U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1933
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 333-119234
THE FLOORING ZONE, INC.
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(Name of Small Business Issuer in its charter)
NEVADA 20-0019425
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3219 Glynn Avenue, Brunswick, Georgia 31520
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(Address of principal executive Offices) (Zip Code)
Issuer's telephone number: (912) 264-0505
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered pursuant to section 12(g) of the Exchange Act: None
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. (1) Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenue for its most recent fiscal year was: $3,043,852.
The aggregate market value of the issuer's voting stock held as of June 20, 2006
by non-affiliates of the issuer, based on the price at which the shares were
sold, was approximately: $721,725.
As of June 20, 2006, the issuer had 19,569,750 shares of its $0.001 par value
common stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: none
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TABLE OF CONTENTS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.............................................
ITEM 2. DESCRIPTION OF PROPERTY.............................................
ITEM 3. LEGAL PROCEEDINGS...................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...............
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION................................
ITEM 7. FINANCIAL STATEMENTS................................................
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................
ITEM 8A. CONTROLS AND PROCEDURES...........................................
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT .......
ITEM 10. EXECUTIVE COMPENSATION.............................................
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................
SIGNATURES..................................................................
2
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PART I
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FORWARD
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This Form 10-KSB contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "hope," "will," "expect," "believe,"
"anticipate," "estimate" or "continue" or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainty, and actual results may differ materially
depending on a variety of factors, many of which are not within the Company's
control. These factors include but are not limited to economic conditions
generally and in the industries in which the Company and its customers
participate; competition within the Company's industry, including competition
from much larger competitors; technological advances which could render the
Company's products less competitive or obsolete; failure by the Company to
successfully develop new products or to anticipate current or prospective
customers' product needs; price increase or supply limitations for components
purchased by the Company for use in its products; and delays, reductions, or
cancellations of orders previously placed with the Company.
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ITEM 1. DESCRIPTION OF BUSINESS
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We filed our Articles of Incorporation on May 5, 2003. On May 13, 2003,
pursuant to a Share Exchange Agreement, we acquired all of the outstanding
common stock of The Flooring Zone of Georgia, Inc., in exchange for 38,125,000
shares of our common stock. The Flooring Zone of Georgia, Inc., was founded by
our president in 2000, and had been operating in the retail floorcovering
industry since its inception. We currently own and operate two retail flooring
stores located in the southeast United States, one in southern Georgia and one
in northern Florida. We have also licensed our name to a floorcovering retailer
with a single store in northern Florida, for which we receive a license fee. Our
executive offices are located in our Georgia store located at 3219 Glynn Avenue,
Brunswick, Georgia 31520. Our telephone number at that location is (912)
264-0505. Our website is located at www.theflooringzone.com.
Retail Floorcovering Industry
The North American retail floorcovering industry is highly fragmented
with approximately 15,000 individual floorcovering retail dealers operating
25,000 locations in North America according to FLOOR COVERING WEEKLY, a leading
floorcovering industry publication. Our management believes that no single
retailer accounts for more than a 5% market share of total annual industry
revenues. The industry is characterized by a large number of small local and
regional companies and a small number of national chains, such as The Home
Depot, and organizations such as Carpet One and Carpet Max, which principally
operate as buying groups offering their members economies of scale in the
purchasing of floorcovering products.
History of the Flooring Zone
Early Development. Our subsidiary, The Flooring Zone of Georgia, Inc.,
was founded in June of 2000 with the strategy of developing a full service
floorcovering retail operation. Through our subsidiary we initiated our present
strategy of providing low-cost product sourcing and advanced specialty retailing
capabilities. We have focused on establishing relationships with the leading
3
carpet suppliers to negotiate favorable purchasing terms. In addition, we seek
to hire experienced retailing management personnel and developed product mix,
distribution, merchandising, advertising, and promotion, sales training and
store operations strategies and resources designed to increase store sales
volume and profitability.
Most small independent floorcovering retailers face distinct
competitive disadvantages and challenges, including limited purchasing power for
products and services, lack of consumer product knowledge, and ineffective asset
management, merchandising, selling and store-management techniques. We are
significantly smaller than the larger floorcovering retailers who may enjoy
better economies of scale. In our experience, however, quality customer service
and that personal touch that is often lost when dealing with the larger
floorcovering retailers.
Our operating strategies are designed to capitalize on competitive
advantages available to the smaller retailer, such as providing excellent
customer services and involvement in the local community, while developing and
maintaining advantageous buying power and implementing professional retailing
operations.
Business Strategy
The principal elements of our business strategy are as follows:
Full-service Retail Formats. A central aspect of our business strategy
is the development of a retail format that targets a specific segment of the
floorcovering market. Our floorcovering stores offer customers a full range of
floorcovering products directly and floorcovering services, including ordering,
measuring, delivery and installation through third parties. Our stores typically
offer discount floorcovering products held in inventory at the store. We have a
small installation staff and can provide installation services. We also maintain
strong relationships with several floorcovering installers who can provide
installation services to our customers. By primarily outsourcing installation,
management believes that we can effectively target both the customer primarily
concerned with product selection, quality and customer service, and the customer
primarily concerned with price.
Purchasing. We strive to obtain competitive pricing, delivery terms and
merchandising programs through good working relationships with floorcovering
manufacturers.
4
Professional Retail Management Capabilities. We have invested
substantial financial and management resources into the development of
information systems, services and infrastructure. We are committed to making
shopping for floorcovering products a pleasant experience through the employment
of well-trained, knowledgeable and courteous sales associates. As it makes
sense, we plan to continue to utilize current technology to improve the
operating efficiency of our business.
Centralized Distribution and Limited Inventory Levels. We attempt to
minimize our store-level inventories by utilizing our primary distribution
center in Brunswick, Georgia. As a result, our retail stores maintain limited
amounts of inventory, consisting primarily of product samples and enough
inventory to support the cash-and-carry customer.
Multiple Product Categories. We offer a full range of floorcovering
products, including broadloom carpets, area rugs, hardwood floorings, ceramic
tiles and vinyl floorings, available in both private and branded labels.
Multiple product categories allow us to respond to changes in consumer demand.
Our focus on multiple floorcovering products results in decreased carpet sales
as a percentage of total retail sales.
Growth Strategy. We have revised our growth strategy to some extent. We
still hope to expand to larger markets and to develop a retail floorcovering
network in the southeastern United States, we anticipate that this will
primarily be accomplished through (i) opening additional company-owned stores
and (ii) making selective acquisitions. Because our public offering was
significantly less successful than anticipated, rather than fund expansion
through with funds raised in our offering, we now intend to expand operations
only as cash flow from operations and market conditions so justify. This will
result in slower expansion than we originally planned.
Opening of New Stores. If and when we expand, we intend to expand
within our existing markets or into contiguous new markets and will attempt to
cluster our stores within a market in order to achieve management and operating
efficiencies and to enhance our name recognition.
