U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1933
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 333-119234
THE FLOORING ZONE, INC.
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(Name of Small Business Issuer in its charter)
NEVADA 20-0019425
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3219 Glynn Avenue, Brunswick, Georgia 31520
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(Address of principal executive Offices) (Zip Code)
Issuer's telephone number: (912) 264-0505
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered pursuant to section 12(g) of the Exchange Act: None
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. (1) Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was: $3,769,343.
The aggregate market value of the issuer's voting stock held as of March 15,
2005, by non-affiliates of the issuer, based on the price at which the shares
were sold, was approximately: $440,625.
As of March 15, 2005, the issuer had 38,428,700 shares of its $0.001 par value
common stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: none
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TABLE OF CONTENTS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................. 3
ITEM 2. DESCRIPTION OF PROPERTY............................................. 8
ITEM 3. LEGAL PROCEEDINGS................................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS............... 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............ 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION................................ 10
ITEM 7. FINANCIAL STATEMENTS................................................ 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 34
ITEM 8A. CONTROLS AND PROCEDURES........................................... 34
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ....... 35
ITEM 10. EXECUTIVE COMPENSATION............................................. 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................... 37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 38
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................... 39
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................. 40
SIGNATURES.................................................................. 41
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PART I
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FORWARD
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This Form 10-KSB contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "hope," "will," "expect," "believe,"
"anticipate," "estimate" or "continue" or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainty, and actual results may differ materially
depending on a variety of factors, many of which are not within the Company's
control. These factors include but are not limited to economic conditions
generally and in the industries in which the Company and its customers
participate; competition within the Company's industry, including competition
from much larger competitors; technological advances which could render the
Company's products less competitive or obsolete; failure by the Company to
successfully develop new products or to anticipate current or prospective
customers' product needs; price increase or supply limitations for components
purchased by the Company for use in its products; and delays, reductions, or
cancellations of orders previously placed with the Company.
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ITEM 1. DESCRIPTION OF BUSINESS
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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
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.
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
3
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 retailer while developing and maintaining
industry-leading buying power and implementing professional retailing
operations.
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.
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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.
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
5
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.
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.
6
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
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
7
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
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.
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ITEM 2. DESCRIPTION OF PROPERTY
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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, was $186,790 and will be
$194,266 for the year ending December 31, 2005.
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ITEM 3. LEGAL PROCEEDINGS
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Neither us, nor any of our officers or directors is a party to any
material legal proceeding or litigation not arising in the ordinary course of
business 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
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No matters were submitted to a vote of our shareholders during the
fiscal year ended December 31, 2004.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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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. Our shareholders may, therefore, find it difficult to resell their
securities. Furthermore, our shares are not marginable and it is unlikely that a
lending institution would accept our common stock as collateral for a loan.
We are currently undertaking a public offering of a maximum of
10,000,000 shares of our common stock at a price of $2.00 per share, for an
aggregate offering of up to $20,000,000. This public offering was registered
with the Securities and Exchange Commission pursuant to an SB-2 registration
statement. Subsequent to the year end, on January 31, 2005, our SB-2
registration statement was declared effective by the Securities and Exchange
Commission. We commenced our public offering on January 31, 2005. The commission
file number assigned to this registration statements is 333-119234.
As of March 23, 2005, we had sold 72,000 shares, raising $144,000.
Currently the offering is self underwritten and is being sold by the
officers and directors of the Company, so no underwriting discounts and
commissions, finders' fees or expenses have been paid.
9
In accordance with the use of proceeds set forth in the registration
statement, as of March 23, 2005, approximately $120,000 has been used to reduce
outstanding debt obligations of the Company. Of the $120,000, approximately
$29,000 was paid to reduce amounts owed on a line of credit extended to us by
Michael Carroll and a note payable to Michael Carroll. Mr. Carroll is an officer
and director of the Company.
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.
Of our 38,428,700 common shares currently outstanding, 38,352,700
shares have been held for more than one year and would be eligible for resale in
compliance with the provisions of Rule 144.
Cash Dividends
The Company has not declared a cash dividend on any class of common
equity in the last two fiscal years. There are no restrictions on the Company's
ability to pay cash dividends, other than state law that may be applicable;
those limit the ability to pay out all earnings as dividends. The Board of
Directors does not, however, anticipate paying any dividends in the foreseeable
future; it intends to retain the earnings that could be distributed, if any, for
the operations, expansion and development of its business.
