As filed with the Securities and Exchange Commission on December 1, 2004.
REGISTRATION NO. 333-119234
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2/A-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
THE FLOORING ZONE, INC.
---------------------------------------------
(Name of Small Business Issuer in its Charter)
Nevada 5211 20-0019425
- ----------------------------- -------------------------- -------------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
3219 Glynn Avenue, Brunswick, Georgia 31520
(912) 264-0505
-------------------------------------------------------------------------
(Address and Telephone Number of Registrant's Principal Place of Business)
Gateway Enterprises, Inc.
3230 East Flamingo Road, Suite 156 Las Vegas, Nevada 89121
800 992-4333
------------------------------------------------------------
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Ronald L. Poulton, Esq.
Poulton & Yordan
136 East South Temple, Suite 1700-A, Salt Lake City, Utah 84111
(801) 355-1341
Approximate Date of Proposed Sale to the Public: As soon as practicable from
time to time after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If delivery of the prospectus is expected pursuant to Rule 434, please check the
following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Title of each Number of Proposed Maximum Proposed Maximum Amount of
Class of Securities Securities Offering Price Aggregate Offering Registration
to be Registered to be Registered Per Share Price (1) Fee(1)
- --------------------------------------------------------------------------------------------------------------------
Common Stock 10,000,000 $2.00 $20,000,000 $2,534
- --------------------------------------------------------------------------------------------------------------------
- -------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
2
THE FLOORING ZONE, INC.
Maximum Offering: 10,000,000 Common Shares
Offering Price: $2.00 per share
================================================================================
The Flooring Zone, Inc. This is our initial public offering.
3219 Glynn Avenue No public market exists currently for
Brunswick, Georgia 31520 our common shares, although we intend
to apply for trading on the OTC
Bulletin Board, or the NASD Small Cap
market if this offering is successful.
We have not arranged to have a
broker/dealer make The Offering
application with the NASD to act as a
market maker for our common stock
after the offering.
Total
Per Share Maximum
--------- -------
Public Price ..... $2.00 $20,000,000 The offering price may not reflect the
Underwriting market price of our shares after the
Discounts ........ -0- -0- offering. There is no minimum offering
Maximum amount and no escrow of funds is
Proceeds to us ... $2.00 $20,000,000* required by us.
================================================================================
*Proceeds to The Flooring Zone, Inc. are shown before deducting estimated
offering costs of $200,000 including legal and accounting fees and printing
costs payable by The Flooring Zone, Inc. This offering is self underwritten and
will be managed by us. The shares will be offered and sold by our officers and
directors without discounts or other commissions. We may also retain licensed
broker/ dealers to assist us in the offer and sell of shares in this offering,
if we deem such to be in our best interest. At this time we do not have any
commitments, agreements or understandings with any broker/dealers. The maximum
underwriting discounts and commissions we are willing to pay to engage
broker/dealers is 10% of the proceeds realized from the sale of shares sold by
such broker/dealers. In the event we retain any broker/dealers to assist in the
offer and sell of units, such broker/dealers must receive approval from the NASD
as to the reasonableness of the compensation paid by us to the broker/dealer.
All funds raised in this offering will be immediately available for our
use when we accept your subscription.
Investing in these Shares involves a high degree of risk. The Shares
offered should not be purchased by any investor who cannot afford to sustain the
total loss of their investment. See "RISK FACTORS" on pages 4 through 6 for a
discussion of certain material risk factors that should be considered in
connection with an investment in the common shares offered hereby.
These securities have not been approved by the Securities and Exchange
Commission or any state securities agency nor has the Commission or any agency
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
This offering will commence with the date of this prospectus and will
end 270 days from that date, unless terminated earlier by us. There will be no
extensions of time in which to continue this offering.
The date of this Prospectus is ____, 2004.
3
TABLE OF CONTENTS
Page
Summary................................................................... 5
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
Determination of Offering Price........................................... 12
Dilution.................................................................. 12
Selling Security Holders.................................................. 12
Plan of Distribution...................................................... 13
Legal Proceedings......................................................... 13
Directors, Executive Officers, Promoters and Control Persons.............. 14
Security Ownership of Certain Beneficial Owners and Management............ 15
Description of Securities................................................. 16
Interest of Named Experts and Counsel..................................... 18
Disclosure of Commission Position of Indemnification for
Securities Act Liabilities.............................................. 18
Organization Within Last Five Years....................................... 19
Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................. 24
Plan of Operations........................................................ 31
Description of Property................................................... 31
Certain Relationships and Related Transactions............................ 32
Market for Common Equity and Related Stockholders Matters................. 32
Executive Compensation.................................................... 33
Financial Statements...................................................... 34
Changes in and Disagreements with Accountant Disclosure................... 54
4
PROSPECTUS SUMMARY
The Company
The Flooring Zone, Inc. is a Nevada corporation organized on May 5,
2003, to operate full service retail floorcovering stores. We have a
wholly-owned subsidairy, The Flooring Zone of Georgia, Inc. The Georgia
corporation was formed in 2000, by the founders of The Flooring Zone, Inc., and
was established to develop our business concept in the retail floorcovering
industry. Through our subsidiary we operate a total of three retail stores. We
have stores in Brunswick and St. Mary's, Georgia and one in Yulee, Florida. We
also maintain administrative offices and warehouse facilities in Brunswick,
Georgia. We are conducting this offering to raise capital to expand our
operations and store locations in the southeastern United States.
Our principal executive offices are located at 3219 Glynn Avenue,
Brusnwick, Georgia 31520. Our telephone number is (800) 992-4333. Our website
address is www.theflooringzone.com.
The Offering
Securities Offered: 10,000,000 Shares of $.001 par value Company common stock.
Offering Price: $2.00 per share.
Summary of Selected
Financial Data: For the nine months ended December 31,
September 30,2004 (Unaudited) 2003 2002
----------------------------- -------------------------
Balance Sheet Data
------------------
Total Assets $ 894,781
Total Current Liabilities $ 593,252
Stockholders' Deficit $ 320,541
Net Tangible Book Value $ (324,386)
Net Tangible Book Value
Per Share $ (0.01)
Operations Data (Unaudited)
---------------------------
Gross Profits $1,066,987 $1,012,237 $1,004,070
Expenses $1,005,615 $1,434,035 $1,099,370
Net Income (Loss) $ 61,372 $ (421,798) $ (95,300)
Income(Loss) per Share $ (0.00) $ (0.01) $ (0.01)
Termination Date: This offering will commence with the date of this prospectus and will end 270 days
from that date, unless terminated earlier by us. There will be no extensions of time in
which to continue this offering.
5
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO
THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE
FINANCIAL STATEMENTS AND NOTES, PRIOR TO MAKING AN INVESTMENT IN THE FLOORING
ZONE, INC.
IF WE ARE UNABLE TO EXPAND INTO NEW MARKETS, OUR ABILITY TO GROW OUR
BUSINESS AND TO OPERATE PROFITABLY COULD BE MATERIALLY ADVERSELY EFFECTED AND
YOU COULD LOSE SOME OR ALL OF THE FUNDS YOU INVEST IN THIS OFFERING. We intend
to pursue an aggressive growth strategy for the foreseeable future. Our future
operating results will depend largely upon our ability to open and operate new
stores successfully. To support our growth, we employ a centralized management
information system to integrate our store operations and financial data. There
can also be no assurance that we will be able to expand our market presence in
our existing markets or successfully enter new or contiguous markets by opening
new stores or that any such expansion will not adversely affect our
profitability and results of operations. If we are unable to manage this growth
effectively, our business, results of operations and financial condition could
be materially adversely affected.
IF WE ARE UNABLE TO MANAGE THIS GROWTH EFFECTIVELY, OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY
AFFECTED. Our ability to successfully open new stores is dependent on a number
of factors including:
o the ability to hire, train and assimilate management and
store-level employees
o the adequacy of our financial resources
o the ability to identify new and contiguous markets, to locate
and construct suitable store sites, to negotiate acceptable
lease terms and to successfully compete in new and contiguous
markets
o ability to minimize delay, increased expenses or loss of
potential sites due to the complexities associated with the
regulatory and permitting processes in the markets in which we
attempt to locate our stores
There can be no assurance that we will be able to achieve the planned expansion,
that the new stores will be accepted in the marketplace or that they will
achieve planned operating results or results comparable with the existing
Flooring Zone stores.
THE FLOORCOVERING MARKET IS HIGHLY COMPETITIVE. IF WE ARE UNABLE TO
SUCCESSFULLY COMPETE IN THE INDUSTRY, YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Competition in the retail floorcovering market is intense due to the significant
number or retailers. The majority of flooring retailers are independently owned
and operated stores. In addition, large retailers also provide significant
competition, including The Home Depot, Inc., Lowe's and Sears, Roebuck & Co.
Another significant competitor in the market is Shaw Industries, Inc., the
world's largest carpet manufacturer. In 1995 Shaw Industries announced its
decision to move into the retail floorcovering sector and has since acquired
6
Carpetland USA, Inc and New York Carpet World, Inc. The principal methods of
competition within the retail floorcovering industry include store location,
product selection, merchandising strategy, customer service and price.
THE FLOORCOVERING BUSINESS IS CYCLICAL AND OUR QUARTERLY RESULTS OF
OPERATIONS MAY FLUCTUATE SIGNIFICANTLY BASED ON VARIOUS FACTORS SUCH AS
SEASONALITY AND ECONOMIC DOWNTURNS. IF WE ENCOUNTER AN UNEXPECTED OR EXTENDED
CYCLICAL DOWNTURN, WE MAY NOT HAVE SUFFICIENT FINANCIAL RESOURCES TO CONTINUE
OPERATIONS, WHICH COULD RESULT IN YOU LOSING ALL OR PART OF YOUR INVESTMENT IN
OUR COMPANY. Our quarterly operating results have fluctuated in the past and are
expected to fluctuate in the future as a result of a variety of factors. We
expect our business to continue to exhibit some measure of seasonality, which we
believe is typical of the floorcovering industry. Individual stores generally
experience lower net sales, operating income and cash flow from operations and
lower sales of manufactured carpets in the first and fourth fiscal quarters when
compared to the second and third quarters, due primarily to the effect of winter
weather on home improvement projects. Other factors which may affect operating
results include the timing of store openings and related pre-openings expenses,
weather conditions, price increases by suppliers, actions by competitors,
conditions in the carpet manufacturing, home building and improvement markets
and the floorcovering industry in general. In addition, the floorcovering
industry historically has been adversely impacted by economic downturns. The
industry is also significantly influenced by economic conditions generally and
particularly by consumer behavior, consumer confidence, the level of personal
discretionary spending, the condition of the residential and commercial
construction industries, interest rates, credit availability and the overall
strength of the economy . A prolonged economic downturn could have a material
adverse effect on financial results and our ability to continue operations.
WE HAVE REALIZED NET LOSSES FROM OPERATIONS IN EACH OF THE PAST TWO
FISCAL YEARS AND IN THE MOST RECENT FISCAL QUARTER, IF WE CANNOT REVERSE THIS
TREND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT IN OUR COMPANY. During the
years ended December 31, 2003, and 2002, we realized net losses from operations
of $467,460 and $127,099, respectively. While we have realized net income of
$15,635 for the nine months ended September 30, 2004, we realized a net loss of
$43,555 during the most recently ended fiscal quarter. If we are unable to
reverse this trend of net losses from operations, depending on the size of those
losses, it is unlikely that the Company would be able to continue operations. If
we cannot operate profitably, we would expect that the price of our shares will
decrease. If we sustain significant or prolonged periods of net losses, we may
be unable to continue operations. If we are unable to continue operations, we
anticipate our common shares would have little or no value, which means you
could lose most or all of the money you invest in this offering.
YOU MAY LOSE THE FULL AMOUNT OF YOUR INVESTMENT IF WE WERE TO LOSE THE
SERVICES OF OUR PRESIDENT OR OTHER KEY SENIOR MANAGEMENT MEMBERS. Our is largely
dependent on the skills, experience and efforts of its senior management and
especially its President and Chief Executive Officer, Jimmy S. Lee. The loss of
the services of Mr. Lee or other members of our senior management could have a
material adverse effect on our business and prospects. We believe that our
future success will also depend in part upon our ability to attract, retain and
motivate qualified personnel.
