10-Q 1 doc1.txt 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, 2002 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 88-043120 -------------------------- ------------------------------------- (State of Incorporation) (I.R.S. EmployerIdentification 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) 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 November 14, 2002, 25,746,682 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. See accompanying notes to consolidated financial statements. PART I: FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. PAVING STONE CORPORATION AND SUBSIDIARIES CONTENTS -------- PAGE 1 CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001 PAGE 2 STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 (CONSOLIDATED) AND 2001 (COMBINED) (UNAUDITED) PAGE 3 STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (CONSOLIDATED) AND 2001 (COMBINED) (UNAUDITED) PAGES 4 - 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 1 PAVING STONE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------

See accompanying notes to consolidated financial 2 PAVING STONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ---------------------------------

See accompanying notes to consolidated financial statements. 3

See accompanying notes to consolidated financial statements. 4 NOTE 1 BASIS OF PRESENTATION ------- The accompanying unaudited 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 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 statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. For further information, refer to the financial statements and footnotes for the year ended December 31, 2001 included in the Company's Form 10-KSB. NOTE 2 PRINCIPLES OF CONSOLIDATION ------- ----------------------------- The accompanying 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. NOTE 3 PRINCIPLES OF COMBINATION ------- --------------------------- The 2001 financial statements are presented on a combined basis, which represents The Paving Stone Company, Inc. and its affiliates, which include 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. Significant intercompany balances and transactions were eliminated in the combination. NOTE 4 INVENTORIES ------- ----------- Inventories consist of brick pavers and installation supplies. Inventories are stated at the lower of cost or market value, as determined using the first in, first out method. NOTE 5 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 and 2001 are as follows: 5