Recent Sales of Unregistered Securities
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified.
During the quarter ended December 31, 2004, we did not issue any
securities that had not been registered under the Securities Act of 1933.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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This discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and capital
resources during our fiscal years ended December 31, 2004 and 2003. This
discussion should be read in conjunction with the financial statements and
financial statement footnotes included in this registration statement.
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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. While we enjoyed our higher revenues in fiscal
2004 than in any prior year, we still realized a net less in 2004.
Revenues
We generate revenue primarily from the sale of flooring products. We
sell flooring products to two groups - retail customers and contractors. Retail
customers generally pay higher prices for products than contractors. Typically,
about 70% of our product sales are to retail customers and 30% of our product
sales are to contractors. An exception to this general rule occurred during the
third quarter of 2004, when as a result of the unusually active hurricane
season, retail customer sales accounted for only 40% of total product sales. As
a result, even though sales volume increased an average of 12% during the first,
second and fourth quarters of 2004 compared to the same quarters of 2003, and we
raised retail product prices an average of 2% in January 2004, we realized an
increase in net revenue of only 11% for the year ended December 31, 2004,
compared to December 31, 2003.
In the twelve months ended December 31, 2004, we realized net revenue
of $3,774,562, an 11% increase compared to the twelve months ended December 31,
2003. We believe the increase in net revenue during the twelve month period
ended December 31, 2004, compared to the same period of 2003, is attributable to
improving economies and consumer confidence in the communities where we operate.
As noted above, our revenues are affected by consumer confidence. Based
on sales in 2004, 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
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from operations. We believe the revenues we can earn from one store in the
larger markets we are targeting will be equivalent to the revenue we earn in the
three stores we currently have.
Gross Profits
Our gross profits are directly affected by our costs of sales. Cost of
sales includes all direct costs of floor coverings, materials used in
installation and installation labor. As with revenues, our cost of sales and
gross profits are directly affected by changes in the percentage of products
sold to retail customers versus contractors. As discussed above, the prices we
can charge contractors are lower than the prices we can charge retail customers,
therefore, our profit margin on product sales to retail customers is greater.
Moreover, we typically also realize profit from the sale of materials used in
installation and from the costs charged for installation labor to retail
customers. Conversely, contractors typically use their own subcontractors to
install the floor covering products they purchase. These subcontractors provide
the materials used in installation and the installation labor.
Gross profit during the year ended December 31, 2004, was $1,147,069,
13% higher than the $1,012,237 gross profit realized during the year ended
December 31, 2003, as increased net revenues were partially offset by a 10%
increase in cost of sales during fiscal 2004.
We believe the improvement in our gross profit during the year ended
December 31, 2004, resulted from several factors. First, in January 2004, we
increased average retail product price by 2%. This resulted in a 5% increase in
gross profit on retail products sales. Second, at the start of the year we
negotiated 5% to 10% lower installation rates with some of our installers by
agreeing to pay them a fixed monthly fee. Finally, during 2004, we began
purchasing product in larger quantities, which resulted in a reduction in the
costs we pay to purchase the flooring covering products we sell. These changes
resulted in 25% higher gross profits during the first nine months of the 2004
fiscal year end. During the fourth quarter of 2004, however our gross profit was
$80,082, compared to $157,799 during the fourth quarter of 2003, a decrease of
49%. We believe this significant decrease is the result of several factors. As a
result of the unusually active hurricane season in August and September 2004, we
installed very little product and realized limited income from installations in
October 2004. Despite realizing limited income from installations in October
2004, we still incurred fixed installation costs, which were not offset by
revenue. Also during the fourth quarter of 2004, many of our product suppliers
raised their prices to compensate for significantly higher transportation costs.
Overall, for the 2004 fiscal year, gross profit as a percentage of sales
remained constant, increasing 0.6% compared to fiscal 2003.
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.
