION PAYABLE
Note and capital lease obligation payable consisted of the following at
December 31, 2002 and 2001:
2002 2001
---------------- ----------------
4.90% installment loan payable through July 2003 in sixty monthly $ 4,803 $ 12,724
installments of $697 including principal and interest,
collateralized by a van
13
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
8.54% capital lease obligation payable through September 2005 in
monthly sixty installments of $1,136 including principal and
interest, collateralized by a loader and trailer - 43,719
3.90% installment loan payable through May 2007 in sixty monthly
installments of $778 including principal and interest,
collateralized by a loader and trailer 37,849 -
4.43% capital lease obligation payable through October 2004 in
thirty-six monthly installments of $423 including principal and
interest, collateralized by all property owned by the Company 35,220 52,669
8.25% capital lease obligation payable through June 2005 in sixty monthly
installments of $335 including principal and interest,
collateralized by a trailer 15,284 -
Loan payable through December 20, 2002 in monthly installments of $1,747,
collateralized by a smooth roller. At December 31, 2002,
the note is currently in default 6,988 -
---------------- ----------------
Total long-term debt 100,144 109,112
Less current maturities (38,330) (33,111)
---------------- ----------------
Long-term debt $ 61,814 $ 76,001
================ ================
Scheduled maturities of long-term debt at December 31, 2002 are as
follows:
2003 $ 42,054
2004 33,370
2005 13,358
2006 13,358
Thereafter 6,236
----------------
Total future minimum note and lease payments 108,376
Less: interest (8,232)
----------------
Present value of future minimum note and lease payments 100,144
Less: current portion (38,330)
----------------
Long-term obligation under note and capital lease obligation $ 61,814
================
14
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 6 NOTES PAYABLE - STOCKHOLDER
During 2000, the Company received advances from a stockholder in the
aggregate amount of $335,693. The stockholder provided funding for
working capital requirements. The loan bears interest at 7% and was due
on June 30, 2002 and included in a new note payable in 2002.
During 2001, the Company received advances from the same stockholder in
the aggregate amount of $64,353 to satisfy related party balances. The
loan bears interest at the rate of 6% and is due on January 31, 2003. The
advances were included in a new note payable in 2002.
During 2001, the Company received advances from the same stockholder of
$50,000 and $10,000 to fund consulting fees related to the acquisition of
Cottage Investments (See Note 1(A)). The loans bear interest at 13% and
7%, respectively. The advances were included in a new note payable in
2002.
During 2002, the Company made repayments to the stockholder of $316,999
including accrued interest of $35,460. The Company entered into a note
payable of $143,047, interest of 7%, due January 2004 and unsecured.
NOTE 7 NOTE PAYABLE - RELATED PARTY
On November 13, 2002, the Company received a loan from a director of the
Company in the amount of $700,000. The loan bears interest at the rate of
10%, payable semi-annually, and is due on January 31, 2004 (See Note 12).
NOTE 8 LINE OF CREDIT
2002 2001
--------------- ----------------
Revolving line of credit with a financial institution with a
maximum line of $2,500,000. The line of credit is payable on
demand with interest charged at the 30-day dealer commercial paper
rate plus 2.55%. It is secured by all of the assets of the Company
and Paving Stone Industries, Inc. a corporation owned by our
majority stockholder (See Notes 11(C) and 12). $ 2,502,588 $ 2,240,271
=============== ================
The line of credit is due for renewal on April 30, 2003 and has
not been renegotiated for renewal as of such date.
15
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 9 STOCKHOLDERS' EQUITY
(A) AMENDMENT TO ARTICLES OF INCORPORATION
During December 2001, the Board of Directors approved an amendment to the
Articles of Incorporation to change the shares authorized from
350,000,000 to 150,000,000 (See Reverse Stock Split Note 9(B)).
(B) REVERSE STOCK SPLIT
During December 2001, the Board of Directors authorized a 133 for 1
reverse stock split. All capital stock shares and amounts and per share
data have been retroactively restated to reflect the reverse stock split.
(C) COMMON STOCK ISSUANCES
During 2001, the Company issued 376,937 shares of common stock and had
3,466,500 shares of common stock to be issued to consultants for services
rendered having an aggregate fair value of $5,187,600.
