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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to ___________
000-30051
-------------------
(Commission File No.)
PAVING STONE CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0443120
- ---------------------------- -------------------------------------
(State of Incorporation) (I.R.S. EmployerIdentification No.)
9900 West Sample Road, Suite 300, Coral Springs, FL 33065
------------------------------------------
(Address of principal executive offices)
(954) 971-3235
---------------------------
(Registrant's telephone number)
Cottage Investments, Inc.
---------------------------
(Registrant's Former Name)
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 whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes No X
At December 30, 2003, 107,519,753 shares of the Registrant's common stock were
issued and outstanding.
Throughout this Report, the terms "we", "us", "our" and other similar pronouns
refer to the Paving Stone Corporation. The terms "PVNG", the "Company," or
"Registrant" also refer to the Paving Stone Corporation.
PART I: FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
PAVING STONE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
PAVING STONE CORPORATION
AND SUBSIDIARIES
CONTENTS
PAGE 1 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003
(UNAUDITED) AND DECEMBER 31, 2002
PAGE 2 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
PAGES 3 - 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
PAGES 5 - 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2003 (UNAUDITED)
PAVING STONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2003 December 31,
(Unaudited) 2002
------------ ------------
CURRENT ASSETS
Cash $ 6,403 $ --
Investment 3,900,000 --
Inventory 1,350,000 --
Assets of discontinued operations 49,895 4,088,860
------------ ------------
Total Current Assets 5,306,298 4,088,860
------------ ------------
PROPERTY AND EQUIPMENT - NET 67,598 --
------------ ------------
OTHER ASSETS
Security deposits and other assets - net of amortization 1,370 --
------------ ------------
Total Other Assets 1,370 --
------------ ------------
TOTAL ASSETS $ 5,375,266 $ 4,088,860
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Line of credit $ 2,530,081 $ 2,502,588
Accounts payable and accrued expenses 730,637 352,714
Accrued stock compensation 55,000 102,123
Customer deposit 5,000 --
Note and capital lease obligation payable - current portion 25,973 --
Notes payable - stockholder 136,744 --
Note payable - related party 700,000 --
Liabilities of discontinued operations 3,948,277 5,951,613
------------ ------------
Total Current Liabilities 8,131,712 8,909,038
------------ ------------
LONG TERM LIABILITIES
Notes payable - stockholder -- 143,047
Note payable - related party -- 700,000
------------ ------------
Total Long-Term Liabilities -- 843,047
------------ ------------
TOTAL LIABILITIES 8,131,712 9,752,085
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock, $.00001 par value, 150,000,000 shares authorized, 45,519,753, and
26,177,382 shares issued and outstanding, respectively 455 262
Common stock to be issued, none and 779,300 shares, respectively -- 8
Additional paid-in capital 8,119,311 6,498,322
Accumulated deficit (10,876,212) (12,161,817)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,756,446) (5,663,225)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 5,375,266 $ 4,088,860
============ ============
See accompanying notes to condensed consolidated financial statements.
