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
September 30, 2005 333-119234
THE FLOORING ZONE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA
------------------------------------------------------------
(State or other jurisdiction of incorporation or organization
20-0019425
------------------------------------
(I.R.S. Employer Identification No.)
3219 Glynn Avenue, Brunswick, Georgia 31520
-------------------------------------------
(Address of principal executive offices)
(912) 264-0505
(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 December 23, 2005 we had 38,569,250 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........................................... 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the six months ended June 30, 2005 and 2004...... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)... 6
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 5. Other Information............................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................. 18
Signatures............................................................. 19
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet
September 30, 2005
(Unaudited)
ASSETS
Current assets:
Cash $ 23,027
Accounts receivable, net 147,280
Inventory 546,145
Prepaid expense 13,936
--------------------
Total current assets 730,388
Property & equipment, net 271,125
Other assets:
Intangible assets, net 6,171
Deposits 6,031
--------------------
Total other assets 12,202
--------------------
TOTAL ASSETS $ 1,013,715
====================
See accompanying notes to financial statements
3
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet-[continued]
September 30, 2005
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 500,416
Line of credit-bank 237,361
Line of credit-related party
Customer deposits 53,864
Accrued liabilities 14,269
Current portion long-term debt 123,348
--------------------
Total current liabilities 929,258
Long-term liabilities:
Note payable-related party 110,378
Long-term debt 627,246
Current portion long-term debt (123,348)
--------------------
Total long-term liabilities 614,276
Total liabilities 1,543,534
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; 38,569,250 shares issued and outstanding 38,569
Additional paid in capital 605,257
Accumulated deficit (1,173,645)
--------------------
Total stockholders' deficit (529,819)
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,013,715
====================
See accompanying notes to financial statements
4
The Flooring Zone, Inc.
Condensed Consolidated Statements of Operations
For the three month and nine month periods ended
September 30, 2005 and 2004
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Revenues:
Sales $ 788,714 $ 922,271 $ 2,573,395 $ 2,933,034
Licensing Fees - - 2,500 5,219
------------------ ------------------ ------------------ ------------------
Net revenues 788,714 922,271 2,575,895 2,938,253
Less cost of sales 669,427 644,241 1,761,256 1,871,266
------------------ ------------------ ------------------ ------------------
Gross profit 119,287 278,030 814,639 1,066,987
General and administrative expenses 310,856 306,877 952,160 1,005,615
------------------ ------------------ ------------------ ------------------
Net income (loss) from operations (191,569) (28,847) (137,521) 61,372
Other income (expense):
Interest expense (18,712) (14,708) (62,592) (45,737)
------------------ ------------------ ------------------ ------------------
Total other income(expense) (18,712) (14,708) (62,592) (45,737)
------------------ ------------------ ------------------ ------------------
Net income (loss) before taxes (210,281) (43,555) (200,113) 15,635
Income taxes - - - -
------------------ ------------------ ------------------ ------------------
Net income (loss) $ (210,281) $ (43,555) $ (200,113) $ 15,635
================== ================== ================== ==================
Income (loss) per share-basic and diluted $ (0.01) $ (0.01) $ (0.01) $ 0.00
================== ================== ================== ==================
Weighted average shares outstanding-
basic and diluted 38,560,572 38,428,700 38,494,636 38,401,997
================== ================== ================== ==================
See accompanying notes to financial statements
5
The Flooring Zone, Inc.
