United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 2005 333-119234
THE FLOORING ZONE, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
20-0019425
------------------------------------
(I.R.S. Employer Identification No.)
3219 Glynn Avenue, Brunswick, Georgia 31520
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(Address of principal executive offices)
(912) 264-0505
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act: Common,
$0.001 par value
Check whether the Issuer 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), Yes [X] No [ ]
Check whether the Issuer has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
As of August 8, 2005 we had 38,564,750 shares of our $0.001 par value, common
stock outstanding.
THE FLOORING ZONE, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of
June 30, 2005 .................................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 2005 and 2004........ 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2005 and 2004.................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited)... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
Item 3. Controls and Procedures....................................... 16
PART II -- OTHER INFORMATION
Item 2. Changes in Securities......................................... 17
Item 6. Exhibits and Reports on Form 8-K.............................. 17
Signatures............................................................. 18
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet
June 30, 2005
(Unaudited)
ASSETS
Current assets:
Cash $ 94,726
Accounts receivable, net 148,730
Inventory 520,469
Prepaid expense 8,120
-------------------
Total current assets 772,045
Property & equipment, net 280,697
Other assets:
Intangible assets, net 6,425
Deposits 6,031
-------------------
Total other assets 12,456
-------------------
TOTAL ASSETS $ 1,065,198
===================
See accompanying notes to financial statements
3
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet-[continued]
June 30, 2005
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 549,959
Line of credit-bank and related party 142,000
Customer deposits 40,851
Accrued liabilities 16,156
Current portion long-term debt 134,179
-------------------
Total current liabilities 883,145
Long-term liabilities:
Note payable-related party 113,448
Long-term debt 581,323
Current portion long-term debt (134,179)
-------------------
Total long-term liabilities 560,592
Total liabilities 1,443,737
Stockholders' deficit:-Note 2
Preferred Stock, 10,000,000 shares authorized $.001 par value
value: No shares issued and outstanding -
Common stock, 100,000,000 shares authorized $.001 par
value; 38,539,750 shares issued and outstanding 38,540
Additional paid in capital 546,287
Accumulated deficit (963,366)
-------------------
Total stockholders' deficit (378,539)
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,065,198
===================
See accompanying notes to financial statements
4
The Flooring Zone, Inc.
Condensed Consolidated Statements of Operations
For the three month and six month periods ended June 30, 2005 and 2004
(Unaudited)
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Revenues:
Sales $ 926,128 $ 937,535 $ 1,784,681 $ 2,010,763
Licensing Fees 0 9 2,500 5,219
---------------- ---------------- ---------------- ----------------
Net revenues 926,128 937,544 1,787,181 2,015,982
Less cost of sales 608,283 624,338 1,090,695 1,227,026
---------------- ---------------- ---------------- ----------------
Gross profit 317,845 313,206 696,486 788,956
General and administrative expenses 294,308 307,599 642,555 698,738
---------------- ---------------- ---------------- ----------------
Net income (loss) from operations 23,537 5,607 53,931 90,218
Other income (expense):
Interest expense (23,039) (14,860) (43,765) (31,029)
---------------- ---------------- ---------------- ----------------
Total other income(expense) (23,039) (14,860) (43,765) (31,029)
---------------- ---------------- ---------------- ----------------
Net income (loss) before taxes 498 (9,253) 10,166 59,189
Income taxes - - - -
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 498 $ (9,253) $ 10,166 $ 59,189
================ ================ ================ ================
Income (loss) per share-basic and diluted $ 0.00 $ (0.01) $ 0.00 $ 0.00
================ ================ ================ ================
Weighted average shares outstanding -
basic and diluted 38,522,145 38,416,034 38,475,423 38,384,436
================ ================ ================ ================
See accompanying notes to financial statements
5
The Flooring Zone, Inc.