1
PAVING STONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET SALES $ 7,000,000 $ -- $ 7,000,000 $ --
COST OF SALES 3,100,000 -- 3,100,000 --
------------ ------------ ------------ ------------
GROSS PROFIT 3,900,000 -- 3,900,000 --
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 74,668 616,918 122,356 1,218
Common stock issued for services 121,872 7,245 370,463 112,245
Common stock returned in consultant settlement -- (615,700) -- (615,700)
------------ ------------ ------------ ------------
Total Operating Expenses 196,540 8,463 492,819 (502,237)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,703,460 (8,463) 3,407,181 502,237
------------ ------------ ------------ ------------
OTHER EXPENSE
Interest expense 36,029 1,800 104,065 5,400
Other expense 4,286 -- 4,286 50,000
------------ ------------ ------------ ------------
Total Other Expense 40,315 1,800 108,351 55,400
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,663,145 (10,263) 3,298,830 446,837
LOSS FROM DISCONTINUED OPERATIONS (360,998) (1,800,644) (2,112,515) (2,735,279)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,302,147 $ (1,810,907) $ 1,186,315 $ (2,288,442)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
Income (loss) from continuing operations $ .08 $ (.00) $ .07 $ .02
(Loss) from discontinued operations (.01) (.07) (.05) (.10)
------------ ------------ ------------ ------------
$ .07 $ (.07) $ .02 $ (.08)
============ ============ ============ ============
Weighted average shares outstanding during the
period - basic and diluted 44,943,449 25,861,374 34,565,339 24,069,532
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
PAVING STONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 3,298,830 $ 446,837
Adjustments to reconcile net income to net cash used in operating activities:
Stock issued for services 370,463 112,245
Stock returned in consultant settlement -- (615,700)
Loss from discontinued operations (2,112,515) (2,735,279)
Depreciation 49,346 --
Amortization 6,250 --
Loss on disposal of property and equipment (123,194) --
Investment received from sale of inventory (3,900,000) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Security deposits and other assets (1,370) --
Assets of discontinued operations 4,038,965 1,159,468
Increase (decrease) in:
Accounts payable and accrued expenses 377,924 --
Accrued stock compensation (47,123) --
Customer deposits payable 5,000 --
Liabilities of discontinued operations (1,965,006) 604,377
----------- -----------
Net Cash Used In Operating Activities (2,430) (1,028,052)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on issuance of stock for cash, net -- 1,000,000
Proceeds from notes payable -- 200,000
Line of credit 27,493 266,091
Advances from related parties -- (91,683)
Payments on notes and capital lease obligations (12,357) (69,994)
Shareholder loan payable (6,303) (311,801)
----------- -----------
Net Cash Provided By Financing Activities 8,833 992,613
----------- -----------
NET INCREASE (DECREASE) IN CASH 6,403 (35,439)
CASH - BEGINNING OF PERIOD -- 35,439
----------- -----------
CASH - END OF PERIOD $ 6,403 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
PAVING STONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 95,673
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired by note payable $ -- $ 69,279
=========== ===========
Purchase of inventory for common stock $ 1,350,000 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules and regulations of
the Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all the information necessary for a
comprehensive presentation of the Company's consolidated financial
position and results of operations.
It is management's opinion, however that all material adjustments
(consisting of normal recurring adjustments) have been made which are
necessary for a fair financial statements presentation. The results for
the interim period are not necessarily indicative of the results to be
expected for the year.
The condensed consolidated balance sheet information as of December 31,
2002, was derived from the audited consolidated financial statements
included in the Company's Annual Report Form 10-KSB. It is suggested that
the interim condensed consolidated financial statements be read in
conjunction with the audited financial statements for the year ended
December 31, 2002, as filed with the Securities and Exchange Commission
on Form 10-K, from which the interim statements were derived.
In preparing condensed consolidated 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 condensed
consolidated financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Paving Stone Corporation and its wholly owned subsidiaries.
All significant inter-company transactions and balances have been
eliminated in consolidation.
(B) Fair Value of Financial Instruments
The carrying value of financial instruments including receivables,
accounts payable, accrued expenses and debt, approximates fair vales at
September 30, 2003 and December 31, 2002 due to the relatively short-term
nature of these instruments.
5
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
(C) Income (Loss) Per Common Share
Net income (loss) per common share (basic and diluted) is based on the
net income (loss) divided by the weighted average number of common shares
outstanding during each period. The Company does not have any common
stock equivalents to be included in the computation of diluted net loss
per common share because the effect would be anti-dilutive.