We intend to open new stores in Class A strip shopping retail space and
we have developed several standardized store formats ranging from 6,500 to
10,000 square feet to accelerate store openings and minimize store opening
costs. The interior store designs include pre-determined product mixes, fixtures
and equipment, signage, and point-of-sale advertising and promotional programs.
Once a new store site is identified, we will stage the products, merchandising
systems and personnel for the new store in our distribution center and
headquarters. We believe that we can open a Flooring Zone store within 60 to 90
days of executing a lease, with expected total capital expenditures, initial
inventory investments and pre-opening expenses ranging from $75,000 to $150,000
per store. We do not currently intend to offer our stores as franchises.
Broadening of Products and Services. We are developing additional
services relating to product installation, maintenance and in-store credit,
among others. These additional services, if fully developed, will be utilized by
retail operations to increase sales and profitability.
5
Making Selective Acquisitions. As cash flow from operations and market
conditions justify, we intend to search for existing floorcovering retail stores
that would strengthen our distribution capabilities, that can be reasonably
converted into Flooring Zone stores, and that are able to be acquired at or
below what we believe our costs would be to open a new store and generate
customer traffic.
Company Operations
We provide our retail floorcovering stores with products, services and
trained personnel that we believe are top quality. Our resources include
merchandising, purchasing and distribution, advertising and promotion,
management and sales training and management information systems, as described
below.
Purchasing and Distribution. We seek to purchase high-quality products
and services at competitive prices. A substantial portion of the floorcovering
products purchased by or through our Company are shipped directly by the
supplier to our individual retail stores or to our distribution hub. Our stores
generally maintain minimal inventory, which predominantly consists of product
samples. Our distribution center or hub allows us to make opportunistic
purchases from carpet mills at substantially discounted prices. We are also able
to offer special purchases to customers, including purchases of mill drops
(discontinued lines) and excess mill inventory that are occasionally made
available to us at discounted prices. We also make available on an ongoing basis
remnant packages and short roll packages which can be as small as 10 and as
large as 1,000 remnants at a time. Our ability to purchase and inventory
private-label products and specials creates the opportunity for increased
revenues and margins and lower pricing to the customer. We have relationships
with many vendors within the industry. While we have preferred vendors from whom
we purchase a majority of our products, because of our numerous relationships
within the industry, we do not believe that we are dependent upon any one vendor
for product purchases. Nor do we believe that the loss of any single vendor
would have a long-term material adverse effect on our operating results or
financial position.
Product Mix and Merchandising. We offer a full range of floorcovering
products from key suppliers, including Shaw, Mohawk Industries, Beaulieu of
America, DuPont and AlliedSignal for proprietary carpet fiber, Armstrong World
Industries and Congoleum for vinyl flooring, Bruce Hardwood Floors (a division
of Triangle Pacific) for hardwood flooring and Dal-Tile for ceramic tile. Each
of these suppliers is a leader in its respective floorcovering category. Our
suppliers also include niche carpet, vinyl, hardwood and ceramic tile producers,
as well as leading manufacturers and importers of room-size area rugs.
Our merchandising strategies address effective store layout, fixtures,
signage, product mix, and cross-selling techniques designed to increase sales
closing performance, average transaction size, sales per square foot of retail
space, and gross margins. Store interiors provide easy-to-locate presentation of
floorcovering samples, organized by product line, in an attractive and brightly
lit interior. In addition, we provide conference rooms where contractors and
interior designers can meet with their clients to discuss flooring options.
6
Advertising and Promotion. We believe advertising and promotion are
important to our success. Therefore, we budget a percentage of revenues per
market for multimedia advertising campaigns. These campaigns include radio,
billboard, print, direct mail and television promotions. To promote our products
we also offer our low price guarantee - If you find a local competitor selling
your new first quality carpet for less money we will double the difference. We
also hold one day "Private Sales" events at each of our retail stores twice a
year. Our Private Sales events are conducted by direct mail invitation with
coordinated manufacturer's participation.
Management and Sales Training. Our training program focuses on
developing professional sales and leadership skills and team building concepts.
Our training methodology incorporates a turnkey training and diagnostics system
that provides our retail stores with competent and skilled professional
personnel.
In addition, our management has ongoing training to keep our employees
informed about the latest floorcovering information such as new technology, new
products, merchandising, available specials and design trends.
Management Information Systems. Our stores utilize a point-of-sale
software system for tracking consumer demographics and purchasing patterns and
other data to integrate all store operations into a central information system
we spent several years developing in-house.
Credit. Through a national bank we offer consumer credit packages.
Store Operations
Retail Operations. Our stores generate revenues through sales of
floorcovering products to consumers and other customers. Each store carries the
full product mix available to our Company including several leading brand names.
Our stores average 6,500 -10,000 square feet, are typically located in Class A
strip shopping retail space in suburban locations, and are staffed with two to
six personnel. These stores cater primarily to consumers seeking a variety of
high-quality products and customer service. Consumers make purchase selections
from floor samples, and the order is usually delivered from our local warehouse
or hub, or direct from the manufacturer. We maintain some internal installation
staff and have established relationships with several local contractors and
usually subcontract installation. Our stores are supported by the full range of
services provided by manufacturers, including merchandising and sales promotion
programs, high quality advertising, our own integrated information systems, and
professionally trained management and sales personnel. Our customers include
homeowners, designers, homebuilders and commercial contractors. We are not
dependent on one or a few major customers. Our stores compete with other
independent retailers, industry franchisees and a small number of national
chains, including The Home Depot.
We believe that the Flooring Zone concept utilized in our stores is
visually appealing and provides an enjoyable shopping experience for our
customers. Our stores standardized layout is professionally designed to include
eye-catching signage, bright lighting, a conferencing area and departmentalized
product displays. Our stores use floor samples to display the full range of our
available products, with separate areas dedicated to carpet, area rugs, hardwood
flooring, vinyl flooring and ceramic tiles.
7
Competition
Through our retail stores we compete with other floorcovering retailers
in their respective local market areas. According to FLOOR COVERING WEEKLY, the
North American market consists of approximately 15,000 individual floorcovering
retailers, which represent 25,000 locations. Competition in the retail
floorcovering market is intense due to the significant number of retailers in
operation. In addition, large retailers have entered the market and provide
significant competition, including Home Depot, Inc.
Trademarks, Service Marks, Trade Names and Commercial Symbols
We have registered marks with the U.S. Trademark Office including: "The
Flooring Zone" and "Save A Comma." At this time, we know of no infringing uses
that could materially affect the use of our service marks, logos or slogans in
any state in which stores are or are proposed to be located. We are not the
owner or licensee of any patents or copyrights.
Employees
As of the date of this prospectus we employ approximately 9 persons on
a full-time basis, including approximately 6 persons at our retail operations
and 3 persons at our corporate offices. No employee is a party to any collective
bargaining agreement.
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ITEM 2. DESCRIPTION OF PROPERTY
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Our principal executive offices are located in leased office space
located at 3219 Glynn Avenue, Brunswick, Georgia 31520. We also lease warehouse
space and space for our two retail stores in Georgia and Florida. We believe
these spaces will be adequate for our needs through the terms of their existing
leases, the first of which expires in 2007 and the last of which expires in
2014. Based on leases currently have in place, our minimum required annual lease
payments for these locations through December 31, 2005, was $238,165 and will be
$146,578 for the year ending December 31, 2006.
