Attached files
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EX-32.1 - AAA CENTURY GROUP USA, INC. | v166518_ex32-1.htm |
EX-31.1 - AAA CENTURY GROUP USA, INC. | v166518_ex31-1.htm |
EX-31.2 - AAA CENTURY GROUP USA, INC. | v166518_ex31-2.htm |
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 2)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended: September 30,
2009
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number: 000-52769
VINYL PRODUCTS, INC.
|
(Exact
name of registrant as specified in its
charter)
|
Nevada
|
26-0295367
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
2210 South Ritchey Street,
Santa Ana, California 92705
(Address
of principal executive offices)
(714)
210-8888
(Registrant's
telephone number)
(Former
name, former address and former
|
fiscal
year, if changed since last
report)
|
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. x Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes x No
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. ¨ Yes ¨ No
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: At November 13, 2009 there were
22,864,200 shares of common stock outstanding.
Item
1. Financial Statements and Supplementary Data
Financial
Statement Index
Unaudited
Consolidated Financial Statements
for
the Nine Months Ended September 30, 2009
Page
|
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited)
and
December 31, 2008 (audited)
|
F–1
|
Consolidated
Statements of Operations (unaudited)
for
the nine months ended September 30, 2009 and 2008
|
F–2
|
Consolidated
Statements of Stockholders’ Deficit (unaudited)
for
the nine months ended September 30, 2009 and 2008
|
F-3
|
Consolidated
Statements of Cash Flows (unaudited)
for
the nine months ended September 30, 2009 and 2008
|
F–4
|
Notes
to the Financial Statements
|
F–5
|
VINYL
PRODUCTS, INC. (fka RED OAK CONCEPTS, INC.)
|
CONSOLIDATED
BALANCE SHEET
September
30, 2009 (unaudited) and December 31, 2008
(audited)
|
As of
|
||||||||
September 30, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and Cash Equivalents
|
$ | 47,740 | $ | 114,901 | ||||
Accounts
Receivable
|
59,031 | 57,575 | ||||||
Stock
Receivable
|
- | 5,000 | ||||||
Inventory
|
150,037 | 156,865 | ||||||
Prepaid
Expenses
|
71,176 | 38,651 | ||||||
Total
Current Assets
|
327,454 | 372,992 | ||||||
PROPERTY
AND EQUIPMENT:
|
||||||||
Property
and Equipment
|
448,810 | 429,255 | ||||||
Less
Accumulated Depreciation
|
186,183 | 148,084 | ||||||
Net
Property and Equipment
|
262,627 | 281,171 | ||||||
OTHER
ASSETS:
|
||||||||
Security
Deposits
|
8,690 | 8,690 | ||||||
Total
Other Assets
|
8,690 | 8,690 | ||||||
TOTAL
ASSETS
|
$ | 598,771 | $ | 662,853 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
Portion of Long-Term Liabilities
|
$ | 16,900 | $ | 18,646 | ||||
Bank
Line of Credit
|
24,828 | - | ||||||
Accounts
Payable and Accruals
|
290,238 | 255,401 | ||||||
Customer
Deposits
|
197,444 | 161,658 | ||||||
Income
Taxes Payable
|
450 | 21,200 | ||||||
Total
Current Liabilities
|
529,860 | 456,905 | ||||||
LONG-TERM
LIABILITIES:
|
||||||||
Vehicle
and Installment Purchase Contracts
|
36,403 | 48,824 | ||||||
Less
Current Portion Shown Above
|
16,900 | 18,646 | ||||||
Net
Long-Term Liabilities
|
19,503 | 30,178 | ||||||
Total
Liabilities
|
549,363 | 487,083 | ||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Preferred
Stock ($.0.0001 par value; 10,000,000 shares authorized;
|
||||||||
no
shares issued and outstanding at September 30, 2009 and December 31,
2008)
|
- | - | ||||||
Common
Stock ($0.0001 par value; 100,000,00 shares authorized;
|
||||||||
22,864,200
shares issued and outstanding at September 30, 2009 and
22,859,000
shares issued and outstanding at December 31, 2008)
|
2,286 | 2,286 | ||||||
Paid
in Capital
|
93,414 | 90,814 | ||||||
Retained
Earnings (Deficit)
|
(46,292 | ) | 82,670 | |||||
Total
Shareholders' Equity
|
49,408 | 175,770 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 598,771 | $ | 662,853 |
The
accompanying unaudited notes are an integral part of these unaudited financial
statements.
F-1
VINYL
PRODUCTS, INC.
Consolidated
Statements of Operations
For the
Three Months and Nine Months Ended September 30, 2009
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
Sept. 30, 2009
|
Sept. 30, 2008
|
Sept. 30, 2009
|
Sept. 30, 2008
|
|||||||||||||
Income
|
$ | 1,026,571 | $ | 1,082,582 | $ | 2,511,482 | $ | 3,154,037 | ||||||||
Cost
of Goods Sold:
|
||||||||||||||||
Labor
|
176,352 | 235,436 | 441,930 | 637,917 | ||||||||||||
Materials,
net of discounts
|
283,804 | 359,418 | 678,434 | 1,013,479 | ||||||||||||
Other
|
13,582 | 2,921 | 26,878 | 23,341 | ||||||||||||
Total
Cost of Goods Sold
|
473,738 | 597,775 | 1,147,242 | 1,674,737 | ||||||||||||
Gross
Profit
|
552,833 | 484,807 | 1,364,240 | 1,479,300 | ||||||||||||
Expenses:
|
||||||||||||||||
Advertising
and Marketing
|
44,780 | 48,653 | 125,917 | 144,769 | ||||||||||||
Selling,
General and Administrative
|
127,374 | 114,105 | 308,988 | 322,869 | ||||||||||||
Payroll
|
272,386 | 189,694 | 792,432 | 699,453 | ||||||||||||
Professional
Fees
|
47,604 | 37,193 | 182,258 | 124,295 | ||||||||||||
Rent
|
26,070 | 26,070 | 78,210 | 77,720 | ||||||||||||
Total
Expenses
|
518,214 | 415,715 | 1,487,805 | 1,369,106 | ||||||||||||
Net
Operating Income
|
34,619 | 69,092 | (123,565 | ) | 110,194 | |||||||||||
Other
Income (Expense):
|
||||||||||||||||
Interest
Income
|
29 | 461 | 378 | 5,706 | ||||||||||||
Interest
Expense
|
( 1,423 | ) | (1,025 | ) | (4,375 | ) | (6,383 | ) | ||||||||
Net
Other Income (Expense
|
(1,394 | ) | (564 | ) | (3,997 | ) | (677 | ) | ||||||||
Income
Before Income Taxes
|
33,225 | 68,528 | (127,562 | ) | 109,517 | |||||||||||
Income
Taxes
|
(1,000 | ) | (34,300 | ) | (1,400 | ) | (62,000 | ) | ||||||||
Net
Income
|
$ | 32,225 | $ | 34,228 | $ | (128,962 | ) | $ | 47,517 | |||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | .00 | $ | .00 | $ | (.01 | ) | $ | .00 | |||||||
Diluted
|
$ | .00 | $ | .00 | $ | (.01 | ) | $ | .00 | |||||||
Weighted
average shares outstanding - basic
|
22,863,526 | 22,800,000 | 22,862,371 | 22,800,000 | ||||||||||||
Weighted
average shares outstanding – diluted
|
22,976,613 | 22,810,135 | 22,976,613 | 22,803,415 |
The
accompanying unaudited notes are an integral part of these unaudited financial
statements.