NOTE 3 INVESTMENT
As of September 30, 2003, the Company holds 2,550,000 shares of common
stock and 5,250,000 convertible preferred shares in an unrelated public
company, representing approximately 12% ownership, whose common stock has
no trading volume. The investment of $3,900,000 is based on the fair
value of $.50 per share, represented by private placement sales of this
company's common stock for cash from June 18, 2003 through September 30,
2003. The Company acquired the shares from the sale of high-grade
commercial equipment in exchange for common stock (See Note 5).
NOTE 4 INVENTORY
During the second quarter of 2003, the Company formed a wholly owned
subsidiary, PSC Equipment, Inc., to purchase and sell high-grade
commercial equipment. On May 30, 2003, the Company entered into an
Equipment Purchase Agreement ("EPA") with a vendor and purchased its
first block of equipment inventory. Under the EPA, the Company issued
15,000,000 restricted shares of its common stock and executed a $500,000
Money Purchase Contract for the equipment inventory. The inventory is
located at four sites around the U.S.A. and will remain there until sold.
Under the EPA, the Company is not required to make lease, storage fee or
insurance payments for two years. The inventory is valued at $1,350,000
on the condensed consolidated balance sheet as of September 30, 2003,
based on the value of the shares on the date of the EPA. The $500,000
money purchase contract is not recorded as a liability on the condensed
consolidated balance sheet as of September 30, 2003 since it is
contingent on the Company obtaining cash proceeds from the sale of the
inventory or from financing secured by the inventory (See Note 10).
On June 25, 2003, the Company executed a second Equipment Purchase
Agreement ("EPA-2") with a vendor to purchase additional equipment
inventory located in one site in Texas. Under EPA-2, the Company was
obligated to pay $450,000 for the inventory under a Money Purchase
Contract using 900,000 shares of stock from the ultimate purchaser of the
inventory. As of September 30, 2003, the Company sold the inventory and
therefore made the payment under the Money Purchase Contract (See Note
5).
6
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 5 EQUIPMENT INVENTORY SALE
On July 29, 2003, the Company sold a portion of the first block of
equipment inventory acquired on May 30, 2003, under an EPA to a public
company located in the southwest U.S.A. Under the EPA, the selling price
was $7,500,000 comprising a $500,000 Money Purchase Contract, 7,000,000
shares of the purchasers restricted common stock valued at $3,500,000,
and 7,000,000 shares of the purchasers convertible preferred stock valued
at $3,500,000. The valuation of both the preferred and common stock was
based on the fair market value of the public company's common stock as
determined by recent sales of the stock in private placements.
On September 18, 2003, the Company executed an amendment to the July 29th
$7,500,000 EPA as follows:
1. The Company purchased a new block of inventory using 1,800,000 of
the common shares received in the original July 29, 2003
transaction per above and an additional 900,000 of these common
shares were used to fully consummate the EPA dated June 25, 2003
as described in the Inventory footnote.
2. The original inventory sold as per the July 29, 2003 EPA was
swapped in its entirety for the two blocks of inventory described
above resulting in the Company still owning the $1,350,000 of
inventory acquired on May 30, 2003, as of September 30, 2003 (See
Note 4).
The cost basis of the inventory sold in the $7,500,000 transaction was
based on the 2,700,000 common shares received from the purchaser, valued
at $1,350,000, which were used to acquire the applicable blocks of
inventory. The net sales proceeds in the transaction exclude the $500,000
Money Purchase Contract portion, since this amount has not yet been
received. Below is a summary of how the transaction was recorded during
the third quarter of 2003.
Sales $ 7,000,000
Less cost of goods sold inventory (2,700,000 restricted common shares @ $.50) 1,350,000
Less commissions and other expenses (3,500,000 shares @$.50 - 1,750,000 restricted
common and 1,750,000 convertible preferred) 1,750,000
-----------
Net profit $ 3,900,000
===========
Stock held by purchaser (7,800,000 shares @ $.50 - 2,550,000 restricted common and
5,250,000 convertible preferred) $ 3,900,000
===========
7
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 6 DISCONTINUED OPERATIONS
During December 2002, the Company made the decision to discontinue its
Florida and New England Paving Stone operations. As of September 30,
2003, all paving installation operations are completely discontinued. All
paving installation operations have been accounted for as discontinued
operations and accordingly, amounts in the condensed consolidated
financial statements and related notes for all periods shown, reflect
discontinued operations accounting. 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. Through September 30, 2003, the Company has not recorded any
commissions under the contract. The Company discontinued Arizona/Texas,
Georgia/Mid-Atlantic, Nevada and California operations by the end of the
third quarter.