7
WE ARE DEPENDENT UPON SEVERAL SUPPLIERS OF FLOORCOVERING PRODUCTS. ANY
SIGNIFICANT DISRUPTION OR CHANGE IN OUR RELATIONSHIPS WITH THESE SUPPLIER COULD
MATERIALLY ADVERSELY EFFECT OUR RESULTS OF OPERATIONS AND THE VALUE OF YOUR
INVESTMENTS IN OUR COMPANY. We rely on several large independent floorcovering
manufacturers for the production of the floorcoverings we sell. In addition, our
retail inventory management is highly dependent on the delivery capabilities of
these manufacturers. Any significant changes in our relationships with
manufacturers, or in the manner in which these manufacturers produce or
distribute their products, could have a material adverse effect on our
operations. Although these manufacturers have been reliable, high-quality
producers, there can be no assurance that in the future these manufacturers will
be willing or able to meet our requirements on a timely basis or that their
pricing and rebate policies will remain competitive. While we believe there are
a number of alternative manufacturers capable of supplying and distributing the
floorcovering products we sell, any delays in obtaining alternative suppliers
could have a material adverse effect on our operations.
WE HAVE A LIMITED OPERATING HISTORY. We have developed our company's
business model based upon our experience in opening and operating three retail
floorcovering stores located in southeast Georgia and Northeast Florida. Based
upon the success of this offering, we intend to pursue a growth strategy by
opening and operating new retail floorcovering stores in areas with greater
populations such as Jacksonville, Florida and Atlanta, Georgia and other
metropolitan area in the southern states. There can also be no assurance that we
will be able to enter new or contiguous markets successfully.
IF WE ARE UNSUCCESSFUL IN GAINING MARKET SHARE IN THE MARKETS INTO
WHICH WE EXPAND, WE WILL BE UNABLE TO GENERATE REVENUE FROM THOSE STORES AND YOU
MAY LOSE YOUR ENTIRE INVESTMENT. Our proposed business is based on our belief
that we can successfully enter and compete in new markets. We believe market
acceptance will be dependent on a number of factors including:
o advertising and promotion;
o acceptance from consumers;
o availability of competing products and services;
o pricing factors;
o other intangible factors.
The abovementioned factors change rapidly and cannot be predicted with
certainty. If we are unable to properly analyze market need and acceptance, we
may not gain the market share in these new markets that we need to generate
sufficient revenue to operate profitably. If our new stores cannot operate
profitably, that could materially adversely effect the results of operations of
the Company, which could result in you losing your entire investment.
8
THERE IS NO MARKET FOR OUR SECURITIES WHICH WILL CAUSE YOUR INVESTMENT
TO BE EXTREMELY ILLIQUID AND VIRTUALLY IMPOSSIBLE TO SELL. Currently, our stock
is not listed on any established trading system. Therefore, the market for our
common stock is limited and we cannot assure you that a market will ever be
developed or maintained. The fact that most of our stock is held by a small
number of investors, further reduces the liquidity of our stock and the
likelihood that any active trading market will develop.
The market for our common stock is likely to be volatile and many
factors may affect the market. These include, for example:
o our success, or lack of success, in marketing our products and
services;
o competition;
o governmental regulations; and
o fluctuations in operating results.
The stock markets generally have experienced, and will likely continue
to experience, extreme price and volume fluctuations which have affected the
market price of the shares of many small capital companies. These fluctuations
have often been unrelated to the operating results of such companies. Such broad
market fluctuations, as well as general economic and political conditions, may
decrease the market price of our common stock in any market that may develop.
BECAUSE OUR STOCK IS A "PENNY STOCK" TRADING IN OUR STOCK MAY BE MORE
EXPENSIVE AND MORE VOLATILE THAN TRADING IN HIGHER PRICED STOCKS, WHICH COULD
RESULT IN YOU PAYING GREATER TRANSACTION COSTS AND REALIZING LESS GAIN, A LOSS
OR EVEN NOTHING FROM YOUR INVESTMENT IN OUR SECURITIES. "Penny stocks" are
generally defined as shares that trade at a price below $5.00 per share, other
than securities registered on certain national securities exchanges or quoted on
NASDAQ. While we intend to seek a listing for our common shares on a national
trading system, such as the Over-the-Counter Bulletin Board, we do not
anticipate, at least initially, seeking listing on a national securities
exchange or NASDAQ. Therefore, we anticipate that if we do obtain a listing for
our common stock on an established trading system, our common shares will be
deemed to be a penny stock. Broker-dealer practices in connection with
transactions in penny stocks are regulated by certain penny stock rules adopted
by the Securities and Exchange Commission. These penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the nature of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction, and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control of the market, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
broker-dealers who sell these securities to persons other than established
customers and "accredited investors" must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. Consequently, these
requirements may have the effect of reducing trading activity, if any, in the
secondary market for a security subject to the penny stock rules, and investors
in our common stock may find it difficult to sell their shares.
9
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on
our current expectations, assumptions, estimates and projections about us and
our industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify forward
looking statements. These statements include, but are not limited to, statements
under the captions "Risk Factors," "Use of Proceeds," "Plan of Operations,"
"Description of Business" and elsewhere in this prospectus.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
prospectus.
USE OF PROCEEDS
The following table sets forth our estimate of the allocation of net
proceeds from this offering based on varying levels of funding that we deem to
be key milestones to our operations. Actual expenditures may vary from these
estimates. If we raise at least $1,375,000 we will seek to satisfy our
outstanding debt obligations. If we raise at least $4,750,000, we intend to open
four new showroom stores and one warehouse/hub facility in Florida. If we raise
at least $10,250,000, we intend to open ten new showroom stores and two
warehouse/hub facilities in Florida. If we raise at least $15,750,000, we intend
to open ten new showroom stores, two warehouse/hub facilities in Florida and
eight new showroom stores and one to two warehouse/hub facilities in Georgia. In
the event we raise the full $20,000,000, in addition to the showroom stores and
warehouse/hub facilities we plan to open if we raise at least $15,750,000, we
may open additional stores in Florida and/or Georgia, and stores in North
Carolina and/or South Carolina. Pending such uses, we will invest the net
proceeds in investment-grade, short-term, interest bearing securities. The
following order of the use of proceeds reflects the order of priority of each
purpose.
$1,375,000 % $4,750,000 % $10,250,000 % $15,750,000 % $20,000,000 %
---------- - ---------- - ----------- - ----------- - ----------- -
Commissions/
Finders' fees(1) 137,500 10 475,000 10 1,025,000 10 1,575,000 10 2,000,000 10
Offering expenses 225,000 16 225,000 4 225,000 2 225,000 2 225,000 1
Reduce debt (2) 1,000,000 73 1,000,000 21 1,000,000 10 1,000,000 6 1,000,000 5
Working capital(3) 12,500 1 990,000 21 2,000,000 20 3,200,000 20 4,193,750 21
----------
Leasehold
improvements,
deposits 450,000 9 1,200,000 12 1,950,000 13 2,516,250 13
Furniture, fixtures,
displays, samples 510,000 11 1,360,000 13 2,210,000 14 2,851,750 14
10
Inventory 600,000 13 1,840,000 18 2,990,000 19 3,858,250 19
Computer
hardware/software 120,000 3 320,000 3 520,000 3 671,000 3
Machinery,
equipment 90,000 2 240,000 2 390,000 3 503,250 3
Store Signs 145,000 3 520,000 5 845,000 5 1,090,375 5
Advertising prior
to opening new
stores 145,000 3 520,000 5 845,000 5 1,090,375 6
---------- ----------- ----------- -----------
Total $1,375,000 $4,750,000 $10,250,000 $15,750,000 $20,000,000
========== ========== =========== =========== ===========
- ----------------
(1) At the present time, we intend to have our officers and directors offer
and sell the shares included in this prospectus. Our officers and
directors will not be paid any commission or finders' fee for shares they
sell. We reserve the right, however, to retain licensed broker/dealers to
assist us in the offer and sale of shares in this offering, if we deem
such to be in our best interest. At this time we do not have any
commitments, agreements or understandings with any broker/dealers, we
have, however, designated maximum underwriting discounts, commissions and
fees we are willing to pay to engage broker/dealers at 10% of the proceeds
realized from the sale of shares sold by such broker/dealers. To the
extent we do not incur commissions and finders' fees, funds set aside to
pay such commissions and finders' fees will be applied to working capital.
(2) The net proceeds of the offering designated to reduce debt will be applied
to reduce current liabilities including accounts payable, accrued
liabilities and long-term debt. The long-term debts to be reduced include
the following:
a) A secured note payable to a bank requiring monthly payments through
April 2005, and bearing interest at a rate of 8.00%
b) A secured note payable to a bank requiring monthly payments through
August 2006, and bearing interest at a rate of 5.84%;
c) An unsecured note payable to a shareholder requiring monthly
payments through October 2008, and bearing interest at a rate of
10.00%;
d) A secured note payable to a bank requiring monthly payments through
August 2013, and bearing interest at 6.00% per year; and
e) An unsecured note payable to an individual that is due on demand and
bears interest at a rate of 6.00% per year.
(3) The net proceeds of the offering remaining in working capital will be
invested in short-term, interest bearing accounts and investments.
11
DETERMINATION OF OFFERING PRICE
As no underwriter has been retained to offer our securities, the
offering price of our shares was not determined by negotiation with an
underwriter as is customary in underwritten public offerings. Rather, we
arbitrarily selected the offering price. There is no relationship between the
offering price of the shares and our assets, earnings, book value, net worth or
other economic or recognized criteria or future value of our shares.
DILUTION
As of the date of this offering, we had 38,428,700 common shares issued
and outstanding and no preferred shares outstanding, and a net tangible book
value of $(324,386) or $(0.01) per share. The proceeds from the sale of shares
will vary depending on the total shares sold.
If all 10,000,000 shares offered herein are sold there would be a total
of 48,428,700 common shares outstanding. If the maximum offering is sold, the
net proceeds to us after deducting sales commissions/finders' fees and offering
costs would be $17,775,000. Adding the net proceeds to our current net tangible
book value, our total net tangible book value would be $17,450,614. Dividing our
net worth by the number of common shares outstanding discloses a per share book
value of approximately $0.36 per share. Therefore, the shareholders who
purchased pursuant to the offering will suffer an immediate dilution in the book
value of their shares of approximately $1.64 or approximately 82% and the
present shareholders will receive an immediate increase in book value of
approximately $0.37 per share.
The following table illustrates the dilution that will be experienced
by investors in the offering:
If 10,000,000
shares sold
-------------
Offering price per share before deduction of offering expense $ 2.00
Net tangible book value per share before the offering $(0.01)
Net tangible book value per share after the offering $ 0.36
Dilution to new investors per share $ 1.64
Dilution to new investors as a percentage 82%
SELLING SECURITY HOLDERS
None of our existing shareholders is selling securities pursuant to
this registration statement.
12
PLAN OF DISTRIBUTION
Currently we plan to have our officers and directors, Jimmy Lee,
Michael Carroll and Steven Nichols sell the common shares on a self underwritten
basis. They will receive no discounts or commissions. In the past, we have
received unsolicited indications of interest in The Flooring Zone, Inc. from
store clients, suppliers and other persons familiar with our business. These
indications have been nothing more than verbal communications and we have no
commitments, oral or written, from any party to purchase any of our shares. Our
officers and directors will deliver prospectuses to these individuals and to
others who they believe might have interest in purchasing all or a part of this
offering. We also plan to offer these shares to our current shareholders,
friends, family and personal and business acquaintances of our officers and
directors. We anticipate the primary method our officers and directors will use
to advertise this offering will be word of mouth to store clients, supplies,
vendors and others who are familiar with our business. At this time, we do not
anticipate engaging in a media campaign to advertise this offering. At this
time, we do not intend to retain an underwriter or licensed broker/dealers to
assist us in the offer and sell of the shares. If, however, our officers and
directors are unable to raise sufficient capital in the offering, we may seek to
engage broker/dealers to assist us in the offer and sell of the shares. If we
were to do so, we will file a post-effective amendment to this registration
statement identifying such broker/dealers as underwriters prior to any offers or
sales being made by such broker/dealers. We do not intend to offer the shares
for sale via the internet. None of our officers or directors are registered
broker-dealers and therefore will rely on the exemption provided in Rule 3a4-1
under the Securities Exchange Act of 1934 to sell the shares.