F-2
VINYL
PRODUCTS, INC. (f/k/a RED OAK CONCEPTS, INC.)
|
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' DEFICIT—UNAUDITED
|
Preferred Stock
|
Common Stock
|
Paid-In
|
Retained
|
|||||||||||||||||||||
Shares
|
Stock
|
Shares
|
Stock
|
Capital
|
Earnings
|
|||||||||||||||||||
Balances,
December 31, 2008
|
- | $ | - | 22,859,000 | $ | 2,286 | $ | 90,814 | $ | 82,670 | ||||||||||||||
Issuance
of Common Stock
|
- | - | 5,200 | - | 2,600 | - | ||||||||||||||||||
Net
Income/(Loss) for the Period
|
- | - | - | - | - | (128,962 | ) | |||||||||||||||||
Balances,
September 30, 2009
|
- | $ | - | 22,864,200 | $ | 2,286 | $ | 93,414 | $ | (46,292 | ) |
The
accompanying unaudited notes are an integral part of these unaudited financial
statements.
F-3
VINYL
PRODUCTS, INC. (f/k/a RED OAKS CONCEPTS, INC.)
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS—UNAUDITED
|
For the Nine Months Ended
|
||||||||
Sept. 30, 2009
|
Sept.30, 2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
Income/(Loss)
|
$ | (128,962 | ) | $ | 47,517 | |||
Adjustments
to Reconcile Net Income to Net Cash Provided by
Operations:
|
||||||||
Depreciation
|
38,100 | 35,528 | ||||||
Changes
in Assets and Liabilities:
|
||||||||
Decrease
(Increase) in Accounts Receivable
|
(1,456 | ) | 6,327 | |||||
Decrease
(Increase) in Inventory
|
6,826 | 6,786 | ||||||
Decrease
(Increase) in Prepaid Expenses
|
(31,994 | ) | 72 | |||||
Increase
(Decrease) in Accounts Payable and Accrued Expenses
|
18,421 | 46,858 | ||||||
Decrease
in Customer Deposits
|
35,785 | 101,473 | ||||||
Increase
(Decrease) in Credit Card Balances
|
16,418 | (14,709 | ) | |||||
Increase
(Decrease) in Income Taxes Payable
|
(20,750 | ) | 3,468 | |||||
Net
Cash Provided (Used) by Operating Activities
|
(67,612 | ) | 233,320 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of Property and Equipment
|
(19,556 | ) | (39,485 | ) | ||||
Net
Cash Provided (Used) by Investing Activities
|
(19,556 | ) | (39,485 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Issuance
of Common Stock
|
2,600 | 2,100 | ||||||
Collection
of Stock Receivable
|
5,000 | - | ||||||
Proceeds
from Line of Credit Borrowings, net of repayments
|
24,828 | - | ||||||
Vehicle
Loan Proceeds, net of Principal Payments
|
(12,421 | ) | (15,000 | ) | ||||
Increase
(Decrease) in Note Payable to Shareholder
|
- | 152,000 | ||||||
Dividends
|
- | (330,000 | ) | |||||
Net
Cash Provided by (Used in) Financing Activities
|
20,007 | (190,900 | ) | |||||
NET
CASH INCREASE (DECREASE) FOR THE PERIOD
|
(67,161 | ) | 2,935 | |||||
Cash
at Beginning of Period
|
114,901 | 134,251 | ||||||
CASH
AT END OF PERIOD
|
$ | 47,740 | $ | 137,186 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
CASH
PAID DURING THE PERIOD FOR:
|
||||||||
INTEREST
|
$ | 4,375 | $ | 6,383 | ||||
TAXES
|
$ | 19,931 | $ | 72,463 |
The
accompanying unaudited notes are an integral part of these unaudited financial
statements.
F-4
VINYL
PRODUCTS, INC.
Notes
to Unaudited Consolidated Financial Statements
For
the Nine Months Ended September 30, 2009
NOTE A – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization – Vinyl Products, Inc. (“the
Company”) was incorporated in the State of Delaware on May 24, 2007 under the
name Red Oak Concepts, Inc. to serve as a vehicle for a business combination
through a merger, capital stock exchange, asset acquisition or other similar
business combination. The Company filed a registration statement on Form
10 under the Securities Exchange Act of 1934, as amended, to register its class
of common stock on September 15, 2007 that was effective as of November 14,
2007. On December 4, 2007, the Company changed its jurisdiction of
domicile by merging with a Nevada corporation titled Red Oak Concepts,
Inc. On November 21, 2008, the Company changed its name to Vinyl Products,
Inc. in connection with a reverse acquisition transaction with The Vinyl Fence
Company, Inc. (“TVFC”), a California corporation.
On
November 20, 2008, the Company entered into a Share Exchange Agreement (the
“Exchange Agreement”) with The Vinyl Fence Company, Inc. (“TVFC”), a company
incorporated under the laws of the State of California. Pursuant to the
terms of the Exchange Agreement, the Company acquired all of the
outstanding capital stock of TVFC from the TVFC shareholders in exchange for
22,100,000 shares of the Company’s common stock. Because the acquisition
is treated as a reverse acquisition, the financial statements of the Company
have been retroactively adjusted to reflect the acquisition from the beginning
of the reported periods. The stock exchange transaction has been accounted as a
reverse acquisition and recapitalization of the Company whereby TVFC is deemed
to be the accounting acquirer (legal acquiree) and the Company to be the
accounting acquiree (legal acquirer). The basis of the assets, liabilities
and retained earnings of TVFC has been carried over in the recapitalization, and
earnings per share have been retroactively restated to reflect the reverse
acquisition.
Pursuant
to the Exchange Agreement, on November 21, 2008, the Company filed a Certificate
of Amendment to its Articles of Incorporation with the Secretary of State for
the State of Nevada to change its corporate name to “Vinyl Products, Inc.” to
better reflect its business.