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended
September 30, 2005 and 2004
(Unaudited)
9/30/2005 9/30/2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (200,113) $ 15,635
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 32,070 27,585
Decrease (increase) in accounts receivable 1,381 (49,209)
Decrease (increase) in inventories (242,971) (126,023)
Decrease (increase) in prepaid expenses 65,571 703
Decrease (increase) in deferred financing costs - (3,338)
Increase (decrease) in accounts payable (17,143) 91,240
Increase (decrease) in accrued liabilities (295) (11,689)
Increase (decrease) in customer deposits 18,052 (116,218)
----------------- -----------------
Net cash used in operating activities (343,448) (171,314)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (7,748) (4,349)
Purchase of intangible assets - -
----------------- -----------------
Net cash used in investing activities (7,748) (4,349)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing(payments) on line of credit-related party 210,361 (124,000)
Net borrowing(payments) on long term debt (127,823) (341,356)
Proceeds from borrowing on long term debt - 550,000
Proceeds from the issuance of common stock (less costs) 201,593 107,500
----------------- -----------------
Net cash provided by financing activities 284,131 192,144
----------------- -----------------
NET INCREASE IN CASH (67,065) 16,481
CASH AT BEGINNING OF PERIOD 90,092 55,014
----------------- -----------------
CASH AT END OF PERIOD $ 23,027 $ 71,495
================= =================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 58,589 $ 45,737
Cash paid for income taxes - -
NON-CASH FINANCING ACTIVITIES
Trade payables converted to notes payable $ $ 165,302
See accompanying notes to financial statements
6
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
September 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 September 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
nine months ended September 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:
9/30/2005 9/30/2004
------------ ------------
Net income (loss), as reported $ (200,113) $ 15,635
Compensation cost under fair value-based
accounting method, net of tax - -
------------ ------------
Net loss, pro forma (200,113) 15,635
Net loss per share-basic and diluted:
As reported $ (0.01) $ 0.00
Pro forma $ (0.01) $ 0.00
7
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
September 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 nine
months ended September 30, 2005 the Company issued 140,550 shares of
its common stock at a price of $2.00 per share for a total of $281,100.
Note 3 INVENTORY
---------
Inventories are stated at lower of cost or market and consist of the
following:
9/30/05
---------------------
Flooring material 546,145
---------------------
Total $ 546,145
=====================
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 nine months ended September 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 subsidiary, 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 two retail stores. We have stores in
Brunswick, Georgia and Yulee, Florida. We also maintain administrative offices
and warehouse facilities in Brunswick, Georgia. We recently closed our store in
St. Mary's, Georgia because of poor performance.
We recently completed our registered public offering. In the offering
we raised total proceeds of $281,100. The primary purpose of our public offering
was to raise capital to expand our operations and store locations in the
southeastern United States. Unfortunately, we were unsuccessful in raising
sufficient funds to warrant expansion into other markets at this time.
Therefore, we now plan to focus our efforts on increasing sales at our current
locations, reducing our debt load and funding expansion with net profits from
operations. Based thereon, we do not anticipate expanding to new locations until
such time as net profits from operations justifies future expansion.
Results of Operations
For the nine months ended September 30, 2005 and 2004
We have incurred a net loss through the first nine months of 2005,
compared to net income during the same nine 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 nine months ended September 30, 2005 compared to the same nine month
period of 2004, we realized a decrease in revenues of 12% to $2,575,895. This
decrease in revenue in the first nine 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 12%, we believe that, exclusive of the condominium project and
the hospital, our revenue from product sales in the first nine months of 2005 is
somewhat lower when compared with revenues from the first nine months of 2004.
9
As noted above, our revenues are affected by consumer confidence. Based
on sales during the first nine 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.
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,
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 nine months of 2005, was $814,639, 24%
lower than the $1,066,987 gross profits realized during the first nine months of
2004. During the first nine month of 2005, we realized a 12% decrease in net
revenue. We also realized a 6% decrease in cost of sales during that period.
Cost of sales as a percentage of net revenues increased approximately 5% during
the 2005 period compared to the 2004 period. 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 nine months ended September 30, 2005 and 2004
General and administrative expenses for the nine months ended September
30, 2005, decreased $53,455, or 5% to $952,160 compared to the nine months ended
September 30, 2004, and as a percentage of sales revenue increased approximately
3% during the nine months ended September 30, 2005 and 2004. During the nine
months ended September 30, 2005 and 2004, general and administrative costs
consisted of:
Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Salaries & benefits costs $ 383,949 $ 463,072
Advertising & display costs 73,647 57,049
Occupancy costs & utilities 235,010 223,497
Legal & accounting costs 41,505 38,340
Other 218,049 223,657
-------------- -------------
$ 952,160 $ 1,005,615
============== =============
10
The 17% reduction in salaries and benefits costs in the nine months
ended September 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 nine months ended September 30, 2005 we increased our
advertising and display costs by 29% 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 be reduced in upcoming quarters.
Occupancy costs and utilities during the nine months ended September
30, 2005 compared to the same period of 2004, increased 6%. We expect these
costs to remain relatively constant in the upcoming quarters.
Legal and accounting costs increased 8% to $41,505 during the nine
month period ended September 30, 2005 compared to the nine month period ended
September 30, 2004. We anticipate legal and accounting costs to continue at
levels consistent with or higher than the amounts incurred in the first nine
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 about 3% during the
nine months ended September 30, 2005 compared to September 30, 2004. We
anticipate other expenses to remain fairly constant in upcoming quarters.