Condensed Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2005 and 2004
(Unaudited)
6/30/2005 6/30/2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,166 $ 59,189
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 21,245 18,278
Decrease (increase) in accounts receivable (69) (7,512)
Decrease (increase) in inventories (217,295) (230,346)
Decrease (increase) in prepaid expenses (8,120) 703
Increase (decrease) in accounts payable 32,400 51,185
Increase (decrease) in accrued liabilities 1,592 (8,776)
Increase (decrease) in customer deposits 5,039 (109,752)
-------------- --------------
Net cash used in operating activities (155,042) (227,031)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (6,748) (3,265)
Purchase of intangible assets - -
-------------- --------------
Net cash used in investing activities (6,748) (3,265)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing(payments) on line of credit-related party 15,000 74,144
Net borrowing(payments) on long term debt (70,676) 67,771
Proceeds from the issuance of common stock 222,100 107,500
-------------- --------------
Net cash provided by financing activities 166,424 249,415
-------------- --------------
NET INCREASE IN CASH 4,634 19,119
CASH AT BEGINNING OF PERIOD 90,092 55,014
-------------- --------------
CASH AT END OF PERIOD $ 94,726 $ 74,133
============== ==============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 43,765 $ 31,029
Cash paid for income taxes - -
See accompanying notes to financial statements
6
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2005
Note 1 ORGANIZATION AND INTERIM FINANCIAL STATEMENTS
Organization-The Flooring Zone, Inc. (the "Company) is a corporation
organized under the laws of the State of Nevada on May 5, 2003. The
company's business operations provide for full-service retail floor
covering products and services.
Interim financial statements-The accompanying condensed consolidated
financial statements are unaudited and have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by accounting principles for complete financial
statements generally accepted in the United States of America. In the
opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of our financial position
as of June 30, 2005. There has not been any change in the significant
accounting policies of The Flooring Zone, Inc. for the periods
presented. The results of operations for the three months and six
months ended June 30, 2005 and 2004 are not necessarily indicative of
the results for a full-year period. It is suggested that these
unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004 filed with the Securities and
Exchange Commission (the "SEC").
Stock based compensation- The Company accounts for stock compensation
arrangements under the intrinsic value method outlined in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, (APB Opinion No. 25) and currently intends to continue to do
so until it adopts the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R, Share-Based Payment, (SFAS No. 123R).
Accordingly, no compensation cost has been recognized for stock
compensation arrangements. If the compensation cost for the
compensation plans had been determined consistent with SFAS No. 123R,
net income and earnings per common share and common share equivalent
would have changed to the pro forma amounts indicated below:
6/30/2005 6/30/2004
--------- ---------
Net income, as reported $10,166 $59,189
Compensation cost under fair value-based
accounting method, net of tax - -
------- -------
Net loss, pro forma 10,166 59,189
Net loss per share-basic and diluted:
As reported $ 0.00 $ 0.00
Pro forma $ 0.00 $ 0.00
7
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2005
(Unaudited)
Note 2 COMMON STOCK
The Company's SB-2 Registration statement filed with the Securities and
Exchange Commission became effective in January 2005. During the six
months ended June 30, 2005 the Company issued 111,050 shares of its
common stock at a price of $2.00 per share for a total of $222,100.
Note 3 INVENTORY
Inventories are stated at lower of cost or market and consist of the
following:
6/30/05
--------------
Flooring material 520,469
--------------
Total $ 520,469
==============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and capital
resources during the three and six months ended June 30, 2005 and 2004. This
discussion should be read in conjunction with the financial statements and
financial statement footnotes included in this registration statement.
Forward-Looking Statements
Certain statements of our expectations contained herein, including, but
not limited to statements regarding sales growth, new stores, increases in
comparable store sales, commodity price inflation and deflation, and capital
expenditures constitute "forward-looking statements." Such statements are based
on currently available operating, financial and competitive information and are
subject to various risks and uncertainties that could cause actual results to
differ materially from our historical experience and our present expectations.
These risks and uncertainties include but are not limited to, fluctuations in
and the overall condition of the U.S. economy, stability of costs and
availability of sourcing channels, conditions affecting new store development,
our ability to implement new technologies and processes, our ability to attract,
train, and retain highly-qualified associates, unanticipated weather conditions
and the impact of competition and regulatory and litigation matters. Undue
reliance should not be placed on such forward-looking statements, as such
statements speak only as of the date on which they are made.
8
General
The Flooring Zone, Inc. is a Nevada corporation organized on May 5,
2003, to operate full service retail floorcovering stores. We have a
wholly-owned subsidairy, The Flooring Zone of Georgia, Inc. The Georgia
corporation was formed in 2000, by the founders of The Flooring Zone, Inc., and
was established to develop our business concept in the retail floorcovering
industry. Through our subsidiary we operate a total of three retail stores. We
have stores in Brunswick and St. Mary's, Georgia and one in Yulee, Florida. We
also maintain administrative offices and warehouse facilities in Brunswick,
Georgia. We are currently conducting a registered offering to raise capital to
expand our operations and store locations in the southeastern United States.