Business
Activity — The
Vinyl Fence Company, Inc. designs, fabricates and installs fencing, patio
covers, gates and railing made of co-extruded vinyl from its location in Santa
Ana, California. The Company operates in one reportable segment, the
domestic vinyl products industry.
Cash and Cash
Equivalents — The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. The
Company routinely has deposits at a financial institution that exceed federal
depository insurance coverage.
Management believes that maintaining the deposits at a large reputable
institution mitigates risks associated with these excess
deposits.
F-5
NOTE A – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Management’s Use of
Estimates — The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
Revenue Recognition —
Customer deposits are recorded as a current liability when received. Under
California law, the customer has three days in which to cancel the
contract. Revenues are recognized when the installations of the products
are complete. The
related cost of goods sold includes materials, installation labor, and
miscellaneous other costs.
Comprehensive
Income – The
Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”, which
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. There were no items of
comprehensive income applicable to the Company during the periods covered in the
financial statements.
Advertising and Marketing
Expense — The
Company expenses all advertising and marketing costs as incurred.
Advertising and marketing expense was $125,917 in the nine months ended
September 30, 2009, and $144,769 in the nine months ended September 30,
2008.
Fair Value of Financial
Instruments — The
carrying value of cash and cash equivalents, accounts receivables, accounts
payable and accrued expenses approximate their fair value based on the
short-term nature of these accounts. Long-term debt obligations bear fixed
interest rates, and their fair value was estimated using a discounted cash flow
analysis based on the Company’s current incremental borrowing rate for similar
types of borrowing arrangements. The estimated fair value of the Company’s
long-term debt obligations approximates the fair value at September 30, 2009 and
2008.
Accounts
Receivable — The
Company sells to individual homeowners and homeowner associations.
Accounts receivable are minimized by requiring a down payment at the time a
sales agreement is signed, and the balance at completion of installation.
Bad debt losses are recorded as incurred. Bad debt expense was
($1,859) in the nine months ended September 30, 2009 due to recovery of a
previously written-off account, and $-0- in the nine months ended September 30,
2008. Accounts receivable were $59,031 at September 30,
2009.
F-6
NOTE A – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Impairment of Long-Lived
Assets – Using
the guidance of Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets”, the Company reviews the carrying value
of property, plant, and equipment for impairment whenever events and
circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows
are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. The factors
considered by management in performing this assessment include current operating
results, trends and prospects, the manner in which the property is used, and the
effects of obsolescence, demand, competition, and other economic
factors.
Property and
Equipment —
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Vehicles
|
2 –
7 years
|
Furniture
and Fixtures
|
7 –
15 years
|
Machinery
and Equipment
|
5 –
15 years
|
Office
and Computer Equipment
|
3 –
20 years
|
Signs
|
7
years
|
Leasehold
improvements are classified as property and equipment and are amortized using
the straight-line method over 15 years and 39 years. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is recognized in
operations for the period. The cost of maintenance and repairs is charged
to operations as incurred. Significant renewals and betterments are
capitalized. Depreciation expense was $38,100 in the nine months ended
September 30, 2009 and $35,528 in the nine months ended September 30,
2008.
Recent Accounting
Pronouncements – In February 2007, the FASB issued Statement of Financial
Standards No. 159, “The Fair Value for Financial Assets and Financial
Liabilities – including an amendment of FASB Statement No. 115”. This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of
fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments, and is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 17, 2007, provided the entity also
elects to apply the provisions of FASB Statement No. 157, “Fair Value
Measurements”. No entity is permitted to apply the Statement
retrospectively to fiscal years preceding the effective date unless the entity
chooses early adoption. Early adoption of the standard is not expected to
have a material effect on the Company’s results of operations or its financial
position.
F-7
NOTE A – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations in a number of areas, including the
treatment of contingent considerations, contingencies, acquisition costs,
IPR&D and restructuring costs. In additions, under SFAS 141R, changes
in deferred tax asset valuation allowances and acquired income tax uncertainties
in a business combination after the measurement period will impact income tax
expense. SFAS 141R is effective for fiscal years beginning after December
15, 2008. The Company has not yet determined the impact, if any, of SFAS
141R on its financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Non Controlling Interests in
Financial Statements, an amendment of ARB No. 51”. SFAS 160 will change
the accounting and reporting of minority interests, which will be
re-characterized as non-controlling interests (NCI) and classified as a
component of equity. This new consolidation method will significantly
change the account with minority interest holders. SFAS 160 is effective
for fiscal years beginning after December 15, 2008. The Company has not
yet determined the impact, if any, of SFAS 160 on its financial
statements.
NOTE B – SUPPLEMENTAL CASH
FLOW INFORMATION
Supplemental
disclosures of cash flow information for the nine months ended September 30,
2009 and 2008 are summarized as follows:
Cash paid
for interest and income taxes during the nine months ended September
30:
2009
|
2008
|
|||||||
Interest
|
$ | 4,375 | $ | 6,383 | ||||
Income
Taxes
|
$ | 19,931 | $ | 72,463 |
NOTE C –
COMMITMENTS/LEASES
The
Company leases its 10,000 square foot facility under a non-cancellable lease
arrangement that expires on March 31, 2011, with an option to renew for an
additional two-year
period. The lease is guaranteed by one of the Company’s
shareholders. Future minimum payments under the current operating lease
are $26,070 in 2009, $106,629 in 2010, and $26,853 in 2011.
F-8
NOTE C – COMMITMENTS/LEASES
(CONTINUED)
The
Company has an available $100,000 line of credit which it opened in January
2006. Borrowings under the line of credit were paid off in 2007. The
interest rate is prime plus 3 percentage points. In 2009, the Company drew
down $52,000 under its line of credit; the balance owed as of September 30, 2009
was $24,828.
NOTE D — LONG-TERM DEBT
OBLIGATIONS
The
Company acquired four vehicles under installment sales contracts with interest
rates varying from 4.9% to 6.9%. Future payments under these agreements
are as follows:
2009
|
$ | 4,622 | ||
2010
|
$ | 17,052 | ||
2011
|
$ | 12,038 | ||
2012
|
$ | 3,571 |
NOTE E – INCOME
TAXES
Prior to
2008, the Company had elected to be taxed as a Subchapter S corporation, and as
such the net income of the Company was passed through to the Company’s two
shareholders. The Company is now a Subchapter C corporation and is subject
to Federal and State income taxes.
