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
March 31, 2006 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
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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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of September 12, 2006, we had 19,569,750 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
March 31, 2006 .................................................. 2
Condensed Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 2006 and 2005.................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 2006 and 2005.................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited).... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
Item 3. Controls and Procedures........................................ 15
PART II -- OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 16
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures.............................................................. 17
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet
March 31, 2006
(Unaudited)
ASSETS
Current assets:
Cash $ -
Accounts receivable, net 126,413
Inventory 376,765
Prepaid expense 4,230
--------------------
Total current assets 507,408
Property & equipment, net 236,371
Other assets:
Intangible assets, net 5,664
Deposits 6,031
--------------------
Total other assets 11,695
--------------------
TOTAL ASSETS $ 755,474
====================
See accompanying notes to financial statements
2
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet-[continued]
March 31, 2006
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 371,616
Bank overdraft 6,926
Line of credit-related parties 1,395,825
Customer deposits 8,500
Accrued liabilities 10,021
Current portion long-term debt 102,259
--------------------
Total current liabilities 1,895,147
Long-term liabilities:
Note payable-related party 91,400
Long-term debt 493,782
Current portion long-term debt (102,259)
--------------------
Total long-term liabilities 482,923
Total liabilities 2,378,070
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; 38,569,750 shares issued and outstanding 38,570
Additional paid in capital 608,257
Accumulated deficit (2,269,423)
--------------------
Total stockholders' deficit (1,622,596)
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 755,474
====================
See accompanying notes to financial statements
3
The Flooring Zone, Inc.
Condensed Consolidated Statements of
Operations For the three month periods ended March 31, 2006 and 2005
(Unaudited)
Three months ended March 31,
2006 2005
-------------------- ------------------
Revenues:
Sales $ 621,467 $ 858,553
Licensing Fees - 2,500
-------------------- ------------------
Net revenues 621,467 861,053
Less cost of sales 496,711 482,412
-------------------- ------------------
Gross profit 124,756 378,641
General and administrative expenses 192,136 348,247
-------------------- ------------------
Net income from operations (67,380) 30,394
Other income (expense):
Interest Income 9 42
Interest expense (30,765) (20,766)
-------------------- ------------------
Total other income(expense) (30,756) (20,724)
-------------------- ------------------
Net income before taxes (98,136) 9,670
Income taxes - -
-------------------- ------------------
Net income $ (98,136) $ 9,670
==================== ==================
Net income(loss) per share-basic and diluted $ (0.01) $ 0.00
==================== ==================
Weighted average shares outstanding - basic
and diluted 38,569,750 38,455,856
==================== ==================
See accompanying notes to financial statements
4
The Flooring Zone, Inc.
Condensed Consolidated Statements of Cash
Flows For the three month periods ended March 31, 2006 and 2005
(Unaudited)
3/31/2006 3/31/2005
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (98,136) $ 9,670
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 5,957 10,581
Decrease (increase) in accounts receivable 2,795 (1,052)
Decrease (increase) in inventories (146,158) (167,229)
Decrease (increase) in prepaid expenses and deposits -0- (6,000)
Increase (decrease) in accounts payable 74,142 (38,878)
Increase (decrease) in bank overdraft 6,926 -
Increase (decrease) in accrued liabilities (5,600) 6.742
Increase (decrease) in customer deposits (65,560) (7,284)
----------------- -----------------
Net cash used in operating activities (225,634) (193,450)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - -
----------------- -----------------
Net cash used in investing activities - -
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing(payments) on line of credit-related party 190,100 15,000
Net borrowing(payments) on long term debt (28,748) 7,130
Proceeds from the issuance of common stock -0- 150,000
----------------- -----------------
Net cash provided by financing activities 161,352 172,130
----------------- -----------------
NET INCREASE (DECREASE) IN CASH (64,282) (21,320)
CASH AT BEGINNING OF PERIOD 64,282 90,092
----------------- -----------------
CASH AT END OF PERIOD $ - $ 68,772
================= =================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 30,765 $ 20,766
Cash paid for income taxes - -
See accompanying notes to financial statements
5
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
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 March 31, 2006 and 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 ended
March 31, 2006 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, 2005 filed with the Securities and Exchange Commission
(the "SEC").
Stock based compensation - On January 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R, "Share-Based Payment," using the modified
prospective method. However, for the three months ended March 31, 2006,
the Company's results of operations do not reflect any compensation
expense because the Company had no new stock options granted under its
stock incentive plans during the first three months of fiscal year 2006
and no previous stock option grants which vested during the first three
months of fiscal year 2006.