Information relating to the paver installation operations for the nine
months ended September 30, 2003 and 2002 are as follows:
2003 2002
------------ ------------
Revenues $ 6,264,347 $ 24,494,143
Costs and expenses 8,376,862 27,229,422
------------ ------------
Net (Loss) $ (2,112,515) $ (2,735,279)
============ ============
Assets and liabilities of the discontinued operations were as follows:
September 30, December 31,
2003 2002
------------ ------------
Assets
Cash $ -- $ 17,795
Accounts receivable, net 41,132 3,256,887
Cost in excess of billings -- 448,163
Prepaid expenses -- 27,105
Inventories -- 17,500
Property and equipment -- 292,927
Other assets 8,763 28,483
------------ ------------
Total Assets $ 49,895 $ 4,088,860
============ ============
8
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
September 30, December 31,
2003 2002
------------ ------------
Liabilities
Cash overdraft $ -- $ 328,011
Billing in excess of cost -- 953,567
Accounts payable and accrued expenses 3,948,277 4,569,891
Notes payable and capital lease obligations -- 100,144
------------ ------------
Total Liabilities $ 3,948,277 $ 5,951,613
============ ============
NOTE 7 SEGMENT REPORTING
As of September 30, 2003, the Company has two reportable segments:
Corporate and PSC Equipment. The Corporate segment is inactive except for
stock issuances. The PSC Equipment segment purchases and sells high-grade
used kitchen equipment for commercial use. The Company evaluates segment
performance based on income (loss) 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
(loss) for one segment may not be comparable to another segment. Segment
results for the nine months ended September 30, 2003 and 2002 are as
follows:
Corporate PSC Equipment Total
---------- ------------- ----------
2003
----
Net sales $ -- $7,000,000 $7,000,000
Income (loss) from operations (596,329) 3,895,159 3,298,830
Depreciation and amortization 23,668 -- 23,668
Assets 73,995 5,251,376 5,325,371
9
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
2002
----
Net sales $ -- $ -- $ --
Income (loss) from operations -- -- --
Depreciation and amortization -- -- --
Assets 239,314 -- 239,314
Capital expenditures 16,075 -- 16,075
NOTE 8 STOCK ISSUANCES
During the nine months ended September 30, 2003, the Company issued
3,117,200 shares of common stock to consultants for services. The shares
were valued at $290,217, the fair market value based on closing prices on
the respective issuance dates.
During the nine months ended September 30, 2003, the Company issued
600,000 restricted shares of common stock as collateral for services
performed by a vendor. These shares have not yet been applied as payment
for amounts owed (See Note 9(B)).
During the nine months ended September 30, 2003, the Company issued
2,991,500 shares of common stock as collateral for amounts owed for
services performed by consultants and vendors. The vendors exercised
their option to convert $80,246 of the amount owed into 1,225,171 shares
of the Company's common stock and based on the dates exercised. The
remaining 1,766,329 option shares were collateral at September 30, 2003
(See Note 9(B)).
During the nine months ended September 30, 2003, the Company issued
15,000,000 restricted shares of common stock to purchase commercial
equipment inventory in conjunction with its equipment re-sale subsidiary,
PSC Equipment, Inc. The shares were valued at $1,350,000, based on the
closing market price of the Company's common stock on the date of the
equipment purchase transaction.