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General and Administrative Expenses
For the years ended December 31, 2004 and 2003
General and administrative expenses for the year ended December 31,
2004, decreased $159,626, or 11% to $1,274,409 compared to the year ended
December 31, 2003, and as a percentage of sales revenue decreased from 42%
during the year ended December 31, 2003 to 34% during the year ended December
31, 2004. During the twelve months ended December 31, 2004 and 2003, general and
administrative costs consisted of:
Year ended
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December 31, 2004 December 31, 2003
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Salaries & benefits costs $ 584,700 $ 661,795
Advertising & display costs 64,348 139,516
Occupancy costs & utilities 305,628 309,926
Legal & accounting costs 37,979 67,006
Other 281,754 255,792
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$ 1,274,409 $ 1,434,035
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The reduction in salaries and benefits costs in the year ended December
31, 2004, compared to 2003, is largely the result of a reduction in our
administrative work force with the completion of our management information
system and the consolidation of certain job functions, during the first quarter
of 2004. We do not anticipate significant increases in staffing needs until we
have raised sufficient capital to expand our operations.
During the year ended December 31, 2004, we reduced our advertising and
display costs by 46% compared to the same period of 2003 because we believe we
are well known within our current markets. We anticipate continued reductions in
advertising costs until we expand to new markets.
Occupancy costs and utilities during the year ended December 31, 2004,
compared to the same period of 2003, remained relatively flat, decreasing by
less than 1.5%. We expect these costs to remain constant until we expand our
operations.
Legal and accounting costs decreased 43% to $37,979, during the year
ended December 31, 2004 compared to the year ended December 31, 2003. In 2003,
we incurred significantly higher accounting fees in connection with auditing our
financial statements back through the inception of our Company. Despite the
reduction in legal and accounting costs in fiscal 2004 as compared to fiscal
2003, we anticipate legal and accounting costs in 2005 will return to 2003
levels or even higher as the Company begins to incur legal and accounting costs
in connection with its ongoing public reporting obligations.
Other costs increased 10% to $281,754 during the twelve months ended
December 31, 2004 compared to the comparable period of 2003. This increase is
primarily attributable to a $14,000 increase in postage and office costs
associated with increasing our operations, a $11,000 increase in travel costs as
a result of increasing the number of flooring product shows we attend and
traveling to scout out potential locations for expansion, and an $11,000
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increase in automobile expenses associated with increasing the number of
employees we reimburse for automobile expenses. We anticipate increases in other
expenses to remain constant until we expand and add additional company owned
stores to our network.
Net Loss
Our net loss in fiscal 2004 was $195,124, compared to $467,460 in
fiscal 2003. This 58% decrease in net loss during the twelve months ended
December 31, 2004, is primarily the result of increased product sales in 2004
compared to 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. Subsequent to the year
end, on January 31, 2005, our SB-2 registration statement was declared effective
by the Securities and Exchange Commission and we commenced selling shares of our
common stock at $2.00 per share. As of March 23, 2005, we have raised $144,000.
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 2004 and 2003 cash was primarily used to fund operations.
See below for additional discussion and analysis of cash flow.
Fiscal 2004 Fiscal 2003
------------ -------------------
Net cash used in operating activities $(314,976) $(327,651)
Net cash used in investing activities (40,100) (39,406)
Net cash provided by financing activities $ 390,154 374,397
--------- ---------
NET INCREASE IN CASH $ 35,078 $ 7,340
========= =========
As discussed herein, during fiscal 2004 compared to fiscal 2003,
product sales increased and general and administrative expenses decreased
leading to a reduction in net loss of $272,336, to $195,124. During year ended
December 31, 2004, as product sales have improved, inventory has increased
$53,837 or about 21.6% compared to the year ended December 31, 2003. Similarly,
as a result of increased product sales our accounts receivable increased by
$36,770 to $148,661, during fiscal 2004, compared to fiscal 2003. During fiscal
2004, prepaid expenses increased 81,507 compared to fiscal 2003. These prepaid
expenses relate to the direct costs of our I.P.O. and will be a reduction in
additional paid in capital at the time shares are issued. Customer deposits for
the twelve months ended December 31, 2004, decreased $110,715. This decrease in
customer deposits is attributable to two factors. First, the decrease in
customer deposits is attributable to the decrease in retail sales we experienced
during September as a result of the hurricane season. At the time we sell
product to our retail customers we require a deposit. Once the job is completed
14
we recognize the revenue from the sale. Most retail jobs are completed within
30-60 days. The decrease in customer deposits reflects the drop in retail sales
caused by the hurricanes. Second, we typically experience decreases in retail
sales and correspondingly, customer deposits, during December of each year as
consumer demand for floorcovering products tends to decrease and consumers who
do purchase during the fourth quarter typically want their floorcoverings
installed prior to the holiday season. Net cash used in operating activities
during fiscal 2004 was slightly lower than net cash used in operating activities
in fiscal 2003, decreasing $12,675 or less than 4%. This increase in cash used
in operating activities during fiscal 2004 was largely the result of a net loss
of $195,124 compared to a net loss of $467,460, partially offset by an increase
in inventory, accounts receivable and prepaid expenses and a decrease in
customer deposits.