NOTE 6 STOCK ISSUANCES ------- ---------------- On July 15, 2002, the Company issued 35,000 shares of common stock to its employees, as consideration for services rendered to the Company. During September 2002, 500 of these shares were cancelled due to termination of employment. The shares were valued for financial accounting purposes at $.21 per share, the fair value at the date of grant, resulting in net employee benefits expense of $7,245. The shares were issued to all employees who were employed on or before December 15, 2001. NOTE 7 NOTE PAYABLE - RELATED PARTIES ------- ---------------------------------- During the three months ended September 30, 2002, the Company entered into a note payable with a member of the Company's board of directors of $200,000, secured by the Company's assets and common stock due November 4, 2002 (See Note 10). NOTE 8 COMMITMENTS AND CONTINGENCIES ------- ------------------------------- The Company is currently in a contractual dispute over agreements to issue 1,175,119 shares of common stock to former consultants. An injunction has been filed with the courts 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. NOTE 9 RELATED PARTIES ------- ---------------- During the nine months ended September 30, 2002, the Company paid stockholder loans and advances of $311,801 and $91,683, respectively. See Notes 7 and 10 regarding a note payable to a related party. 6 NOTE 10 SUBSEQUENT EVENT -------- ----------------- During November 2002, the Company entered into a note payable with a member of the Company's board of directors for an additional $500,000 and refinanced $200,000 of outstanding notes payable. The note accrues interest at 10% and is secured by the Company's assets and common stock. The note is due January 31, 2004 (See Note 7). The Company entered into an investment agreement with a private equity fund to purchase up to $15,000,000 in common stock over a period of 30 months, beginning after an applicable registration statement becomes effective. The agreement calls for the stock to be sold at the discretion of the Company. As of the date of this report, the Company has not filed a registration statement and no shares have been sold. In consideration for the institutional investor entering into the agreement with the Company, the Company issued 1,000,000 shares of its common stock to such investor. 7 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 2002, in spite of an unusually high amount of rain at the beginning of the quarter, we posted a 14.9% increase in net sales over the third quarter of 2001. In addition, we increased our year-to-date gross margins up to 19.8% from 18.6% and increased net sales 8.2% over the same period of 2001. We continue to shift our business away from the high volume and low margin work (located primarily in Florida), which characterized our company in prior years. As a result of our expansion into new markets around the country over the last two years, and our shift towards remodeling work, we are continuing our deliberate transition into higher priced and more profitable business with better cash flow. The third quarter also marked the roll out of our at-home installation services into 146 Home Depot stores in Florida, Massachusetts, Rhode Island, New Hampshire and Northern Nevada. We are pleased with the success in new sales volume and higher gross margins, and expect this program to continue to expand aggressively and have a positive impact on sales and profit margins in the 4th quarter and throughout 2003. Although the worsening economy has not had an impact in our gross margins or net sales, it has increased our difficulty in collecting certain aged receivables in our commercial/new construction business divisions. During the third quarter, we made the decision to increase our accounts receivable reserves and adjustments and will continue to review our reserves in the fourth quarter. This resulted in a large charge to net income. Lastly, during the third quarter, we closed on a $200,000 note payable financing with a private investor and have received a commitment for an additional $500,000 from this investor which should be paid later this month. These amounts are expected to convert to equity financing before year-end. In addition, on November 4, 2002, we received a $15 million stock purchase commitment from an institutional investor over a 30-month period. We anticipate funding will begin in early 2003. FINANCIAL CONDITION Total assets as of September 30, 2002 were $5,849,458, a decrease of $1,090,932 or 15.7%, from total assets of $6,940,390 at December 31, 2001. The decrease was primarily attributable to a reduction in accounts receivable of $1,132,608. This decrease was partially a result of increased reserves as described above totaling $618,601 plus normal seasonal fluctuations. Current liabilities increased by $711,985, or 10.5%, from $6,785,668 at December 31, 2001 to $7,497,653 at September 30, 2002. The increase is primarily attributable to an increase in accounts payable and accrued expenses of $579,960, brought about by the continued growth of our offices outside of Florida plus our entry into Home Depot installation services. Stockholders' equity decreased from $14,368 at December 31, 2001 to a deficit of $1,777,530 at September 30, 2002, a decrease of $1,791,898. The decrease is primarily attributable to an increase in paid in capital of $496,507 offset by a year-to-date net operating loss of $2,288,442. 8 RESULTS OF OPERATIONS Net sales increased by $1,122,457, or 14.9%, and $1,858,333, or 8.2%, for the three-month and nine-month periods ended September 30, 2002, respectively, as compared to the same periods in the prior year. The increases were primarily due to the continued growth of our offices outside of Florida plus our initial entry into Home Depot installation services. Cost of goods sold increased $1,500,606, or 24.5%, and $1,200,457 or 6.5%, for the three-month and nine-month periods ended September 30, 2002, respectively, as compared to the same periods in the prior year. The increases were a result of the increases in sales over the prior year, as described above. The unusually high increase in the third quarter of 2002 was a result of higher than expected costs on certain completed jobs. Selling, general and administrative expenses increased by $1,294,576, or 88.4%, and $2,933,099 or 64.2%, for the three-month and nine-month periods ended September 30, 2002, respectively, as compared to the same periods in the prior year. The increases are primarily attributable to the continued growth of the offices outside of Florida plus the entry into Home Depot installation services. We incurred a net loss of $1,810,907 for the three-month period ended September 30, 2002 as compared to a net loss of $119,839 for the three-month period ended September 30, 2001. The increase in net loss of $1,691,068 was partially the result of adjustments to accounts receivable during the quarter totaling $657,656. The remainder of the increase in net loss was due to the entry into Home Depot installation services and the continued growth of certain new