Results of Operations
For the six months ended June 30, 2005 and 2004
While we enjoyed net income during the first six months of 2005, our
revenues and net income during that period, however, were lower compared to the
same six month period 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.
Despite average retail product prices being approximately 10% higher,
during the six months ended June 30, 2005 compared to the same six month period
of 2004, we realized a decrease in net revenue of 11% to $1,787,181. This
decrease in revenue in the first six months of 2005 was primarily the result of
an unusually successful first fiscal quarter of 2004, when we provided flooring
products for a large condominium complex and a local hospital. While overall
revenue decreased 11%, we believe that, exclusive of the condominium project and
the hospital, our revenue from product sales in the first six months of 2005 was
consistent with revenues from the first six months of 2004.
As noted above, our revenues are affected by consumer confidence. Based
on sales during the first six months, we believe consumer confidence in the
communities where we operate continues to be strong. We anticipate revenues at
our current stores to remain constant or even slightly higher during the
remainder of 2005. We anticipate that our planned expansion into more and larger
markets will increase product sales and revenue from operations. We believe the
revenues we can earn from one store in the larger markets we are targeting will
be equivalent to the revenue we earn in the three stores we currently have.
Gross Profit
Our gross profit is 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 profit 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,
9
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 first six months of 2005, was $696,486, 12%
lower than the $788,956 gross profits realized during the first six months of
2004. During the first six month of 2005, we realized an 11% decrease in net
revenue. We also realized an 11% decrease in cost of sales during that period.
Cost of sales as a percentage of net revenues, however, remained constant during
the 2005 and 2004 periods. Until such time as we are able to expand our
operations into additional markets, we anticipate gross profit to remain
consistent with the prior year results or to increase modestly.
General and Administrative Expenses
Comparison of the six months ended June 30, 2005 and 2004
General and administrative expenses for the six months ended June 30,
2005, decreased $56,183, or 8% to $642,555 compared to the six months ended June
30, 2004, and as a percentage of sales revenue remained almost flat during the
six months ended June 30, 2005 and 2004. During the six months ended June 30,
2005 and 2004, general and administrative costs consisted of:
Six Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Salaries & benefits costs $ 250,146 $ 311,078
Advertising & display costs 49,436 46,941
Occupancy costs & utilities 150,992 148,837
Legal & accounting costs 35,808 32,471
Other 156,173 159,411
----------- ------------
$ 642,555 $ 698,738
=========== ============
The 20% reduction in salaries and benefits costs in the six months
ended June 30, 2005 compared to 2004 is largely the result of a reduction in our
work force as we have made a concerted effort to consolidate certain job
functions. We do not anticipate significant increases in staffing needs until we
have raised sufficient capital to expand our operations.
During the six months ended June 30, 2005 we increased our advertising
and display costs by 5% compared to the same period of 2004. This increase in
advertising is largely attributable to our efforts to increase product sales and
our efforts to inform investors of our ongoing public offering. We anticipate
advertising costs to remain fairly consistent with those incurred during the
first six months of 2005 until we expand to new markets.
10
Occupancy costs and utilities during the six months ended June 30, 2005
compared to the same period of 2004, remained relatively flat, increasing by
less than 1.4%. We expect these costs to remain constant until we expand our
operations.
Legal and accounting costs increased 10.3% to $35,808 during the six
month period ended June 30, 2005 compared to the six month period ended June 30,
2004. We anticipate legal and accounting costs to continue at levels consistent
with or higher than the amounts incurred in the first six months of 2005 as we
begin to incur legal and accounting costs in connection with our ongoing public
reporting obligations.
Other costs remained relatively constant decreasing only 2% during the
six months ended June 30, 2005 compared to June 30, 2004. We anticipate other
expenses to remain fairly flat until we expand and add additional Company owned
stores to our network.