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ITEM 3. LEGAL PROCEEDINGS
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Neither us, nor any of our officers or directors is a party to any
material legal proceeding or litigation not arising in the ordinary course of
business and we know of no material legal proceeding or contemplated or
threatened litigation. There are no judgments against us or our officers or
directors. None of our officers or directors has been convicted of a felony or
misdemeanor relating to securities or performance in corporate office.
8
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
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No matters were submitted to a vote of our shareholders during the
fiscal year ended December 31, 2005.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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At present, our securities are not traded publicly. There is no
assurance that a trading market will develop, or, if developed, that it will be
sustained. Our shareholders may, therefore, find it difficult to resell their
securities. Furthermore, our shares are not marginable and it is unlikely that a
lending institution would accept our common stock as collateral for a loan.
During the quarter ended December 31, 2005 we sold no shares that were
not registered under the Securities Act of 1933.
During the quarter ended December 31, 2005 we completed 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.
We sold 141,050 common shares in the offering raising $282,100. Under
the terms of the offering, the offering terminated on October 28, 2005.
The offering was completely self-underwritten and was conducted 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
$282,100, 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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Of our 19,569,250 common shares currently outstanding, 140,550 are
free-trading and 19,428,700 shares have been held for more than one year and
would be eligible for resale in compliance with the provisions of Rule 144.
As of April 14, 2006, we had 107 shareholders of record.
Cash Dividends
We have not declared a cash dividend on any class of common equity
in the last two fiscal years. There are no restrictions on our ability to pay
cash dividends, other than state law that may be applicable; those limit the
ability to pay out all earnings as dividends. The Board of Directors does not,
however, anticipate paying any dividends in the foreseeable future; it intends
to retain the earnings that could be distributed, if any, for the operations,
expansion and development of our business.
Repurchases of Equity Securities
During the quarter ended December 31, 2005, we did not repurchase any
of our equity securities.
At the time of his resignation as an officer and director of the
Company, Mr. Jimmy Lee agreed to the cancellation of his 19,000,000 common
shares in exchange for his release as a personal guarantor on all obligations of
the Company. The cancellation of Mr. Lee's shares occurred during the second
quarter 2006.
Securities for Issuance Under Equity Compensation Plans
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for future
exercise of outstanding issuance under equity
outstanding options, options, warrants compensation plans
warrants and rights and rights (excluding securities reflected in
columns (a))
(a) (b) (c)
------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation
plans approved by
security holders -0- $0.00 450,000
------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation
plans not approved by
security holders -0- $0.00 -0-
------------------------- --------------------------- --------------------------- ------------------------------------
Total -0- $0.00 450,000
------------------------- --------------------------- --------------------------- ------------------------------------
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On May 13, 2003 we adopted The Flooring Zone, Inc., 2003 Stock
Incentive Plan (the "Plan"). The Plan allow us to grant options to our key
employees, officers, directors, consultants, advisors and sales representatives
to purchase up to 500,000 shares of its $.001 par value restricted common stock
at an exercise price to be determined by the Stock Option Committee of the board
at the time of grant.
On June 18, 2003 we granted options under the Plan to 26 employees to
purchase an aggregate of 45,000 shares of our common stock at an exercise price
of $1.25. The options vested immediately and expired on June 18, 2005. Between
June 20, 2003 and September 30, 2003 all of the options were exercised.
There are currently no options, warrants or rights outstanding under
the Plan.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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This discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and capital
resources during our fiscal years ended December 31, 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.
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Going Concern
The Report of Independent Registered Public Accounting Firm contains an
opinion that we will need additional working capital to service our debt and
fund our planned activities, which raises substantial doubt about our ability to
continue as a going concern. We have not generated sufficient revenue from
operations to meet our operating expenses, have accumulated a deficit of
$2,171,287 since inception and have a negative working capital of $1,266,812.
This raises substantial doubt about our ability to continue as a going concern.
To continue operations, we will need to obtain funding from third parties. This
funding may be sought by means of private equity or debt financing. We currently
have no commitments from any party to provide funding and there is no way to
predict when, or if, any such funding could materialize. There is no assurance
that we will be successful in obtaining additional funding on attractive terms
or at all. If we are unsuccessful in obtaining additional funding, we may be
unable to continue operations as we have insufficient working capital necessary
to meet its expenses and service our debt.
Results of Operations
In fiscal 2005, we realized lower revenues as sales decreased while
costs of sales increased as compared to fiscal 2004. During fiscal 2004 we
enjoyed record high revenues. As a result of lower revenues and increased costs,
our net loss and net loss per shares in fiscal 2005 increased as compared to
fiscal 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.
During the twelve months ended December 31, 2005, we realized net
revenue of $3,043,852, a 19% decrease compared to the twelve months ended
December 31, 2004. The decrease in net revenue during the year ended December
31, 2005 is the result of several factors. During fiscal 2004 we provided
flooring products for a large condominium project and a local hospital. These
contracts are non-typical for our business. In fiscal 2005 the volume of sales
we typically engage in was also lower than in fiscal 2004. This was partly the
result of the closing of our St. Mary's store and a reduction in our sales force
in the fourth quarter 2005. Additionally, in 2005 we began offering a wider
range of financing plans to our customer, including offering the option of zero
percent financing. As a result of certain financing options, we realized lower
revenues on financed sales.
With the closing of our St. Mary's store during the fourth quarter
2005, we anticipate sales volume in 2006 could be slightly lower than sales
volume experienced in 2005. We plan to engage in more aggressive marketing and
advertising to offset this reduction in sales volume. While sales volume may be
somewhat lower in 2006, we expect revenue to remain fairly consistent with
revenue earned in 2005. We believe we can improve revenue in 2006 even if sales
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volume is somewhat lower because we now have a better understanding of how
certain financing plans affect our revenues. With this knowledge, we have
changed our pricing structures to insure that we maintain appropriate sales
margins.
Gross Profits
Our gross profits are directly affected by our costs of sales. Cost of
sales includes all direct costs of floor coverings, materials used in
installation and installation labor. As with revenues, our cost of sales and
gross profits are directly affected by changes in the percentage of products
sold to retail customers versus contractors. As discussed above, the prices we
can charge contractors are lower than the prices we can charge retail customers,
therefore, our profit margin on product sales to retail customers is greater.
Moreover, we typically also realize profit from the sale of materials used in
installation and from the costs charged for installation labor to retail
customers. Conversely, contractors typically use their own subcontractors to
install the floor covering products they purchase. These subcontractors provide
the materials used in installation and the installation labor.
Gross profit during the year ended December 31, 2005, was $284,336, 75%
lower than the $1,147,069 gross profit realized during the year ended December
31, 2004. Cost of sales as a percentage of net revenues in 2005 was nearly 91%
in 2005, compared to 70% in 2004. We believe this significant increase in cost
of sales as a percentage of net revenues was the result of several factors.