Net cash used in investing activities in fiscal 2004 increased by only
$694 or, less than 2%, to $40,100.
Net cash provided from financing activities increased $15,757, or 4% in
fiscal 2004 as compared to fiscal 2003. During the twelve months ended December
31, 2004, proceeds from a long term loan and issuance of stock totaled $963,339.
This amount was only partially offset by the repayment on the credit line from a
related party in the amount of $97,000 and payment on long term debt totaling
$476,185, resulting in net cash from financing activities of $390,154. By
comparison, in fiscal 2003, net cash from financing activities totaled $374,397.
Those funds came from a related party credit line, long term loans and the
issuance of stock.
At December 31, 2004 and 2003, we had cash on hand of $90,092 and
55,014, respectively.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of December
31, 2004.
Payments Due by Fiscal Year
---------------------------------------------------------
Contractual Commitments Total 2005 2006 2007 2008 Thereafter
- --------------------------------------------------------------------------------------------------------------------------
Line of Credit-Related Party $ 27,000 $ 27,000 $ -- $ -- $ -- $ --
Note Payable-Related Party 137,964 42,919 47,414 47,631 -- --
Note Payable 700,135 204,871 44,373 47,344 50,515 353,032
Capital Leases 27,348 8,841 10,473 8,034 -- --
Operating Leases 850,406 194,266 199,534 149,388 152,170 155,098
---------- ---------- ----------- ---------- ---------- ----------
TOTAL $1,742,853 $ 477,897 $ 301,794 $ 252,397 $ 202,685 $ 508,130
========== ========== =========== ========== ========== ==========
Off-Balance Sheet Financing Arrangements
As of December 31, 2004 and 2003, we had no off-balance sheet financing
arrangements.
15
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.
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 December 2004, the FASB issued SFAS No. 123R, Share-based Payment.
This standard is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R requires the measurement of the cost of employees
services received in exchange for an award of the entity's equity instruments
based on the grant-date fair value of the award. The cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. No compensation cost is recognized for equity
16
instruments for which employees do not render service. The Company will adopt
SFAS No. 123R on July 1, 2005, which will require stock-based compensation
expense to be recognized against earnings for the portion of outstanding
unvested awards, based on the grant date fair value of those awards calculated
using a Black-Scholes pricing model under SFAS 123 for pro forma disclosure. The
Company is currently evaluating to what extent the entity's equity instruments
will be used in the future for employees services and the transition provisions
of this standard; therefore, the impact to the Company's financial statements of
the adoption of SFAS No. 123R cannot be predicted with certainty.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, Inventory Pricing, to clarify that for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage), should be expensed as incurred and not included in
overhead. In addition, this Statement requires the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions in SFAS No. 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is currently assessing the impact of SFAS no. 151 on its consolidated
financial statements.
In December 2004, the FASB issued Staff Position No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (the "Act") that provides a tax deduction on qualified
production activities. Accordingly FASB indicated that this deduction should be
accounted for as a special deduction in accordance with FASB Statement No. 109.
The Company will comply with the provisions of FSP 109-1 effective January 1,
2005, and does not believe that the adoption of this FASB Staff Position will
have a material impact on the Company's financial statements.
- --------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Flooring Zone, Inc.
Report of Independent Registered Public Accounting Firm
And
Consolidated Financial Statements
December 31, 2004
17
The Flooring Zone, Inc.
