SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
September 30, 2004 0-7722
NEW CENTURY COMPANIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 061034587
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes _X_ No___
The number of shares of Common Stock, par value $ .10 per share, outstanding as
of November 18, 2004 was 7,042,265.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated Financial Statements are set forth at the
end of this document.
Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheet
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
2
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements are set forth at the end
of this document.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-QSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-QSB
are qualified in their entirety by this statement.
OVERVIEW
On May 25, 2001, the Company entered into a plan of Reorganization and
Merger with New Century Remanufacturing, Inc. ("NCR"). Immediately prior to the
merger, the Company had 50,000,000 shares authorized and 2,695,942 shares issued
and outstanding. Pursuant to the merger, all of the 1,800 outstanding shares of
NCR were exchanged for shares of the Company on a 1 to 833.33 basis or into
1,500,000 shares of common stock of the Company for a total of 4,195,942 shares
of common stock issued and outstanding. Immediately after the merger, all then
existing officers and directors of the Company resigned and the management of
NCR was elected and appointed to such positions; thereby effecting a change of
control. Although NCR became a wholly owned subsidiary of the Company following
the transaction, because the transaction resulted in a change of control, the
transaction was recorded as a "reverse merger" whereby NCR was considered to be
the accounting acquirer of the Company.
After the reverse merger the Company changed its name to New Century
Companies, Inc. The results of the Company previously filed in the past years
are not included herein. The related financial statements are the results of
operations for NCR.
PLAN OF OPERATIONS
The earnings of the Company for the three months ended September 30, 2004
were negative as a result of management's strategy of continued investment in
research and development of new projects and of the corporate expenses related
to compliance with the regulatory requirements of being a public company and the
inability to manufacture and ship products as a result of the Company's lack of
working capital. The goal of these expenditures in research and development was
3
to position the Company as a leading manufacturer and remanufacturer of large
horizontal and vertical turning machines. The Company has completed the majority
of this current development effort and expects limited resources to be devoted
to this area in the next fiscal year. The Company's current strategy is to
expand its customer sales base with its present line of machine products. As
stated below, the Company's ability to continue operations and implement its
business plan depends on the raising of additional capital. No assurance can be
given that funds will be available, or if available, the terms thereof.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 2003
REVENUE AND GROSS PROFIT MARGIN
The Company generated revenues of $1,166,947 for the three-month period
ended September 30, 2004, which was a $942,017 or 44.67 % decrease from
$2,108,964 in the corresponding period in 2003. The decrease is the result of a
deficiency in working capital which has limited our ability to fulfill customer
orders. Additionally, the overall market for machine tools is cyclical,
reflecting economic conditions, production capacity utilization, changes in tax
and fiscal policies, corporate profitability and financial condition as well as
the general level of business confidence. The Company anticipates an increase in
customer orders for next quarter, based on the growth of the overall market, but
there can be no assurance of such orders.
There was a 160.15% decrease in gross profit for the three-month period
ended September 30, 2004, due to lower revenues. Gross profit (loss) was
$(205,924), compared to a gross profit of $342,346 from the corresponding period
in 2003. This decrease is a result of the weak economy in the United States and
competitive market conditions that have dampened the demand for the Company's
products.
Interest expense for the three-month period ended September 30, 2004
decreased to $46,099, compared to $78,454 for the period ended September 30,
2003. For the three-month period ended September 30, 2003, the Company
accumulated extra interest of approximately $32,355, for the recapture of
interest unaccrued for the previous periods, on loans from three individuals,
initiated on 12/24/01, 12/03/02 and 1/30/03.
OPERATING EXPENSES
Operating expenses decreased by $118,931 or 32.70%, from $363,750 for the
three-month period ended September 30, 2003 to $244,819 for the corresponding
period in 2004. This decrease is a result of cutting off all the expenses, such
as consulting, and salaries and general and administrative, based on the
continued struggle of the management to increase operational productivity.