First, during the 2005 fiscal year we realized lower margins on products sold as
overall the cost of products increased at a greater rate than the cost we
charged our customers. Second, on a number of occasions we experienced swift
cost increases in products, which we had already sold to customers, but had not
yet ordered or installed. Our sales policies in 2005 contracts did not provide
any way for us to pass these increased costs to our customers. We are currently
developing an implementing a new sales policy that allows us to pass increased
product prices to our customers. Third, as a result of decreased revenues, our
accounts payable to certain vendors increased to levels where we were no longer
offer us advantageous price breaks. During the first quarter 2006, we have
reduced our accounts payable with these vendors to level that once again allow
us to enjoy competitive pricing advantages.
As discussed above, we are currently implementing new policies and
resolving outstanding accounts with vendors. We believe this will help us to
reduce cost of sales as a percentage of net revenues and will bring our sales
margins more in line with the percentages experienced in the years prior to
2005. We also believe that certain events, such as Hurricane Katrina, which
resulted in rapid and significant increases in products prices are unlikely to
repeat in the upcoming fiscal year.
General and Administrative Expenses
General and administrative expenses for the year ended December 31,
2005, increased $95,088, or 7% to $1,369,497 compared to the year ended December
31, 2004, and as a percentage of sales revenue increased from 34% during the
year ended December 31, 2004, to 45% during the year ended December 31, 2005.
During the twelve months ended December 31, 2005 and 2004, general and
administrative costs consisted of:
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Year ended
December 31, 2005 December 31, 2004
----------------- -----------------
Salaries & benefits costs $ 576,802 $ 584,700
Advertising & display costs 86,807 64,348
Occupancy costs & utilities 356,053 305,628
Legal & accounting costs 79,385 37,979
Other 270,450 281,754
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$ 1,369,497 $ 1,274,409
=========== ===========
The reduction in salaries and benefits costs in the year ended December
31, 2005 compared to 2004, is largely the result of a reduction in our sales
force with the closing of our St. Mary's store and a reduction in the number of
in-house installers we employed. The overall reduction in salaries was partially
offset by an increase in worker's compensation expenses of approximately
$25,000. We do not anticipate additional reductions to our workforce at this
time. Nor do we anticipate an increase in our workforce until such time as
revenue from operations, need and market conditions justifies expansion of our
operations.
During the year ended December 31, 2005, we increased our advertising
and display costs by 35% compared to the same period of 2004, in an effort to
increase slumping sales volume. In 2006, we anticipate advertising costs will
continue to be consistent or somewhat higher than advertising costs in 2005 as
we continue to attempt to improve sales volume and revenues.
Occupancy costs and utilities during the year ended December 31, 2005,
compared to the same period of 2004, increased 16%. When we closed the St.
Mary's store we were required to buy out the remaining term of the lease. The
26% increase in occupancy costs and utilities is directly attributable to this
event. We anticipate occupancy costs and utilities in 2006 will be lower than
2005 as a result of the closing of the St. Mary's store.
Legal and accounting costs increased 109% during the year ended
December 31, 2005 compared to the year ended December 31, 2004. This increase is
the result of increased reporting obligations associated with being a public
reporting company. We expect legal and accounting expenses will likely continue
to increase in the 2006 fiscal year.
Other costs remained fairly constant in 2005 decreasing approximately
4% compared to 2004. We anticipate other expenses to remain relatively constant
in 2006.
Net Loss
Our net loss in fiscal 2005 was $1,197,754 compared to $195,124 in
fiscal 2004. As discussed above, this increase in net loss is primarily the
result of decreased product sales and increased cost of goods sold in 2005
compared to 2004.
14
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. On October 28, 2005, we closed the public offering, as per its terms.
We raised a total of $282,100 in the offering. We anticipate our capital
resources in the upcoming twelve months will consist primarily of revenues from
operations and borrowing funds.
During fiscal 2005 and 2004 cash was primarily used to fund operations.
See below for additional discussion and analysis of cash flow.
Fiscal 2005 Fiscal 2004
------------- -------------
Net cash used in operating activities $(1,227,371) $ (314,976)
Net cash used in investing activities $ (7,748) $ (40,100)
Net cash provided by financing activities $ 1,209,309 $ 390,154
----------- -----------
NET INCREASE/(DECREASE) IN CASH $ (25,810) $ 35,078
=========== ===========
As discussed herein, during fiscal 2005 compared to fiscal 2004,
product sales decreased while costs of goods and general and administrative
expenses increased leading to an increase in net loss of $1,002,630 to
$1,197,754. During year ended December 31, 2005, as product sales have slumped,
we have had less revenue to purchase inventory and inventory has decreased by
$72,567. For the same reason, accounts receivable have decrease $19,453.
Customer deposits for the twelve months ended December 31, 2005, increased
$38,248. This increase in customer deposits is attributable to a delay in
completing jobs because of inventory shipping delays. Accounts payable decreased
by $220,085 as we made a conscious effort to reduce amounts owed to vendors in
an effort to improve our relations and hopefully the pricing we receive from the
vendors we work with. Net cash used in operating activities during fiscal 2005
was 290% higher than net cash used in operating activities in fiscal 2004. This
increase in cash used in operating activities during fiscal 2005 was largely the
result of the circumstances explained above.
We used $7,748 cash in investing activities in 2005 to acquire
equipment. By comparison, we used $40,100 in cash in investing activities in
2004.
Net cash provided from financing activities increased $819,155, or 210%
in fiscal 2005, compared to fiscal 2004. During the twelve months ended December
31, 2005, proceeds from borrowing on a related party line of credit totaled
$1,178,725 and we realized proceeds from the issuance of common stock in our
public offering of $282,100. These amounts were only partially offset by
payments on long term debt of $251,516.
15
At December 31, 2005 and 2004, we had cash on hand of $64,282 and
$90,092, respectively.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of December
31, 2005.
Payments Due by Fiscal Year
---------------------------
Contractual Commitments Total 2006 2007 2008 2009 2010
---------------------------------------------------------------------------------------------------------------------
Lines of Credit-Related Party $1,205,725 $1,205,725 $ -- $ -- $ -- $ --
Note Payable-Related Party 98,786 47,413 51,373 -- -- --
Note Payable 495,853 44,373 47,344 50,515 353,621 --
Capital Leases 19,292 10,473 8,819 -- -- --
Operating Leases 761,294 146,578 149,338 152,170 155,098 158,110
---------- ---------- ---------- ---------- ---------- ----------
TOTAL $2,580,950 $1,454,562 $ 256,874 $ 202,685 $ 508,719 $ 158,110
========== ========== ========== ========== ========== ==========
Off-Balance Sheet Financing Arrangements
As of December 31, 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.
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.
16
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 January 1, 2006, 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.
17
--------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Flooring Zone, Inc.
Report of Independent Registered Public Accounting Firm
And
Consolidated Financial Statements
December 31, 2005
18
The Flooring Zone, Inc.