To buy shares you must complete and execute the subscription agreement
and return it to us at 3219 Glynn Avenue Brunswick, Georgia 31520. Payment of
the purchase price may be made by check or money order payable to the order of
"The Flooring Zone, Inc." There is no minimum offering and no escrow account has
been established, therefore, all funds will be made available to The Flooring
Zone, Inc. upon receipt.
We have the right to accept or reject subscriptions in whole or in
part, for any reason or for no reason. All monies from rejected subscriptions
will be returned immediately to the subscriber, without interest or deductions.
Subscriptions for securities will be accepted or rejected within 48 hours after
we receive them. This offering will commence with the date of this prospectus
and will end 270 days from that date, unless terminated earlier by us. There
will be no extensions of time in which to continue this offering.
LEGAL PROCEEDINGS
Neither us, nor any of our officers or directors is a party to any
material legal proceeding or litigation and we know of no material legal
proceeding or contemplated or threatened litigation. There are no judgments
against us or our officers or directors. None of our officers or directors has
been convicted of a felony or misdemeanor relating to securities or performance
in corporate office.
13
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS
The following table sets forth our directors, executive officers,
promoters and control persons, their ages, and all offices and positions held.
Directors are elected for a period of one year and thereafter serve until their
successor is duly elected by the stockholders. Officers and other employees
serve at the will of the Board of Directors.
Name Age Positions Held Director Since
---- --- -------------- --------------
Jimmy S. Lee 41 CEO/President and Director May 2003
Michael J. Carroll 35 Secretary/Treasurer and Director May 2003
Steven C. Nichols 37 Vice President May 2003
There is currently one vacancy on our board of directors that we expect
to fill with an independent director. Our ability to locate an independent
director may be unsuccessful because we do not have error and omission insurance
for officers and directors. The above individuals will serve as officers and/or
directors. A brief description of their positions, proposed duties and their
background and business experience follows:
Jimmy S. Lee. Mr. Lee founded the Flooring Zone, Inc., in May 2003, and
has served as the President, CEO and a Director of the Flooring Zone, Inc.,
since that time. Mr. Lee founded the Flooring Zone of Georgia, Inc., in June
2000. Since June of 2000, he has also served as the President, CEO and a
Director of the Flooring Zone of Georgia, Inc. In his capacities with the
Flooring Zone and the Flooring Zone of Georgia, Mr. Lee has been responsible for
the day to day operations and overseen the activities of the sales departments
of each entity. Prior to founding the Flooring Zone of Georgia, Mr. Lee served
as the General Manager of Tommy Lee Carpets, Inc., where he managed office
personnel, sales staff and installation subcontractors. Mr. Lee was employed by
Tommy Lee Carpets from July 1996 to May 2000. Mr. Lee is not a director of any
other reporting company.
Michael J. Carroll. Mr. Carroll has served as the Secretary, Treasurer
and a Director of the Flooring Zone, Inc., since May 2003, and has held the same
positions with The Flooring Zone of Georgia, Inc., since June 2000. In August
1997, Mr. Carroll founded Carroll Custom Homes, Inc., and since that time has
served as its President. In that capacity, Mr. Carroll has been primarily
responsible to oversee the development and construction of residential housing
and to manage purchasing, payroll and accounts payable. Mr. Carroll graduated
from Georgia College and State University with a Bachelors Degree in Business
Administration in 1992. Mr. Carroll is not a director of any other reporting
company.
Steven C. Nichols. Mr. Nichols has served as a Vice President of the
Flooring Zone, Inc., since May 2003. Mr. Nichols has also served as the Vice
President of the Flooring Zone of Georgia, Inc., since May 2002. As the Vice
President Mr. Nichols duties include sales, collections, customer service and
overseeing the operations of Company stores. From December 2000 to December
2001, Mr. Nichols also worked as an account representative for Cook's Wholesale
14
Flooring in Atlanta, Georgia where he was responsible for introducing new and
existing products to existing and prospective accounts. From January 1997 to
December 2000, Mr. Nichols owned and operated Floors For Less Floor Coverings.
As the owner, he was responsible to oversee all aspects of the business. Mr.
Nichols earned a Bachelors of Science Degree in Economic from Valdosta State
College in 1989. Mr. Nichols is not a director of any other reporting company.
There are no family relationships among any of our officers and
directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The term "beneficial owner" refers to both the power of investment (the
right to buy and sell) and rights of ownership (the right to receive
distributions from the company and proceeds from sales of the shares). Inasmuch
as these rights or shares may be held by more than one person, each person who
has a beneficial ownership interest in shares is deemed the beneficial owners of
the same shares because there is shared power of investment or shared rights of
ownership.
The following table discloses the beneficial ownership of certain
beneficial owners and management based on the number of shares we had
outstanding as of November 15, 2004. As of November 15, 2004, we had 38,428,700
common shares outstanding.
Amount of
Title of Beneficial % of Class % of Class
Name and Address Class Ownership Before Offering After Offering(1)
- ---------------- -------- --------- --------------- -----------------
Jimmy Lee Common 19,000,000 49% 39%
3219 Glynn Avenue
Brunswick, Georgia 31520
Michael Carroll Common 19,000,000 49% 39%
3219 Glynn Avenue
Brunswick, Georgia 31520
Steven Nichols Common 1,000 * *
3219 Glynn Avenue
Brunswick, Georgia 31520
- -------------------------------------------------------------------------------------------------------------------
All officers and directors
as a group (3 persons) 38,001,000 99% 78%
- -------------------------------------------------------------------------------------------------------------------
15
- -------------------------------------------------------------------------------------------------------------------
TOTAL 99% 78%
===================================================================================================================
* Less than 1%
- -------------------
(1) Assumes that all 10,000,000 shares are sold in this offering.
DESCRIPTION OF THE SECURITIES
Description of Common Stock. Our authorized capital stock consists of
100,000,000 shares of common stock with a $.001 par value and 10,000,000 shares
of preferred stock with a $.001 par value. As of September 1, 2004, we had
approximately 38,428,700 common shares outstanding. We have no preferred shares
outstanding. Holders of our common shares are entitled to receive dividends when
declared by the Board of Directors out of funds legally available therefore. Any
such dividends may be paid in cash, property or shares. We have not paid any
dividends since our inception. All dividends will be subject to the discretion
of the Board of Directors, and will depend upon, among other things, our
operating and financial conditions, capital requirements and general business
conditions. Therefore, there can be no assurance that any dividends on the
shares will be paid in the future.
All common shares have equal voting rights and, when validly issued and
outstanding, will have one vote per share on all matters to be voted upon by the
shareholders. Cumulative voting in the election of directors is not allowed, and
a quorum for shareholder meetings shall result from a majority of the issued and
outstanding shares present in person or by proxy. Accordingly, the holders of a
majority of the common shares present, in person or by proxy at any legally
convened shareholders' meeting at which the Board of Directors is to be elected,
will be able to elect all directors and the minority shareholders will not be
able to elect a representative to the Board of Directors.
Common shares have no preemptive or conversion rights, no redemption or
sinking fund provisions, and are not liable for further call or assessment. Each
common share is entitled to share pro rata any assets available for distribution
to holders of its equity securities upon our liquidation.
Description of Preferred Stock. We currently have authorized 10,000,000
shares of preferred stock, $.001 par value, with no shares issued or
outstanding. No rights, privileges and preferences have been designated for our
preferred stock. Our Board of Directors is authorized to divide our preferred
shares into classes or series and to designate the rights, privileges and
preferences of any such class or series of preferred stock by resolution prior
to its issuance.
Description of Stock Options. We have adopted The Flooring Zone, Inc.,
2003 Stock Incentive Plan (the "Plan") allowing us to offer our key employees,
officers, directors, consultants and sales representatives, an opportunity to
acquire a proprietary interest in our corporation. The various types of
incentive awards which may be provided under the Stock Option Plan will enable
16
us to respond to changes in compensation practices, tax laws, accounting
regulations and the size and diversity of its business. The total number of
common shares reserved and available for distribution under the Plan is 500,000
shares. These shares will underlie the options granted by us pursuant to the
Plan. In June 2003, we granted stock options to purchase up to 45,000 shares of
our common stock to our employees and consultants. All such options were
exercised prior to the year ended December 31, 2003. At the current time, there
are no stock options outstanding. No option shares are being registered under
this registration statement
Option holders are not protected against dilution if we should issue
additional shares in the future. Neither the options, nor the shares underlying
the option have preemptive rights.
In the case of any reclassification, change, consolidation, merger,
sale or conveyance of our shares to another corporation, we will make adequate
provision whereby the registered holder of any outstanding option will have the
right thereafter to receive an exercise of the options immediately prior to the
reclassification, change, consolidation, merger, sale or conveyance of our
shares.
Other provisions of the options are set forth below. This information
is subject to the provisions of the Plan and the Stock Option Certificates
representing the options. The following information is a summary of The Flooring
Zone, Inc., 2003 Stock Incentive Plan.
1. The shares underlying the options offered pursuant to the Plan are
subject to the same rights and restrictions as other shares.
2. Once an option is granted, we may not be call the option.
3. The options may not be sold prior to six months from the date of the
grant of the related award without our prior approval.
4. Unless exercised within the time provided for exercise, the options
will automatically expire.
5. The exercise price per share purchasable under a stock option shall
be determined by the Committee at the time of grant and may not be less that
100% of Fair Market Value of the shares, provided however, that the exercise
price of an Incentive Stock Option granted to a 10% Stockholder shall not be
less than 110% of the Fair Market Value of the shares.
6. There is no minimum number of shares that must be purchased upon
exercise of the option.
7. The option holders, in certain instances, are protected against
dilution of their interest represented by the underlying shares upon the
occurrence of stock dividends, stock splits, reclassifications and mergers.
17
Transfer Agent. OTC Stock Transfer, Inc., located at 231 East 2100
South, Salt Lake City, Utah 84165, Telephone (801) 485-5555, has agreed to be
our transfer agent upon completion of this offering.
INTEREST OF NAMED EXPERTS AND COUNSEL
None of the experts named herein was or is a promoter, underwriter,
voting trustee, director, officer or employee of The Flooring Zone, Inc.
Further, none of the experts was hired on a contingent basis and none of the
experts named herein will receive a direct or indirect interest in The Flooring
Zone, Inc.
Legal Matters. Certain legal matters will be passed upon for us by
Poulton & Yordan, of Salt Lake City, Utah.
Accounting Matters. The financial statements included in this
prospectus and elsewhere in the registration statement have been audited by
Mantyla McReynolds LLC, located in Salt Lake City, Utah, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "act") may be permitted to directors, officers and controlling
persons for the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that any claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ORGANIZATION WITHIN LAST FIVE YEARS
We filed our Articles of Incorporation on May 5, 2003. On May 13, 2003,
pursuant to a Share Exchange Agreement, we acquired all of the outstanding
common stock of The Flooring Zone of Georgia, Inc., in exchange for 38,125,000
shares of our common stock. The Flooring Zone of Georgia, Inc., was founded by
our president in 2000, and had been operating in the retail floorcovering
industry since its inception. We currently own and operate a network of three
18
retail flooring stores located in the southeast United States, two of which are
in southern Georgia and one in northern Florida. We have also licensed our name
to a floorcovering retailer with a single store in northern Florida, for which
we receive a license fee. Our executive offices are located in our Georgia store
located at 3219 Glynn Avenue, Brunswick, Georgia 31520. Our telephone number at
that location is (912) 264-0505. Our website is located at
www.theflooringzone.com.
DESCRIPTION OF BUSINESS
Retail Floorcovering Industry
The North American retail floorcovering industry is highly fragmented
with approximately 15,000 individual floorcovering retail dealers operating
25,000 locations in North America according to FLOOR COVERING WEEKLY, a leading
floorcovering industry publication. Our management believes that no single
retailer accounts for more than a 5% market share of total annual industry
revenues. The industry is characterized by a large number of small local and
regional companies and a small number of national chains, such as The Home
Depot, and organizations such as Carpet One and Carpet Max, which principally
operate as buying groups offering their members economies of scale in the
purchasing of floorcovering products.