Income
tax expense for the nine months ended September 30, 2009 and September 30, 2008
is as follows:
2009
|
2008
|
|||||||
Federal
|
$ | -0- | $ | 47,000 | ||||
California
|
$ | 1,400 | $ | 15,000 |
As of
December 31, 2008, the Company had a net operating loss carryforward for federal
tax purposes of $56,025 and a net operating loss carryforward for state tax
purposes of $42,209.
NOTE F – NET INCOME PER
COMMON SHARE
The
Company’s reconciliation of the numerators and denominators of the basic and
fully diluted income per share is as follows for the nine months ended September
30, 2008 and 2009:
F-9
NOTE F – NET INCOME PER
COMMON SHARE (CONTINUED)
For the Nine Months Ended September 30, 2008
|
||||||||||||
Income
|
Shares
|
Per-Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
Net
Income (Loss)
|
$ | 47,517 | ||||||||||
Basic
EPS
|
||||||||||||
Income
available to
|
||||||||||||
Common
shareholders
|
$ | 47,517 | 22,800,000 | $ | .00 | |||||||
(A)
|
||||||||||||
Effect
of Dilutive Securities
|
||||||||||||
Stock
Options
|
3,415 | |||||||||||
Diluted
EPS
|
||||||||||||
Income
available to
|
||||||||||||
Common
shareholders
|
$ | 47,517 | 22,803,415 | $ | .00 |
For the Nine Months Ended September 30, 2009
|
||||||||||||
Income
|
Shares
|
Per-Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
Net
Income (Loss)
|
$ | (128,962 | ) | |||||||||
Basic
EPS
|
||||||||||||
Income
available to
|
||||||||||||
Common
shareholders
|
$ | (128,962 | ) | 22,863,526 | $ | (.01 | ) | |||||
(A)
|
||||||||||||
Effect
of Dilutive Securities
|
||||||||||||
Stock
Options (antidilutive)
|
118,935 | |||||||||||
Diluted
EPS
|
||||||||||||
Income
available to
|
||||||||||||
Common
shareholders
|
$ | (128,962 | ) | 22,972,461 | $ | (.01 | ) |
|
(A)
See Note A.
|
NOTE G – EMPLOYEE STOCK
OPTION PLAN
On
September 24, 2008, the Company granted stock options to employees to purchase
133,800 shares of common stock at $.50 a share. Three employees
subsequently left the Company and their options for 600 shares were
terminated. The options expired on September 23, 2009. As of
September 30, 2009, options to purchase 5,200 shares had been
exercised.
F-10
NOTE H – THEFT
LOSS
In
connection with the preparation of unaudited financial statements for the
quarter ended September 30, 2008, management of TVFC became aware of accounting
irregularities that resulted in being unable account for approximately $200,000
of inventory that TVFC had purchased that was not the subject of corresponding
sales orders. During the course of TVFC's preliminary investigation of the
matter, management discovered that certain employees were committing fraud
against the company by stealing inventory and reselling it pursuant to
fraudulent sales orders that were never submitted to the company. These
employees were retaining the sale price of the inventory and, in some cases,
using company employees to fabricate and install the products on company time
using company vehicles.
During
the last quarter of 2008, management believed that it had identified most if not
all of the perpetrators of the fraud, and some of the instances in which
inventory was stolen and the jobs to which the inventory was allocated. The
fraud extended not only to the loss of the inventory and man hours for the labor
associated with the jobs at which the inventory was applied, but also some
degree of lost income that
TVFC
might have recognized if it had completed the jobs. However, since the
sales prices for these fraudulent jobs were substantially below TVFC’s normal
sales prices, management believes that it would not have been able to obtain
many of these fraudulent sales as company sales.
Management
has taken what it believes to be appropriate action to address the material
weaknesses in internal control over financial reporting, including terminating
three employees, making other personnel changes, and implementing improved
physical and documentary controls and procedures. However, management does
not expect that its disclosure controls and procedures or internal control over
financial reporting will prevent all errors or all instances of fraud in the
future. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control
system’s objectives will be 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. Inherent
limitations in all control systems include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
errors or mistakes. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and any
design may not succeed in achieving its stated goals under all potential future
conditions.
F-11
NOTE H – THEFT LOSS
(CONTINUED)
On
December 5, 2008, one of the terminated employees referred to above filed a
complaint in Superior Court against the company and its principals, seeking
compensatory damages, attorneys' fees, punitive damages and equitable
relief. On April 28, 2009, the Court granted Company counsel’s motion to
compel arbitration. The parties are currently in the process of selecting
an arbiter. The Company is advised by the insurance carrier that all the
claims made by the plaintiff are covered by an insurance policy maintained for
the benefit of the Company and its PEO and that any amount awarded the
plaintiff, either by way of court decision, arbitration or other settlement, are
covered by such policy. Accordingly, the Company has no exposure or
monetary damages that may be awarded the plaintiff.
NOTE I –
EQUITY
Common
Shares
The
Company is authorized to issue 100,000,000 shares of $.0001 par value common
stock, and as of September 30, 2009, the Company had 22,864,200 shares
outstanding. During the nine months ended September 30, 2009, the Company
employees exercised options for 5,200 shares for cash in the amount of $2,600
($.50 per share).
Preferred
Shares
The
Company is authorized to issue 10,000,000 shares of $.0001 par value preferred
stock. The Company has never issues any preferred shares of preferred
stock.
F-12
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
You
should read the following discussion and analysis of financial condition and
results of operations, together with our consolidated financial statements and
related notes thereto appearing elsewhere in this report. In addition to
historical financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs.
Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to
these differences include those discussed below and elsewhere in this report,
particularly in the section entitled “Risk Factors.”
General
We market
and install a wide variety of attractive, durable, low-maintenance vinyl
products, including fencing, patio covers, decking, railing and trim categories
from our retail location in Santa Ana, California. Our products are used
largely in renovation and remodeling by our customers who include homeowners and
homeowner associations.
We
differentiate our Company from others in the industry on the basis of the manner
in which we market and sell our products and the level of service we offer our
customers. Given that the purchase of our products represents a
substantial investment in a customer's home, typically their most significant
capital asset, we seek to connect with home owners' intrinsic desire to take the
time to make an informed, value-driven purchasing decision. Throughout the
sales process, we invest the time and effort to develop a relationship with a
prospect, as opposed to home centers, specialized retail distributors and
independent contractors that typically employ a hard-sell pitch and seek to make
a sale only when a consumer is prepared to make a purchase.
Our
marketing efforts are designed to capture information about prospective
purchasers of exterior vinyl products early in the buying cycle. We
maintain contact with them over the course of the decision-making process to
educate and consult with them about vinyl products generally, the purchasing and
installation process and the ownership experience. We seek to demonstrate
to prospects that purchasing from us represents the best value for their money
in that we provide a worry-free ownership experience that we believe is not
available from other independent retailers, contractors or the national home
improvement chains.
