10-Q 1 v00594.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 June 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 88-043120 - -------------------------- ------------------------------------- (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 November 12, 2003, 44,400,282 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 JUNE 30, 2003 PAVING STONE CORPORATION AND SUBSIDIARIES CONTENTS PAGE 1 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002 PAGE 2 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) PAGES 3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) PAGES 5 - 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) PAVING STONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements. 1 PAVING STONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 2 PAVING STONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 3 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 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 June 30, 2003 and December 31, 2002 due to the 4 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) relatively short-term nature of these instruments. (C) Loss Per Common Share Net loss per common share (basic and diluted) is based on the net loss divided by the weighted average number of common shares outstanding during each year. Common stock equivalents are not included in the computation of diluted net loss per common share because the effect would be anti-dilutive. NOTE 3 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 June 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 June 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 is obligated to pay for the inventory under a Money Purchase Contract using 900,000 shares of stock from the ultimate purchaser of the inventory. As of June 30, 2003, the Company had not yet sold the inventory and therefore had not yet made a payment under the Money Purchase Contract. As such, the inventory is not valued on the June 30, 2003 balance sheet since EPA-2 was not fully consummated. See Note 10 for the final consummation of this transaction. NOTE 4 DISCONTINUED OPERATIONS During December 2002, the Company made the decision to discontinue its Florida and New England Paving Stone operations. As of June 30, 2003, the Florida and New England operations are completely discontinued. Both 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. 5 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) 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 June 30, 2003, the Company has not recorded any commissions under the contract. The Company expects its Arizona/Texas, Georgia/Mid-Atlantic, Nevada and California operations to be completely discontinued by the end of the third quarter. Information relating to the Florida and New England operations for the six months ended June 30, 2003 and 2002 are as follows: 2003 2002 ----------- ----------- Revenues $ 919,453 $ 9,231,919 Costs and expenses 2,047,953 9,788,558 ----------- ----------- Net (Loss) $(1,128,500) $ (556,639) =========== =========== Assets and liabilities of the discontinued operations were as follows: June 30, 2003 December 31, 2002 ------------- ----------------- Assets Accounts receivable, net $ 85,619 $1,995,086 Cost in excess of billings -- 288,828 Inventories -- 17,500 Property and equipment 20,479 184,816 Other assets (2,000) 27,390 ----------- ---------- Total Assets $ 104,098 $2,513,620 =========== ========== Liabilities Cash overdraft $ 91,363 $ 249,618 Billing in excess of cost -- 735,250 Accounts payable and accrued expenses 2,422,583 2,687,582 ----------- ---------- Total Liabilities $ 2,513,946 $3,672,450 =========== ========== NOTE 5 SEGMENT REPORTING The Company has six geographic reportable segments: Arizona, Atlanta, Nevada, California, Corporate and PSC Equipment. Each segment, with the exception of PSC Equipment, installs 6 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) interlocking pavers on driveways and patios for residential and 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 six months ended June 30, 2003 and 2002 are as follows:

NOTE 6 STOCK ISSUANCES During the six months ended June 30, 2003, the Company issued 2,123,000 shares of common stock to consultants for services. The shares were valued at $238,917, the fair market value based on closing prices on the respective issuance dates. During the six months ended June 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 7(B)). During the six months ended June 30, 2003, the Company issued 2,066,500 shares of common stock as collateral for amounts owed for services performed by consultants and vendors. The vendors exercised their option to convert $9,674 of the amount owed into 105,700 shares of the Company's common stock and based on the dates exercised. The remaining 1,960,800 option shares were collateral at June 30, 2003 (See Note 7(B)). During the six months ended June 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. 7 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) NOTE 7 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. (B) Collateralized Shares During the six months ended June 30, 2003, the Company issued 2,560,800 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 June 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. (C) Payroll and Payroll Taxes As of June 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. 8 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) (D) Lack of Insurance As of June 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 June 30, 2003, there is no assurance that none exist. (E) Capitalized Leases As of June 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. Amount of assets taken off books $26,892 ------- Amount of debt taken off books $20,632 ======= NOTE 8 RELATED PARTIES During the six months ended June 30, 2003, the Company repaid stockholder loans in the amount of $12,419. NOTE 9 GOING CONCERN As reflected in the accompanying condensed consolidated financial statements, the Company has a net loss of $2,115,832 for the six months ended June 30, 2003, a working capital deficiency of $6,335,234 and a stockholders' deficiency of $6,180,466. 