History of the Flooring Zone
Early Development. Mr. Lee founded our subsidiary, The Flooring Zone of
Georgia, Inc. in June of 2000. Based upon his experience working with retail
carpet stores owned by his grandfather and father and his experience with a
national floorcovering retail company, Mr. Lee developed a strategy for a full
service floorcovering retail operation. Through our subsidiary we initiated our
present strategy of providing low-cost product sourcing and advanced specialty
retailing capabilities. We have focused on establishing relationships with the
leading carpet suppliers to negotiate favorable purchasing terms. In addition,
we seek to hire experienced retailing management personnel and developed product
mix, distribution, merchandising, advertising, and promotion, sales training and
store operations strategies and resources designed to increase store sales
volume and profitability.
Most small independent floorcovering retailers face distinct
competitive disadvantages and challenges, including limited purchasing power for
products and services, lack of consumer product knowledge, and ineffective asset
management, merchandising, selling and store-management techniques. We believe
our network of three Company owned stores is larger than most other independent
floorcovering retailers. We also believe that we are significantly smaller than
the larger floorcovering retailers who may enjoy better economies of scale but
often lose the personal touch delivered by smaller operations.
Our operating strategies are designed to capitalize on competitive
advantages of the smaller retailers while developing and maintaining
industry-leading buying power and the implementing professional retailing
operations.
19
Business Strategy
The principal elements of our business strategy are as follows:
Full-service Retail Formats. A central aspect of our business strategy
is the development of a retail format that targets a specific segment of the
floorcovering market. Our floorcovering stores offer customers a full range of
floorcovering products directly and floorcovering services, including ordering,
measuring, delivery and installation through third parties. Our stores typically
offer discount floorcovering products held in inventory at the store. We have a
small installation staff and can provide installation services. We also maintain
strong relationships with several floorcovering installers who can provide
installation services to our customers. By primarily outsourcing installation,
management believes that we can effectively target both the customer primarily
concerned with product selection, quality and customer service, and the customer
primarily concerned with price.
Purchasing. We believe we are able to obtain competitive pricing,
delivery terms and merchandising programs by leveraging the purchasing power of
our retail network and by maintaining close relationships with floorcovering
manufacturers.
Professional Retail Management Capabilites. We have invested
substantial financial and management resources into the development of
information systems, services and infrastructure to support our retail
floorcovering network. We are committed to making shopping for floorcovering
products a pleasant experience through the employment of well-trained,
knowledgeable and courteous sales associates. We plan to continue to invest in
information systems and use current technology to improve the operating
efficiency of our business.
Centralized Distribution and Limited Inventory Levels. We attempt to
minimize our store-level inventories by utilizing our primary distribution
center in Brunswick, Georgia. As we grow, we plan to use regional warehouse
facilities on a limited basis to receive shipments and to stock high volume
items. As a result, our retail stores will maintain limited amounts of
inventory, consisting primarily of product samples and enough inventory to
support the cash-and-carry customer. In addition, a distribution center or hub
allows us to purchase and inventory "specials," or seasonal overruns.
Multiple Product Categories. We offer a full range of floorcovering
products, including broadloom carpets, area rugs, hardwood floorings, ceramic
tiles and vinyl floorings, available in both private and branded labels.
Multiple product categories allow us to respond to changes in consumer demand.
Our focus on multiple floorcovering products results in decreased carpet sales
as a percentage of total retail sales.
Growth Strategy. Our growth strategy is to develop the leading retail
floorcovering network in North America. We intend to continue our growth
strategy initially throughout the southeastern United States in the areas
surrounding our current network. The principal elements of our growth strategy
include (i) opening additional company-owned stores, (ii) broadening our
products and services, and (iii) making selective acquisitions.
20
Opening of New Stores. We intend to initially expand within our
existing markets or into contiguous new markets and attempt to continue to
cluster our stores within a market in order to achieve management and operating
efficiencies and to enhance our name recognition. We believe, however, that we
can also establish company-owned stores in new markets due to our effective
strategies in generating customer traffic.
We intend to open new stores in Class A strip shopping retail space and
we have developed several standardized store formats ranging from 6,500 to
10,000 square feet to accelerate store openings and minimize store opening
costs. The interior store designs include pre-determined product mixes, fixtures
and equipment, signage, and point-of-sale advertising and promotional programs.
Once a new store site is identified, we will stage the products, merchandising
systems and personnel for the new store in our distribution center and
headquarters. We believe that we can open a Flooring Zone store within 45 to 90
days of executing a lease, with expected total capital expenditures, initial
inventory investments and pre-opening expenses ranging from $75,000 to $150,000
per store. We do not currently intend to offer our stores as franchises.
Broadening of Products and Services. We are developing additional
services relating to product installation, maintenance and in-store credit,
among others. These additional services, if fully developed, will be utilized by
retail operations to increase sales and profitability.
Making Selective Acquisitions. We intend to search for existing
floorcovering retail stores that would strengthen our distribution capabilities,
that can be reasonably converted into Flooring Zone stores, and that are able to
be acquired at or below what we believe our costs would be to open a new store
and generate customer traffic.
Company Operations
We provide our retail floorcovering stores with products, services and
trained personnel that we believe generally are unavailable to many independent
floorcovering retailers and would be cost prohibitive for most independent
dealers to develop. Our resources include merchandising, purchasing and
distribution, advertising and promotion, management and sales training and
management information systems, as described below.
Purchasing and Distribution. Due to the floorcovering puchasing volume
of our retail network and our relationships with floorcovering suppliers,
management believes that we obtain high-quality products and services at
competitive costs. A substantial portion of the floorcovering products purchased
by or through our Company are shipped directly by the supplier to our individual
retail stores or to our distribution hub. Our stores generally maintain minimal
inventory, which predominantly consists of product samples. Our distribution
center or hub allows us to make opportunistic purchases from carpet mills at
substantially discounted prices. We are also able to offer special purchases to
customers, including purchases of mill drops (discontinued lines) and excess
mill inventory which are occasionally made available to us at discounted prices.
21
We also make available on an ongoing basis remnant packages and short roll
packages which can be as small as 10 and as large as 1,000 remnants at a time.
Our ability to purchase and inventory private-label products and specials
creates the opportunity for increased revenues and margins and lower pricing to
the customer. We have relationships with many vendors within the industry. While
we have preferred vendors from whom we purchase a majority of our products,
because of our numerous relationships within the industry, we do not believe
that we are dependent upon any one vendor for product purchases. Nor do we
believe that the loss of any single vendor would have a long-term material
adverse effect on our operating results or financial position.
Product Mix and Merchandising. We offer a full range of floorcovering
products from key suppliers, including Shaw, Mohawk Industries, Beaulieu of
America, DuPont and AlliedSignal for proprietary carpet fiber, Armstrong World
Industries and Congoleum for vinyl flooring, Bruce Hardwood Floors (a division
of Triangle Pacific) for hardwood flooring and Dal-Tile for ceramic tile. Each
of these suppliers is a leader in its respective floorcovering category. Our
suppliers also include niche carpet, vinyl, hardwood and ceramic tile producers,
as well as leading manufacturers and importers of room-size area rugs.
Our merchandising strategies address effective store layout, fixtures,
signage, product mix, and cross-selling techniques designed to increase sales
closing performance, average transaction size, sales per square foot of retail
space, and gross margins. Store interiors provide easy-to-locate presentation of
floorcovering samples, organized by product line, in an attractive and brightly
lit interior. In addition, we provide conference rooms where contractors and
interior designers can meet with their clients to discuss flooring options.
Advertising and Promotion. We believe advertising and promotion are
important to our success. Therefore, we budget a percentage of revenues per
market for multimedia advertising campaigns. These campaigns will include radio,
billboard, print, direct mail and television promotions. To promote our products
we also offer our low price guarantee - If you find a local competitor selling
your new first quality carpet for less money we will double the difference. We
also hold one day "Private Sales" events at each of our retail stores twice a
year. Our Private Sales events are conducted by direct mail invitation with
coordinated manufacturer's participation.
Management and Sales Training. Our training program focuses on
developing professional sales and leadership skills and team building concepts.
Our training methodology incorporates a turnkey training and diagnostics system
that provides our retail stores with competent and skilled professional
personnel.
In addition, our management has ongoing training to keep our employees
informed about the latest floorcovering information such as new technology, new
products, merchandising, available specials and design trends.
Management Information Systems. Our stores utilize a point-of-sale
software system for tracking consumer demographics and purchasing patterns and
22
other data to integrate all store operations into a central information system
we spent the last three years developing in-house.
Credit. Through a national bank we offer consumer credit packages to
our retail network.
Store Operations
Retail Operations. We have and intend to continue to open and operate
floorcovering stores in markets that we believe have the potential for
above-average growth in floorcovering sales. Our stores generate revenues
through sales of floorcovering products to consumers and other customers. Each
store carries the full product mix available to our Company including several
leading brand names. New stores average 6,500 -10,000 square feet, are typically
located in Class A strip shopping retail space in suburban locations, and are
staffed with two to six personnel. These stores cater primarily to consumers
seeking a variety of high-quality products and customer service. Consumers make
purchase selections from floor samples, and the order is usually delivered from
our local warehouse or hub, or direct from the manufacturer. We maintain some
internal installation staff and have established relationships with several
local contractors and usually subcontract installation. Our stores are supported
by the full range of services provided by manufacturers, including merchandising
and sales promotion programs, high quality advertising, our own integrated
information systems, and professionally trained management and sales personnel.
Our customers include homeowners, designers, homebuilders and commercial
contractors. We are not dependent on one or a few major customers. Our stores
compete with other independent retailers, industry franchisees and a small
number of national chains, including The Home Depot.
We believe that the Flooring Zone concept utilized in our stores is
visually appealing and provides an enjoyable shopping experience for our
customers. Our stores standardized layout is professionally designed to include
eye-catching signage, bright lighting, a conferencing area and departmentalized
product displays. Our stores use floor samples to display the full range of our
available products, with separate areas dedicated to carpet, area rugs, hardwood
flooring, vinyl flooring and ceramic tiles.
Competition
Through our retail stores we compete with other floorcovering retailers
in their respective local market areas. According to FLOOR COVERING WEEKLY, the
North American market consists of approximately 15,000 individual floorcovering
retailers, which represent 25,000 locations. Competition in the retail
floorcovering market is intense due to the significant number of retailers in
operation. In addition, large retailers have entered the market and provide
significant competition, including Home Depot, Inc.
Trademarks, Service Marks, Trade Names and Commercial Symbols
We have registered marks with the U.S. Trademark Office including: "The
Flooring Zone" and "Save A Comma." At this time, we know of no infringing uses
that could materially affect the use of our service marks, logos or slogans in
23
any state in which stores are or are proposed to be located. We are not the
owner or licensee of any patents or copyrights.
Employees
As of the date of this prospectus we employ approximately 12 persons on
a full-time basis, including approximately 6 persons at our retail operations
and 6 persons at our corporate offices. No employee is a party to any collective
bargaining agreement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and capital
resources during our fiscal years ended December 31, 2002 and 2003, and for the
three and nine month periods ended September 30, 2004. This discussion should be
read in conjunction with the financial statements and financial statement
footnotes included in this registration statement.
Forward-Looking Statements
Certain statements of our expectations contained herein, including, but
not limited to statements regarding sales growth, new stores, increases in
comparable store sales, commodity price inflation and deflation, and capital
expenditures constitute "forward-looking statements." Such statements are based
on currently available operating, financial and competitive information and are
subject to various risks and uncertainties that could cause actual results to
differ materially from our historical experience and our present expectations.
These risks and uncertainties include but are not limited to, fluctuations in
and the overall condition of the U.S. economy, stability of costs and
availability of sourcing channels, conditions affecting new store development,
our ability to implement new technologies and processes, our ability to attract,
train, and retain highly-qualified associates, unanticipated weather conditions
and the impact of competition and regulatory and litigation matters. Undue
reliance should not be placed on such forward-looking statements, as such
statements speak only as of the date on which they are made.
Results of Operations
Despite our expectation that we would realize an operating profit in
fiscal 2003 as a result of having all three of our Company-owned store locations
open for all of fiscal 2003, compared to two stores for all of fiscal 2002 and a
third store for part of fiscal 2002, we realized a slightly increased net loss
from operations in fiscal 2003. Based on our results of operations for the three
and nine months ended September 30, 2004, as compared to the comparable periods
of 2003, we believe we will enjoy increased revenues and realize an operating
profit in 2004.