In 2002, 536,500 shares of common stock that were to be issued under a
consulting agreement executed in 2001 were not issued per a settlement
agreement. The shares were valued at $724,275, the fair value on the date
of grant.
During 2002, the Company issued 4,000,000 shares of common stock for cash
proceeds of $1,000,000 and 1,500,000 warrants to purchase shares of
common stock of the Company, $0.00001 par value, at a share price
determined by taking a thirty percent discount to the average closing bid
price on the ten trading days prior to the exercise date. At no point
shall the exercise price exceed $1.00.
During 2002, the Company issued 456,000 shares of common stock to
consultants for services. The shares were valued at $292,800, the fair
value on the dates of grants.
During 2002, the Company issued 34,500 shares of common stock to its
employees, as consideration for serviced rendered to the Company. The
shares were valued at $7,244, the fair value on the dates of grants.
During 2002, the Company issued 1,000,000 shares of common stock to a
private equity fund as consideration for stock advisory services. The
shares were valued at $680,000, the fair value on the date of grant. As
stated in the agreement, the equity fund had the option to terminate the
agreement in the event the applicable registration statement had not
become effective by February 1, 2003 (Commencement Date). On April 10,
2003, the equity fund exercised its option to terminate the agreement
based on the above provision. The 1,000,000 shares were expensed in 2002.
16
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 10 DISCONTINUED OPERATIONS
During December 2002, the Company made the decision to discontinued its
Florida and New England operations. Both operations have been accounted
for as discontinued operations and accordingly, amounts in the financial
statements and related notes for all periods shown, reflect discontinued
operations accounting. In connection with the Company's planned
discontinuance, the Company recorded $872,000 related to the planned
discontinuance of the operations, including asset impairments and lease
termination costs. Concurrently, the Company entered into an agreement to
assist a contractor in acquiring all the Company's former customers in
various Florida markets. The agreement calls for the Company to receive a
commission of 5% of the actual gross margin earned during 2003.
Information relating to the Florida and New England operations for the
years ended December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
----------------- ----------------- -----------------
Revenues $ 18,347,205 $ 23,640,422 $ 22,040,663
Costs and expenses 22,008,410 23,734,084 21,820,215
----------------- ----------------- -----------------
Net (Loss) Income $ (3,661,205) $ (93,662) $ 220,448
================= ================= =================
2002 2001
--------------- ----------------
ASSETS
Accounts receivable, net $ 1,995,086 $ 3,763,937
Cost in excess of billings 288,828 352,607
Rebate receivable - 330,438
Inventories 17,500 37,065
Property and equipment 184,816 233,001
Other assets 27,390 96,375
--------------- ----------------
Total Assets $ 2,513,620 $ 4,813,423
=============== ================
LIABILITIES
Cash overdraft $ 249,618 $ 266,715
Billing in excess of cost 735,250 135,094
Accounts payable and accrued expenses 2,687,582 2,554,014
Other liabilities - 45,594
--------------- ----------------
Total Liabilities $ 3,672,450 $ 3,001,417
=============== ================
17
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 11 COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company leases office, showroom and warehouse space under various
related party (See Note 11(C)) and third party operating lease agreements
some of which provide for minimum annual rental payments plus a portion
of real estate taxes and operating costs. The Company also leases
equipment under an operating lease agreement.
Future minimum lease payments for the operating leases are as follows at
December 31, 2002:
2003 $ 287,023
2004 252,469
2005 208,685
2006 137,365
2007 and thereafter 2,051,809
-----------------
$ 2,937,351
=================
Rent expense on operating leases existing during the years ended December
31, 2002, 2001 and 2000 amounted to $678,191, $325,720 and $248,338,
respectively.
(B) LEGAL ACTIONS
The Company is party to certain legal actions occurring in the normal
course of business. During 2002, the Company prematurely terminated
several operating leases and vacated premises they occupied. The Company
estimates that the settlement costs of terminating these leases will
approximate $122,000. This amount has been accrued at December 31, 2002
and is included in accounts payable and accrued expenses.
(C) CONTINGENCIES
The Company is a co-borrower with Paving Stone Properties, Inc. (a
company owned by the Company's majority stockholder) on two properties
that are currently being occupied by the Company under 25-year operating
leases (See Notes 11(A) and 12). The Company is contingently liable for
the mortgages in the event of default by Paving Stone Properties, Inc. in
the amount of approximately $681,900 as of December 31, 2002. The
Company's subsidiaries are also guarantors of said mortgages.