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm................. 20
Consolidated Balance Sheet-December 31, 2005............................ 21-22
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004............................................ 23
Consolidated Statements of Stockholders' Deficit for the Years
Ended December 31, 2005 and 2004...................................... 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004............................................ 25
Notes to Consolidated Financial Statements.............................. 26
19
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
The Flooring Zone, Inc.
We have audited the accompanying consolidated balance sheet of The Flooring
Zone, Inc. as of December 31, 2005 and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 2005 and 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Flooring Zone,
Inc. and subsidiaries as of December 31, 2005 and the results of operations and
cash flows for the years ended December 31, 2005 and 2004, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Flooring
Zone, Inc. will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has accumulated losses from operations and a
deficit in working capital. These issues raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 12. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Mantyla McReynolds
Mantyla McReynolds
Salt Lake City, Utah
February 23, 2006
20
The Flooring Zone, Inc.
Consolidated Balance Sheet
December 31, 2005
ASSETS
Current assets:
Cash $ 64,282
Accounts receivable, net of allowance of $20,426 129,208
Inventory-Notes 1 & 3 230,607
Prepaid expenses 4,230
--------------------
Total current assets 428,327
Property & equipment, net - Notes 1 & 2 242,075
Other assets:
Intangible assets, net of accumulated amortization of $2,380 5,918
Deposits 6,031
--------------------
Total other assets 11,949
--------------------
TOTAL ASSETS $ 682,351
====================
See accompanying notes to financial statements
21
The Flooring Zone, Inc.
Consolidated Balance Sheet [continued]
December 31, 2005
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 297,474
Line of credit-related party-Note 7 1,205,725
Customer deposits 74,060
Accrued liabilities 15,621
Current portion long-term debt - Note 8 102,259
--------------------
Total current liabilities 1,695,139
Long-term liabilities:-Note 8
Notes payable-related party 98,786
Long-term debt 515,145
Current portion long-term debt (102,259)
--------------------
Total long-term liabilities 511,672
--------------------
Total liabilities
2,206,811
Stockholders' deficit:-Note 5
Preferred Stock, 10,000,000 shares authorized $.001 par
value: No shares issued and outstanding -
Common stock, 100,000,000 shares authorized $.001 par
value; 38,569,750 shares issued and outstanding 38,570
Additional paid in capital 608,257
Accumulated deficit (2,171,287)
--------------------
Total stockholders' deficit (1,524,460)
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 682,351
====================
See accompanying notes to financial statements
22
The Flooring Zone, Inc.
Consolidated Statements of Operations
For the years ended December 31, 2005 and 2004
Revenues: 2005 2004
------------------ ------------------
Sales $ 3,041,352 $ 3,769,343
Licensing Fees 2,500 5,219
------------------ ------------------
Net revenues 3,043,852 3,774,562
Less cost of sales 2,759,516 2,627,493
------------------ ------------------
Gross profit 284,336 1,147,069
General and administrative expenses 1,369,497 1,274,409
Loss on disposal of assets 18,667 -
------------------ ------------------
Net income (loss) from operations (1,103,828) (127,340)
Other income/expense:
Interest expense (93,926) (67,784)
------------------ ------------------
Total other income/(expense) (93,926) (67,784)
------------------ ------------------
Net income (loss) before taxes (1,197,754) (195,124)
Provision for income taxes - -
------------------ ------------------
Net income (loss) $ (1,197,754) $ (195,124)
================== ==================
Net Loss per share-basic and diluted $ (0.03) $ (0.01)
================== ==================
Weighted average shares outstanding-basic
and diluted 38,499,110 38,406,689
================== ==================
See accompanying notes to financial statements
23
The Flooring Zone, Inc.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 2005 and 2004
Additional Accounts Total
Shares Common Paid in Receivable, Accumulated Stockholders'
Issued Stock Capital Shareholder Deficit Deficit
------------- ----------- ------------- ---------------- --------------- -----------------
Balance, January 1, 2004 38,352,700 $ 38,353 $ 308,881 $ (12,500) $ (778,409) $ (443,675)
Shares issued for cash at
$1.25/share in 2004 76,000 76 94,924 95,000
Payments received on shares issued
in 2003 12,500 12,500
Net loss for year ended
December 31, 2004 (195,124) (195,124)
------------- ----------- ------------- ---------------- --------------- -----------------
Balance, December 31, 2004 38,428,700 38,429 403,805 - (973,533) (531,299)
Stock issuance costs (77,507) (77,507)
Shares issued for cash at
$2.00/share 141,050 141 281,959 282,100
Net loss for year ended
December 31, 2005 (1,197,754) (1,197,754)
------------- ----------- ------------- ---------------- --------------- -----------------
Balance, December 31, 2005 38,569,750 $ 38,570 $ 608,257 $ - $ (2,171,287) $ (1,524,460)
============= =========== ============= ================ =============== =================
See accompanying notes to financial statements
24
The Flooring Zone, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2005 and 2004
2005 2004
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,197,754) $ (195,124)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 42,706 39,383
Loss on disposal of assets 18,667 -
Decrease (increase) in accounts receivable 19,453 (36,770)
Decrease (increase) in inventories 72,567 (53,837)
Decrease (increase) in employee loans and advances - (207)
Decrease (increase) in prepaid expenses (2,230) (79,507)
Decrease (increase) in deposits - 703
Increase (decrease) in accounts payable (220,085) 134,847
Increase (decrease) in accrued liabilities 1,057 (13,749)
Increase (decrease) in customer deposits 38,248 (110,715)
---------------- -----------------
Net cash used in operating activities (1,227,371) (314,976)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (7,748) (36,646)
Purchase of intangible assets - (3,454)
---------------- -----------------
Net cash used in investing activities (7,748) (40,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing (payments) on line of credit-related party 1,178,725 (97,000)
Proceeds from borrowing on long term debt - 855,839
Payments on long term debt (251,516) (476,185)
Proceeds from the issuance of common stock 282,100 107,500
---------------- -----------------
Net cash provided by financing activities 1,209,309 390,154
---------------- -----------------
NET INCREASE (DECREASE) IN CASH (25,810) 35,078
CASH AT BEGINNING OF YEAR 90,092 55,014
---------------- -----------------
CASH AT END OF YEAR $ 64,282 $ 90,092
================ =================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 83,760 $ 63,784
Cash paid for income taxes - -
Issued stock to relinquish debt - -
See accompanying notes to financial statements
25
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Flooring Zone, Inc. (the Company) is a corporation
organized under the laws of the State of Nevada on May 5, 2003. On May
13, 2003 pursuant to a Share Exchange Agreement, the Company acquired
all of the outstanding common stock of The Flooring Zone of Georgia,
Inc (the Georgia Company), a Georgia Corporation, in exchange for
38,125,000 shares of common stock of the Company. The company's
business operations provide for full-service retail floor covering
products and services.
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The following
summarizes the more significant of such policies:
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of The Flooring Zone, Inc. and its
wholly owned subsidiary, The Flooring Zone of Georgia, Inc. All
significant intercompany balances and transactions are eliminated.