24
Revenues
In fiscal 2002, we realized our highest yearly revenue. We had
experienced significant revenue growth each fiscal year until fiscal 2003.
During fiscal 2003, sales fell $32,694, to $3,396,107 as compared to fiscal
2002, a decrease of about 1%. Licensing fees earned from the licensing of our
name during fiscal 2003 was $978 compared to $20,413 during fiscal 2002. This
resulted in a 1.5% reduction in net revenues in fiscal 2003 compared to fiscal
2002. We believe the reduction in revenues we experienced in fiscal 2003 as
compared to fiscal 2002, was the result of various factors that contributed to a
reduction in consumer confidence in the region in which we operate.
In the three and nine month periods ended September 30, 2004, we have
realized increases in net revenue as compared to the same periods of 2003. In
the three months ended September 30, 2004, we realized a 7% increase in net
revenue as compared to the three months ended September 30, 2003. For the nine
months ended September 30, 2004, we realized net revenue of $2,938,253 compared
to $2,619,985, which represents a 12% increase, over the same period ended
September 30, 2003. We believe the increase in net revenue is attributable to
several factors. Year to date, we have experienced a growth in product sales of
approximately 15% compared to 2003. We believe this increase in sales volume is
largely the result of improving economies and consumer confidence in the
communities where we operate. Also, in January 2004, we increased product prices
by an average of 2%. We believe these are the primary factors that have
contributed to our 12% growth in revenue during the nine months ended September
30, 2004. Based on the results of operations to date in the fourth quarter of
2004, we anticipate growth to remain at about the same rate for the remainder of
the 2004 fiscal year.
As noted above, the results of operations of our current stores are
affected by the consumer confidence. Based on sales in the past 30 days, we
believe consumer confidence in the communities where we operate is strong. We
anticipate revenues at our current stores to remain constant or even slightly
higher in 2005. We anticipate that our planned expansion into more and larger
markets will increase product sales and revenue from operations. We believe the
revenues we can earn from one store in the large markets we are targeting will
be equivalent to the revenue we earn in the three stores we currently have.
Gross Profits
Cost of sales includes all direct costs of floor coverings, materials
used in installation and installation labor. In fiscal 2003, our cost of sales
margins were essentially unchanged as compared to fiscal 2002 and we realized an
$8,167 increase in gross profit in fiscal 2003.
During the three months ended September 30, 2004, our gross profit was
$278,030 or 7% lower than in the comparable three month period of 2003. We
believe this reduction in gross profit is largely the result of an increase in
cost of sales associated with greater sales to contractors as a percentage of
total sales. We primarily sell product to retail customers and contractors. Our
margins on sales to contractors are lower than sales to retail customers. During
the three months ended September 30, 2004, sales to retail customers were down
as a result of the hurricanes experienced in the region. During the nine months
ended September 30, 2004, our gross profit was $1,066,987 or 25% greater than
25
the comparable nine month period of 2003. This 25% improvement in cost of sales
margin is the result of several factors. First, as discussed above, in January
2004, we increased average product price by 2%/ Second, we negotiated lower
rates with our installers. Finally, during the nine months ended September 2004,
our cost of sales margin has increased because our percentage of retails sales
versus new construction sales has increased. Our cost of sales margins are
higher on retail sales than new construction sales.
We have and will continue to seek to build alliances with major vendors
in the floor covering industry. We believe these relationships and our strategic
purchasing methods have contributed to improving margins. We also expect our
cost of sales margins to improve as we increase the utilization of in-house
installation labor.
General and Administrative Expenses
General and administrative expenses increased $334,665, or 30% to $1.43
million in fiscal 2003, and as a percentage of sales revenue increased from 32%
in fiscal 2002 to 42% in fiscal 2003. These increases are due to expenses we
have incurred in hiring and training staff, at various levels, to expand into
larger markets in southeast Georgia and northern Florida; purchase and
implementation of our computer system with sales and inventory systems capable
of operating a large floor covering company, and increases in accounting and
legal expenses as a result of this offering. Because of delays in plans to
expand to new locations, our general and administrative expenses in 2003 were
not offset by increases in sales and revenue generated by the opening of
additional stores. In fiscal 2003 and 2002, general and administrative costs
consisted of:
2003 2002
---- ----
Salaries & benefits costs $ 661,795 $ 513,209
Advertising & display costs 139,516 158,173
Occupancy costs & utilities 309,926 213,879
Legal & accounting costs 67,006 16,773
Interest expense 45,662 31,799
Other 210,130 165,537
------------ -----------
$ 1,434,035 $ 1,099,370
============ ===========
We have experienced increases in salaries in each of the past two
fiscal years. With the completion of our management information system, during
the first quarter of 2004, we reduced our staff. We do not anticipate
significant increases in staffing needs until we have raised sufficient capital
to expand our operations.
In fiscal 2003, we reduced our advertising & display costs because we
believe we are well known within our current markets. We anticipate continued
reductions in advertising costs until we expand to new markets.
26
Occupancy costs & utilities in fiscal 2003 increased primarily as a
result of our expansion from two stores to three. We expect these costs to
remain constant until we expand our operations.
As discussed above, the significant increase in legal and accounting
costs in 2003, is the result of our efforts to undertake this offering.
During the three and nine months ended September 30, 2004, general and
administrative expenses decreased 18% and 1% respectively, compared to the three
and nine months ended September 30, 2003. During the current year, we reduced
salary expense by consolidating certain job functions. During the current year,
we also reduced expenses by hiring our own in-house installation crews rather
than paying the higher subcontractor rates. Finally, during the current year we
completed development of our computer system and other infrastructure we have
put in place to support the expansion of our operations. With the completion of
these projects, we are no longer incurring ongoing development costs.
Net Loss
Our net loss in fiscal 2003 increased $340,361, to $467,460, compared
to fiscal 2002. As discussed above, this increase in net loss was primarily the
result of reduced product sales in 2003. During the three months ended September
30, 2004, we realized a net loss of $28,847, a reduction in net loss of $43,587
compared to the three months ended September 30, 2003. During the nine months
ended September 30, 2004, we have realized net income of $15,635 compared to a
net loss of $199,892 for the nine months ended September 30, 2003.
Liquidity and Capital Resources
Our capital resources have consisted of revenues from operations, funds
raised through the sale of our common stock and debt. We anticipate our capital
resources in the upcoming twelve months will likewise consist primarily of
revenues from operations, funds raised in financing activities and debt.
During fiscal 2002 and 2003 and the nine months ended September 30,
2003 and 2004, cash was primarily used to fund operations. See below for
additional discussion and analysis of cash flow.
Fiscal 2003 Fiscal 2002 9/30/2004 9/30/2003
------------------ ------------------ ------------------ ---------------
Net cash used in operating activities $(327,651) $ (75,032) $(171,314) $(245,882)
Net cash used in investing activities (39,406) (160,990) (4,349) (32,150)
Net cash provided by financing activities 374,397 283,696 192,144 316,603
--------- --------- --------- ---------
NET INCREASE IN CASH $ 7,340 $ 47,674 $ 16,481 $ 38,571
========= ========= ========= =========
27
Net cash used in operating activities increased $252,619 in fiscal 2003
compared to fiscal 2002. As discussed above, revenue from product sales and
licensing fees was 1.5% lower in fiscal 2003 compared to fiscal 2002. Also, in
2003 general and administrative expenses increased 23% compared to 2002 as we
spent significant funds in 2003 developing infrastructure and a new computer
system that could support our planned expanded operations. This reduction in
revenue coupled with the increase in general and administrative expenses
combined to result in a 268% increase in net loss. Because of the slow down in
product sales, accounts receivable decreased 91% in 2003 compared to 2002.
During 2003, we used cash flow from operations to reduce our accounts payable by
120%. These reductions to our cash used in operating activities were only
partially offset by a 146% decrease in inventory, which we allowed to happen to
insure we would have sufficient cash to meet our needs in 2003. These factors
contributed to a $252,619 or 337% increase in cash used from operations in 2003
compared to 2002.
By comparison, as discussed herein, during the first nine months of
2004 compared to the same period 2003, product sales have increased and general
and administrative expenses have decreased leading to a change from a net loss
of $199,892 during the nine months ended September 30, 2003, to net income of
$15,635 in the nine months ended September 30, 2004. During the first nine
months of 2004, as product sales have improved, inventory has increased $94,521
or about 300% compared to the nine months ended September 20, 2003. Also in
2004, as a result of our new billing policy, customer deposits for the nine
months ended September 30, 2004, have decreased $116,218 compared to the same
nine months period of 2003, while accounts receivable have increased $38,431 or
358%. Net cash used in operating activities decreased $74,568 or 30% for the
first nine months of 2004 compared to the first nine months of 2003. This
increase in cash used in operating activities during the six month period ended
June 30, 2004, was largely the result of an increase in inventory and a decrease
in customer deposits.
Net cash used in investing activities decreased in fiscal 2003 by
$121,584 compared to fiscal 2002. During 2002, we incurred significant costs in
opening new stores in St. Marys, Georgia and Yulee, Florida. In 2003, we opened
no new stores and incurred no comparable expenses. Cash used in investing
activities decreased $27,801 in the nine months ended September 30, 2004,
compared to the same period 2003. In 2003, we upgraded our computer hardware and
infrastructure to accommodate our plans for expanded operations.
Net cash provided from financing activities increased $90,701 in fiscal
2003 compared to fiscal 2002. In fiscal 2003, the funds we raised through
financing activities were primarily obtained from a line of credit provided by a
related party, and the sale of our securities. In 2002, the funds we obtained
through financing activities were the result of borrowing funds. During the nine
months ended September 30, 2004, proceeds from a long term loan and issuance of
stock totaled $657,500. This amount was only partially offset by the repayment
of the credit line from a related party in the amount of $124,000 and payments
on long term debt totaling $341,356, resulting in net cash from financing
28
activities of $192,144. By comparison, in the nine months ended September 30,
2003, net cash from financing activities totaled $316,603. Those funds came from
a related party credit line, long term loans and the issuance of stock totaling
$401,183. Because of the slow down in our operations during the nine months
ended September 30, 2003, and our desire to have sufficient cash flows to meet
our needs, we used only $84,580 of the funds from financing activities to reduce
debts.
At December 31, 2003 and September 30, 2004, we had cash on hand of
$55,014 and $71,495, respectively.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of December
31, 2003.
Payments Due by Fiscal Year
-------------------------------------------------------------------------
Contractual Commitments Total 2004 2005 2006 2007 Thereafter
- -------------------------------------------------------------------------------------------------------------------
Line of Credit-Related Party(1) $ 124,000 $ 124,000 $ -- $ -- $ -- $ --
Note Payable-Related Party(2) 209,296 35,450 39,162 43,263 47,793 43,628
Long Term Debt2 276,497 38,881 29,915 24,757 23,041 159,903
Operating Leases 872,186 186,790 189,310 194,578 149,338 152,170
----------- ---------- --------- ---------- --------- ---------
TOTAL $ 1,481,979 $ 385,121 $ 258,387 $ 262,598 $ 220,172 $ 355,701
=========== ========== ========= ========== ========= =========
- ------------------
(1) On August 2, 2004, we paid the line of credit in full.
(2) On August 2, 2004, we consolidated the note payable to the related party and
our long term debt by obtaining a loan from a bank. The new loan is in the
amount of $550,000, bears interest at a rate of 6.6%, requires monthly
installment payments of $6,270 and matures in August 2014.
Off-Balance Sheet Financing Arrangements
As of December 31, 2003, and June 30, 2004, we had no off-balance sheet
financing arrangements.
Critical Accounting Policies
Revenue Recognition
We recognize revenues in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) number 104, "Revenue Recognition in
Financial Statements." SAB 104 clarifies application of U. S. generally accepted
accounting principles to revenue transactions. Accordingly, revenue is
recognized when an order has been received, the price is fixed and determinable,
the order is shipped and installed, collection is reasonably assured and we have
no significant obligations remaining. Licensing fees are royalties paid to us
for licensing the use of the name The Flooring Zone. The royalties range from
1-2% of the licensee's commercial sales volume.
29
We record accounts receivable for sales which have been delivered but
for which money has not been collected. An allowance for doubtful accounts is
provided for accounts deemed potentially uncollectible based on analysis and
aging of accounts. For customer purchases or deposits paid in advance, we record
a liability until products are shipped or installed.