expansion offices outside of Florida. We incurred a net loss of $2,288,442 for the nine-month period ended September 30, 2002 as compared to a net loss of $491,779 for the same period in the prior year. The increase in net loss of $1,796,663 was primarily the result of the accounts receivable adjustments described above, the entry into Home Depot installation services and the continued growth of certain new expansion offices outside of Florida. LIQUIDITY AND CAPITAL RESOURCES During the nine-month period ended September 30, 2002, operating activities consumed $1,004,354 of cash as compared to $87,790 for the same period in the prior year. The increase in cash consumed was primarily due to our entry into Home Depot installation services plus the continued growth of certain new expansion offices outside of Florida. In addition, cash inflows decreased over 2001 in our southernmost Florida operation as a result of new construction declines caused by full saturation of the new construction market. The primary sources of funding, during the nine-month period ended September 30, 2002, came from an equity financing with a private investor totaling $1,000,000 in gross proceeds, note payable financing of $200,000 and an increase in our line of credit of $250,000, bringing the total credit facility up to $2,500,000. On November 4, 2002, we received a commitment from an institutional investor to purchase up to $15,000,000 of common stock over a 30-month period beginning after an applicable registration statement becomes effective. We anticipate this to occur in early 2003. On November 13, 2002, we received a commitment for an additional $500,000 of note payable financing from a private investor, with funding anticipated within a month. We continue to monitor our cash situation and will pursue additional equity funding as needed until we can access the funds from the institutional investor described above. 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", 9 "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: * 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 not be able to manage its expansion growth plan. * The Company may not be able to manage its expanding operations effectively. * 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. * The Company is dependent upon several key customers and the loss of any of these key customers could cause a material, negative effect on its financial condition. * The Company requires a high volume of quality products that are procured from, and assembled by, third party suppliers and reliance on suppliers, as well as industry supply conditions generally, involves several 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. * The Company may not be able to collect accounts receivable or may retain inadequate reserves for bad debt. * 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 faces the risk of default of debt obligations and negative impacts of restrictive covenants. * The Company has not and may not pay dividends to shareholders in the foreseeable future. * The Company could face claims of product liability, personal injury or other legal claims. * 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 paver installation 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. 10 * The Company may not be able to maintain its listing on the Over-the-Counter Bulletin Board if it does not continue to meet the Criteria necessary to maintain such listing. * 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 Within the 90 days prior to the filing date of this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in the reports the Company files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required. There were no significant changes in the Company's internal controls or in other factors that could significantly affect such internal controls subsequent to the date of the evaluation described in the paragraph above, including any corrective actions with regard to significant deficiencies and material weaknesses PART II: OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. The Company knows of no material legal proceedings at this time. Periodically, the Company becomes party to legal claims that arise in the ordinary course of business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On July 15, 2002, the company issued 35,000 shares of common stock to all employees who were employed on or before December 15, 2001, as consideration for services rendered to the company. During September 2002, 500 of these shares of common stock were cancelled due to termination of employment. The shares were valued at $.21 per share, the fair value at the time of grant. The Company believes that the issuance of the shares was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 11 ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. -------- 10.1 Common Stock Purchase Agreement dated November 4, 2002 between the Company and Fusion Capital Fund II, LLC1 10.2 Promissory Note dated November 13, 2002 between the Company and Jack Hight* 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 _________________ 1. Filed as exhibit to the Company's Form 8-K filed with the SEC on November 8, 2002. * Filed herewith. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the fiscal quarter. On November 8, 2002 the Company filed a report on Form 8-K announcing the signing of a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. The signed Common Stock Purchase Agreement and the form of Registration Rights Agreement were filed as exhibits to the Form 8-K. 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: November 14, 2002 12 CERTIFICATION I, Maurice F. Sigouin, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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. /s/ Maurice F. Sigouin ------------------------------ Maurice F. Sigouin Date:November 14, 2002 Chief Executive Officer 13 CERTIFICATION I, Jace Simmons, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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. /s/ Jace Simmons ------------------------- Jace Simmons Date:November 14, 2002 Executive Vice President Finance and Chief Financial Officer 14 EXHIBIT 99.1 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 Quarterly Report on Form 10-Q of the Paving Stone Corporation (the "Company") for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Maurice F. Sigouin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-Q 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 Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Maurice F. Sigouin -------------------------- Maurice F. Sigouin Chief Executive Officer November 14, 2002 15 EXHIBIT 99.2 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 Quarterly Report on Form 10-Q of the Paving Stone Corporation (the "Company") for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Jace Simmons, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) the Securities Exchange Act of 1934; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jace Simmons ------------------- Jace Simmons Chief Financial Officer November 14, 2002

PAVING STONE CORP 10-Q