Net Income
Our net income in the six months ended June 30, 2005 was $10,166
compared to $59,189 in during the first six months of 2004. This 83% decrease in
net income during the first six months of 2005 is primarily the result of
decreased sales volume compared to the first six months of 2004 as the Company
completed a number of unusually large jobs during the first six months of 2004.
Comparison of the three months ended June 30, 2005 and 2004.
During the three months ended June 30, 2005, we realized net income
compared to a net loss during the three months ended June 30,2004.
Revenues
Despite average retail product prices being approximately 10% higher,
in the three months ended June 30, 2005 compared to the same three month period
of 2004, net revenue remained relatively constant decreasing only 1%. This
decrease in revenue in the first fiscal quarter 2005 was primarily the result of
an unusually successful second fiscal quarter of 2004, when we provided flooring
products for a large condominium complex and a hospital, combined with the fact
that we shifted our spring private sales event from March to April in 2005.
While overall revenue decreased 20%, we believe that, exclusive of the
condominium project and the hospital and the timing of our spring private sale,
our revenue from product sales in the second quarter 2005 was consistent with
revenues from the second quarter of 2004.
11
Gross Profit
Gross profit during the second fiscal quarter of 2005, was $317,845,
essentially unchanged from the $313,206 gross profit realized during the second
fiscal quarter of 2004, as net revenue and cost of sales each decreased by 1%
during the second fiscal quarter of 2005. Until such time as we are able to
expand our operations into additional markets, we anticipate gross profits to
remain consistent with the prior year results or to increase modestly.
General and Administrative Expenses
For the three months ended June 30, 2005 and 2004
General and administrative expenses for the three months ended June 30,
2005, decreased $13,291, or 4% to $294,308 compared to the three months ended
June 30, 2004. As a percentage of sales revenue general and administrative
expenses decrease to 32% during the quarter ended June 30, 2005, compared to 33%
during the quarter ended March 31, 2004. During the three months ended June 30,
2005 and 2004, general and administrative costs consisted of:
Three Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Salaries & benefits costs $ 120,265 $ 145,150
Advertising & display costs 28,086 15,478
Occupancy costs & utilities 73,872 72,799
Legal & accounting costs 8,308 7,518
Other 63,777 66,654
----------- ------------
$ 294,308 $ 307,599
=========== ============
The 17% reduction in salaries and benefits costs in the quarter ended
June 30, 2005 compared to the quarter ended June 30, 2004 is largely the result
of a reduction in our administrative work force as we have made a concerted
effort to control costs through the consolidation of certain job functions. We
do not anticipate significant increases in staffing needs until we have raised
sufficient capital to expand our operations.
During the three months ended June 30, 2005 we increased our
advertising and display costs by 81% compared to the same period of 2004 in an
effort to increase sales and in connection with our public offering. We
anticipate advertising costs to remain fairly consistent with those incurred
during the second quarter 2005 until we expand to new markets.
Occupancy costs and utilities during the second quarter 2005 compared
to the same quarter 2004, remained relatively flat, increasing by less than
1.5%. We expect these costs to remain constant until we expand our operations.
Legal and accounting costs increased 10.5% during the three months
ended June 30, 2005 compared to the three months ended June 30, 2004. We
anticipate legal and accounting costs to continue at levels consistent with or
higher than the second quarter 2005 as we begin to incur legal and accounting
costs in connection with our ongoing public reporting obligations.
Other costs were relatively unchanged during the quarters ended June
30, 2005 and 2004 decreasing 4.3% in the second quarter of the current year.. We
anticipate other expenses to remain relatively constant until we expand and add
additional Company owned stores to our network.
12
Net Income
Our net income in the second quarter 2005 was $498 compared to a net
loss of $9,253 in the second quarter 2004. This change from a net loss to net
income during the first quarter 2005 is primarily the result of decreased cost
of sales and general and administrative expenses, only being partially offset by
slightly lower sales volume and increased interest expense compared to the first
quarter 2004.
Liquidity and Capital Resources
Our capital resources have consisted of revenues from operations, funds
raised through the sale of our common stock and debt. 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 August 8, 2005, we have raised $272,100. 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 the first six months of 2005 and 2004 cash was primarily used to
fund operations. See below for additional discussion and analysis of cash flow.