Revenue Recognition - The Company recognizes revenue according to Staff
Accounting Bulletin 104, Revenue Recognition which clarifies U.S.
generally accepted accounting principles for revenue transactions.
Accordingly, revenue is recognized when an order has been received, the
price is fixed and determinable, the order is shipped and installed,
collection is reasonably assured and the Company has no significant
obligations remaining. Licensing fees are royalties paid to the Company
for licensing the use of the name The Flooring Zone. The royalties
range from 1-2% of the licensee's commercial sales volume.
Use of Estimates in Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and cash equivalents - The Company considers all highly liquid
investments with original maturities at the date of purchase of three
months or less to be cash equivalents.
Bad debt and allowance for doubtful accounts - The allowance for
doubtful accounts is maintained at a level sufficient to provide for
estimated credit losses based on evaluating known and inherent risks in
the receivables portfolio. The Company provides an allowance for
doubtful accounts which, based upon management's evaluation of numerous
factors, including economic conditions, a predictive analysis of the
outcome of the current portfolio and prior credit loss experience, is
deemed adequate to cover reasonably expected losses inherent in
outstanding receivables.
Concentrations of credit risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of trade receivables. The Company provides credit to its
customers in the normal course of business, and accordingly performs
ongoing credit evaluations and maintains allowances for potential
credit losses. Concentrations of credit with respect to trade
receivables are limited due to the Company requiring a deposit from
customers.
Inventory - Inventories are stated at the lower of cost or market, cost
being determined on a first-in, first-out method.
26
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
Vendor Funds - We receive funds from vendors in the normal course of
business for purchase - volume-related rebates. Our accounting
treatment for these vendor-provided funds is consistent with Emerging
Issues Task Force (EITF) 02-16 "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received From a Vendor." Under EITF
02-16, purchase volume rebates should be treated as a reduction of
inventory cost, unless they represent a reimbursement of specific,
incremental and identifiable costs incurred by the customer to sell the
vendor's product. The purchase volume rebates that we receive do not
meet the specific, incremental and identifiable criteria in EITF 02-16.
Therefore, they are treated as a reduction in the cost of inventory and
we recognize these funds as a reduction of cost of sales when the
inventory is sold.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged to expense as
incurred. The following is a summary of the estimated useful lives and
depreciation methods used in computing depreciation expense:
Depreciation Estimated
Asset Method useful life
--------------------------- ------------------------- -----------------
Equipment Straight-line 5-10 years
Furniture and fixtures Straight-line 10-15 years
Vehicles Straight-line 10 years
Leasehold improvements Straight-line 10 years
Displays Replacement N/A
Intangible Assets - Intangible assets include trademarks that have been
registered with the United States Patent and Trademarks office.
Intangible assets also include the closing costs for refinancing a
portion of the Company's debt with a bank. The costs of obtaining
trademarks and closing costs are capitalized as incurred and are
amortized over their estimated useful lives of fifteen years and five
years, respectively, using the straight-line method. Amortization
expense for the years ended December 31, 2005 and 2004 were $1,014 and
$611, respectively.
Income Taxes - In July 2000 the Company elected to be taxed as an S
Corporation under the Internal Revenue Service Code. Accordingly, under
such an election, the Company's taxable income was reported by the
individual shareholders. In 2003 the Company cancelled its election to
be taxed as an S Corporation and therefore applies the provisions of
Statement of Financial Accounting Standards(SFAS) No. 109, Accounting
for Income Taxes which requires an asset and liability approach for
financial accounting and reporting for income taxes, and the
recognition of deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled.
Net Loss Per Common share - In accordance with SFAS No. 128, Earnings
Per Share, basic loss per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per share
is computed using weighted average number of common shares plus
dilutive common share equivalents outstanding during the period using
the treasury stock method. At December 31, 2005 there are no common
stock equivalents outstanding, thus, basic and diluted loss per share
calculations are the same.
27
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
Stock based compensation - SFAS No. 123, Accounting for Stock-Based
Compensation allows companies to choose whether to account for employee
stock-based compensation on a fair-value method, or to account for such
compensation under the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has chosen to account for stock-based
compensation using APB 25. If the compensation cost for the Company's
compensation plan had been determined consistent with SFAS No. 123 the
Company's net income and net income per common share would have changed
to the pro forma amounts indicated below:
2005 2004
------------- ------------
Net loss, as reported $ (1,197,754) $ (195,124)
Compensation cost under fair value-based
accounting method, net of tax - -
-------------- -------------
Net loss, pro forma (1,197,754) (195,124)
Net loss per share-basic and diluted:
As reported $ (0.03) $ (0.01)
Pro forma $ (0.03) $ (0.01)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 0%; risk-free
interest rate of 3% and expected lives of 3,650 days(See note 6).
Advertising Costs - Advertising costs of the Company are charged to
expense as incurred. Advertising expense amounted to $79,790 and
$53,102 in 2005 and 2004, respectively.
Recently Issued Financial Accounting Standards--In December 2004, the
FASB issued SFAS No. 123R, Share-based Payment. This standard is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance.
SFAS No. 123R requires the measurement of the cost of employees
services received in exchange for an award of the entity's equity
instruments based on the grant-date fair value of the award. The cost
will be recognized over the period during which an employee is required
to provide service in exchange for the award. No compensation cost is
recognized for equity instruments for which employees do not render
service. The Company will adopt SFAS No. 123R on January 1, 2006, 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.
28
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
[continued]
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 does not
feel the adoption of SFAS No. 151 will have a material affect on their
financial statements.
Note 2 PROPERTY AND EQUIPMENT
The major categories of property and equipment are as follows:
12/31/2005
-------------
Equipment $ 134,146
Furniture and fixtures 21,331
Vehicles 20,127
Leasehold improvements 131,721
Displays 85,522
Accumulated depreciation (150,772)
------------
Net property and equipment $ 242,075
============
Included in equipment are assets totaling $29,978 which are financed by
capital lease. Related amortization is included in accumulated
depreciation. Depreciation expense was $41,692 in 2005 and $38,773 in
2004.
Note 3 INVENTORY
Inventories are stated at lower of cost or market and consist of the
following:
12/31/05
---------------------
Flooring material 230,607
---------------------
Total $ 230,607
=====================
Note 4 INCOME TAXES
Below is a summary of deferred tax asset calculations on net operating
loss carry forward amounts. Loss carry forward amounts expire through
2025. A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized.
29
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 4 INCOME TAXES - [continued]
NOL
Description Balance Tax Rate
------------------------------- -------------- ------------- ----------------
Federal Income Tax $1,657,403 $563,517 34%
Georgia State Income Tax 1,657,403 99,444 6%
-------------
Valuation allowance (662,961)
-------------
Deferred tax asset 12/31/2005 $ 0
=============
The allowance has increased $395,327 from $267,634 as of December 31,
2004.
Note 5 COMMON STOCK/PREFERRED STOCK
In February 2004 the Company received proceeds of $12,500 for 10,000
shares of its common stock that were issued in September 2003.