NET INCOME/LOSS AND EARNING/LOSS PER SHARE
4
Net loss was $492,030 for the three-month period ended September 30, 2004,
compared to a loss of $100,725 for the corresponding period in 2003. The
increase in net loss is attributable to cash flow problems which affected the
Company's ability to complete timely the manufacture and shipment of machines.
Loss per share for the three-month period ended September 30, 2004
increased to $(0.08) for the three-month period ended September 30, 2004, from
$(0.02) for the corresponding period in 2003.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 2003.
REVENUE AND GROSS PROFIT MARGIN
For the nine-month period ended September 30, 2004, total revenues were
$3,728,016, which was a $2,036,920 or 35.33 % decrease from $5,764,936 in the
corresponding period in 2003. The decrease is the result of a decrease in
customer's orders and a deficiency in working capital that has limited our
ability to fulfill customer orders.
For the nine-month period ended September 30, 2004, gross profit (loss)
was $(179,407) or (5)% of revenue, compared to $214,746 or 4% of revenue in the
corresponding period in 2003. This decrease is a result of competitive market
conditions that have caused the Company to sell products at lower costs.
Interest expense decreased from $220,671 for the nine months ended
September 30, 2003 to $132,901 for the nine-month period ended September 30,
2004. For the nine-month period ended September 30, 2003, the Company
accumulated extra interest of approximately $32,355, for the recapture of
interest unaccrued for the previous periods, on loans from three individuals,
initiated on 12/24/01, 12/03/02 and 1/30/03.
OPERATING EXPENSES
For the nine-month period ended September 30, 2004, operating expenses
decreased by $616,945 or 38.60% from $1,598,389 for the nine month period ended
September 30, 2003, to $981,444 for the nine month period ended September 30,
2004. This decrease is a result of cutting off all the expenses, such as
consulting, and salaries and general and administrative, based on the continued
struggle of the management to increase operational productivity.
NET LOSS AND LOSS PER SHARE
For the nine-month period ended September 30, 2004, we had a net loss of
$743,882 compared to a net loss of $1,606,781 for the corresponding period in
2003. The decrease in net loss is primarily attributable to a $87,770 decrease
in interest expenses, a loss of deposit of $465,428 in 2003, and a $549,870 gain
on forgiveness of accounts payable from a negotiation between the Company's
management and its vendors.
5
For the nine-month period ended September 30, 2004, loss per share
decreased by $0.16 from $(0.28) for the nine-month period ended September 30,
2003 to $(0.12) for the corresponding period in 2003.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our working capital requirements through a combination of
internally generated cash and short-term loans.
Cash was $3,212 as of September 30, 2004.
At September 30, 2004, we had a stockholder's deficit of $1,832,222
(excluding notes receivable from stockholders) and an accumulated deficit of
$6,696,703. Our primary liquidity need is for working capital. To date, we have
financed our working capital requirements through a combination of internally
generated cash and short-term loans. We intend to continue funding our current
operations through sales and debt and equity financing arrangements that may be
insufficient to fund our capital expenditures, working capital and other cash
requirements. In order to continue operations, we must obtain financing. We are
currently addressing our liquidity issue by the following actions:
o Continue our aggressive program for selling inventory.
o Continue to implement plans to further reduce operating costs.
o Continue seeking investment capital through the public or private
markets.
o Secure new customer orders. Since January 2004, we have secured
$4,500,000 of new orders.
There is no guarantee that any of these strategies will enable the Company
to meet its obligations for the foreseeable future. If we are not successful in
implementing these strategies and if we are unable to obtain additional
financing, we will be unable to continue our operations.