Six Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Net cash used in operating activities $ (155,042) $ (227,031)
Net cash used in investing activities $ (6,748) $ (3,265)
Net cash provided by financing activities $ 166,424 $ 249,415
------------ ------------
NET INCREASE (DECREASE) IN CASH $ 4,624 $ 19,119
============ ============
As discussed herein, during the six months ended June 30, 2005 compared
to the six months ended June 30, 2004 product sales decreased leading to a
reduction in net income of $49,023 to $10,166. During the first six months of
2005 inventory has increased $217,295. As we have increased our marketing to try
and increase sales. Accounts payable have also increased by $32,400 as we have
had less income from operations to resolve accounts payable. Net cash used in
operating activities during the six months ended June 30, 2005, was 32% lower
than net cash used in operating activities during the six months ended June 31,
2004. This decrease in cash used in operating activities during the six months
ended quarter 2005, was largely the result of significantly higher customer
deposits.
We used $6,748 net cash in investing activities to acquire equipment
during the first six months of 2005, compared to $3,265 during the first six
months of 2004.
Net cash provided from financing activities was $166,424 during the six
months ended June 30, 2005 compared to $249,415 during the six months ended June
30, 2004, a 33% decrease. During the six months ended June 30, 2005 we repaid
$70,676 in long term debt compared to borrowing $67,771 during the first six
13
months of 2004. Also during the first quarter 2005, we raised $222,100 from the
sale of our common stock in a public offering compared to funds raised in
private sales of our common stock totaling $107,500 during the six months ended
June 30, 2004.
At June 30, 2005 and 2004, we had cash on hand of $94,726 and $74,133,
respectively.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of June 30,
2005.
Payments Due by Fiscal Year
-------------------------------------------------------
Contractual Commitments Total 2005 2006 2007 2008 Thereafter
---------- -------- -------- -------- -------- ----------
Note Payable-Related Party 113,448 18,403 47,414 47,631 -- --
Notes Payable 557,478 62,214 44,373 47,344 50,515 353,032
Capital Leases 23,846 5,339 10,473 8,034 -- --
Operating Leases 753,323 97,133 199,534 149,388 152,170 155,098
---------- -------- -------- -------- -------- --------
TOTAL $1,448,095 $183,089 $301,794 $252,397 $202,685 $508,130
========== ======== ======== ======== ======== ========
Off-Balance Sheet Financing Arrangements
As of June 30, 2005 and 2004, we had no off-balance sheet financing
arrangements.
Critical Accounting Policies
Revenue Recognition
We recognize revenues in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) number 104, "Revenue Recognition in
Financial Statements." SAB 104 clarifies application of U. S. generally accepted
accounting principles to revenue transactions. Accordingly, revenue is
recognized when an order has been received, the price is fixed and determinable,
the order is shipped and installed, collection is reasonably assured and we have
no significant obligations remaining. Licensing fees are royalties paid to us
for licensing the use of the name The Flooring Zone. The royalties range from
1-2% of the licensee's commercial sales volume.
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.
14
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
instruments for which employees do not render service. The Company will adopt
SFAS No. 123R on December 15, 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.
15
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 3. 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 the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by it 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 the Company's 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.
Management, including the Certifying Officers, does not expect that the
Company's disclosure controls or its 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.
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PART II - OTHER INFORMATION
Item 2. Changes in 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 June 30, 2005.
During the quarter, we sold no shares that were not registered under
the Securities Act of 1933.
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. Our SB-2 registration statement was declared effective by the
Securities and Exchange Commission on January 31, 2005 and we commenced our
public offering at that time. The commission file number assigned to this
registration statement is 333-119234.
As of August 8, 2005, we had sold 136,050 common shares raising
$272,100.
Currently the offering is self underwritten and is being sold by our
officers and directors, so no underwriting discounts and commissions, finders'
fees or expenses have been paid.
In accordance with the use of proceeds set forth in the registration
statement, as of June 30, 2005, approximately $198,850 has been used to reduce
outstanding debt obligations of the Company. Of the $198,850, 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.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
None.
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(B) Exhibits. The following exhibits are included as part of this
report:
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 Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned
thereunto duly authorized.
THE FLOORING ZONE, INC.
August 15, 2005 /s/ Jimmy Lee
----------------------------------------
Jimmy Lee, Chief Executive Officer
August 15, 2005 /s/ Michael Carroll
----------------------------------------
Michael Carroll, Chief Financial Officer
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