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 its Florida and New England operations and expects to discontinue all paver installation segments as of September 30, 2003 and has consolidated its California operations into one central office. Management has also reduced other operating expenses during 2003 throughout the Company to return to profitable operations during 2003. 9 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) 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 10 SUBSEQUENT EVENT (A) 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. 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 $7,000,000 Less cost of goods sold inventory 1,350,000 Less commissions and other expenses (3,500,000 shares @$.50) 1,750,000 ---------- Net profit $3,900,000 ---------- Stock held by purchaser (7,800,000 shares @ $.50) $3,900,000 ---------- 10 PAVING STONE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) Had this transaction been consummated prior to June 30, 2003, the second quarter consolidated results would have been as follows: Net profit for the 3 months ended March 31, 2003 $ 2,495,464 Earnings per share $ .08 Net profit for the 6 months ended June 30, 2003 $ 1,784,168 Earnings per share $ .06 Total assets at June 30, 2003 $ 6,259,272 Total stockholders' deficiency at June 30, 2003 $(2,280,466) (B) Stock and Option Activity Subsequent to June 30, 2003, 300,000 shares of common stock held as collateral by consultants and vendors was applied as payment for amounts owed. The common stock was valued at $24,000 on the date applied to the debt. Subsequent to June 30, 2003, the Company issued 720,000 shares to consultants and vendors pursuant to its stock compensation plans, as payment for fees owed. The shares were valued at $51,300 based on the dates of issuance. Subsequent to June 30, 2003, the Company issued 925,000 shares of common stock to consultants and vendors as collateral for amounts owed for services to be performed. (C) 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 is payable on demand with interest at the 30-day dealer commercial paper rate plus 2.55%. It is 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 as of April 30, 2003, and has not been renegotiated for the renewal as of the date of this report. The financial institution is currently negotiating a forbearance agreement with the Company to restructure the debt. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 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. * 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-QSB, 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 six months ended June 30, 2003, the Company issued 2,397,800 shares of common stock to consultants for services. The shares were valued at $248,591, the fair value on the respective grant dates. During the six months ended June 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. During the six months ended June 30, 2003, the Company issued 2,066,500 option shares pursuant to its stock option plans as collateral for services performed by consultants and vendors. Of these, 105,700 option shares were exercised and valued at $10,570 based on the dates exercised. The remaining 1,960,800 option shares were collateral at June 30, 2003. During the six months ended June 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 June 30, 2003, 300,000 of previously issued option shares were exercised by consultants and vendors and applied as payment for amounts owed. The option shares were valued at $24,000 based on the dates of exercise Subsequent to June 30, 2003, the Company issued 720,000 shares to consultants and vendors pursuant to its stock option plans, as payment for fees owed. The shares were valued at $51,300 based on the dates of issuance. Subsequent to June 30, 2003, the Company issued 925,000 option shares to consultants and vendors pursuant to its stock option plans, as collateral for services to be performed. These option shares have not yet been exercised as payment for amounts owed. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. -------- 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: November 12, 2003 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 12, 2003 Chief Executive Officer 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 12, 2002 Executive Vice President Finance and Chief Financial Officer ITEM 2. 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 second quarter of 2003, we formed a new subsidiary, PSC Equipment, Inc., to buy and sell high grade commercial equipment. This illustrates our continuing shift away from the unprofitable paver installation business. To begin this new division, 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 is valued at cost on our June 30, 2003 balance sheet at $1,350,000. During the third quarter of 2003, we purchased an additional $14,000,000 of similar equipment (appraised resale value) and recorded a sale of $7,000,000. This transaction is disclosed as a subsequent event in the footnotes to the financial statements, and generated an individual 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 reflect continuing operations, comprised of our paver installation divisions in California, Arizona, Nevada and the Mid-Atlantic, and our newly formed equipment resale division. FINANCIAL CONDITION Total assets from continuing operations as of June 30, 2003 were $2,255,175, an increase of $679,935 or 43.2%, from total assets of $1,575,240 at December 31, 2002. The increase was primarily attributable to the