We intend to pursue external financing sources to meet the cash
requirement of ongoing operations. Management is currently seeking to raise
additional funds in the form of an equity or debt securities offering, or a
combination thereof. However, there can be no guarantee that we will raise
sufficient capital to execute our business plan. To the extent that we are
unable to raise sufficient capital, our business plan will require substantial
modifications and our operations may be curtailed. These conditions raise
substantial doubt about our ability to continue as a going concern. Continuation
as a going concern is dependent upon our ability to ultimately attain profitable
operations, generate sufficient cash flow to meet obligations, and obtain
additional financing as may be required.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
6
GOING CONCERN
The Company has incurred operating losses in the last two years, has a
working capital deficit and a significant stockholders' deficit. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
CRITICAL ACCOUNT POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in the condensed consolidated financial statements
and the accompanying notes. The amounts of assets and liabilities reported on
the balance sheet and the amounts of revenues and expenses reported for each of
the fiscal periods are affected by estimates and assumptions, which are used
for, but not limited to, the accounting for revenue recognition, accounts
receivable, doubtful accounts and inventories. Actual results could differ from
these estimates. The following critical accounting policies are significantly
affected by judgments, assumptions and estimates used in the preparation of the
financial statements:
Concentration of Credit Risk
The Company sells products to customers throughout the United States.
The Company's ability to collect receivables is affected by economic
fluctuations in the geographic areas served by the Company. Although the Company
does not obtain collateral with which to secure its contracts receivable,
management periodically reviews contracts receivable and assesses the financial
strength of its customers and, as a consequence, believes that the receivable
credit risk exposure is limited.
Long-Lived Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. If the cost basis of a
long-lived asset is greater than the projected future undiscounted net cash
flows from such asset (excluding interest), an impairment loss is recognized.
Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value. SFAS 144 also requires companies to
separately report discounted operations and extends that reporting to a
component of an entity that either has been disposed of (by sales, abandonment
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. The Company adopted SFAS 144 on January 1, 2002. The provision of
this statement for assets held for sale or other disposal generally are required
to be applied prospectively after the adoption date to newly initiated
commitments to plan to sell such assets, as defined, by management. As a result,
management cannot determine the potential effects that adoption of SFAS 144 will
have on the Company's financial statements with respect to future disposal
decision, if any. To date, management has determined that no such impairment
exists and therefore, no adjustments have been made to the carrying values of
long-lived assets. There can be no assurance, however, that market conditions
will not change or demand for the Company's products or services will continue
which could result in impairment of long-lived assets in the future.
7
Revenue Recognition
Service revenues are billed and recognized in the period the services
are rendered.
The Company accounts for shipping and handling fees and costs in
accordance with EITF 00-10 "Accounting for Shipping and Handling Fees and
Costs." Such fees and costs incurred by the Company are immaterial to the
operations of the Company.
In accordance with SFAS 48, "Revenue Recognition when Right of Return
Exists," revenue is recorded net of an estimate of markdowns, price concessions
and warranty costs. Such reserve is based on management's evaluation of
historical experience, current industry trends and estimated costs.
The Securities and Exchange Commission issued Staff Accounting Bulletin
104 ("SAB 104"), "Revenue Recognition," which outlines the basic criteria that
must be met to recognize revenue and provides guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the Securities and Exchange Commission. Management
believes that the Company's revenue recognition policy for services and product
sales conforms to SAB 104. The Company recognizes revenue of long-term contracts
pursuant to Statement of Position 81-1, "Accounting for Performance of
Construction - Type and Certain Production - Type Contracts."
Method of Accounting for Long-Term Contracts
The Company uses the percentage-of-completion method of accounting to
account for long-term contracts and, therefore, takes into account the cost,
estimated earnings and revenue to date on fixed-fee contracts not yet completed.
The percentage-of-completion method is used because management considers total
cost to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.
The amount of revenue recognized at the statement date is the portion
of the total contract price that the cost expended to date bears to the
anticipated final cost, based on current estimates of cost to complete. It is
not related to the progress billings to customers. Contract costs include all
materials, direct labor, machinery, subcontract costs and allocations of
indirect overhead.