Prior to the first quarter of fiscal year 2006, the Company accounted
for its stock-based employee compensation arrangements in accordance
with the provisions and related interpretations of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for stock-based compensation been
determined consistent with SFAS No. 123R, the net loss and net loss per
share for the three months ended March 31, 2005 would have been
adjusted to the following pro forma amounts:
6
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Note 1 ORGANIZATION AND INTERIM FINANCIAL STATEMENTS - (continued)
Net income, as reported $ 9,763
Compensation cost under fair value-based accounting
method, net of tax -
----------------
Net loss, pro forma 9,763
Net loss per share-basic and diluted:
As reported $ 0.00
Pro forma $ 0.00
Note 2 INVENTORY
Inventories are stated at lower of cost or market and consist of the
following:
3/31/06
---------------------
Flooring material 376,765
---------------------
Total $ 376,765
=====================
Note 3 GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, the Company has an accumulated deficit of
$2,269,423, and a negative working capital of $1,387,739. These factors
raise substantial doubt about the Company's ability to continue as a
going concern.
Management plans include obtaining additional debt financing to cover
the shortfalls in revenue and allowing the Company to begin purchasing
inventory at a discount, and making changes in operations to reduce
expenses. The Company may also seek additional equity financing through
the sale of its shares, although the Company currently has no
commitments for additional equity financing and there is no guarantee
that the Company can obtain equity financing on acceptable terms or at
all. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
7
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Note 4 COMMON STOCK/SUBSEQUENT EVENT
In November 2005, Jimmy Lee resigned as the Company's President, CEO
and director. Mr. Lee returned his 19,000,000 shares of the Company's
common stock. In return the Company agreed to remove his name from all
debt and personal guarantees. As of March 31, 2005 the Company had
received the stock certificate but had not yet canceled it because Mr.
Lee's name had not been completely removed from all debt. The
19,000,000 shares are showing as issued and outstanding in these
financial statements. Subsequent to the quarter end the Company did
remove Mr. Lee's name from all debt of the Company and canceled the
stock certificates.
8
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 months ended March 31, 2006 and 2005. This discussion
should be read in conjunction with the financial statements and financial
statement footnotes included in this quarterly report.
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.
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.
During the fourth quarter 2005, we completed a registered public
offering for the primary purpose of raising funds to expand our store locations
into new markets in the southeastern United States. Unfortunately, we were
unsuccessful in raising sufficient funds to warrant expansion into other markets
at this time. Therefore, we have been focusing our efforts on increasing sales
at our current locations and reducing our expenses and debt load with a goal to
operate the Company profitably. At this time, we do not have plans to expand to
other markets. We do not plan to revisit the issue of expansion until such time
as market conditions so justify and we can either fund expansion from revenue
and profits from operations or we receive a firm commitment for the funding we
would need to expand. We neither have, nor are we currently seeking such a
commitment.
9
Results of Operations
For the three months ended March 31, 2006 and 2005
We have incurred a net loss of $98,136 through the first quarter of
2006, compared to net income of $9,670 during the same quarter of 2005.
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 product than contractors.
Historically, about 60% to 70% of our product sales have been to retail
customers. We believe we are experiencing a shift in our traditional customer
mix. During the current fiscal year, contractors have accounted for
approximately 50% of our product sales. We believe this shift in our customer
mix is, at least, partially due to Mr. Carroll taking a more active role in the
day-to-day operations of the Company following his appointment as CEO. Mr.
Carroll has been involved in the construction industry in Georgia for a number
of years and we believe the increase in product sales to contractors has
resulted from his relationships in the industry. While we realize smaller
margins on products sold to contractors, we believe such decreases in net
revenue will be partially offset by decreases in other expenses, including
advertising and display costs. Contractors, unlike most retail customers,
represent routine repeat business. Contractors buy product often and in larger
quantities than do retail customers. As our customer mix shifts to a higher
percentage of contractor sales we have and may continue to decrease our
advertising and display expenses as we decrease our need to constantly drive new
retail customers to our stores.