NOTE 9 COMMITMENTS AND CONTINGENCIES
(A) Ongoing Litigation
The Company is currently in a contractual dispute over agreements to
issue 1,175,119 shares of common stock to former consultants. A legal
opinion has been issued to the transfer agent requesting to stop the
transfer of 395,819 previously issued shares and the remaining 779,300
shares have not been issued, pending a resolution of this dispute. The
Company is presently a defendant in twenty-five collection related
lawsuits totaling approximately $520,000, some of which judgments have
been obtained and some are pending. The majority of these legal actions
are a result of the Company's discontinued operations. Additionally,
there are presently eighteen potential lawsuits which are all collection
related matters totaling approximately $200,000.
10
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
(B) Collateralized Shares
During the nine months ended September 30, 2003, the Company issued
3,591,500 shares of common stock as collateral for amounts owed for
services previously performed by vendors. The amounts due to these
vendors are recorded in accounts payable and accrued expenses as of
September 30, 2003. Upon payment of these outstanding invoices by the
Company, the shares will be returned to the Company and canceled. In
addition, the vendor has the option to satisfy amounts owed to them,
after notifying the Company, by either selling the shares in the open
market or accepting the shares in lieu of full payment of the debt. As of
the date of this report, no shares have been returned and 1,225,171
options have been exercised resulting in an ending balance of 2,366,329
shares.
(C) Payroll and Payroll Taxes
As of September 30, 2003, the Company owes approximately $123,000 of
payroll and payroll taxes to its payroll processing company. This amount
has been accrued and is included in accounts payable and accrued
expenses. On August 1, 2003 the payroll processing company filed a civil
action summons for the payroll and payroll tax deficiency plus accrued
interest at the rate of 1.5% per month.
(D) Lack of Insurance
As of September 30, 2003, the Company has not maintained any liability
insurance or any other form of insurance. The Company is also lacking
insurance coverage for workman's compensation, disability and directors
and officers liability insurance. Although the Company is not aware of
any claims arising subsequent to September 30, 2003, there is no
assurance that none exist.
(E) Capitalized Leases
As of September 30, 2003, the Company was in default of capitalized
equipment leases. Certain of the assets pertaining to the leased
equipment were repossessed and as such have been removed from the
Company's possession. There is no assurance that legal action will not be
taken against the Company for the shortfalls on the balance of the
leases.
11
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
Amount of assets taken off books $ 26,892
--------
Amount of debt taken off books $ 20,632
========
NOTE 10 RELATED PARTIES
During the nine months ended September 30, 2003, the Company repaid
stockholder loans in the amount of $12,419.
NOTE 11 GOING CONCERN
As reflected in the accompanying condensed consolidated financial
statements the Company has a working capital deficiency of $2,825,414 and
a stockholders' deficiency of $2,756,446 as of September 30, 2003 and a
negative cash flows from operations of $2,430 for the nine months ended
September 30, 2003. 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 condensed
consolidated 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 all of its paving installation operations
segments as of September 30, 2003. 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 restructuring its revolving line
of credit for which they are currently in active negotiations with a
financial institution.
NOTE 12 SUBSEQUENT EVENTS
(A) Stock Activity
Subsequent to September 30, 2003, the Company issued 62,000,000 shares of
common stock to two of its officers as compensation in lieu of cash for
services rendered. The shares were valued at $620,000 based on the date
of issuance.
12
PAVING STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
(B) Revolving Line of Credit
The Company had a revolving line of credit with a financial institution
with a maximum line of $2,500,000. The line of credit was payable on
demand with interest at the 30-day dealer commercial paper rate plus
2.55%. It was secured by all the assets of the Company and Paving Stone
Industries, Inc., a corporation owned by the majority stockholder. The
line of credit was due for renewal on April 30, 2003, and has not been
renegotiated for renewal.