Because long-term contracts may extend over a period of time, changes
in job performance, changes in job conditions and revisions of estimates of cost
and earnings during the course of the work are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract becomes known, the entire amount of the estimated ultimate
loss is recognized in the consolidated financial statements.
Contracts that are substantially complete are considered closed for
consolidated financial statement purposes. Revenue earned on contracts in
progress in excess of billings (under billings) is classified as a current
asset. Amounts billed in excess of revenue earned (overbillings) are classified
as a current liability.
Other Significant Accounting Policies
Other significant accounting policies not involving the same level of
measurement uncertainties, as those discussed above are nevertheless important
to an understanding of the financial statements. The policies related to
consolidation and loss contingencies require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under reexamination by
8
accounting standards setters and regulators. Although no specific conclusions
reached by these standards setters appear likely to cause a material change in
the Company's accounting policies, outcomes cannot be predicted with confidence.
Also see Note 1 of the Notes to Condensed Consolidated Financial Statements,
Organization and Significant Accounting Policies, which discusses accounting
policies that must be selected by management when there are acceptable
alternatives.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer who is also our Chief Financial Officer has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures in accordance with Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on his evaluation, he concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective in enabling us to record, process,
summarize and report in a timely manner the information required to be disclosed
in reports we file under the Exchange Act.
No change in our internal control over financial reporting occurred
during the three months ended September 30, 2004 that has materially affected,
or is reasonable likely to materially affect, our internal control over
financial reporting.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 2004, a shareholder converted 2,820 Preferred Shares Series C
in to 47,000 shares of common stock. The shares were issued pursuant to
an exemption provided by Section 3(a)(10).
Item 3. Defaults Upon Senior Securities
1. A note payable to an unaffiliated third party in the amount of
$500,000 with an interest of 10% per annum, matured in May 2003 and
is currently in default. The interest rate increased to 12% after
the maturity date.
2. A note payable to an unaffiliated third party in the amount of
$250,000 with an interest of 8% per annum, matured in May 2003 and
is currently in default. The interest rate increased to 12% after
the maturity due date.
3. A note payable to an unaffiliated third party in the amount of
$250,000 that was in default was extended until December 31, 2003.
Originally, the Company issued to the note holder warrants to
purchase 100,000 shares of the Company's restricted common stock at
an exercise price of $2.00 valued at $106,000 (based on the
Black-Scholes option pricing model), which the Company has amortized
to interest expense during the year ended December 31, 2002. As part
of an extension agreement, the Company effectively cancelled the
original 100,000 warrants and issued warrants to purchase 200,000
shares of common stock at an exercise price of $1.00, which vested
upon grant and expire in December 2003.
4. A promissory note to an unaffiliated third party in the amount of
$215,000 with an interest of 15% per annum, matured in March 2002
and is currently in default.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits:
31.1 302 Sarbanes Oxley Certification of David Duquette, Chief
Executive Officer and Chief Financial Officer
32.1 906 Sarbanes Oxley Certification
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
November 19, 2004 /s/ David Duquette
----------------------------------------
Name: David Duquette
Title: Chief Executive Officer and Chief
Financial Officer
11
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2004 (unaudited)
-------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 3,212
Contracts receivable 129,017
Inventories, net 1,224,671
Costs in excess net of billings on uncompleted contracts 283,183
Prepaid expenses and other current assets 20,310
------------
Total current assets 1,660,393
Property and Equipment, net 400,038
------------
$ 2,060,431
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank overdraft $ 115,042
Accounts payable and accrued expenses 1,993,060
Dividends payable 314,250
Billings in excess of costs on uncompleted contracts 637,418
Notes payable 1,215,000
Current portion of obligations under capital lease 79,575
------------
Total current liabilities 4,354,345
Obligations Under Capital Lease, net of current portion 4,467
------------
Total Liabilities 4,358,812
------------
Commitments and Contingencies
Stockholders' Deficit
Cumulative, convertible, Series B preferred stock, $1 par value,
15,000,000 shares authorized, no shares issued and outstanding --
Cumulative, convertible, Series C preferred stock, $1 par value,
75,000 shares authorized, 60,780 shares issued and outstanding
(liquidation preference of $1,904,000) 60,780
Cumulative, convertible, Series D preferred stock, $25 par value,
75,000 shares authorized, 23,640 shares issued and outstanding
(liquidation preference of $591,000) 591,000
Common stock, $0.10 par value, 50,000,000 shares authorized;
7,042,265 shares issued and outstanding 704,227
Subscriptions receivable (462,500)
Notes receivable from stockholders (466,159)
Additional paid-in capital 3,970,974
Accumulated deficit (6,696,703)
------------
Total stockholders' deficit (2,298,381)
------------
$ 2,060,431
============
See accompanying notes to the condensed consolidated financial statements.