Merchandise Inventory
We record inventory at the lower of cost or market, cost being
determined on a first-in, first-out method. We do not believe our merchandise
inventories are subject to significant risk of obsolescence in the near-term,
and we have the ability to adjust purchasing practices based on anticipated
sales trends and general economic conditions.
Vendor Funds
We receive funds from vendors in the normal course of business for
purchase-volume-related rebates. Our accounting treatment for these
vendor-provided funds is consistent with Emerging Issues Task Force (EITF) 02-16
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received From a Vendor." Under EITF 02-16, purchase volume rebates should be
treated as a reduction of inventory cost, unless they represent a reimbursement
of specific, incremental and identifiable costs incurred by the customer to sell
the vendor's product. The purchase volume rebates that we receive do not meet
the specific, incremental and identifiable criteria in EITF 02-16. Therefore,
they are treated as a reduction in the cost of inventory and we recognize these
funds as a reduction of cost of sales when the inventory is sold.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities
(VIEs), in an effort to expand upon and strengthen existing accounting guidance
that addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity. In general, a VIE is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 requires a VIE to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the VIE's activities, is entitled to receive a majority of the VIE's residual
returns, or both. FIN 46 also requires disclosures about VIEs that the Company
is not required to consolidate, but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply immediately to VIEs
created after January 31, 2003, and to other entities no later than the three
months ended September 30, 2003. Certain disclosure requirements are required in
all financial statements issued after January 31, 2003, regardless of when the
VIE was established. The Company has not identified any VIEs that must be
consolidated.
30
On April 30, 2003 -- The FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. The amendments set forth in SFAS No. 149 require that
contracts with comparable characteristics be accounted for similarly. SFAS No.
149 is generally effective for contracts entered into or modified after June 30,
2003 (with a few exceptions) and for hedging relationships designated after June
30, 2003. The guidance is to be applied prospectively only. The adoption of this
pronouncement had no effect on the Consolidated Financial Statements of the
Company.
On May 15, 2003 -- The FASB issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. The Statement improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. It also
establishes standards for how an issuer classifies and measures on its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003,
and was otherwise effective for us as of July 1, 2003. The adoption of the
applicable provisions of this statement as of the indicated dates has had no
effect on the Company's financial statements.
DESCRIPTION OF PROPERTY
Our principal executive offices are located in leased office space
located at 3219 Glynn Avenue, Brunswick, Georgia 31520. We also lease warehouse
space and space for our four retail stores in Georgia and Florida. We believe
these spaces will be adequate for our needs through the terms of their existing
leases, the first of which expires in 2007 and the last of which expires in
2014. Based on leases currently have in place, our minimum required annual lease
payments for these locations through December 31, 2004, is $186,790 and will be
$189,310 for the year ending December 31, 2005.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, we have issued shares to the following
officers, directors, promoters and beneficial owners of more than 5% of our
outstanding securities.
Number Consideration Relationship to
Name of Shares Given Issuer
- ---- --------- -------------- ----------------
Jimmy Lee 19,000,000 Services CEO/President/Director *
Michael Carroll 19,000,000 Services Secretary/Treasurer/Director*
31
Steven Nichols 1,000 Cash Vice President
* Holder of 5% or more of our outstanding securities.
On May 13, 2003, Jimmy Lee, our president and director and Michael
Carroll, our secretary/treasurer and director each gave 62,500 common shares of
their personal shareholdings to satisfy debt of the Company in the amount of
$61,609. Mr. Lee and Mr. Carroll received no consideration from the Company in
connection with this transaction.
In October 2003, we entered into an agreement with Mr. Carroll, whereby
he agreed to extend a line of credit to the Company. The interest rate on the
line of credit is 6%. The outstanding balance on the line of credit as of June
30, 2004, was $198,144. This line of credit was paid in full by the Company on
August 2, 2004.
In August 2000, Mr. Carroll loaned Flooring Zone of Georgia, Inc.,
$275,000 pursuant to an unsecured note payable. This note bears interest at a
rate of 10% per year. Under the terms of the note, we are required to make
monthly installment payments of $4,565.33 though October 2008. As of June 30,
2004, the outstanding balance on this note was $192,012.
We believe that each of the above-described transactions was negotiated
on terms at least as favorable to us as those available to us on an arms-length.
As with the above transactions, all future material transactions entered into
with related parties shall be on terms no less favorable to us than we can
obtain from an unaffiliated third party on an arms-length basis and will be
approved by a majority of our disinterested directors.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At present, our securities are not traded publicly. There is no
assurance that a trading market will develop, or, if developed, that it will be
sustained. A purchaser of shares may, therefore, find it difficult to resell the
securities offered herein should he or she desire to do so when eligible for
public resales. Furthermore, the shares are not marginable and it is unlikely
that a lending institution would accept our common stock as collateral for a
loan.
Pursuant to this registration statement, we propose to publicly offer
10,000,000 common shares. To date, none of our outstanding shares of common
stock are subject to outstanding options or warrants to purchase our common
stock. We currently have approximately 60 shareholders.
None of our currently issued and outstanding shares are eligible for
public resale under Rule 144 because our stock is not listed on any exchange and
no broker-dealer is making a market for our securities. Therefore, shareholders
seeking to make public resales of our stock would currently be precluded by both
the trading volume limitations and the brokers' transaction requirements of Rule
144. Assuming, however, that there was a trading market for our securities,
38,352,700 of our outstanding common shares have been held for more than one
year and would be eligible for resale pursuant to the provisions of Rule 144.
32
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
the compensation paid or accrued since the Company's inception on May 5, 2003
through December 31, 2003, (the end of the Registrant's last completed fiscal
year).
Summary Compensation Table
Long Term Compensation
---------------------------------------------
Annual Compensation Awards Payouts
----------------------------------- ---------------------------------------------
Restricted LTIP
Name and Principal Other Annual Stock Options/ Payout All Other
Position Year Salary Bonus Compensation Awards SARs # ($) Compensation
- -------- ---- ------ ----- ------------ --------- -------- ------ ------------
Jimmy Lee, CEO, 2003 $62,400 $10,000 $-0- $-0- -0- $-0- $-0-
President and Director
Steven Nichols 2003 59,800 2,500 -0- -0- -0- -0- -0-
Vice President
Employment Agreements with Executive Officers
We have no formal employment agreements with any of our executive
officers.
Compensation of Directors
We have no arrangements pursuant to which your directors are
compensated for any services provided as a director, or for committee
participation or special assignments.
Termination of Employment and Change of Control Arrangement
There are no compensatory plans or arrangements, including payments to
be received from us, with respect to any person named in cash compensation set
forth above that would in any way result in payments to any such person because
of his resignation, retirement, or other termination of such person's employment
with the company or its subsidiaries, or any change in control, or a change in
the person's responsibilities following a changing in control of the Company.
33
FINANCIAL STATEMENTS
The Flooring Zone, Inc.
Report of Independent Registered Public Accounting Firm
and
Consolidated Financial Statements
December 31, 2003
34
The Flooring Zone, Inc.
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm.......... 36
Consolidated Balance Sheet - December 31, 2003................... 37
Consolidated Statements of Operations for the Years Ended
December 31, 2003 and 2002..................................... 39
Consolidated Statements of Stockholders' Deficit for the Years
Ended December 31, 2003 and 2002............................... 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003 and 2002..................................... 41
Notes to Consolidated Financial Statements....................... 42
35
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
The Flooring Zone, Inc.
We have audited the accompanying consolidated balance sheet of The Flooring
Zone, Inc. as of December 31, 2003 and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Flooring Zone,
Inc. and subsidiaries as of December 31, 2003 and the results of operations and
cash flows for the years ended December 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Mantyla McReynolds, LLC
Mantyla McReynolds, LLC
Salt Lake City, Utah
February 27, 2004
36
The Flooring Zone, Inc.
Consolidated Balance Sheet
December 31, 2003
ASSETS
Current assets:
Cash $ 55,014
Accounts receivable, net of allowance of $45,976 111,684
Inventory-Notes 1 & 3 249,337
Prepaid expense 4,468
-------------------
Total current assets 420,503
Property & equipment, net - Notes 1 & 2 296,812
Other assets:
Intangible assets, net of accumulated amortization of $755
4,088
Deposits 2,266
-------------------
Total other assets 6,354
-------------------
TOTAL ASSETS $ 723,669
===================
See accompanying notes to financial statements
37
The Flooring Zone, Inc.
Consolidated Balance Sheet [continued]
December 31, 2003
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 382,712
Line of credit-related party-Note 7 124,000
Customer deposits 146,527
Accrued liabilities 28,312
Current portion long-term debt - Note 8 74,331
-------------------
Total current liabilities 755,882
Long-term liabilities:-Note 8
Note payable-related party 209,296
Long-term debt 276,497
Current portion long-term debt (74,331)
-------------------
Total long-term liabilities 411,462
Total liabilities 1,167,344
Stockholders' deficit:-Note 5
Preferred Stock, 10,000,000 shares authorized $.001 par
value: No shares issued and outstanding -
Common stock, 100,000,000 shares authorized $.001 par
value; 38,352,700 shares issued and outstanding 38,353
Additional paid in capital 308,881
Accounts receivable, shareholder (12,500)
Accumulated deficit (778,409)
-------------------
Total stockholders' deficit (443,675)
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 723,669
===================
See accompanying notes to financial statements
38
The Flooring Zone, Inc.
Consolidated Statements of Operations
For the years ended December 31, 2003 and 2002
Revenues: 2003 2002
----------------- -----------------
Sales $ 3,396,107 $ 3,428,801
Licensing Fees 978 20,413
----------------- -----------------
Net revenues 3,397,085 3,449,214
Less cost of sales 2,384,848 2,445,144
----------------- -----------------
Gross profit 1,012,237 1,004,070
General and administrative expenses 1,434,035 1,099,370
----------------- -----------------
Net income (loss) from operations (421,798) (95,300)
Other income/(expense):
Interest expense (45,662) (31,799)
----------------- -----------------
Total other income/(expense) (45,662) (31,799)
----------------- -----------------
Net income (loss) before taxes (467,460) (127,099)
Income taxes - -
----------------- -----------------
Net income (loss) $ (467,460) $ (127,099)
================= =================
Loss per share-basic and diluted $ (0.01) $ (0.01)
================= =================
Weighted average shares outstanding-basic and
diluted 38,176,515 38,000,000
================= =================
See accompanying notes to financial statements
39
The Flooring Zone, Inc.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 2003 and 2002
Additional Accts. Total
Shares Common Paid in Receivable, Accumulated Stockholders'
Issued Stock Capital Shareholder Deficit Deficit
------------- ------------ --------------- --------------- ---------------- -----------------
Balance January 1, 2002 100 $ 1,000 - - $ (168,850) $ (167,850)
Distributions to shareholders (15,000) (15,000)
Net loss for year ended
December 31, 2002 (127,099) (127,099)
------------- ------------ --------------- --------------- ---------------- -----------------
Balance, December 31, 2002 100 1,000 - - (310,949) (309,949)
Recapitalization at merger with
Nevada Corporation, May 13, 2003 38,124,900 37,125 24,484 61,609
Shares issued pursuant to Stock
Incentive Plan at $1.25/share 45,000 45 56,205 56,250
Shares issued for cash/credit at
$1.25/share 182,700 183 228,192 (12,500) 215,875
Net loss for year ended
December 31, 2003 (467,460) (467,460)
------------- ------------ --------------- --------------- ---------------- ----------------
Balance, December 31, 2003 38,352,700 $ 38,353 $ 308,881 $ (12,500) $ (778,409) $ (443,675)
============= ============ =============== =============== ================ ================
See accompanying notes to financial statements
40
The Flooring Zone, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2003 and 2002
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (467,460) $ (127,099)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 35,436 24,659
Bad debt expense 27,776 8,700
Decrease (increase) in accounts receivable (6,128) (70,840)
Decrease (increase) in accounts receivable-related party 3,694 (3,694)
Decrease (increase) in inventories 44,468 (97,436)
Decrease (increase) in employee loans and advances 4,667 (4,667)
Decrease (increase) in prepaid expenses 2,000 (6,468)
Decrease (increase) in deposits (115) (2,151)
Increase (decrease) in bank overdraft - (11,473)
Increase (decrease) in accounts payable (37,805) 186,136
Increase (decrease) in payroll and payroll taxes payable (7,945) 21,014
Increase (decrease) in customer deposits 73,761 8,287
--------------- ---------------
Net cash used in operating activities (327,651) (75,032)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (39,406) (159,671)
Purchase of intangible assets - (1,319)
--------------- ---------------
Net cash used in investing activities (39,406) (160,990)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on line of credit-related party 124,000 -
Proceeds from borrowing on long term debt 26,127 331,609
Payments on long term debt (47,855) (32,913)
Proceeds from the issuance of common stock 272,125 -
Distributions to shareholders - (15,000)
--------------- ---------------
Net cash provided by financing activities 374,397 283,696
--------------- ---------------
NET INCREASE IN CASH 7,340 47,674
CASH AT BEGINNING OF YEAR 47,674 -
--------------- ---------------
CASH AT END OF YEAR $ 55,014 $ 47,674
=============== ===============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 45,662 $ 31,799
Cash paid for income taxes - -
Issued stock to relinquish debt 61,069 -
See accompanying notes to financial statements
41
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization-The Flooring Zone, Inc. (the "Company) is a corporation
organized under the laws of the State of Nevada on May 5, 2003. On May
13, 2003 pursuant to a Share Exchange Agreement, the Company acquired
all of the outstanding common stock of The Flooring Zone of Georgia,
Inc (the "Georgia Company), a Georgia Corporation, in exchange for
38,125,000 shares of common stock of the Company. The company's
business operations provide for full-service retail floor covering
products and services.