In May 2004 pursuant to Rule 506 of Regulation D of the Securities Act
of 1933 the Company accepted the Subscriptions and Investment
Representation Letters from 3 investors and issued 76,000 shares of its
restricted common stock at a price of $1.25 per share for a total of
$95,000.
The Company's preferred stock may be issued from time to time in one or
more series. The Board of Directors are to establish by resolution(s)
the number of shares to be included in each series, and to fix the
designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. As
of December 31, 2005 no shares of preferred stock have been issued by
the Company.
The Company's SB-2 Registration statement filed with the Securities and
Exchange Commission became effective in January 2005. In 2005, the
Company had raised $282,100 and issued 141,050 shares of its common
stock. Costs associated with issuing this stock totaled $77,507.
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 December 31, 2005 the Company had
received the stock certificate but had not yet canceled it because Mr.
Lee's name has not been completely removed from all debt. The
19,000,000 shares are showing as issued and outstanding in these
financial statements.
Note 6 STOCK OPTION PLAN
On May 13, 2003 the Company's Board of Directors adopted the Company's
2003 Stock Incentive Plan (The Plan). The Plan grants options to its
key employees, officers, directors, consultants, advisors and sales
representatives to purchase up to 500,000 shares of its $.001 par value
restricted common stock at an exercise price determined by the Stock
Option Committee of the board at the time of grant. The options fully
vest upon the date of grant. No stock options were granted, exercised
or outstanding during the years ended December 31, 2005 and 2004.
30
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 7 LINE OF CREDIT-RELATED PARTY
During the year ended December 31, 2003 the Company obtained a line of
credit with a shareholder of the Company for the purpose of meeting
cash flow needs. The interest rate on the line of credit is prime plus
1%. As of December 31, 2005 and 2004, the outstanding balances on this
line were $115,000 and $27,000, respectively. In October 2005, the
Company obtained a line of credit from a related company, whose owner
is a shareholder and director of the Company, for $200,000 which was
outstanding at December 31, 2005 with an interest rate of prime plus 1%
maturing within twelve (12) months. In December 2005, the Company
obtained lines of credit with a shareholder and related company, whose
owner is a shareholder and director of the Company, totaling $950,000
of which $890,725 was outstanding at December 31, 2005 with an interest
rate of prime plus 1% all maturing within twelve (12) months. The
interest rate on the lines of credit at December 31, 2005 was 8.00%.
Note 8 LONG-TERM DEBT
The following is a summary of the Company's indebtedness as of December
31, 2005:
Note payable to a bank with interest at 6.50% due in
monthly installments of $6,270.32 through August
2009, secured by Company equipment and property owned
by the Company's president. $ 495,853
Note payable to a shareholder with interest at 10.00%
due in monthly installments of $4,565.33 through
October 2007, unsecured. 98,786
Lease payable to Dell Financial with interest at 17.06%
due in monthly installments of $1069.63 through
August 2007, secured by equipment. 19,292
----------
Total $ 613,931
==========
Maturities of debt are as follows:
Year Ending December 31: Amount
--------------------------- --------------
2006 $ 102,259
2007 107,536
2008 50,515
2009 353,621
Thereafter -
-------------
$ 613,931
=============
31
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 9 LEASES
The Company has entered into three operating leases with unrelated
parties for its retail stores, warehouse and office facilities. The
leases expire between 2007 and 2014. During the year ended December 31,
2005, and 2004 the Company paid lease payments in the amount of
$238,165 and $226,690, respectively. In 2005 and 2004 the Company also
leased on a month to month basis additional office space totaling
$14,400 each year. In November 2005, the Company terminated the lease
on the St. Marys Store (See note 11).
The following is a schedule by years of future minimum lease payments
required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31,
2005:
Year ended Total
--------------------------------- ------------------
December 31, 2006 $ 146,578
December 31, 2007 149,338
December 31, 2008 152,170
December 31, 2009 155,098
December 31, 2010 158,110
------------------
Totals $ 761,294
==================
Note 10 CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position. However, an unfavorable
outcome in these claims could result in a possible judgment against the
company of as much as $6,500.
The Company records contingent losses when they are probable and
reasonably estimable. The Company and their legal council have
determined that these liabilities are possible but not probable.
Note 11 CLOSED OPERATIONS
The Company closed the St. Marys, Georgia store in November 2005, due
to poor performance. All inventory was transferred to the Yulee or
Brunswick Stores. The Company paid $18,000 to terminate its lease. The
leasehold improvements totaling $18,667 were written off in 2005.
32
The Flooring Zone, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
Note 12 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
$2,171,287, and a negative working capital of $1,266,812. 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 and improve margins. 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.
33
--------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
None.
--------------------------------------------------------------------------------
ITEM 8A. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
Our principal executive officers and our principal financial officer
(the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Such officers have concluded (based upon their evaluations of
these controls and procedures as of the end of the period covered by this
report) that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in this report is accumulated and
communicated to management, including the Certifying Officers as appropriate, to
allow timely decisions regarding required disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls over financial reporting or other
factors that could significantly affect such controls subsequent to the date of
their evaluation, and there were no significant deficiencies and material
weaknesses.
Our management, including the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and may not be detected.
34
--------------------------------------------------------------------------------
ITEM 8B. OTHER INFORMATION
--------------------------------------------------------------------------------
On April 21, 2006, Mr. Steven Nichols resigned as the Company's 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.
The Company's 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 that responsibility on an interim basis.
--------------------------------------------------------------------------------
PART III
--------------------------------------------------------------------------------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLAINCE WTH SECTION 16(a) OF THE EXCHANGE ACT
--------------------------------------------------------------------------------
The following table sets forth our directors, executive officers,
promoters and control persons, their ages, and all offices and positions held.
Directors are elected for a period of one year and thereafter serve until their
successor is duly elected by the stockholders. Officers and other employees
serve at the will of the Board of Directors.
Name Age Positions Held Director Since
---- --- -------------- --------------
Michael J. Carroll 36 CEO/President, Interim
CFO and Director May 2003
Joel Arline 36 Director November 2005
There is currently one vacancy on our board of directors that we expect
to fill with an independent director. Our ability to locate an independent
director may be unsuccessful because we do not have error and omission insurance
for officers and directors. The above individuals will serve as officers and/or
directors. A brief description of their positions, proposed duties and their
background and business experience follows:
Michael J. Carroll. Prior to his appointment as CEO and President in
November 2005, Mr. Carroll served as the Secretary, Treasurer and a Director of
the Flooring Zone, Inc., since May 2003. He has held the same positions with The
Flooring Zone of Georgia, Inc., since June 2000. In August 1997, Mr. Carroll
founded Carroll Custom Homes, Inc., and since that time has served as its
President. In that capacity, Mr. Carroll has been primarily responsible to
35
oversee the development and construction of residential housing and to manage
purchasing, payroll and accounts payable. Mr. Carroll graduated from Georgia
College and State University with a Bachelors Degree in Business Administration
in 1992. Mr. Carroll is not a director of any other SEC reporting company.
Joel 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.