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2004 and 2003
-------------------------------------------------------------------------------
For the Three Months For the Nine Months
Ended September 30, 2004 Ended September 30, 2004
---------------------------- -----------------------------
2004 2003 2004 2003
---------------------------- -----------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
NET SALES $ 1,166,947 $ 2,108,964 $ 3,728,016 $ 5,764,936
COST OF SALES 1,372,871 1,766,618 3,907,423 5,550,190
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (205,924) 342,346 (179,407) 214,746
------------ ------------ ------------ ------------
OPERATING EXPENSES
Consulting and other compensation 16,306 -- 202,819 --
Salaries and related 78,689 -- 207,437 --
Selling, general and administrative 149,824 363,750 571,188 1,132,961
Loss of deposit -- -- -- 465,428
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 244,819 363,750 981,444 1,598,389
------------ ------------ ------------ ------------
OPERATING LOSS (450,743) (21,404) (1,160,851) (1,383,643)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain on forgiveness of accounts payable 4,812 -- 549,870 --
Interest Expense (46,099) (78,454) (132,901) (220,671)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (41,287) (78,454) 416,969 (220,671)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (492,030) (99,858) (743,882) (1,604,314)
PROVISION FOR INCOME TAXES -- 867 -- 2,467
------------ ------------ ------------ ------------
NET LOSS $ (492,030) $ (100,725) $ (743,882) $ (1,606,781)
============ ============ ============ ============
NET LOSS APPLICABLE
TO COMMON STOCKHOLDERS $ (531,780) $ (140,475) $ (863,132) $ (1,704,281)
============ ============ ============ ============
Basic and diluted net loss available to
common stockholders per common share $ (0.08) $ (0.02) $ (0.12) $ (0.28)
============ ============ ============ ============
Basic and diluted weighted average common shares
outstanding 7,018,765 6,150,828 6,975,321 6,007,231
============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements.
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2004 and 2003
-------------------------------------------------------------------------------
2004 2003
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (743,882) $ (1,606,781)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization of property and equipment 207,215 225,464
Gain on forgiveness of accounts payable 545,058 --
Amortization of consulting fees 109,813 55,833
Amortization of debt discount on notes payable -- 45,000
Estimated fair market value of common stock issued for
consulting services 50,000 111,812
Estimated fair market value of warrants issued in connection
with notes payable -- 17,350
Changes in operating assets and liabilities:
Contracts receivable 21,434 876,650
Inventories (67,728) 159,352
Costs in excess of billings on uncompleted contracts 37,349 5,971
Prepaid expenses and other current assets 5,381 (24,010)
Deposits -- 471,800
Accounts payable and accrued expenses (834,682) (15,640)
Billings in excess of costs on uncompleted contracts 69,804 168,843
------------ ------------
Net cash (used in) provided by operating activities (600,238) 491,644
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,396) (10,257)
------------ ------------
Net cash used in investing activities (1,396) (10,257)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 521,000 --
Bank overdraft (9,516) 7,333
Proceeds from the issuance of notes payable -- 455,000
Principal repayments on notes payable -- (900,000)
Principal repayments on obligations under capital lease (62,607) (68,359)
------------ ------------
Net cash provided by (used in) financing activities 448,877 (506,026)
------------ ------------
Net decrease in cash (152,757) (24,639)
Cash at beginning of period 155,969 80,276
------------ ------------
Cash at end of period $ 3,212 $ 55,637
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Dividends payable $ 79,500 $ 28,875
============ ============
Conversion of preferred stock to common stock $ 4,700 $ --
============ =============
Preferred stock issued in lieu of accounts payable $ 40,000 $ --
============ =============
See accompanying notes to the condensed consolidated financial statements.