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The following
summarizes the more significant of such policies:
Principles of Consolidation-The accompanying consolidated financial
statements include the accounts of The Flooring Zone, Inc. and its
wholly owned subsidiary, The Flooring Zone of Georgia, Inc. All
significant intercompany balances and transactions are eliminated.
Revenue Recognition- The Company recognizes revenue according to Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements
which clarifies U.S. Generally accepted accounting principles for
revenue transactions. Accordingly, revenue is recognized when an order
has been received, the price is fixed and determinable, the order is
shipped and installed, collection is reasonably assured and the Company
has no significant obligations remaining. Licensing fees are royalties
paid to the Company for licensing the use of the name The Flooring
Zone. The royalties range from 1-2% of the licensee's commercial sales
volume.
Use of Estimates in Preparation of Financial Statements- The
preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 period. Actual results could differ
from those estimates.
Cash and cash equivalents- The Company considers all highly liquid
investments with original maturities at the date of purchase of three
months or less to be cash equivalents.
Bad debt and allowance for doubtful accounts- The allowance for
doubtful accounts is maintained at a level sufficient to provide for
estimated credit losses based on evaluating known and inherent risks in
the receivables portfolio. The Company provides an allowance for
doubtful accounts which, based upon management's evaluation of numerous
factors, including economic conditions, a predictive analysis of the
outcome of the current portfolio and prior credit loss experience, is
deemed adequate to cover reasonably expected losses inherent in
outstanding receivables.
Concentrations of credit risk- Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of trade receivables. The Company provides credit to its
customers in the normal course of business, and accordingly performs
ongoing credit evaluations and maintains allowances for potential
credit losses. Concentrations of credit with respect to trade
receivables are limited due to the Company requiring a deposit from
customers.
Inventory - Inventories are stated at the lower of cost or market, cost
being determined on a first-in, first-out method.
42
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
Property and Equipment - Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged to expense as
incurred. The following is a summary of the estimated useful lives and
depreciation methods used in computing depreciation expense:
Depreciation Estimated
Asset Method useful life
--------------------------- ------------------- ---------------
Equipment Straight-line 5-10 years
Furniture and fixtures Straight-line 10-15 years
Vehicles Straight-line 10 years
Leasehold improvements Straight-line 10 years
Displays Replacement N/A
Intangible Assets- Intangible assets include trademarks that have been
registered with the United States Patent and Trademarks office. The
costs of obtaining trademarks are capitalized as incurred and are
amortized over their estimated useful lives of ten years using the
straight-line method. Amortization expense for the years ended December
31, 2003 and 2002 were $323 and $316, respectively.
Income Taxes - In July 2000 the Company elected to be taxed as an S
Corporation under the Internal Revenue Service Code. Accordingly, under
such an election, the Company's taxable income was reported by the
individual shareholders. In 2003 the Company cancelled its election to
be taxed as an S Corporation and therefore applies the provisions of
Statement of Financial Accounting Standards("SFAS") No. 109, Accounting
for Income Taxes which requires an asset and liability approach for
financial accounting and reporting for income taxes, and the
recognition of deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled.
Net Loss Per Common In accordance with SFAS No. 128, "Earnings Per
Share," basic loss per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per share
is computed using weighted average number of common shares plus
dilutive common share equivalents outstanding during the period using
the treasury stock method. At December 31, 2003 there are no common
stock equivalents outstanding, thus, basic and diluted loss per share
calculations are the same.
Stock based compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation" allows companies to choose wether to account for employee
stock-based compensation on a fair-value method, or to account for such
compensation under the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for
stock-based compensation using APB 25.
Advertising Costs - Advertising costs of the Company are charged to
expense as incurred. Advertising expense amounted to $104,000 and
$147,414 in 2003 and 2002, respectively.
43
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
Note 2 PROPERTY AND EQUIPMENT
The major categories of property and equipment are as follows:
12/31/2003
--------------
Equipment $ 101,275
Furniture and fixtures 21,331
Vehicles 20,127
Leasehold improvements 152,515
Displays 82,750
Accumulated depreciation (81,186)
--------------
Net property and equipment $ 296,812
==============
Depreciation expense was $35,113 in 2003, and $24,343 in 2002.
Note 3 INVENTORY
Inventories are stated at lower of cost or market and consist of the
following:
12/31/03
--------------
Flooring material 249,337
--------------
Total $ 249,337
==============
Note 4 INCOME TAXES
Below is a summary of deferred tax asset calculations on net operating
loss carry forward amounts. Loss carry forward amounts expire through
2023. A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized.
Description NOL Balance Tax Rate
------------------------------ ------------ ------------ -----------
Federal Income Tax $473,960 $161,146 34%
Georgia State Income Tax 473,960 28,438 6%
------------
Valuation allowance (189,584)
------------
Deferred tax asset 12/31/2003 $0
============
The allowance has increased $189,584 from $0 as of December 31, 2002.
44
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
Note 5 COMMON STOCK/PREFERRED STOCK
On May 13, 2003 pursuant to a Share Exchange Agreement, the Company
acquired all of the outstanding common stock of The Flooring Zone of
Georgia, Inc (the "Georgia Company), a Georgia Corporation, in exchange
for 38,125,000 shares of common stock of the Company of which 125,000
eventually were issued to a creditor to relieve $61,609 of debt.
On June 20, 2003 pursuant to receiving Notices of Stock Option exercise
the Company issued 44,950 shares of its restricted Common Stock for
$56,187.50 or $1.25 per share. The Company also accepted the
Subscriptions and Investment Representation Letters from 14 investors
and issued 37,700 shares of its restricted common stock at a price of
$1.25 per share for a total of $47,125.
On August 1, 2003 the Company accepted the Subscriptions and Investment
Representation Letters from 16 investors and issued 76,400 shares of
its restricted common stock at a price of $1.25 per share for a total
of $95,500.
In September 2003 the Company accepted the Subscriptions and Investment
Representation Letters from 7 investors and issued 68,600 shares of its
restricted common stock at a price of $1.25 per share for a total of
$85,750. Of this, 10,000 shares were issued but payment of $12,500 was
not received until February 2004. This amount has been recorded as a
receivable from shareholder in these financial statements. The Company
also received Notices of Stock Option exercise and issued 50 shares of
its restricted Common Stock for $62.50 or $1.25 per share.
The Company's preferred stock may be issued from time to time in one or
more series. The Board of Directors are to establish by resolution(s)
the number of shares to be included in each series, and to fix the
designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof.
Note 6 STOCK OPTION PLAN
On May 13, 2003 the Company's board of directors adopted the Company's
2003 Stock Incentive Plan ("The Plan"). The Plan grants options to its
key employees, officers, directors, consultants, advisors and sales
representatives to purchase up to 500,000 shares of its $.001 par value
restricted common stock at an exercise price of $1.25 per share. The
options fully vest upon the date of grant. During the year ended
December 31, 2003 45,000 options were granted and all were exercised at
$1.25 per share. As of December 31, 2003 the Company has no stock
options outstanding.
45
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
Note 7 LINE OF CREDIT-RELATED PARTY
During the year ended December 31, 2003 the Company obtained a line of
credit with a shareholder of the Company for the purpose of meeting
cash flow needs. The interest rate on the line of credit is 6%. As of
December 31, 2003, the outstanding balance on this line was $124,000.
Note 8 LONG-TERM DEBT
The following is a summary of the Company's indebtedness as of December
31, 2003:
Note payable to a bank with interest at 6.00% due in
monthly installments of $2,780.00 through August 2013,
secured by property owned by the Company's president $ 244,341
Note payable to a shareholder with interest at 10.00%
due in monthly installments of $4,565.33 through
October 2008, unsecured 209,296
Note payable to a bank with interest at 5.84% due in
monthly installments of $610.94 through April 2006,
secured by a vehicle 16,526
Note payable to a bank with interest at 8.00% due in
monthly installments of $633.42 through April 2005,
secured by equipment 9,630
Note payable to an individual with interest at 6%, due
on demand, unsecured 6,000
-----------
Total $ 485,793
===========
Maturities of debt are as follows:
Year Ending December 31: Amount
------------------------ ------
2004 $ 74,331
2005 69,077
2006 68,020
2007 70,834
Thereafter 203,531
-----------
$ 485,793
===========
46
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
Note 9 LEASES
The Company has entered into three operating leases with unrelated
parties for its retail stores, warehouse and office facilities. The
leases expire between 2007 and 2014. During the year ended December 31,
2003, and 2002 the Company paid lease payments in the amount of
$198,220 and $131,260, respectively. In 2003 the Company also leased on
a month to month basis additional office space totaling $14,400.
The following is a schedule by years of future minimum lease payments
required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31,
2003:
Year ended Total
--------------------- --------------
December 31, 2004 $ 186,790
December 31, 2005 189,310
December 31, 2006 194,578
December 31, 2007 149,338
December 31, 2008 152,170
-----------
Totals $ 872,186
===========
Note 10 SUBSEQUENT EVENTS
On February 14, 2004 the Company entered into a note payable agreement
with one of its vendors in the amount of $155,070.11. This amount is
included in the accounts payable section of these financial statements.
Monthly payments are due in the amount of $12,922.51 with interest at
6.00% through February 2005.
In April 2004 the Company accepted the Subscriptions and Investment
Representation Letters from 3 investors and issued 76,000 shares of its
restricted common stock at a price of $1.25 per share for a total of
$95,000.
47
The Flooring Zone, Inc.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
48
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet
September 30, 2004
(Unaudited)
ASSETS
Current assets:
Cash $ 71,495
Accounts receivable, net 160,893
Inventory 375,360
Prepaid expense 4,468
----------------
Total current assets 612,216
Property & equipment, net 273,819
Other assets:
Intangible assets, net 3,845
Deferred financing costs, net 3,338
Deposits 1,563
----------------
Total other assets 8,746
----------------
TOTAL ASSETS $ 894,781
================
See accompanying notes to financial statements
49
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet-[continued]
September 30, 2004
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 308,650
Customer deposits 30,309
Accrued liabilities 16,623
Current portion long-term debt 237,670
----------------
Total current liabilities 593,252
Long-term liabilities:
Note payable- related party 154,041
Long-term debt-Note 3 705,699
Current portion long-term debt (237,670)
----------------
Total long-term liabilities 622,070
Total liabilities 1,215,322
Stockholders' deficit:-Note 2
Preferred Stock, 10,000,000 shares authorized $.001 par
value: No shares issued and outstanding -
Common stock, 100,000,000 shares authorized $.001 par
value; 38,428,700 shares issued and outstanding 38,429
Additional paid in capital 403,805
Accumulated deficit (762,775)
Total stockholders' deficit (320,541)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 894,781
================
See accompanying notes to financial statements
50
The Flooring Zone, Inc.