Our business is subject to numerous
substantial risks, including, among others, that we purchase all of our vinyl
products from a single source; our future growth is dependent upon the success
of our planned franchise program and there are numerous risks associated with
such program; the availability of disposable income to homeowners; the
availability of consumer credit; the availability of credit to prospective
purchasers of our franchises; the seasonality of our business, which ebbs prior
to the year-end holidays and during the first quarter of each calendar year,
corresponding to the rainy season in California, and general economic
conditions. These risks and other important factors relating to our
current and proposed business are detailed in our Annual Report on Form 10-K for
the year ended December 31, 2008 that we filed with the Securities and Exchange
Commission on March 31, 2009 (the "2008 10-K") and the amendments to those
documents.
Summary
Financial Report
Sales for
the third quarter of 2009 were $1,026,571, a decrease of 5% compared to sales of
$1,082,582 during the third quarter of 2008. Sales for the first three
quarters of 2009 were $2,511,482, a decrease of 20% compared to sales of
$3,154,037 during the first three quarters of 2008. We believe that
national economic conditions affected our financial and operating results during
the first three quarters of 2009. Over the last year, consumer confidence
has been down, consumer financing has been difficult to obtain, home equity
values have deteriorated, the amount available for home equity loan withdrawals
has declined and it has been our experience that many homeowners have elected
not to use their disposable income to undertake home renovation projects.
Accordingly, orders for our products were down and sales, income and profits
declined commensurately. In response, we laid-off one of our installer
crews and reduced certain selling, general and administrative
expenses.
Notwithstanding
our lackluster financial performance for each of the first three quarters as
compared to the corresponding 2008 periods, we believe that the accounting
controls and procedures we implemented during the fourth quarter of 2008 have
remediated the material weaknesses in our internal controls over financial
reporting that we discovered in the third quarter of 2008, as reported in the
2008 10-K. We base our conclusion on the significant increase in gross
profit as a percentage of revenue in the first three quarters of 2009 over the
prior four quarters, which we have determined demonstrates that we are
recognizing revenue on all the raw materials we purchase. We continue to
fine-tune our disclosure controls as we gain greater familiarity with the
nuances of our public company obligations and our personnel develop the skills
and expertise with respect to financial reporting under federal securities laws.
As described below under Item 4(T). Controls and Procedures, we did not made any
material changes to our internal control over financial reporting during the
nine months ended September 30, 2009.
Business
Strategy
The
retail outdoor vinyl products is dominated by (i) manufacturers of fencing
products, including all of the product material groups, numbering in the
hundreds, (ii) distributors, including lumber yards and home centers that carry
wood and vinyl fencing and (iii) independent sellers, contractors and installers
of all sizes, such as our company. Manufacturers sell their products to
all segments of the downstream supply chain. Home centers and lumber yards
generally sell products to contractors and homeowners. Typically,
homebuilders and home centers subcontract the installation of fencing to
contractors. Most product-specific retailer and general contractors
install or arrange for installation of products.
In the
retail space in which we operate, retailers that sell and install only fence,
decks and related products and in which marketing and sales are directed to
retail consumers, the market is typified by numerous small companies that seek
to gain market share only in their limited geographic operating areas. It
is our experience that these entities typically employ rudimentary marketing and
advertising programs and tend to be concerned with immediate product sales
rather than building a business. We are not aware of any participant in
the exterior vinyl products industry that operates on a national basis and
believe that a significant opportunity exists for us to develop a national
franchise to establish our products and company as a unique brand.
We
believe that our business model can be replicated throughout the country and
that the fundamental elements of our proprietary sales and marketing techniques,
which we believe are sophisticated when compared to our direct competitors, can
be conveyed effectively through written materials and training to motivated
entrepreneurs. We will seek to leverage our business model by developing a
franchise organization and establishing our Company and brand as the first
national vinyl fencing and patio cover retail chain. We recently engaged a
franchise consultant to assist with the development of the program. We are
only beginning to establish the parameters of our organization, but we believe
that we can complete the document preparation process and develop a general
program design over the next two to three months. Thereafter, we will file
documents to register our organization in the States of California and
Washington. We hope to be able to offer franchises to the public in the
first half of 2010.
Critical
Accounting Policies and Estimates
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
could differ materially from those estimates (See Note A in the Notes to
Financial Statements).
Revenue
recognition
We record
customer deposits on sales as a current liability when received, and we
recognize revenues (i.e., income) when installations of the products are
complete.
Accounts
Receivable
We
require a down payment at the time a sales agreement is signed and the balance
at completion of installation, which minimizes our accounts receivable.
Bad debt losses have been minimal (less than .3% of revenue since inception of
the Company), and we record them as they are incurred.
Inventory
Inventory
is stated at the lower of average cost or market value. Inventory consists
of raw materials (approximately 80%) and fabricated materials awaiting
installation (approximately 20%). Under the terms of its agreement with its
vinyl supplier, the Company receives substantial discounts to product
prices.
Results
of Operations
Comparison of the Three
Months Ended September 30, 2009 and 2008
Income:
Income for the third quarter covered by this report was $1,026,571, a
decrease of 5% compared to income of $1,082,582 during the third quarter of
2008. We believe that such decrease is directly correlated to the general
weakness in the national economy, the fact that homeowners either do not have
the disposable income to allocate to home renovation projects or have elected
not to spend their disposable income on fence, patio cover or decking projects
at this time, and tight consumer credit conditions.
Cost of Goods Sold:
During 2008 and 2009, the contract with our vinyl supplier provided for
significant discounts on raw materials we purchased upon achieving certain
specified purchase quotas, which we met. We benefitted materially from the
discount for the 2008 and 2009 fiscal years. Our cost of goods sold for
all periods reported in this Quarterly Report on Form 10-Q is net of the
discount we receive on the cost of raw materials. (In October 2009, the supplier
eliminated the specified purchase quotas.)
Gross Profit:
Gross profit increased from $484,807 for the 2008 period to $552,833 for the
2009 period, an increase of 14%; and the gross profit percentage increased from
45% in 2008 to 54% in 2009. We attribute the increase in the gross profit
percentage directly to the various personnel adjustments we made when we learned
that certain employees had been defrauding the Company by stealing materials and
reselling and installing them for their own benefit. These adjustments
included terminating the employees involved, re-defining the roles of our staff
responsible for fabrication and installation, improving control procedures,
restructuring our work force, and increasing the involvement of our accounting
manager in inventory control. These issues and our reaction and
remediation efforts are more fully described in our annual report on Form 10-K
for the year ended December 31, 2008.