(D) CONSULTING AGREEMENT
On December 6, 2002, the Company entered into an agreement with a third
party and terminated their prior agreement dated April 5, 2002. The
agreement provides for consulting services to be rendered in connection
with securing equity capital. The Company agreed to make a payment to the
consultant an aggregate amount of $61,123 consisting of services rendered
18
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
for the period June 1, 2002 through November 13, 2002 (See Note 9). At
December 31, 2002, $14,000 has been paid in cash and the Company accrued
stock compensation in the amount of $47,123, representing 65,629 shares
of common stock for services rendered to the Company. The shares were
valued for financial accounting purposes at $0.75 per share, the fair
value at the date of grant. Additionally, subject to the terms of the
agreement, the Company accrued stock compensation in the amount of
$15,000, representing 25,000 shares of common stock for services rendered
to the Company. The shares were valued for financial accounting purpose
at $0.60 per share, the fair value at the date of grant. The agreement
provides for additional compensation to the consultant with regards to
the consummation of various equity or debt financing transactions
subsequent to the previously mentioned date whereby the consultant has
materially participated in the negotiation and structuring of the
transaction. The consultant shall be compensated a fee of 2% for debt
financing transactions and 5% for equity financing transactions. The
agreement may be terminated at any time without any liability to either
party by providing written notice of such termination to the other party.
(E) BOARD OF DIRECTORS FEES
On December 30, 2002, the Company approved the issuance of 25,000 shares
of common stock to three board members plus 175,000 stock options per
member with an exercise price equal to the market value on a future date.
At December 31, 2002, the Company accrued stock compensation in the
amount of $40,000, representing 75,000 shares of common stock for
services rendered to the Company. The shares were valued for financial
accounting purposes at $0.53 per share, the fair value on the date of
grant. The stock options were equal to the market value on the date of
grant and no compensation expense was recorded.
(F) CONSULTING AGREEMENT
During 2003, the Company entered into an agreement with a third party to
provide business and financial consulting services with particular
expertise in the areas of business development and strategic alliances.
The term of the agreement is for a period of six months. The Company
shall have the right to terminate the agreement for cause. As
compensation, the consultant shall receive an engagement fee of 90,000
shares of common stock; 58,000 shares upon execution of the agreement and
32,000 shares ninety days from the date of execution. The Company has
agreed to file a Registration Statement covering the shares of common
stock issued pursuant to the agreement.
NOTE 12 RELATED PARTY TRANSACTIONS
The Company is co-borrower with Paving Stone Properties, Inc. in
connection with the financing of two facilities currently occupied by the
Company. The majority shareholder of the Company is also the sole
shareholder of Paving Stone Properties, Inc. (See Notes 10 and 11(A)).
19
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
The Company leased administrative offices from Paving Stone Properties,
Inc. on a month-to-month basis and paid rent in the amount of $103,831,
$107,196 and $36,000 for the years ended December 31, 2002, 2001 and
2000, respectively (See Note 11(A) and (C)).
See Notes 6 and 7 for additional related party transactions.
NOTE 13 CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
During 2002, 2001 and 2000, 7.9%, 19.8% and 22.3% of the Company's total
revenues were derived from sales to two customers. During 2002 and 2001,
no single customer owed the Company over 10% of accounts receivable (See
Note 2).
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of accounts receivable. The
Company's allowance for doubtful accounts is based upon management's
estimates and historical experience. The Company performs ongoing credit
evaluations of its customers (See Note 2).