Condensed Consolidated Statements of
Operations For the three month and nine month periods ended
September 30, 2004 and 2003
(Unaudited)
Three months ended Sept. 30, Nine months ended Sept. 30,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Revenues:
Sales $ 922,271 $ 862,439 $ 2,933,034 $ 2,619,985
Licensing Fees - - 5,219 -
--------------- --------------- --------------- ---------------
Net revenues 922,271 862,439 2,938,253 2,619,985
Less cost of sales 644,241 562,382 1,871,266 1,765,547
--------------- --------------- --------------- ---------------
Gross profit 278,030 300,057 1,066,987 854,438
General and administrative expenses 306,877 372,491 1,005,615 1,015,691
--------------- --------------- --------------- ---------------
Net income (loss) from operations (28,847) (72,434) 61,372 (161,253)
Other income (expense):
Interest expense (14,708) (19,582) (45,737) (38,639)
--------------- --------------- --------------- ---------------
Total other income(expense) (14,708) (19,582) (45,737) (38,639)
--------------- --------------- --------------- ---------------
Net income (loss) before taxes (43,555) (92,016) 15,635 (199,892)
Income taxes - - - -
--------------- --------------- --------------- ---------------
Net income (loss) $ (43,555) $ (92,016) $ 15,635 $ (199,892)
=============== =============== =============== ===============
Income (loss) per share-basic and diluted $ (0.01) $ (0.01) $ 0.00 $ (0.01)
=============== =============== =============== ===============
Weighted average shares outstanding-
basic and diluted 38,428,700 38,258,448 38,401,997 38,116,922
=============== =============== =============== ===============
See accompanying notes to financial statements
51
The Flooring Zone, Inc.
Condensed Consolidated Statements of Cash
Flows For the nine month periods ended September 30, 2004 and 2003
(Unaudited)
9/30/2004 9/30/2003
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 15,635 $ (199,892)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 27,585 26,010
Decrease (increase) in accounts receivable (49,209) (10,778)
Decrease (increase) in inventories (126,023) (31,502)
Decrease (increase) in prepaid expenses 703 (116)
Decrease (increase) in deferred financing costs (3,338) -
Increase (decrease) in accounts payable 91,240 (18,857)
Increase (decrease) in accrued liabilities (11,689) (10,747)
Increase (decrease) in customer deposits (116,218) -
--------------- ----------------
Net cash used in operating activities (171,314) (245,882)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,349) (32,150)
--------------- ----------------
Net cash used in investing activities (4,349) (32,150)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on line of credit-related party - 124,000
Payments on line of credit-related party (124,000) -
Payments on long-term debt (341,356) (84,580)
Proceeds from borrowing on long term debt 550,000 20,127
Proceeds from the issuance of common stock 107,500 257,056
--------------- ----------------
Net cash provided by financing activities 192,144 316,603
--------------- ----------------
NET INCREASE IN CASH 16,481 38,571
CASH AT BEGINNING OF PERIOD 55,014 47,674
--------------- ----------------
CASH AT END OF PERIOD $ 71,495 $ 86,245
=============== ================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 45,737 $ 38,639
Cash paid for income taxes - -
NON-CASH FINANCING ACTIVITIES
Trade payables converted to notes payable $ 165,302 $ -
See accompanying notes to financial statements
52
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2004
Note 1 ORGANIZATION AND INTERIM FINANCIAL STATEMENTS
Organization-The Flooring Zone, Inc. (the "Company) is a corporation
organized under the laws of the State of Nevada on May 5, 2003. The
Company's business operations provide for full-service retail floor
covering products and services.
Interim financial statements- The accompanying condensed consolidated
financial statements have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
interim financial statements reflect all adjustments that, in the
opinion of management, are necessary in order to make the financial
statements not misleading. Certain information and disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31,
2003.
Note 2 COMMON STOCK
In February 2004 the Company received payment in the amount of $12,500
for 10,000 shares of common stock that were issued in September of
2003.
In April 2004 the Company accepted the Subscriptions and Investment
Representation Letters from 3 investors and issued 76,000 shares of its
restricted common stock at a price of $1.25 per share for a total of
$95,000.
Note 3 LINE OF CREDIT, NOTE PAYABLE, AND LONG-TERM DEBT
On February 14, 2004 the Company entered into a note payable agreement
with one of its vendors, whereby, it converted $155,070.11 of trade
payables to a note payable. Monthly payments on the note are due in the
amount of $12,922.51 with interest at 6.00% through February 2005. On
September 28, 2004, the Company refinanced the note payable increasing
the amount converted from trade payables to a note payable to
$165,302.32. The monthly payment increased to $13,775.19 with an
increase in the interest rate to 7.25% through September 2005.
On August 8, 2004 the Company entered into a note payable agreement
with a financial institution in the amount of $550,000, for the purpose
of consolidating some of its debt. The note is payable in sixty monthly
installments of $6,270.32 with an interest rate of 6.50%.
53
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until __________, 2005, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
- --------------------------------------------------------------------------------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The statutes, charter provisions, bylaws, contracts or other
arrangements under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against any liability which
they may incur in such capacity are as follows:
(a) Section 78.751 of the Nevada Business Corporation Act provides that
each corporation shall have the following powers:
1. A corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except an action by or in the right of
the corporation, by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he
acted in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, does not, of itself create
a presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal
action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
54
2. A corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit if
he acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the
action or suit was brought or other court of competent jurisdiction,
determines upon application that in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections 1
and 2, or in defense of any claim, issue or matter therein, he must be
indemnified by the corporation against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the
defense.
4. Any indemnification under subsections 1 and 2, unless
ordered by a court or advanced pursuant to subsection 5, must be made
by the corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee
or agent is proper in the circumstances. The determination must
be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a
quorum consisting of directors who were not parties to the
act, suit or proceeding;
(c) If a majority vote of a quorum consisting of
directors who were not parties to the act, suit or proceeding
so orders, by independent legal counsel, in a written opinion;
or
(d) If a quorum consisting of directors who were not
parties to the act, suit or proceeding cannot be obtained, by
independent legal counsel in a written opinion.
5. The certificate or articles of incorporation, the bylaws or
an agreement made by the corporation may provide that the expenses of
officers and directors incurred in defending a civil or criminal
55
action, suit or proceeding must be paid by the corporation as they are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined
by a court of competent jurisdiction that he is not entitled to be
indemnified by the corporation. The provisions of this subsection do
not affect any rights to advancement of expenses to which corporate
personnel other than directors or officers may be entitled under any
contract or otherwise by law.
6. The indemnification and advancement of expenses authorized
in or ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a
person seeking indemnification or advancement of expenses may
be entitled under the certificate or articles of incorporation
or any bylaw, agreement, vote of stockholders of disinterested
directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his
office, except that indemnification, unless ordered by a court
pursuant to subsection 2 or for the advancement of expenses
made pursuant to subsection 5, may not be made to or on behalf
of any director or officer if a final adjudication establishes
that his acts or omissions involved intentional misconduct,
fraud or a knowing violation of the law and was material to
the cause of action.
(b) Continues for a person who has ceased to be a
director, officer, employee or agent and inures to the benefit
of the heirs, executors and administrators of such a person.
7. The registrant's Articles of Incorporation limit liability
of its Officers and Directors to the full extent permitted by the
Nevada Business Corporation Act.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses we will
pay in connection with the offering described in this registration statement.
Amount
Expense Maximum
------- -------
SEC Registration Fees $ 1,840.00
Blue Sky fees and expenses 5,000.00
Printing and shipping expenses 10,000.00
Legal fees and expenses 100,000.00
Accounting fees and expenses 100,000.00
Transfer and miscellaneous expenses 8,160.00
------------
Total $ 225,000.00
============
56
RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following unregistered securities since our
inception on May 5, 2003:
On May 13, 2003, 38,125,000 restricted common shares were issued to our
CEO and director, Jimmy Lee, and to our Secretary and director, Mike Carroll,
pursuant to a Share Exchange Agreement in exchange for 98,000,000 common shares
of The Flooring Zone of Georgia, Inc., a Georgia corporation, which shares were
owned by Mr. Lee and Mr. Carroll. The shares were issued without registration
under the Securities Act of 1933 in reliance on an exemption from registration
provided by Section 4(2) of the Securities Act, and from similarly applicable
state securities laws, rules and regulations exempting the offer and sale of
these securities by available state exemptions. No general solicitation or
general advertising was made in connection with the offer or sale of these
securities. The Company received no cash for these securities. As officers and
directors, Mr. Lee and Mr. Carroll had knowledge of our operations and financial
condition. Mr. Lee and Mr. Carroll represented their intention to acquire the
securities for investment purposes only and not with a view towards
distribution. Appropriate legends were affixed to the certificates issued to the
individuals.
In June 2003, under The Flooring Zone, Inc., 2003 Stock Incentive Plan
we granted stock options to purchase up to an aggregate of 45,000 shares of our
common stock to 26 of our employees and/or consultants, all of whom were
natural persons providing bona fide sevices for us, which services were not in
connection with capital raising transactions or to promote or maintain a market
for our securities. The options were issued without registration under the
Securities Act of 1933, pursuant to a written compensation benefit plan in
reliance on an exemption from registration provided by Rule 701 of Regulation E
of the Securities Act, and from similarly applicable state securities laws,
rules and regulations exempting the offer and sale of these securities by
available state exemptions. The Company received no cash for these securities
and the value of the options issued did not exceed $1,000,000, 15% of our total
assets or 15% of our then outstanding common stock.
In June and September of 2003, 45,000 restricted common shares were
issued to 26 employees and/or consultants pursuant to Notices of Exercise of the
stock options discussed in the preceeding paragraph. The shares were issued
without registration under the Securities Act of 1933 in reliance on an
exemption from registration provided by Rule 701 of Regulation E of the
Securities Act, and from similarly applicable state securities laws, rules and
regulations exempting the offer and sale of these securities by available state
exemptions. No general solicitation or general advertising was made in
connection with the offer or sale of these securities. The Company received
$56,250 cash for these securities.
From June through September of 2003, 182,700 restricted common shares
were issued pursuant to subscription agreements received from 34 individuals.
The shares were issued without registration under the Securities Act of 1933 in
reliance on an exemption from registration provided by Rule 504 of Regulation D
of the Securities Act, and from similarly applicable state securities laws,
rules and regulations exempting the offer and sale of these securities by
available state exemptions. No general solicitation or general advertising was
made in connection with the offer or sale of these securities. The Company
received $228,375 cash for these securities.
In April of 2004, 76,000 restricted common shares were issued pursuant
to subscription agreements received from three accredited investors. The shares
were issued without registration under the Securities Act of 1933 in reliance on
an exemption from registration provided by Rule 506 of Regulation D of the
57
Securities Act, and from similarly applicable state securities laws, rules and
regulations exempting the offer and sale of these securities by available state
exemptions. No general solicitation or general advertising was made in
connection with the offer or sale of these securities. The Company received
$95,000 cash for these securities.
EXHIBIT INDEX
SEC
Reference Exhibit No. Document Location
- --------- ----------- -------- --------
3 3.01 Articles of Incorporation As filed
3 3.02 Bylaws As filed
4 4.01 The Flooring Zone, Inc. As filed
2003 Stock Incentive Plan
5 5.01 Opinion on Legality Attached
10 10.01 Material Contract Attached
23 23.01 Consent of Independent Auditors Attached
23 23.02 Consent of Attorney See Exhibit 5.01
99 99.01 Specimen Subscription Agreement As filed
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
The Flooring Zone, Inc. pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of The Flooring Zone, Inc. in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
We hereby undertake to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
58
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
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SIGNATURES
The issuer has duly caused this SB-2/A-1 registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Brunswick, State of Georgia, on November 24, 2004.
THE FLOORING ZONE, INC.
By:/s/ Jimmy Lee
-----------------------------
Jimmy Lee, President
This SB-2 registration statement has been signed by the following
persons in the capacities and on the dates indicated.
Name and Title Date
/s/ Jimmy Lee November 24, 2004
- ------------------------------
Jimmy Lee
CEO, President & Director
/s/ Michael Carroll November 24, 2004
- ------------------------------
Michael Carroll
Principal Financial and
Accounting Officer, Secretary
& Director
60