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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

OrganizationVinyl 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 ActivityThe 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 EstimatesThe 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 IncomeThe 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 ExpenseThe 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 InstrumentsThe 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 ReceivableThe 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:

 
·
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.

 
·
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.

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
 
Description
     
31.1
 
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.
     
31.2
 
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.
     
32.1*
 
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.

*  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.
     
Date: November 16, 2009
By:  
/s/  Gordon Knott
 
Name:  
Gordon Knott
 
Title:  
President and Chief Executive Officer
     
Date: November 16, 2009
By:  
/s/  Douglas E. Wells
 
Name:  
Douglas E. Wells
 
Title:  
Chief Financial Officer and Principal Financial Officer