NOTE 14 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2002 and
2001 is summarized as follows:
2002 2001
----------------- -----------------
Current:
Federal $ 30,795 $ -
State - -
Deferred - Federal and State - -
Change in valuation allowance - -
----------------- -----------------
Income tax expense (benefit) $ 30,795 $ -
================= =================
The Company's tax expense differs from the "expected" tax expense for the
years ended December 31, 2002 and 2001, as follows:
2002 2001
----------------- -----------------
U.S. Federal income tax provision (benefit) $ (2,346,900) $ -
Effect of unused net operating loss carryforward 2,346,900 -
----------------- -----------------
$ - $ -
================= =================
The tax effects of temporary differences that gave rise to significant
portions of deferred tax assets and liabilities at December 31, 2002 and
2001 are as follows:
20
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001
----------------- -----------------
Deferred tax assets:
Net operating loss carryforward $ 2,346,900 $ -
----------------- -----------------
Total gross deferred tax assets 2,346,900 -
Less valuation allowance (2,346,900) -
----------------- -----------------
Net deferred tax assets $ - $ -
================= =================
Because the Company underwent an ownership change, as defined in Section
382 of the Internal Revenue Code, the Company's net tax operating loss
carryforwards generated prior to the ownership change may be subject to
annual limitation which could reduce or defer the utilization of those
losses.
At December 31, 2002, the Company had a net operating loss carryforward
of approximately $6,902,600 for U.S. Federal Income tax purposes
available to offset future taxable income expiring beginning 2021. The
Company recorded a valuation allowance of $2,346,900 at December 31, 2002
to fully offset the deferred tax asset benefit.
NOTE 15 SEGMENT REPORTING
The Company has six geographic reportable segments: Florida, Arizona,
Atlanta, Nevada, California and Corporate. Each segment installs
interlocking pavers on driveways and patios for residential and
commercial use. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. The Company
evaluates segment performance based on income from operations. Sales for
each segment are based on the location of the third-party customer. All
intercompany transactions between segments have been eliminated. The
Company's selling, general and administrative expenses and engineering
expenses are charged to each segment based on the region where the
expenses are incurred. As a result, the components of operating income
for one segment may not be comparable to another segment. Segment results
for 2002, 2001 and 2000 are as follows:
Arizona/ Georgia/
Texas Mid-Atlantic Nevada California Corporate Total
---------------------------------------------------------------------------------------------------
2002
- ----
Net sales $ 4,934,638 $ 3,015,005 $ 1,730,699 $ 3,337,238 $ 62,764 $ 13,080,344
Net income (loss) from
operations (20,364) (325,946) (266,044) (1,495,829) (1,163,974) (3,272,157)
Depreciation and
amortization 3,544 11,347 1,868 5,657 5 22,416
Assets 625,370 475,625 184,619 289,626 - 1,575,240
Capital expenditures 10,013 42,378 - 42,157 - 94,548
---------------------------------------------------------------------------------------------------
21
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
2001
- ----
Net sales $ 2,816,978 $ 2,922,190 $ 1,016,628 $ 1,358,757 $ - $ 8,114,553
Net income (loss) from
operations 16,568 46,995 3,595 (475,676) (5,198,500) (5,607,018)
Depreciation and
amortization 2,321 11,196 1,862 358 - 15,737
Assets 559,073 855,859 295,264 436,771 (20,000) 2,126,967
Capital expenditures 6,666 3,021 - 6,150 - 15,837
---------------------------------------------------------------------------------------------------
2000
- ----
Net sales $ 1,106,322 $ 1,888,267 $ 440,660 $ - $ - $ 3,4352249
Net income (loss) from
operations (58,150) 135,858 (82,160) - - (4,452)
Depreciation and
amortization 805 2,741 922 - - 4,468
Assets 102,816 301,279 15,247 100 - 419,442
Capital expenditures 6,693 60,188 7,812 - - 74,693
---------------------------------------------------------------------------------------------------
NOTE 16 GOING CONCERN
As reflected in the accompanying financial statements, the Company has a
net loss of $6,933,362 a negative cash flow from operations of
$1,583,086, a working capital deficiency of $4,892,091 and a
stockholders' deficiency of $5,663,225. These factors raise substantial
doubt about its ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent on the Company's
ability to raise additional funds and implement its business plan. The
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Management has discontinued its Florida and New England operations and
has consolidated its California operations into one central office. These
operations accounted for a significant portion of the losses in 2002.
Management has also reduced other operating expenses during 2003
throughout the Company to return to profitable operations during 2003.
Management's future plans also include obtaining additional financing for
which they are currently in active negotiations with several financing
institutions.
NOTE 17 SUBSEQUENT EVENTS
(A) COMMON STOCK ISSUANCE
During 2003, 2,548,700 shares of common stock were issued to consultants
for services performed. The shares were valued at $795,370, the fair
value on the date of grants.
22