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm.................. 19
Consolidated Balance Sheet-December 31, 2004............................. 20
Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003............................................. 22
Consolidated Statements of Stockholders' Deficit for the Years
Ended December 31, 2004 and 2003....................................... 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003............................................. 24
Notes to Consolidated Financial Statements............................... 25
18
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, 2004 and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 2004 and 2003. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2004 and the results of operations and
cash flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Mantyla McReynolds
Mantyla McReynolds
Salt Lake City, Utah
February 18, 2004
19
The Flooring Zone, Inc.
Consolidated Balance Sheet
December 31, 2004
ASSETS
Current assets:
Cash $ 90,092
Accounts receivable, net of allowance of $20,426 148,661
Inventory-Notes 1 & 3 303,174
Prepaid expenses 79,507
------------------
Total current assets 621,434
Property & equipment, net - Notes 1 & 2 294,687
Other assets:
Intangible assets, net of accumulated amortization of $1,366 6,931
Deposits 6,031
------------------
Total other assets 12,962
------------------
TOTAL ASSETS $ 929,083
==================
See accompanying notes to financial statements
20
The Flooring Zone, Inc.
Consolidated Balance Sheet [continued]
December 31, 2004
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 517,559
Line of credit-related party-Note 7 27,000
Customer deposits 35,812
Accrued liabilities 14,564
Current portion long-term debt - Note 8 256,631
------------------
Total current liabilities 851,566
Long-term liabilities:-Note 8
Note payable-related party 137,964
Long-term debt 727,483
Current portion long-term debt (256,631)
------------------
Total long-term liabilities 608,816
Total liabilities 1,460,382
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; 38,428,700 shares issued and outstanding 38,429
Additional paid in capital 403,805
Accumulated deficit (973,533)
------------------
Total stockholders' deficit (531,299)
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 929,083
==================
See accompanying notes to financial statements
21
The Flooring Zone, Inc.
Consolidated Statements of Operations
For the years ended December 31, 2004 and 2003
Revenues: 2004 2003
----------------- -----------------
Sales $ 3,769,343 $ 3,396,107
Licensing Fees 5,219 978
----------------- -----------------
Net revenues 3,774,562 3,397,085
Less cost of sales 2,627,493 2,384,848
----------------- -----------------
Gross profit 1,147,069 1,012,237
General and administrative expenses 1,274,409 1,434,035
----------------- -----------------
Net income (loss) from operations (127,340) (421,798)
Other income/(expense):
Interest expense (67,784) (45,662)
----------------- -----------------
Total other income/(expense) (67,784) (45,662)
----------------- -----------------
Net income (loss) before taxes (195,124) (467,460)
Income taxes - -
----------------- -----------------
Net income (loss) $ (195,124) $ (467,460)
================= =================
Net Loss per share-basic and diluted $ (0.01) $ (0.01)
================= =================
Weighted average shares outstanding-basic and
diluted 38,406,689 38,176,515
================= =================
See accompanying notes to financial statements
22
The Flooring Zone, Inc.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 2004 and 2003
Additional Accounts Total
Shares Common Paid in Receivable, Accumulated Stockholders'
Issued Stock Capital Shareholder Deficit Deficit
------------- ----------- ------------- ---------------- --------------- -----------------
Balance, January 1, 2003 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 45,000 45 56,205 56,250
Incentive Plan at $1.25/share
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)
Payment received on shares issued
in 2003 12,500 12,500
Shares issued for cash at
$1.25/share 76,000 76 94,924 95,000
Net loss for year ended
December 31, 2004 (195,124) (195,124)
---------- ---------- ------------ ----------- ------------- --------------
Balance, December 31, 2004 38,428,700 $ 38,429 $ 403,805 $ - $ (973,533) $ (531,299)
========== ========== ============ =========== ============= ==============
See accompanying notes to financial statements
23
The Flooring Zone, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2004 and 2003
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (195,124) $ (467,460)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 39,383 35,436
Bad debt expense - 27,776
Decrease (increase) in accounts receivable (36,770) (6,128)
Decrease (increase) in accounts receivable-related party - 3,694
Decrease (increase) in inventories (53,837) 44,468
Decrease (increase) in employee loans and advances (207) 4,667
Decrease (increase) in prepaid expenses (79,507) 2,000
Decrease (increase) in deposits 703 (115)
Increase (decrease) in accounts payable 134,847 (37,805)
Increase (decrease) in accrued liabilities (13,749) (7,945)
Increase (decrease) in customer deposits (110,715) 73,761
------------- -------------
Net cash used in operating activities (314,976) (327,651)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (36,646) (39,406)
Purchase of intangible assets (3,454) -
------------- -------------
Net cash used in investing activities (40,100) (39,406)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing (payments) on line of credit-related party (97,000) 124,000
Proceeds from borrowing on long term debt 855,839 26,127
Payments on long term debt (476,185) (47,855)
Proceeds from the issuance of common stock 107,500 272,125
------------- -------------
Net cash provided by financing activities 390,154 374,397
------------- -------------
NET INCREASE IN CASH 35,078 7,340
CASH AT BEGINNING OF YEAR 55,014 47,674
------------- -------------
CASH AT END OF YEAR $ 90,092 $ 55,014
============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 63,784 $ 45,662
Cash paid for income taxes - -
Issued stock to relinquish debt - 61,069
See accompanying notes to financial statements
24
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
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 104, Revenue Recognition 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.