During the first quarter of 2006 average retail product prices were
fairly constant, although we did raise increase prices for supplies such as
carpet pad, glue, etc., approximately 10% higher as compared to the same quarter
of 2005. Despite higher retail prices for supplies, overall we realized a 28%
decrease in revenue from product sales. This decrease in revenue from product
sales in the first three months of 2006 is primarily the result of the closing
of our St. Mary's store. As discussed above, another contributing factor to our
decreased revenue from sales is the shift in our customer mix because
contractors typically pay lower prices for product than do retail customers. We
expect that revenue from product sales will continue to be lower throughout the
rest of the 2006 fiscal year as compared to the 2005 fiscal year because of the
closing of the St. Mary's store.
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 often realize profit from providing installation services to retail
10
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 three months ended March 31, 2006 was $124,756,
67% lower than the $378,641 gross profits realized during the three months ended
March 31, 2005. During the first three months of 2006, we realized a 28%
decrease in net revenue. We also realized a 3% increase in cost of sales during
the first quarter 2006 compared to the first quarter 2005. As a result of
decreased revenue and increasing prices we pay for product, cost of products
sold, cost of sales as a percentage of net revenues increased from 56% during
the first quarter 2005 to 80% during the first quarter 2006. During the quarter
we also revisited certain previously completed jobs to perform repair work that
was performed at our expense, which resulted in an increase to our costs of
product sold, with no corresponding increase to revenue.
For the reasons detailed above, as our customer mix continues to shift
to a higher percentage of contractors, we anticipate cost of sales will continue
to represent a higher percentage of net revenues than it has historically. As
discussed above, however, we believe this decrease in margins can be at least
partially offset by decreases in other expenses such as advertising and display
costs and salaries and benefits.
General and Administrative Expenses
Comparison of the three months ended March 31, 2006 and 2005
General and administrative expenses for the three months ended March
31, 2006, decreased $156,111, or 45% to $192,136 compared to the three months
ended March 31, 2005, and as a percentage of sales revenue decreased from 40% to
30% during the three months ended March 31, 2005 and 2006. During the three
months ended March 31, 2006 and 2005, general and administrative costs consisted
of:
Three Months Ended
March 31, 2006 March 31, 2005
-------------- --------------
Salaries & benefits costs $ 77,775 $ 129,881
Advertising & display costs 10,431 21,350
Occupancy costs & utilities 64,113 77,120
Legal & accounting costs 8,998 27,500
Other 30,819 92,396
------------- --------------
$ 192,136 $ 348,247
============= ==============
The 40% reduction in salaries and benefits costs in the three months
ended March 31, 2006 compared to 2005 is the result of a reduction in our work
force. This reduction in our work force resulted from the closing of our St.
Mary's store and a reduction in our retails sales and accounts payable
departments. In anticipation of expansion, we had hired more retail sales and
11
accounts payable personnel than we needed to operate our current locations. With
the decision not to expand at the current time, we laid off several persons. We
do not expect significant additional changes in salaries and benefits throughout
the balance of 2006.
During the three months ended March 31, 2006, advertising and display
costs decreased by 51% compared to the same period of 2005. As explained above,
this decrease is primarily attributable to the closing of our St. Mary's store.
We anticipate the advertising and display costs will continue at lower rates
during the balance of the 2006 fiscal year as a result of closing of the St.
Mary's store and as a result of reduced marketing costs as we focus more
attention on product sales to contractors rather than retail buyers
Occupancy costs and utilities during the three months ended March 31,
2006 compared to the same period of 2005, decreased 17% as a result of the
closing of the St. Mary's store. We expect these costs to remain relatively
constant in the upcoming quarters.
Legal and accounting costs decreased 67% to $8,998 during the three
month period ended March 31, 2006 compared to the three month period ended March
31, 2005. We believe this decrease in legal and accounting costs is more an
issue of timing than a reflection of any long-term reduction in legal and
accounting costs and we expect legal and accounting costs to continue at levels
consistent with or higher than the amounts incurred during the prior fiscal
year.
Other costs decreased 67% during the three months ended March 31, 2005
compared to three months ended March 31, 2005, as we continued our efforts to
control expenses. We anticipate other costs will to remain fairly constant in
upcoming quarters.
Net Loss
For the reasons disclosed above, during the three months ended March
31, 2006 we realized a net loss of $98,136 compared to net income of $9,670
during the three months ended March 31, 2005. We expect that net loss will
decrease in upcoming quarters.
Liquidity and Capital Resources
Our capital resources have consisted of revenues from operations, funds
raised through the sale of our common stock and debt. During the fourth quarter
2005 we completed a public offering of our securities pursuant to an effective
SB-2 registration statement. The funds raised in the SB-2 have since been used
to fund our operations. As shown in our financial statements, we have an
accumulated deficit of $2,269,423, and negative working capital of $1,387,739.