On December 19, 2003, the Company signed a forbearance agreement with the
lender. The forbearance agreement is in effect through March 31, 2004 and
may be extended so long as the Company is making required payments and is
not otherwise in default. The forbearance agreement is structured so that
all payments received by the Company shall be paid directly to a lockbox.
One half of all amounts received by the lender will be paid by the lender
to itself and one half will be paid to the Company up to a maximum of
$125,000 per month. Any amounts in excess of $125,000 shall be paid 100%
to the lender. In order for the Company not to be in default, there must
be at least $100,000 paid into the lockbox by January 15, 2004 with a
minimum of $50,000 paid to the lender. Further, the lender must receive
an additional $500,000 paid into the lockbox on or before February 28,
2004 for a total amount of $600,000 by the end of February and $300,000
paid to the lender. Interest charged under this agreement is at the
30-day dealer commercial paper rate plus 4.55%.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and notes thereto included under
Item 1 above. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
During the third quarter of 2003, as a result of continuous losses
incurred, we discontinued all remaining paver installation operations. Going
forward, our only remaining line of business is our newly created equipment
resale subsidiary, PSC Equipment, Inc. As previously reported, we formed this
new division during the second quarter of 2003, to buy and sell high grade
commercial equipment.
To begin this new division, during the second quarter of 2003, we purchased
high grade food processing equipment located in four sites around the USA with
an appraised resale value of $20,000,000. We issued 15,000,000 restricted common
shares and executed a $500,000 money purchase contract as consideration for this
purchase. This equipment was booked at cost on our balance sheet at $1,350,000.
During the third quarter of 2003, we purchased additional similar equipment
having an appraised resale value of $14,000,000, and recorded a sale of
$7,000,000.
This transaction generated an individual non cash profit of $3,900,000 in the
third quarter of 2003. We continue to aggressively market our equipment
inventory for resale and continue to search for new equipment inventory to
purchase.
The following explanations primarily reflect continuing operations,
comprised solely of our newly formed equipment resale division and corporate
operations.
FINANCIAL CONDITION
Total assets from continuing operations as of September 30, 2003 were
$5,325,371, an increase of $5,325,371, from zero assets at December 31, 2002.
The increase was primarily attributable to the purchase of equipment inventory
described above totaling $1,350,000, along with investments (restricted stock
proceeds) from the sale of equipment totaling $3,900,000.
Current liabilities from continuing operations increased by $1,226,010 or
41.4%, from $2,957,425 at December 31, 2002 to $4,183,435 at September 30, 2003.
The increase is primarily attributable to a reclassification of long-term debt
to short-term debt totaling $843,047.
Stockholders' deficit decreased from $5,663,225 at December 31, 2002 to
$2,756,446, a decreased deficit of $2,906,779. This was a result of profits in
the nine months ended September 30, 2003 of $1,186,315, along with increased
additional paid in capital of $1,620,989, largely a result of the $1,350,000
equipment inventory purchase for common stock, described above.
RESULTS OF OPERATIONS
Net sales were $7,000,000, for the three-month and nine=month periods ended
September 30, 2003, as compared to zero sales for the same periods in the prior
year. This reflects one equipment sale transaction in the third quarter of 2003
within the newly formed equipment resale division. This new division reflects
all continuing operations and was formed in the second quarter of 2003.
Cost of goods sold was $3,100,000, for the three-month and nine-month
periods ended September 30, 2003, as compared to zero for the same periods in
the prior year. This reflects one equipment sale transaction in the third
quarter of 2003 within the newly formed equipment resale division. This new
division reflects all continuing operations and was formed in the second quarter
of 2003.
Selling, general and administrative expenses decreased by $542,250, or 88%,
and increased by $121,138 or 9,846%, for the three-month and nine-month periods
ended September 30, 2003, respectively, as compared to the same periods in the
prior year. The fluctuations were primarily due to changes in the number of
employees in continuing operations.