25
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
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.
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.
Intangible assets also include the closing costs for refinancing a
portion of the Company's debt with a bank. The costs of obtaining
trademarks and closing costs are capitalized as incurred and are
amortized over their estimated useful lives of fifteen years and five
years, respectively, using the straight-line method. Amortization
expense for the years ended December 31, 2004 and 2003 were $611 and
$323, 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 share- 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.
26
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
At December 31, 2004 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 whether 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. If the compensation cost for the Company's
compensation plan had been determined consistent with SFAS No. 123 the
Company's net income and net income per common share would have changed
to the pro forma amounts indicated below:
2004 2003
------------------- -----------------
Net loss, as reported $ (195,124) $ (467,460)
Compensation cost under fair value-based accounting
method, net of tax - 14,578
------------------- -----------------
Net loss, pro forma (195,124) (482,038)
Net loss per share-basic and diluted:
As reported $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 0%; risk-free
interest rate of 3% and expected lives of 3,650 days.
Advertising Costs- Advertising costs of the Company are charged to
expense as incurred. Advertising expense amounted to $53,102 and
$104,000 in 2004 and 2003, respectively.
Recently Issued Financial Accounting Standards--In December 2004, the
FASB issued SFAS No. 123R, Share-based Payment. This standard is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance.
SFAS No. 123R requires the measurement of the cost of employees
services received in exchange for an award of the entity's equity
instruments based on the grant-date fair value of the award. The cost
will be recognized over the period during which an employee is required
to provide service in exchange for the award. No compensation cost is
recognized for equity instruments for which employees do not render
service. The Company will adopt SFAS No. 123R on July 1, 2005, which
will require stock-based compensation expense to be recognized against
earnings for the portion of outstanding unvested awards, based on the
grant date fair value of those awards calculated using a Black-Scholes
pricing model under SFAS 123 for pro forma disclosure. The Company is
currently evaluating to what extent the entity's equity instruments
will be used in the future for employees services and the
27
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
transition provisions of this standard; therefore, the impact to the
Company's financial statements of the adoption of SFAS No. 123R cannot
be predicted with certainty.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, Inventory Pricing, to clarify that
for abnormal amounts of idle facility expense, freight, handling costs,
and wasted material (spoilage), should be expensed as incurred and not
included in overhead. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities.
The provisions in SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company
is currently assessing the impact of SFAS no. 151 on its consolidated
financial statements.
In December 2004, the FASB issued Staff Position No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to
the tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004 (the "Act") that provides a tax
deduction on qualified production activities. Accordingly FASB
indicated that this deduction should be accounted for as a special
deduction in accordance with FASB Statement No. 109. The Company will
comply with the provisions of FSP 109-1 effective January 1, 2005, and
does not believe that the adoption of this FASB Staff Position will
have a material impact on the Company's financial statements.
Note 2 PROPERTY AND EQUIPMENT
The major categories of property and equipment are as follows:
12/31/2004
---------------------
Equipment $ 133,146
Furniture and fixtures 21,331
Vehicles 20,127
Leasehold improvements 156,265
Displays 83,775
Accumulated depreciation (119,957)
---------------------
Net property and equipment $ 294,687
=====================
Included in equipment are assets totaling $29,978 which are financed by
capital lease. Related amortization is included in accumulated
depreciation. Depreciation expense was $38,773 in 2004 and $35,113 in
2003.