These factors raise substantial doubt about our ability to continue as a going
concern.
We have been working to obtain additional debt financing to cover the
shortfalls in revenue and to allow us to begin purchasing inventory at a
discount. As noted above, we have also been making changes in operations to
reduce expenses. We may also seek additional equity financing through the sale
of our shares, although we currently have no commitments for additional equity
financing and there is no guarantee that we can obtain equity financing on
acceptable terms or at all.
12
During the first quarter 2006 and 2005 cash was primarily used to fund
operations. See below for additional discussion and analysis of cash flow.
Three Months Ended
March 31, 2006 March 31, 2005
-------------- --------------
Net cash used in operating activities $(225,634) $(193,450)
Net cash used in investing activities $ - $ -
Net cash provided by financing activities $ 161,352 $ 172,130
--------- ---------
$ (64,282) $ (21,320)
========= =========
NET INCREASE (DECREASE) IN CASH
As discussed herein, during the three months ended March 31, 2006
compared to the three months ended March 31, 2005 product sales decreased
leading to a change from net income of $9,670 during the first quarter 2005 to a
net loss of $98,136 during the first quarter 2006. During the three months ended
March 31, 2006, inventory has increased $146,158 and customer deposits have
decreased $65,600 combined with a net loss of $98,136, these reductions in cash
from operations were only partially offset by increases in accounts payable of
$74,142 and an increase of bank overdrafts of $6,926. Net cash used in operating
activities during the three months ended March 31, 2006 was 17% higher than net
cash used in operating activities during the three months ended March 31, 2005.
This increase in cash used in operating activities during the three months ended
March 31, 2006 was largely the result of circumstances explained above.
We used no net cash in investing activities to acquire property or
equipment during the first quarter 2006 or the first quarter 2005.
Net cash provided from financing activities was $161,352 during the
three months ended March 31, 2006 compared to $172,130 during the three months
ended March 31, 2005, a 6% decrease. During the three months ended March 31,
2006, however, cash provided from financing activities primarily came from
borrowing on a line of credit extended by a related party. By contrast, during
the three months ended March 31, 2005 cash provided from financing activities
primarily came from the sale of our equity securities in our registered public
offering.
At March 31, 2006 and 2005 we had cash on hand of $0 and $68,772,
respectively.
13
Summary of Material Contractual Commitments
The following table lists our significant commitments as of March 31,
2006.
Payments Due by Fiscal Year
---------------------------
Contractual Commitments Total 2006 2007 2008 2009 Thereafter
- -------------------------------------------------------------------------------------------------------------------------------
Lines of Credit-Related Party $1,395,825 $1,395,825 $ -- $ -- $ -- $ --
Note Payable-Related Party 91,400 40,027 51,373 -- -- --
Note Payable 477,042 25,562 47,344 50,515 353,621 --
Capital Leases 16,674 7,855 8,819 -- -- --
Operating Leases 724,649 109,933 149,338 152,170 155,098 158,110
---------- ---------- ----------- ------------ ----------- ------------
TOTAL $2,705,590 $1,579,202 $ 256,874 $ 202,685 $ 508,719 $ 158,110
========== ========== =========== ============ =========== ============
Off-Balance Sheet Financing Arrangements
As of March 31, 2006 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.
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.
14
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 adopted SFAS
No. 123R on January 1, 2006, which requires stock-based compensation expense to
be recognized against earnings for the portion of outstanding unvested awards
that vest during the period, based on the grant date fair value of those awards
calculated using a Black-Scholes pricing model under SFAS 123. 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.
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.
15
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.
Item 5. Other Information
On April 21, 2006, Mr. Steven Nichols resigned as our Chief Financial
Officer. Mr. Nichols' resignation was not the result of any disagreement with
the Company on any matter relating to the Company's operations, policies or
practices.
Our board of directors has not yet determined who it will appoint to
replace Mr. Nichols as the Company's Chief Financial Officer. Until such time as
the board appoints a new Chief Financial Officer, Michael Carroll will assume
those responsibilities on an interim basis.
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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
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.
October 2, 2006 /s/ Michael Carroll
----------------------------------------
Michael Carroll, Chief Executive Officer
October 2, 2006 /s/ Michael Carroll
----------------------------------------
Michael Carroll, Chief Financial Officer
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