Expenses:
Advertising
and marketing expense during the third quarter of 2009 was $44,780, a decrease
of $3,873, or 8%, from the third quarter of 2008 in which we expended
$48,653. The decrease represents modifications to our advertising and
marketing programs resulting from our ongoing effort to identify and adjust the
proper mix of advertising media to maximize the effectiveness of the advertising
media we select and the return on advertising investment.
Selling,
general and administrative expenses increased from $114,105 during the third
quarter of 2008 to $127,374, or 12%, during the third quarter of 2009. The
increase was due primarily to an increase in small tools and supplies
expense.
Payroll
expenses increased from $189,694 to $272,386, an increase of $82,692, or 44%,
due primarily to the hiring of a sales manager and an operations manager and
officer pay increases.
Professional
fees increased from $37,193 during the 2008 period to $47,604 during the
corresponding 2009 period, or 28%. The increase was due primarily to
increases in legal fees.
Income
taxes decreased from $34,300 in 2008 to $1,000 in 2009, due to the Company
making a profit in 2008 and recording a loss in 2009.
For the
three years ended September 30, 2009, inflation and changing prices have had
little impact on revenues and net income. As our sole vinyl supplier has
increased prices, we have been able to increase our prices
correspondingly.
Comparison of the Nine
Months Ended September 30, 2009 and 2008
Income:
Income for the first three quarters covered by this report was $2,511,482,
a decrease of 20% compared to sales of $3,154,037 during the first three
quarters of 2008. We believe that such decrease is directly correlated to
the general weakness in the national economy, the fact that homeowners either do
not have the disposable income to allocate to home renovation projects or have
elected not to spend their disposable income on fence or decking projects at
this time, and tight consumer credit conditions.
Cost of Goods Sold:
During 2008 and 2009, the contract with our vinyl supplier provided for
significant discounts on raw materials we purchased upon achieving certain
specified purchase quotas, which we met. We benefitted materially from the
discount for the 2008 and 2009 fiscal years. Our cost of goods sold for
all periods reported in this Quarterly Report on Form 10-Q is net of the
discount we receive on the cost of raw materials. (In October 2009, the
supplier eliminated the specified purchase quotas.)
Gross Profit:
Gross profit decreased from $1,479,300 for the 2008 period to $1,364,240 for the
2009 period, a decrease of 8%; however, the gross profit percentage increased
from 47% in 2008 to 54% in 2009. We attribute the increase in the gross
profit percentage directly to the various personnel adjustments we made when we
learned that certain employees had been defrauding the Company by stealing
materials and reselling and installing them for their own benefit. These
adjustments included terminating the employees involved, re-defining the roles
of our staff responsible for fabrication and installation, improving control
procedures, restructuring our work force and increasing the involvement of our
accounting manager in inventory control. These issues and our reaction and
remediation efforts are more fully described in our annual report on Form 10-K
for the year ended December 31, 2008.
Expenses:
Advertising
and marketing expense during the first three quarters of 2009 was $125,917, a
decrease of $18,852, or 13%, from the first three quarters of 2008 in which we
expended $144,769. The decrease represents modifications to our
advertising and marketing programs resulting from our ongoing effort to identify
and adjust the proper mix of advertising media to maximize the effectiveness of
the advertising media we select and the return on advertising
investment.
Selling,
general and administrative expenses decreased from $322,869 during the first
three quarters of 2008 to $308,988, or 4%, during the first three quarters of
2009. The decrease was due primarily to decreases in travel, meals and
entertainment expenses.
Payroll
expenses increased from $699,453 to $792,432, an increase of $92,979, or 13%,
due primarily to the hiring of a sales manager and an operations manager and
officer pay increases.
Professional
fees increased from $124,295 during the 2008 period to $182,258 during the
corresponding 2009 period, or 47%. The increase was due primarily to
increases in franchise consulting of $9,500, legal fees of $35,000, and
accounting and auditing fees of $31,000 (in the latter two cases for the
professional services rendered in connection with the share exchange we
consummated in November 2008 and the filings made with the SEC as a result
thereof), offset by decreases in other professional fees.
Income
taxes decreased from $62,000 in 2008 to $1,400 in 2009, due to the Company
making a profit in 2008 and recording a loss in 2009.
For the
three years ended September 30, 2009, inflation and changing prices have had
little impact on revenues and net income. As our sole vinyl supplier has
increased prices, we have been able to increase our prices
correspondingly.
Cash
Flows
Nine Months Ended September
30, 2009 and September 30, 2008
Cash
and Cash Equivalents
Our cash
and cash equivalents were $114,901 at December 31, 2008, and decreased to
$47,740 by September 30, 2009, due primarily to a decrease in net income in
2009.
Net
cash provided by operating activities
Net cash
used by operating activities was $67,612 for the nine months ended September 30,
2009, compared to $233,320 for the nine months ended September 30, 2008.
The decrease of approximately $300,000 was primarily attributable to a decrease
in net income of $176,000, a decrease in customer deposits of $65,000, and other
items, net.
Net
cash used in investing activities
Net cash
used in investing activities was $$19,556 for the nine months ended September
30, 2009, compared to $39,485 for the nine months ended September 30,
2008. The $19,929 decrease was due primarily to the 2008 purchases of
machinery and equipment.
Net
cash provided by financing activities
Net cash
provided by financing activities was $20,007 for the nine months ended September
30, 2009 compared to $190,900 net cash used in the nine months ended September
30, 2008.The increase of approximately $211,000 was due primarily to the payment
of $330,000 of dividends in 2008, offset by an increase in note payable to
shareholders of $152,000 in 2008 and net proceeds from line of credit borrowings
of $25,000 in 2009.
Liquidity
and Capital Resources
Over the
next twelve months, we will commence developing a franchise program. As
described below, we expect that the cost to us to implement the first phase of
our franchise program, including the fees of our franchise consultant and
franchise license fees and costs for registration of our franchise organization
in the States of California and Washington, will not exceed $50,000, as more
fully described below.
We
recently engaged a franchise consultant to assist us with the development of the
program. We are only beginning to establish the parameters of our
organization and we cannot estimate the costs associated with its deployment on
a national basis. We are advised by our franchise consultant that the
costs to develop and implement the program and maintain the organization are
highly variable and are a function of numerous factors, such as the number of
jurisdictions in which franchisees are located and the specific jurisdictions
selected (which will bear on franchise registration fees to be paid); the
geographical location of our franchises (close in proximity to each other or
widely separated – which will bear on advertising and other costs); the extent
of the advertising efforts we may employ; and the additional infrastructure we
may require to manage the organization.