28
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 3 INVENTORY
Inventories are stated at lower of cost or market and consist of the
following:
12/31/04
---------------------
Flooring material 303,174
---------------------
Total $ 303,174
=====================
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
2024. 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 $669,084 $227,489 34%
Georgia State Income Tax 669,084 40,145 6%
-----------------
Valuation allowance (267,634)
-----------------
Deferred tax asset 12/31/2004 $ 0
=================
The allowance has increased $78,050 from $189,584 as of 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. 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.
29
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 5 COMMON STOCK/PREFERRED STOCK - [continued]
In May 2004 pursuant to Rule 506 of Regulation D of the Securities Act
of 1933 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.
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. As
of December 31, 2004 no shares of preferred stock have been issued by
the Company.
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 determined by the Stock
Option Committee of the board at the time of grant. The options fully
vest upon the date of grant.
Changes in stock options for the year ended December 31, 2004 and 2003
is as follows:
Weighted
Average
Exercise
2004: Shares Price
---------------- ----------------
Granted 0 $ 0.00
Exercised 0 0.00
Forfeited/expired 0 0.00
Outstanding @ December 31 0 0.00
Exercisable 0 0.00
Weighted average fair value of options granted during $ 0.00
year
Weighted average fair value of shares issued under
Stock Incentive Plan $ 0.00
30
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 6 STOCK OPTION PLAN -[continued]
Weighted
Average
Exercise
2003: Shares Price
---------------- ----------------
Granted 45,000 $ 1.25
Exercised 45,000 1.25
Forfeited/expired 0 0.00
Outstanding @ December 31 0 0.00
Exercisable 0 0.00
Weighted average fair value of options granted during $ 0.32
year
Weighted average fair value of shares issued under
Stock Incentive Plan $ 1.25
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, 2004 and 2003, the outstanding balances on this line were
$27,000 and $124,000, respectively. The total amount of the credit line
available to the Company as of December 31, 2004 is $60,000. The amount
of the unused line of credit at December 31, 2004 is $33,000.
31
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
Note 8 LONG-TERM DEBT
The following is a summary of the Company's indebtedness as of December
31, 2004:
Note payable to a bank with interest at 6.50% due in monthly
installments of $6,270.32 through August 2009, secured by
Company equipment and property owned by the Company's president. $ 536,852
Note payable to a shareholder with interest at 10.00% due in
monthly installments of $4,565.33 through October 2007,
unsecured. 137,964
Note payable to a vendor with interest at 7.25% due in
monthly installments of $13,775.19 through September 2005,
unsecured. 133,283
Note payable to a vendor with interest at $200 per month due in
monthly installments of $6,200.00 through May 2005, unsecured. 24,000
Lease payable to Dell Financial with interest at 17.06% due
in monthly installments of $1069.63 through August 2007,
secured by equipment. 27,348
Note payable to an individual with interest at 6%, due on demand,
unsecured. 6,000
---------------
Total $ 865,447
===============
Maturities of debt are as follows:
Year Ending December 31: Amount
------------------------------------- -------------------
2005 $ 256,631
2006 102,259
2007 103,010
2008 50,515
Thereafter 353,032
-------------------
$ 865,447
===================
32
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
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,
2004, and 2003 the Company paid lease payments in the amount of
$226,690 and $212,620, respectively. In 2004 and 2003 the Company also
leased on a month to month basis additional office space totaling
$14,400 each year.
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,
2004:
Year ended Total
--------------------------------- ------------------
December 31, 2005 $ 194,266
December 31, 2006 199,534
December 31, 2007 149,388
December 31, 2008 152,170
December 31, 2009 155,098
------------------
Totals $ 850,406
==================
Note 10 CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position. However, an unfavorable
outcome in these claims could result in a possible judgment against the
company of as much as $20,000.
The Company records contingent losses when they are probable and
reasonably estimable. The Company and their legal council have
determined that these liabilities are possible but not probable.
Note 11 SUBSEQUENT EVENTS
The Company's SB-2 Registration statement filed with the Securities and
Exchange Commission became effective in January 2005. As of March 23,
2005 the Company had raised $144,000 and will be issuing 72,000 shares
of its common stock.