We incurred a net profit from continuing operations of $3,663,145 for the
three-month period ended September 30, 2003 as compared to a net loss of $10,263
for the three-month period ended September 30, 2002. The increase of $3,673,408
was primarily due to the equipment resale transaction described above.
We incurred a net profit from continuing operations of $3,298,830 for the
nine-month period ended September 30, 2003 as compared to a net profit of
$446,837 for the nine-month period ended September 30, 2002. The increase of
$2,851,993 was primarily due to the equipment resale transaction described
above.
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2003
Our total assets at September 30, 2003 were $5,375,266 compared with $4,088,860
at December 31, 2002, a increase of $1,286,406. These balances include net
assets from discontinued operations of $49,895 at September 30, 2003 and
$4,088,860 at December 31, 2002, a decrease of $4,038,965, primarily the result
of the winding down of all paver installation business. Our total assets
excluding discontinued operations were $5,325,371 and zero, respectively, at
September 30, 2003 and December 31, 2002, an increase of $5,325,371. This
increase was due to the equipment inventory purchase described above totaling
$1,350,000, along with investments (restricted stock proceeds) from the sale of
equipment of $3,900,000. Total assets at September 30, 2003 were comprised
mainly of $3,900,000 of investments and $1,350,000 of equipment inventory. Total
current assets at September 30, 2003 and December 31, 2002 amounted to
$5,306,298 and $4,088,860, respectively, while total current liabilities for
those same periods amounted to $8,131,712 and $8,909,038 respectively, creating
working capital deficits of $2,825,414 and $4,820,178, respectively. These
working capital deficits are principally attributable to operating losses in the
first two quarters of 2003 and in the full year of 2002. Total liabilities at
September 30, 2003 and December 31, 2002 were $8,131,712 and $9,752,085,
respectively, representing a decrease of $1,620,373. This decrease is primarily
due to a decrease in liabilities from discontinued operations of $2,003,336,
caused primarily by the winding down of operations in Florida.
Shareholders' deficit at September 30, 2003 and December 31, 2002 was $2,756,446
and $5,663,225, respectively, representing a decreased deficit of $2,906,779.
The decreased deficit is primarily due to profits generated from the equipment
inventory sale described above.
The Company's net cash used in operating activities for the nine months ended
September 30, 2003 was $2,430, compared to net cash used in operating activities
of $1,028,052 for the nine months ended September 30, 2002, a decrease of
$1,025,622. This decrease resulted primarily from the discontinuance of
unprofitable paver installation operations.
Our Company's net cash provided by financing activities for the nine months
ended September 30, 2003 was $8,833, compared to $992,613 net cash provided for
the nine months ended September 30, 2002, a decrease of $983,780. The only
source of financing in 2003 was $27,493 from our revolving line of credit. The
primary sources of financing in 2002 were cash proceeds of $1,000,000 from an
issuance of stock, cash proceeds of $268,215 from our revolving line of credit
and cash proceeds of $200,000 from a note payable to an outside director.
Our Company had a revolving line of credit with a financial institution totaling
$2,500,000, which was up for renewal at April 30, 2003. The financial
institution declined to renew the line. On December 19, 2003, after several
months of negotiations, the Company executed a forbearance agreement with this
financial institution whereby the debt was restructured. Under the agreement,
the Company is to pay off the debt using net cash proceeds received in its
equipment resale division. A minimum of 50% of monthly net cash proceeds, up to
$250,000 of monthly proceeds, is payable under the agreement, and 100% of
monthly net cash proceeds over $250,000 is payable under the agreement. The
agreement expires on March 31, 2004, but may be extended if agreed upon payments
are being made. The debt is secured by all assets of the Company and is
personally guaranteed by the C.E.O.
Our Company owes a former outside director $700,000 plus accrued interest, and
owes the C.E.O $136,744 plus accrued interest, under promissory notes payable in
January 2004. The Company plans to negotiate extensions on these notes, and
plans to retire the amounts owed using future cash profits generated from its
equipment resale division, after all scheduled payments have been made under the
forbearance agreement described above. If adequate future cash profits are not
available, the Company will attempt to negotiate a retirement of these debts
using portions of its stock investments held.