We expect
to implement our franchise program in phases. The first phase will
encompass the preparation, with the assistance and guidance of our franchise
consultant, of the preponderance of the documentation required to develop and
implement the program. This includes documents mandated by the government
and internal organizational documentation. We anticipate that this
approach will reduce the program's organizational costs significantly. In
the second phase, we will apply to register to sell franchises in the States of
California and Washington, with the intent of initially selling franchises in
relatively close proximity to our principal offices in Orange County,
California. We believe that we can more competently and efficiently
manage, support and oversee the development of franchises closer to our home
office. We expect that the success of our efforts in California and
Washington will influence directly our decision as to when to commence offering
franchises in other jurisdictions. Success will be measured not only by
the number of franchises we sell and their performance but also by our ability
to manage our operations and provide the level of support necessary to ensure
the success of our franchisees.
We do not
currently expect to engage any additional internal personnel to manage the
process, and consideration as to future staffing requirements will be dictated
by the growth and requirements of the program. We may seek to outsource
facets of the development and operation of the franchise program to avoid the
burdens of building infrastructure and to take advantage of the expertise of
industry professionals. We may engage consultants to assist with franchise
organizational matters, such as legal counsel to assist with preparation of
franchise registration applications, and professionals who engage in franchisee
recruitment and to whom we may pay finders' fees, and advertising.
We hope
that we will be in a position to offer franchises in California and Washington
in the first half of 2010.
Once a
franchise program has been developed, we expect to allocate significant cash
resources to advertising (both to recruit franchisees and to fund advertising on
behalf of our franchisees), marketing staff, accounting staff and general and
administrative expenses, as well as the costs and expenses of any outsourced
operations. We cannot currently estimate the costs associated with these
elements of the program, as they may vary significantly. Future costs will
be contingent on the performance of the program, the speed with which we
determine to expand into additional jurisdictions into which we will offer
franchises, and the size of the organization.
It is our
intention to fund the above-described first two phases of our franchise
organization internally from capital generated from operating revenue from our
existing retail location and our line of credit (of which approximately $74,000
is available for use at November 13, 2009). We will seek to develop a
program and organization within the constraints of our cash resources and take a
conservative approach, growing as conditions, return on investment and available
capital, among other factors, warrant. In the event that we have
underestimated the costs associated with the development of our franchise
program, that we encounter unanticipated costs, delays or difficulties, or that
the recession deepens or extends significantly longer than financial experts
anticipate, we may be required to seek external funding.
In the
event we require capital for any purpose, we may seek to secure third-party
financing. The nature of the financing, debt or equity, will be dependent
upon current market conditions and availability. We cannot be certain that
such capital will be available to us on favorable or acceptable terms, or at
all.
Outlook
Demand
for our products can be linked to changes in the health of the economy in
general and the level of activity in home improvements. These activity
levels, in turn, are affected by such factors as consumer confidence, home
equity values, home equity loan withdrawals, consumer spending habits,
reasonably attainable consumer credit, income, interest rates and
inflation. These factors are all currently in poor positions, and
indications are that they will remain that way in the near-term. We
believe that these factors have resulted in decreased home improvement spending,
which caused our sales and results of operations to decline for the first three
quarters of 2009. We cannot at this time state with any certainty when
significant improvements in market conditions may occur and we are managing our
business on that basis.
While we
expect that current business conditions will persist or improve only slightly
over the remainder of calendar year 2009, we continue to believe that our
business model is fundamentally sound. We believe that the range of
quality products we offer combined with our marketing approach will continue to
attract customers and that we can return to pre-recession sales levels at our
retail location as the economy rebounds. We think that these key elements
of our business will be attractive factors to franchisees and lead us to believe
that our growth strategy, predicated on launching a national franchise program
in 2010, will fill a niche that can generate significant growth over the longer
term.
The
performance of our franchise program may depend, in part, on the availability of
credit to prospective franchisees. Most franchises are acquired by
franchisees utilizing a combination of personal investment and third-party
financing. In light of current adverse economic conditions marked by tight
credit, prospective franchisees may have difficulty obtaining the financing
required to purchase a franchise from us. If credit is not available to
these prospects, franchise sales may be sluggish or we may not sell any
franchises, which would adversely affect our results of operations and liquidity
and impact our ability to expand the franchise program into additional
jurisdictions.
Until the
advent of more promising economic conditions, we will take a conservative
approach to our business generally and to the development of our franchise
program specifically. We will be deliberate in the expansion of our
franchise organization, to avoid over-extending our financial resources, and we
will carefully plan when and how we penetrate new territories. We are
hoping that the credit crisis will have eased by the time we are prepared to
launch our franchise program in 2010 and that credit will be more readily
available which would facilitate the acquisition of loans by our
prospects.
Quantitative
and Qualitative Disclosures About Market Risk
We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash and
cash equivalents, trade accounts receivable and accounts payable.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued Statement of Financial Standards No. 159, “The
Fair Value for Financial Assets and Financial Liabilities – including an
amendment of FASB Statement No. 115”. This statement permits entities to
choose to measure many financial instruments and certain other
items
at fair
value.
The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of
fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments, and is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 17, 2007, provided the entity also
elects to apply the provisions of FASB Statement No. 157, “Fair Value
Measurements”. No entity is permitted to apply the Statement
retrospectively to fiscal years preceding the effective date unless the entity
chooses early adoption. Early adoption of the standard is not expected to
have a material effect on the Company’s results of operations or its financial
position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations in a number of areas, including the
treatment of contingent considerations, contingencies, acquisition costs,
IPR&D and restructuring costs. In additions, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS 141R is effective for fiscal years beginning
after December 15, 2008. The Company has not yet determined the impact, if
any, of SFAS 141R on its financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Non Controlling Interests in
Financial Statements, an amendment of ARB No. 51”. SFAS 160 will change
the accounting and reporting of minority interests, which will be
re-characterized as non-controlling interests (NCI) and classified as a
component of equity. This new consolidation method will significantly
change the account with minority interest holders. SFAS 160 is effective
for fiscal years beginning after December 15, 2008. The Company has not
yet determined the impact, if any, of SFAS 160 on its financial
statements.
Cautionary
Statement Relevant to Forward-Looking Information for the Purpose of “Safe
Harbor” Provisions of the Private Securities Litigation Reform Act of
1995
The
Company and its representatives may from time to time make written or oral
forward-looking statements with respect to long-term goals or anticipated
results of the Company, including statements contained in the Company’s filings
with the Securities and Exchange Commission and in its reports to
stockholders.