33
- --------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
ITEM 8A. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Our principal executive officers and our principal financial officer
(the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Such officers have concluded (based upon their evaluations of
these controls and procedures as of the end of the period covered by this
report) that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in this report is accumulated and
communicated to management, including the Certifying Officers as appropriate, to
allow timely decisions regarding required disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls over financial reporting or other
factors that could significantly affect such controls subsequent to the date of
their evaluation, and there were no significant deficiencies and material
weaknesses.
Our management, including the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and may not be detected.
34
- --------------------------------------------------------------------------------
ITEM 8B. OTHER INFORMATION
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLAINCE WTH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------
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.
35
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
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.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the directors, executive
officers and persons who beneficially own more than 10% of any class of equity
securities of an issuer that have been registered pursuant to Section 12 of the
Exchange Act, to file initial reports of beneficial ownership and reports of
changes in beneficial ownership of those securities with the Securities and
Exchange Commission. As no class of our equity securities have been registered
pursuant to Section 12 of the Exchange Act, our directors, executive officers
and shareholders are not subject to the disclosure obligations of Section 16,
and will not be until such time as we register a class of our equity securities
pursuant to Section 12 of the Exchange Act.
- --------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
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, 2004, (the end of the Registrant's last completed fiscal
year).
36
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, 2004 $62,400 $ -0- $-0- $-0- -0- $-0- $-0-
President and Director 2003 62,400 10,000 -0- -0- -0- -0- -0-
Steven Nichols 2004 60,950 6,700 -0- -0- -0- -0- -0-
Vice President 2003 59,800 2,500 -0- -0- -0- -0- -0-
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.
- --------------------------------------------------------------------------------
ITEM 11. 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 December 31, 2004. As of December 31, 2004, we had 38,428,700
common shares outstanding.
37
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%
- ------------------------------------------------------------------------------------------------------
TOTAL 99% 78%
- ------------------------------------------------------------------------------------------------------
* Less than 1%
(1) As discussed herein, the Company is currently engaged in a public offering
of 10,000,000 shares of its common stock pursuant to an SB-2 registration
statement declared effective by the Securities and Exchange Commission on
January 31, 2005. This column assumes that all 10,000,000 shares are sold in
this offering.
- --------------------------------------------------------------------------------
ITEM 12. 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*
Steven Nichols 1,000 Cash Vice President
* Holder of 5% or more of our outstanding securities.
38
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%. We borrowed $27,000 against this line of credit during the
fourth quarter of 2004. Subsequent to the year end, in February 2005, we paid
$20,000 to Mr. Carroll to reduce the outstanding balance on this line of credit.
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 September
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.
- --------------------------------------------------------------------------------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Reports on Form 8-K.
None.
(b) Exhibits. The following exhibits are included as part of this report:
Exhibit 21.1 List of Subsidiaries
Exhibit 31.1 Certification of Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Principal Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Principal Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
39
- --------------------------------------------------------------------------------
ITEM 14. PRINCIPLE ACOUNTANT FEES AND SERVICES
- --------------------------------------------------------------------------------
Mantyla McReynolds has served as the Company's independent registered
public accounting firm for the fiscal years ended December 31, 2004 and 2003.
Principal accounting fees for professional services rendered for us by Mantyla
McReynolds for the fiscal years ended December 31, 2004 and 2003, are summarized
as follows:
2004 2003
--------- ----------
Audit $ 32,086 $ 22,404
Audit related - -
Tax - -
All other - -
--------- ----------
Total $ 32,086 $ 22,404
========= ==========
Audit Fees. Audit fees were for professional services rendered in
connection with the Company's annual financial statement audits and quarterly
reviews of financial statements for filing with the Securities and Exchange
Commission.
Board of Directors Pre-Approval Policies and Procedures. At its
regularly scheduled and special meetings, the Board of Directors, in lieu of an
established audit committee, considers and pre-approves any audit and non-audit
services to be performed by the Company's independent accountants. The Board of
Directors has the authority to grant pre-approvals of non-audit services.
40
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf of the undersigned,
thereunto duly authorized.
THE FLOORING ZONE, INC.
Dated: March 30, 2005 By: /s/ Jimmy Lee
---------------------------
Jimmy Lee, CEO and Director
Dated: March 30, 2005 By: /s/ Michael Carroll
---------------------------
Michael Carroll,
Secretary and Director
41