Net Loss
Our net loss in the nine months ended September 30, 2005 was $200,113
compared to net income of $15,635 during the first nine months of 2004. This
change from net income to a net loss during the first nine months of 2005 is
primarily the result of decreased sales volume and increased cost of sales
compared to the first nine months of 2004 as the Company completed a number of
unusually large jobs during the first nine months of 2004.
Comparison of the three months ended September 30, 2005 and 2004.
During the three months ended September 30, 2005, we incurred greater
net losses compared to the months ended September 30, 2004.
Revenues
Revenue decreased 14% during the three months ended September 30, 2005
compared to the same three month period of 2004. This decrease in revenue in the
third fiscal quarter 2005 was primarily the result of decreased product sales
during the third fiscal quarter of 2005 compared to the third fiscal quarter of
2004.
11
Gross Profit
Gross profit during the third fiscal quarter of 2005, was $119,287, a
57% decrease compared to the gross profit realized during the third fiscal
quarter of 2004, as net revenue decreased 14%, while cost of sales increased 4%
during the third fiscal quarter of 2005. The decrease in gross profit was
largely impacted by an increase in costs of materials due to a surge in fuels
prices. The Company also experienced an increase in installation labor due to
fuel costs and a number of jobs that required multiple visits by the installers.
The Company anticipates the gross profit to increase modestly in upcoming
quarters.
General and Administrative Expenses
For the three months ended September 30, 2005 and 2004
General and administrative expenses for the three months ended
September 30, 2005, increased $3,979, or 1% to $310,856 compared to the three
months ended September 30, 2004. As a percentage of sales revenue general and
administrative expenses increased to 39% during the quarter ended September 30,
2005, compared to 33% during the quarter ended September 30, 2004. During the
three months ended September 30, 2005 and 2004, general and administrative costs
consisted of:
Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Salaries & benefits costs $ 133,803 $ 151,994
Advertising & display costs 24,211 10,108
Occupancy costs & utilities 84,018 74,660
Legal & accounting costs 5,697 5,869
Other 63,127 64,246
-------------- --------------
$ 310,856 $ 306,877
============== ==============
The 12% reduction in salaries and benefits costs in the quarter ended
September 30, 2005 compared to the quarter ended September 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 September 30, 2005 we increased our
advertising and display costs by 140% to $24,211 compared to the same period of
2004 in an effort to increase sales and in connection with our public offering.
We anticipate advertising to return to more traditional levels in upcoming
quarters.
Occupancy costs and utilities during the third quarter 2005 compared to
the same quarter 2004, increased 13%. We expect these costs to remain relatively
consistent in the upcoming quarters.
12
Legal and accounting costs remained constant, decreasing less than 3%
during the three months ended September 30, 2005 compared to the three months
ended September 30, 2004. We expect this more the result of timing than of any
trend toward reducing legal and accounting costs. We anticipate legal and
accounting costs to continue at levels consistent with or higher than those we
have experienced during the year as a result of our ongoing public reporting
obligations.
Other costs were relatively unchanged during the quarters ended
September 30, 2005 and 2004 decreasing less than 2% in the third quarter of the
current year. We anticipate other expenses to remain relatively constant in
upcoming quarters.
Net Loss
Our net loss in the third quarter 2005 was $210,281 compared to a net
loss of $43,555 in the third quarter 2004. This significant increase in net loss
is primarily the result of small increases in cost of sales and general and
administrative expenses, coupled with a significant decrease in sales volume and
increased interest expense compared to the third 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 September 30, 2005, we have raised $281,100. 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 nine months of 2005 and 2004 cash was primarily used
to fund operations. See below for additional discussion and analysis of cash
flow.
Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Net cash used in operating activities $ (343,448) $ (171,314)
Net cash used in investing activities $ (7,748) $ (4,349)
Net cash provided by financing activities $ 284,131 $ 192,144
------------- -------------
$ (67,065) $ 16,481
============= ============
NET INCREASE (DECREASE) IN CASH
As discussed herein, during the nine months ended September 30, 2005
compared to the nine months ended September 30, 2004 product sales decreased
leading to a change from net income of $15,635 during the nine month period of
2004 to a $200,113 net loss during the nine month period of 2005. During the
first nine months of 2005 inventory has increased $242,971 due to price
13
increases from higher fuel costs and an unusually large number of jobs still in
progress at the end of the quarter but not yet completed. Accounts payable
decreased $17,143. Prepaid expenses have decreased $65,571 because prepaid
expenses related to the ongoing public offering were charged to additional paid
in capital this period. Net cash used in operating activities during the nine
months ended September 30, 2005, was 100% higher than net cash used in operating
activities during the nine months ended September 2004. This increase in cash
used in operating activities during the nine months ended September 30, 2005,
was largely the result of circumstances explained above.