purchase of equipment inventory described above totaling $1,350,000, offset by a reduction in accounts receivable of $574,988. This reduction reflects the continued down sizing of existing paver installation operations. Current liabilities from comtinuing operations increased by $851,019 or 16.4%, from $5,174,774 at December 31, 2002 to $6,025,793 at June 30, 2003. The increase is primarily attributable to a reclassification of long-term debt to short-term debt totaling $904,861. Stockholders' deficit increased from $5,663,225 at December 31, 2002 to $6,180,466, an increased deficit of $517,242. This was a result of losses in the six months ended June 30, 2003 of $2,115,832 of which $1,128,500 came from discontinued operations. This was offset by increased additional paid in capital of $1,499,132, largely a result of the $1,350,000 equipment inventory purchase for common stock, described above RESULTS OF OPERATIONS Net sales decreased by $2,253,242, or 55.2%, and $1,993,319 or 30.1%, for the three month and six month periods ended June 30, 2003, respectively, as compared to the same periods in the prior year. The decreases were primarily due to the continued winding down of existing paver installation operations. Cost of goods sold decreased by $1,172,070, or 43.9%, and $932,656 or 21.0%, for the three month and six month periods ended June 30, 2003, respectively, as compared to the same periods in the prior year. The decreases were primarily due to the continued winding down of existing paver installation operations Selling, general and administrative expenses decreased by $777,063, or 48.3%, and $817,278 or 31.4%, for the three month and six month periods ended June 30, 2003, respectively, as compared to the same periods in the prior year. The decreases were primarily due to the continued winding down of existing paver installation operations. We incurred a net loss from continuing operations of $668,713 for the three-month period ended June 30, 2003 as compared to a net profit of $310,324 for the three-month period ended June 30, 2002. The reduction of $979,037 was primarily due to the continued winding down of existing paver installation operations. We incurred a net loss from continuing operations of $987,332 for the six-month period ended June 30, 2003 as compared to a net profit of $79,104 for the six-month period ended June 30, 2002. The reduction of $1,066,436 was primarily due to the continued winding down of existing paver installation operations. LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2003 Our total assets at June 30, 2003 were $2,359,273 compared with $4,088,860 at December 31, 2002, a decrease of $1,729,587. These balances include net assets from discontinued operations of $104,098 at June 30, 2003 and $2,513,620 at December 31, 2002, a decrease of $2,409,522, primarily the result of the winding down of our Florida business. Our total assets excluding discontinued operations were $2,255,175 and $1,575,240, respectively, at June 30, 2003 and December 31, 2002, an increase of $679,935. This increase was primarily due to the equipment inventory purchase described above totaling $1,350,000, offset by a decrease in net accounts receivable of $574,988, which was due to the winding down of existing paver installation operations. Total assets at June 30, 2003 were comprised mainly of $686,813 of accounts receivable, $1,350,000 of equipment inventory and $146,801 of property and equipment. Total assets at December 31, 2002 were comprised principally 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 current assets at June 30, 2003 and December 31, 2002 amounted to $2,204,505 and $3,955,133, respectively, while total current liabilities for those same periods amounted to $8,539,739 and $8,847,224 respectively, creating working capital deficits of $6,335,234 and $4,892,091, 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 June 30, 2003 and December 31, 2002 were $8,539,739 and $9,752,085, respectively, representing a decrease of $1,212,346. This decrease is primarily due to a decrease in liabilities from discontinued operations of $1,158,504, caused primarily by the winding down of operations in Florida. Shareholders' deficit at June 30, 2003 and December 31, 2002 was $6,180,466 and $5,663,225, respectively, representing an increased deficit of $517,241. The increased deficit is due to losses in the first two quarters of 2003, offset by the equipment inventory purchase for common stock described above. During the second quarter of 2003, we received no significant outside financing. The Company's net cash provided from operating activities for the six months ended June 30, 2003 was $162,118 compared to cash used in operating activities of $852,573 for the six months ended June 30, 2002, an increase of $1,014,691. This increase resulted from the discontinuance of unprofitable paver installation operations. Our Company used no cash in investing activities for the six months ended June 30, 2003, as compared to $9,442 used in investing activities for the six months ended June 30, 2002. Our Company's net cash used in financing activities for the six months ended June 30, 2003 was $36,433, compared to $1,115,352 net cas provided for the six months ended June 30, 2002, a decrease of $1,151,785. The only source of financing in 2003 was $4,422 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 and cash proceeds of $268,215 from our revolving line of credit. 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 and is currently in negotiations with our Company to restructure the debt. We believe this negotiation will be successfully concluded by November 30, 2003. 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 June 30, 2003 working capital deficit of $6,335,234 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.

PAVING STONE CORP 10-Q