There are no family relationships among any of our officers and
directors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the directors, executive
officers and persons who beneficially own more than 10% of any class of equity
securities of an issuer that have been registered pursuant to Section 12 of the
Exchange Act, to file initial reports of beneficial ownership and reports of
changes in beneficial ownership of those securities with the Securities and
Exchange Commission. As no class of our equity securities have been registered
pursuant to Section 12 of the Exchange Act, our directors, executive officers
and shareholders are not subject to the disclosure obligations of Section 16,
and will not be until such time as we register a class of our equity securities
pursuant to Section 12 of the Exchange Act.
Code of Ethics
While we are currently developing a code of ethics that will apply to
our principal executive officer, principal financial officer and principal
accounting officer or controller and to persons performing similar functions we
have not yet completed drafting our code of ethics. The code of ethics will be
designed to deter wrongdoing and to promote honest and ethical conduct, full,
fair, accurate, timely and understandable disclosure, compliance with applicable
laws, rules and regulations, prompt internal reporting of violations of the code
and accountability for adherence to the code. We anticipate completion and
adoption of a code of ethics during the upcoming fiscal year.
36
--------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
the compensation paid or accrued since the Company's inception on May 5, 2003
through December 31, 2005, (the end of the Registrant's last completed fiscal
year).
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
Restricted LTIP
Name and Other Annual Stock Options/ Payout All Other
Principal Position Year Salary Bonus Compensation Awards SARs # ($) Compensation
------------------ ---- ------ ------- ------------ ------ ----- -------- ------------
Michael Carroll, CEO 2005 $ -0- $-0- $-0- $-0- -0- $-0- $-0-
President, Interim CFO 2004 -0- -0- -0- -0- -0- -0- -0-
and Director 2003 -0- -0- -0- -0- -0- -0- -0-
Jimmy Lee, Former 2005 52,800 -0- -0- -0- -0- -0- -0-
CEO, President 2004 62,400 -0- -0- -0- -0- -0- -0-
and Director 2003 62,400 10,000 -0- -0- -0- -0- -0-
Steven Nichols, Former 2005 59,608 -0- -0- -0- -0- -0- -0-
CFO and Vice 2004 60,950 6,700 -0- -0- -0- -0- -0-
President 2003 59,800 2,500 -0- -0- -0- -0- -0-
Employment Agreements with Executive Officers
We have no formal employment agreements with any of our executive
officers.
Compensation of Directors
We have no arrangements pursuant to which your directors are
compensated for any services provided as a director, or for committee
participation or special assignments.
Termination of Employment and Change of Control Arrangement
There are no compensatory plans or arrangements, including payments to
be received from us, with respect to any person named in cash compensation set
forth above that would in any way result in payments to any such person because
37
of his resignation, retirement, or other termination of such person's employment
with the company or its subsidiaries, or any change in control, or a change in
the person's responsibilities following a changing in control of the Company.
--------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------
The term "beneficial owner" refers to both the power of investment (the
right to buy and sell) and rights of ownership (the right to receive
distributions from the company and proceeds from sales of the shares). Inasmuch
as these rights or shares may be held by more than one person, each person who
has a beneficial ownership interest in shares is deemed the beneficial owners of
the same shares because there is shared power of investment or shared rights of
ownership.
The following table discloses the beneficial ownership of certain
beneficial owners and management based on the number of shares we had
outstanding as of June 20, 2006. As of June 20, 2006, we had 19,569.750 common
shares outstanding.
Amount of
Title of Beneficial
Name and Address Class Ownership % of Class
Michael Carroll Common 19,000,000 97%
3219 Glynn Avenue
Brunswick, Georgia 31520
Joel Arline Common -0- *
1606 Reynolds Streets
Brunswick, Georgia 31520
--------------------------------------------------------------------------------
All officers and directors
as a group (2 persons) 19,000,000 97%
--------------------------------------------------------------------------------
TOTAL 19,000,000 97%
--------------------------------------------------------------------------------
* Less than 1%
38
--------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
In October 2003, we entered into an agreement with Mr. Carroll, whereby
he agreed to extend us a line of credit. The interest rate on the line of credit
is prime plus 1%. As of December 31, 2005, the outstanding balance on this line
of credit was $115,000.
In October 2005, we obtained a line of credit for $200,000 from a
related company owned by Mr. Carroll. The interest rate is prime plus 1%. At
December 31, 2005, the outstanding balance for $200,000
We borrowed $27,000 against this line of credit during the fourth
quarter of 2004. Subsequent to the year end, in February 2005, we paid $20,000
to Mr. Carroll to reduce the outstanding balance on this line of credit.
In August 2000, Mr. Carroll loaned Flooring Zone of Georgia, Inc.,
$275,000 pursuant to an unsecured note payable. This note bears interest at a
rate of 10% per year. Under the terms of the note, we are required to make
monthly installment payments of $4,565.33 though October 2008. As of September
30, 2004, the outstanding balance on this note was $192,012.
We believe that each of the above-described transactions was negotiated
on terms at least as favorable to us as those available to us on an arms-length.
As with the above transactions, all future material transactions entered into
with related parties shall be on terms no less favorable to us than we can
obtain from an unaffiliated third party on an arms-length basis and will be
approved by a majority of our disinterested directors.
--------------------------------------------------------------------------------
ITEM 13. EXHIBITS
--------------------------------------------------------------------------------
Exhibits. The following exhibits are included as part of this report:
Exhibit 21.1 List of Subsidiaries
Exhibit 31.1 Certification of Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Principal Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Principal Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
39
--------------------------------------------------------------------------------
ITEM 14. PRINCIPAL ACOUNTANT FEES AND SERVICES
--------------------------------------------------------------------------------
Mantyla McReynolds has served as the Company's independent registered
public accounting firm for the fiscal years ended December 31, 2005 and 2004.
Principal accounting fees for professional services rendered for us by Mantyla
McReynolds for the fiscal years ended December 31, 2005 and 2004, are summarized
as follows:
2005 2004
---- ----
Audit $ 28,392 $ 32,086
Audit related - -
Tax - -
All other - -
-------- ---------
Total $ 28,392 $ 32,086
======== =========
Audit Fees. Audit fees were for professional services rendered in
connection with the Company's annual financial statement audits and quarterly
reviews of financial statements for filing with the Securities and Exchange
Commission.
Board of Directors Pre-Approval Policies and Procedures. At its
regularly scheduled and special meetings, the Board of Directors, in lieu of an
established audit committee, considers and pre-approves any audit and non-audit
services to be performed by the Company's independent accountants. The Board of
Directors has the authority to grant pre-approvals of non-audit services.
--------------------------------------------------------------------------------
SIGNATURES
--------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf of the undersigned,
thereunto duly authorized.
THE FLOORING ZONE, INC.
Dated: August 4, 2006 By: /s/ Michael Carroll
------------------------------------
Michael Carroll, Chief Executive
Officer, Interim Chief Financial
Officer and Director
Dated: August 4, 2006 By: /s/ Joel Arline
------------------------------------
Joel Arline, Director
40