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
New Century Companies, Inc. and Subsidiary (collectively, the "Company"), a
California corporation, was incorporated March 1996 and is located in Southern
California. The Company provides after-market services, including rebuilding,
retrofitting and remanufacturing of metal cutting machinery. Once completed, a
remanufactured machine is "like new" with state-of-the-art computers, and the
cost to the Company's customers is approximately 40% to 50% of that of a new
machine.
The Company currently sells its services by direct sales and through a network
of machinery dealers across the United States. Its customers are generally
medium to large sized manufacturing companies in various industries where metal
cutting is an integral part of their businesses. The Company grants credit to
its customers who are predominately located in the western United States.
The Company completed a reverse merger in May 2001 and trades on the OTC
Bulletin Board under the symbol "NCNC.OB."
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to such SEC rules and regulations; nevertheless, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements and the notes hereto should
be read in conjunction with the financial statements, accounting policies and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2003, filed with the SEC. In the opinion of the Company,
all adjustments, including normal recurring adjustments necessary of the Company
for the interim periods have been included. The results of operations for the
interim period are not necessarily indicative of the results for the full year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of September 30, 2004, the Company has negative
working capital of $2,693,952, an accumulated deficit of $6,696,703 and
recurring
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
GOING CONCERN (continued)
losses from operations. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The Company intends
to fund operations through increased sales and debt and equity financing
arrangements which management believes may be insufficient to fund its capital
expenditures, working capital and other cash requirements for the year ending
December 31, 2005. Therefore, the Company will be required to seek additional
funds to finance its long-term operations. The successful outcome of future
activities cannot be determined at this time and there is no assurance that if
achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
In response to these problems, management has taken the following actions:
o The Company continues its aggressive program for selling inventory.
o The Company continues to implement plans to further reduce operating
costs.
o The Company is seeking investment capital through the public
markets.
The condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of assets carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
INVENTORY
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Inventories represent cost of
work in process on units not yet under contract. Cost includes all direct
material and labor, machinery, subcontractors and allocations of indirect
overhead.
REVENUE RECOGNITION
Service revenues are billed and recognized in the period the services are
rendered.
The Company accounts for shipping and handling fees and costs in accordance with
EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." Such fees and
costs incurred by the Company are immaterial to the operations of the Company.
In accordance with SFAS 48, "Revenue Recognition when Right of Return Exists,"
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management's evaluation of historical
experience, current industry trends and estimated costs.
The Securities and Exchange Commission issued Staff Accounting Bulletin 104
("SAB 104"), "Revenue
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION (continued)
Recognition," which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
Securities and Exchange Commission. Management believes that the Company's
revenue recognition policy for services and product sales conforms to SAB 104.
The Company recognizes revenue of long-term contracts pursuant to Statement of
Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" (see below).
METHOD OF ACCOUNTING FOR LONG-TERM CONTRACTS
The Company uses the percentage-of-completion method of accounting to account
for long-term contracts and, therefore, takes into account the cost, estimated
earnings and revenue to date on fixed-fee contracts not yet completed. The
percentage-of-completion method is used because management considers total cost
to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final cost, based on current estimates of cost to complete. It is not related to
the progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect overhead.