Statements, including those in this
Quarterly Report on Form 10-Q, which are not historical or current facts, are
“forward-looking statements” made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause our results to differ materially from those
anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risk and uncertainty. Some of
the factors that could affect results are the continued uninterrupted
availability of raw materials and the cost thereof, our ability to develop a
successful franchise program, the availability of capital to us as required to
implement our franchise program and other expansion plans, the sensitivity of
our industry to prevailing national economic conditions, the seasonal nature of
the outdoor remodeling industry, the effectiveness of new product introductions,
the amount of sales generated and the profit margins thereon, competition and
general economic conditions. For further information regarding these risks and
uncertainties, see the “Risk Factors” section in Item 1A of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.
The
Company specifically declines to undertake any obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item
4(T). Controls and Procedures.
Controls
and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information we are required to disclose in the reports we file under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and that such information is accumulated and communicated to management,
including our President (chief executive officer) and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Our
management also is responsible for establishing and maintaining internal control
over financial reporting which is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding the
prevention or timely detection of the unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial
statements.
Our
management does not expect that our disclosure controls and procedures or
internal control over financial reporting will be effective in all
instances. There are inherent limitations in all control systems that
reflect both resource constraints and the human factor as it relates to the
application of a control system, including the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Controls also can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events and any
design may not succeed in achieving its stated goals under all potential future
conditions.
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2009, the Company’s management carried out an evaluation, under
the supervision and with the participation of the Company’s Chief Executive
Officer (principal executive officer, or PEO) and Chief Financial Officer
(principal financial officer, or PFO), of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15 and 15d-15 under the Exchange Act), pursuant to Exchange Act Rule
13a-15.
As
previously disclosed under “Item 9A. Controls and Procedures” in an amendment to
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as
filed with the SEC on November 13, 2009 ("Amended 2008 Form 10-K"), our
management identified material weaknesses in our internal control over financial
reporting at December 31, 2008 and each subsequent interim period through
September 30, 2009. A material weakness is defined in
Section 210.1-02(4) of Regulation S-X as a deficiency, or combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis.
As a
result of our failure to accurately compute our federal and state corporate
income tax liability for the year ended December 31, 2008, as described in the
Amended 2008 Form 10-K, management concluded that we had the following
weaknesses in our internal control over financial reporting:
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·
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Inadequate
Expertise in the Application of Federal and State Tax Laws as they Impact
Financial Reporting: Our internal accounting personnel did not possess
sufficient expertise in the application of federal and state tax laws as
they apply to consolidation of an acquired business with a different
fiscal year end.
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·
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Reliance
on Third Party Professionals: We retained a certified public accountant to
prepare our tax returns for the year ended December 31, 2008. We may
not have adequately assessed this person's qualifications to ascertain his
level of experience to render the services for which we retained
him. Moreover, we did not adequately monitor this person's work and
placed undue reliance on his expertise without confirming the accuracy of
the finished product.
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Based on
management’s evaluation and as a result of the identified material weaknesses,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of September 30, 2009, our disclosure controls and procedures were not effective
to ensure that we are able to accumulate and communicate to our management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure, information
that we are required to disclose in the reports that we file with the SEC, and
to record, process, summarize and report that information within the required
time periods.
Changes
in Internal Controls
During
the three months ended September 30, 2009, we did not make any changes to our
internal control over financial reporting (as defined in Rules 13a-15 and 15d-15
under the Exchange Act) that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Plan
of Remediation of Material Weakness
As of the
date of this report, we have not implemented any measures to remediate the
material weaknesses identified above. We currently are exploring all of
the options available to us and will consider each option carefully before
taking any action.
We intend
to continue to evaluate our internal controls on an ongoing basis and to upgrade
and enhance them as needed.
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings.
On
December 5, 2008, Frank Arias, a former employee of the Company filed a
complaint in the Orange County Superior Court of California against the Company
and its principals, Gordon Knott and Garabed Khatchoyan. The complaint
includes nine allegations, including (i) unlawful non-payment of wages; (ii)
breach of implied covenant of good faith and fair dealing; (iii) failure to pay
earned wages upon separation; (iv) defamation and (v) wrongful discharge.
The complaint arises from the Company's termination of Mr. Arias on September
30, 2008 on the basis that he purloined approximately $200,000 of materials from
our warehouse. Mr. Arias generally is seeking compensatory damages,
attorneys' fees, punitive damages and equitable relief but has made no specific
monetary demand for damages. On January 5, 2009, Company counsel filed a
demurrer requesting that the court dismiss the case against Mr. Knott and Mr.
Khatchoyan and several of Mr. Arias' claims against the Company because they are
deficient as a matter of law. Concurrently, we filed a motion to compel
arbitration as provided under the terms of Mr. Arias's employment. On
April 28, 2009, the Court granted our motion to compel arbitration, thereby
rendering our demurrer moot and keeping Mr. Arias's ten causes of action under
the complaint intact. The parties are currently in the process of
selecting an arbiter.
We are advised by our insurance carrier
that all of the claims made by Mr. Arias are covered by an insurance policy
maintained for the benefit of our Company and our PEO and that any amount
awarded to Mr. Arias, either by way of court decision, arbitration or other
settlement are covered by such policy. Accordingly, the Company has no
exposure for monetary damages that may be awarded to Mr. Arias.
Item
1A. Risk Factors.
Smaller
reporting companies are not required to provide the information required by this
item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) During
the three months ended September 30, 2009, the Company did not issue any
securities.
(b) Not
applicable.
(c)
During the three months ended September 30, 2009, neither the issuer nor any
"affiliated purchaser," as defined in Rule 10b-18(a)(13), purchased any shares
or other units of any class of the issuer's equity securities.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibit
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Description
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31.1
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Certification
of the Company’s Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly
Report on Form 10-Q/A for the quarter ended September 30,
2009.
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31.2
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Certification
of the Company’s Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly
Report on Form 10-Q/A for the quarter ended September 30,
2009.
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32.1*
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Certification
of the Company’s Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes Oxley Act of
2002.
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* Pursuant to Commission
Release No. 33-8238, this certification will be treated as “accompanying”
this Quarterly Report on Form 10-Q and not “filed” as part of such report for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended,
or otherwise subject to the liability of Section 18 of the Securities
Exchange Act of 1934, as amended, and this certification will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, except to the
extent that the registrant specifically incorporates it by
reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
VINYL
PRODUCTS, INC.
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Date:
November 16, 2009
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By:
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/s/ Gordon Knott
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Name:
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Gordon
Knott
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Title:
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President
and Chief Executive Officer
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Date:
November 16, 2009
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By:
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/s/ Douglas E.
Wells
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Name:
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Douglas
E. Wells
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Title:
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Chief
Financial Officer and Principal Financial
Officer
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