The report of our independent accountants on our December 31, 2002 financial
statements includes an explanatory paragraph indicating that there is
substantial doubt about our ability to continue as a going concern due to
substantial recurring losses from operations and a significant accumulated
deficit and working capital deficit. Our ability to continue as a going concern
will be determined by our ability to obtain additional funding and to implement
our business plan, particularly pertaining to the new equipment resale division.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our Company has no assured available financial resources to meet its September
30, 2003 working capital deficit of $2,825,414 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.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "anticipates", "believes", "forecasts", "plans", "hopes",
"predicts", "prognosticates", and the like are meant to indicate that such
statements are forward-looking and not historical in nature, and such statements
contain inherent risks and uncertainties which render them capable of not being
achieved. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which could cause the actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. Such factors include, among others:
* The Company's ability to continue as a going concern will be determined by its
ability to obtain additional funding and to implement its business plan.
* 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 does not maintain key man life insurance on its principal
employees.
* The Company may not be able to attract, motivate and retain skilled employees
to install pavers, or to engage sufficient outside contractors to meet the
Company's planned expansion needs.
* There can be no assurance that shareholders of the Company will not be
negatively affected by the concentration of ownership of its Common Shares by
the management and directors of the Company.
* The Company has not and may not pay dividends to shareholders in the
foreseeable future.
* Competition may become more intense as a result of the introduction of new
competitors, consolidation, price discounting, and possibly weakening demand.
* New laws and regulations could negatively impact the equipment resale
industry, causing increased costs and decreased revenue earning opportunities.
* Sales of the Company's common stock in the public market could impair the
market price of our common stock and also impair the ability to complete
successful financing efforts.
* The Company must comply with penny stock regulations which may render the sale
of shares of common stock by a stockholder more difficult.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, 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 Quarterly 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 Quarterly 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 Quarterly 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.
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 Quarterly 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-Q 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 Quarterly 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.
PART II: OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
The Company is presently a defendant in 25 collection related lawsuits
totaling approximately $520,000 some of which judgements have been obtained and
the rest are pending. The majority of these legal actions are a result of the
company's discontinued operations. In addition, there are presently 18
threatened collection related lawsuits totaling approximately $200,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the nine months ended September 30, 2003, the Company issued
3,117,200 shares of common stock to consultants for services. The shares were
valued at $290,217, the fair value on the respective grant dates.
During the nine months ended September 30, 2003, the Company issued 600,000
restricted shares of common stock as collateral for services performed by
vendors. These shares have not yet been applied as payment for amounts owed.
During the nine months ended September 30, 2003, the Company issued
2,991,500 option shares pursuant to its stock option plans as collateral for
services performed by consultants and vendors. Of these, 1,225,171 option shares
were exercised and valued at $80,246 based on the dates exercised. The remaining
1,766,329 option shares were collateral at September 30, 2003.
During the nine months ended September 30, 2003, the Company issued
15,000,000 restricted shares of common stock to purchase commercial equipment
inventory in conjunction with its equipment re-sale subsidiary, PSC Equipment,
Inc. The shares were valued at $1,350,000, based on the date of the equipment
purchase transaction.
Subsequent to September 30, 2003, the Company issued 62,000,000 restricted
shares to officers and directors as compensation in lieu of cash for services
performed. These were valued at $620,000 based on the date of grant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
During the third quarter of 2003, the three outside board members resigned
their board of director positions, citing conflicts with scheduling.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
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99.1 (CEO) Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 (CFO) Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the fiscal quarter.
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
By: /s/ Jace Simmons
--------------------
Jace Simmons, Executive Vice President-Finance,
Chief Financial Officer and Director
(Duly Authorized Officer and Principal Financial Officer)
Dated: December 30, 2003