Because long-term contracts may extend over a period of time, changes in job
performance, changes in job conditions and revisions of estimates of cost and
earnings during the course of the work are reflected in the accounting period in
which the facts that require the revision become known. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
recognized in the consolidated financial statements.
Contracts that are substantially complete are considered closed for consolidated
financial statement purposes. Revenue earned on contracts in progress in excess
of billings (under billings) is classified as a current asset. Amounts billed in
excess of revenue earned (overbillings) are classified as a current liability.
BASIC AND DILUTED LOSS PER COMMON SHARE
Under SFAS 128, "Earnings Per Share," basic earnings per common share is
computed by dividing income available to common stockholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
BASIC AND DILUTED LOSS PER COMMON SHARE (continued)
the additional common shares were dilutive (there were 1,821,583 and 871,853
additional potential common shares of September 30, 2004 and 2003,
respectively). Because the Company has incurred net losses, basic and diluted
loss per share are the same as additional potential common shares would be
anti-dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computations for the three month and
nine month periods ended September 30, 2004 and 2004:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2004 2003
----------- -----------
Net loss $ (492,030) $ (100,725)
Current cumulative preferred dividends (39,750) (39,750)
----------- -----------
Numerator for basic and diluted loss per share:
Net loss applicable to common stockholders (531,780) (140,475)
Denominator for basic and diluted loss per share:
Weighted average shares 7,018,765 6,150,828
----------- -----------
Basic and diluted loss per share $ (0.08) $ (0.02)
=========== ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2004 2003
------------ ------------
Net loss $ (743,882) $ (1,606,781)
Current cumulative preferred dividends (119,250) (97,500)
------------ ------------
Numerator for basic and diluted loss per share:
Net loss applicable to common stockholders (863,132) (1,704,281)
Denominator for basic and diluted loss per share:
Weighted average shares 6,975,321 6,007,231
------------ ------------
Basic and diluted loss per share $ (0.12) $ (0.28)
============ ============
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION
At September 30, 2004, the Company has one stock-based employee compensation
plan and one stock-based non-employee compensation plan. The Company accounts
for the employee compensation plan under the recognition and measurement
principles of APB 25, and related interpretation. The Company accounts for the
non-employee compensation plan under the recognition measurement principles of
SFAS 123. There was no employee stock-based compensation cost recognized in net
loss for the nine- month period ended September 30, 2004 and 2003. All options
granted under these plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------ ------------
Net loss applicable to common stockholders:
As reported $ (863,132) $ (1,704,781)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- --
------------ ------------
Pro forma $ (863,132) $ (1,704,781)
============ ============
Basic and diluted net loss per share:
As reported $ (0.12) $ (0.28)
============ ============
Pro forma $ (0.12) $ (0.28)
============ ============
The above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net loss for future years.
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2003
and 2002 financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB that were required to be adopted during the year
ending December 31, 2004 did not have a significant impact on the Company's
financial statements.
-------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 condensed consolidated
financial statements to conform to the 2004 presentation.
2. CONTRACTS IN PROGRESS
Contracts in progress as of September 30, 2004 were as follows:
Cumulative costs to $ 6,137,881
date
Cumulative gross profit to 3,744,336
date
------------
Cumulative revenue earned 9,882,217
Less progress billings to date (10,236,452)
------------
Net overbillings $ (354,235)
============
The following is included in the accompanying condensed consolidated balance
sheet under these captions as of September 30, 2004:
Costs and estimated earnings on contracts in progress in excess
of billings $ 283,183
Billings in excess of costs and estimated earnings on
contracts in progress (637,418)
------------
Net overbillings $ (354,235)
============
3. EQUITY TRANSACTIONS
During the quarter ended September 30, 2004, the Company issued 47,000 shares of
restricted common stock upon conversion of 2,820 shares of Series C preferred
stock at a conversion rate of 16.667.