We used $7,748 net cash in investing activities to acquire equipment
during the first nine months of 2005, compared to $4,349 during the first nine
months of 2004.
Net cash provided from financing activities was $284,131 during the
nine months ended September 30, 2005 compared to $192,144 during the nine months
ended September 30, 2004, a 48% increase. During the nine months ended September
30, 2005 we repaid $127,823 in long term debt compared to $341,356 during the
first nine months of 2004. We also borrowed $210,361 on a line of credit from a
related party during the first nine months of 2005, whereas in the first nine
months of 2004, we reduced the outstanding balance on the line of credit by
$124,000. Also during the first nine months of 2005, we raised $281,100 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 nine months ended
September 30, 2004.
At September 30, 2005 and 2004, we had cash on hand of $23,027 and
$71,495, respectively.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of September
30, 2005.
Payments Due by Fiscal Year
Contractual Commitments Total 2005 2006 2007 2008 Thereafter
- -----------------------------------------------------------------------------------------------------
Note Payable-Related Party 110,378 15,333 47,414 47,631 -- --
Notes Payable 557,448 62,214 44,373 47,344 50,515 353,032
Capital Leases 21,176 2,670 10,473 8,034 -- --
Operating Leases 753,323 97,133 199,534 149,388 152,170 155,098
---------- -------- -------- -------- -------- --------
TOTAL $1,442,325 $177,350 $301,794 $252,397 $202,685 $508,130
========== ======== ======== ======== ======== ========
Off-Balance Sheet Financing Arrangements
As of September 30, 2005 and 2004, we had no off-balance sheet
financing arrangements.
14
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
15
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.
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.
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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.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
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 September 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 September 30, 2005, we had sold 140,450 common shares raising
$281,100. Under the terms of the offering, the offering terminated on October
28, 2005. We sold no additional shares during the period from September 20, 2005
to October 28, 2005.
The offering was completely self underwritten and was by our officers
and directors. No underwriting discounts and commissions, finders' fees or
expenses were paid.
In accordance with the use of proceeds set forth in the registration
statement, as of December 1, 2005, all of the funds raised in the offering have
been used to reduce outstanding debt obligations of the Company. Of the
$281,100, 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.
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Item 5. Other Information
-----------------
As disclosed in our Current Report on Form 8-K filed on November 9,
2005, Jimmy Lee, our CEO, president and director, resigned from all positions
with the Company and with our wholly-owned subsidiary, The Flooring Zone of
Georgia. Mr. Lee's resignation was not the result of an disagreement on any
matter relating to the Company's operations, policies or practices.
As a result of Mr. Lee's resignation, on November 4, 2005, our board of
directors appointed Joel Arline to fill the vacancy on the board of directors
created by Mr. Lee's resignation. At the same time, the board appointed Michael
Carroll to act as our interim CEO and president. At a subsequent board meeting
the board appointed Mike Carroll to act as the Company's CEO and president on a
full time basis. Upon being appointed as CEO and president, Mr. Carroll resigned
as our CFO and the board appointed Steve Nichols, a Company vice president to
serve as our CFO.
Following is a brief description of the business background of Mr.
Arline:
Mr. Arline is a Certified Public Accountant in Brunswick, GA. He is the
President and Owner of Joel K. Arline, CPA, PC, an accounting firm he founded in
1997. Mr. Arline earned a BBA from Valdosta State University. The CPA firm owned
by Mr. Arline, performs audit, review and compilation engagements and also
performs tax preparation and consulting for its broad base of clients. Mr.
Arline is not a director of any other SEC reporting company. Mr. Arline is 36
years old.
There are no family relationships among any of our officers or
directors.
Item 6. Exhibits
--------
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
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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.
December 28, 2005 /s/ Michael Carroll
----------------------------------------
Michael Carroll, Chief Executive Officer
December 28, 2005 /s/ Steven Nichols
----------------------------------------
Steven Nichols, Chief Financial Officer
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