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:
June 30, 2005 0-7722
NEW CENTURY COMPANIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 061034587
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(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
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(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
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(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 August 19, 2005 was 8,492,265.
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.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12
Condensed Consolidated Balance Sheet 12
Condensed Consolidated Statements of Operations 13
Condensed Consolidated Statements of Cash Flows 14
Notes to Condensed Consolidated Financial Statements 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3
ITEM 3. CONTROLS AND PROCEDURES 8
PART II OTHER INFORMATION 9
ITEM 1. LEGAL PROCEEDING 9
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS 9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS 11
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 within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") 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.
Plan of Operations
The earnings of the Company for the three months ended June 30, 2005 were
negative as a result of a decrease in sales and of the corporate expenses
related to compliance with the regulatory requirements of being a public
company. The Company's current strategy is to expand its customer sales base
with its present line of machine products. Plans for expansion are expected to
be funded through current working capital from ongoing sales. However,
significant growth will require additional funds in the form of debt or equity,
or a combination thereof. However, there can be no assurance these funds will be
available.
Results Of Operations For the Three Months Ended June 30, 2005 Compared to June
30, 2004.
Revenues. The Company generated revenues of $1,207,979 for the three
months ended June 30, 2005, which was a $373,782 or 24% decrease from $1,581,761
for the three months ended June 30, 2004. 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 cannot predict for what
period of time the decreased level of customer purchases will continue, whether
the level of customer purchases will decline further, or the level at which
incoming orders will be.
3
Gross Profit. Gross profit for the three months ended June 30, 2005, was
$372,168 or 31% of revenues, compared to $61,210 or 4% for the three months
ended June 30, 2004. The $310,958 increase in gross profit was generated by a
decrease in cost of sales of $684,740, due to the increased productivity.
Additionally, management increased their effort in cutting material losses and
increased efficiency of labor.
Net operating loss decreased to $(58,632) for the three months ended June
30, 2005 compared to $(217,020) for the three months ended June 30, 2004 as a
result of reducing expenses, such us consulting, salaries and general and
administrative, based on the continue struggle of the management to increase the
operations productivity.
Net Loss. Net loss increased to $128,850 for the three months ended June
30, 2005 compared to a net income of $283,034 for the three months ended June
30, 2004, a decrease of $411,884. The decrease is a result of last years
$545,058 gain on forgiveness of accounts payable when the Company`s CEO/CFO,
David Duquette, proposed to major suppliers a deal for payment of $0.50c open
payable for a $1, and personally pursued the vendors in accepting the proposal.
Interest Expense. Interest expense for the three months ended June 30,
2005, increased to $70,218 compared to $45,004, for the three months ended June
30, 2004, primarily due to the accrual of interest on four default notes payable
due to the inability of the Company to pay off their notes payable. The Company
used these funds for the continuation of the operating activities.
Results Of Operations For the Six Months Ended June 30, 2005 Compared to June
30, 2004.
Revenues. The Company generated revenues of $2,639,868 for the six months
ended June 30, 2005, which was a $78,799 or 3% increase from $2,561,069 for the
six months ended June 30, 2004. The increase is the result of less foreign
competition and improved market conditions with impact in the first quarter of
the fiscal year 2005 sales.
Gross Profit. Gross profit for the six months ended June 30, 2005, was
$758,187 or 29% of revenues, compared to $26,517 or 1% for the six months ended
June 30, 2004. The $731,670 increase in gross profit was generated by a decrease
in cost of sales of $652,871, due to the increased productivity. Management
increased their effort in cutting material losses and increased efficiency of
labor.
Net Operating Income. Net operating income increased to $101,568 for the
six months ended June 30, 2005 from a loss of $710,108 for the six months ended
June 30, 2004, primarily as a result of increased gross profit, and secondarily
as a result of reducing expenses, such us consulting, salaries and general and
administrative, based on the continue struggle of the management to increase the
operations productivity.
4
Net Loss. Net loss decreased to $17,717 for the six months ended June 30,
2005 compared to a net loss of $251,852 for the six months ended June 30, 2004,
a decrease of $234,135. The decrease is a result of 114% increase in operating
income for the analyzed period.
Interest Expense. Interest expense for the six months ended June 30, 2005,
increased to $119,285 compared to $86,802, for the six months ended June 30,
2004, primarily due to the accrual of interest on four default notes payable due
to the inability of the Company to pay off their notes payable. The Company used
these funds for the continuation of the operating activities.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
The net cash decrease of the Company during the six months ended June 30,
2005 was ($96,240). The decrease is due to net cash used in operating activities
of ($54,709) and ($41,531) of principal payments on capital leases. At June 30,
2005, the Company has a substantial working capital deficit and requires an
infusion of funds in the form of equity and/or debt. However, there is no
guarantee that the Company will raise sufficient additional funds to execute its
business plan. To the extent that the Company is unable to raise sufficient
additional funds, the Company's business plan will need to be substantially
modified, its operations curtailed or protection under bankruptcy /
reorganization laws sought.
The Company is currently addressing its liquidity issue by the following
actions: The Company continues its aggressive program for selling inventory that
has been produced or is currently in production. The Company continues to
implement plans to further reduce operating costs. The Company is continually
seeking investment capital through the public markets including through private
placements. However, there is no guarantee that any of these strategies will
enable the Company to meet its obligations for the foreseeable future.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
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, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
5
CRITICAL ACCOUNTING 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
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" 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 noted no indicators requiring review for impairment 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.
6
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition,", as amended and
superceded by SAB 104, 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.
7
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
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
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures (as
defined in Rules 13(a)-15(c) of the Exchange Act) include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
8
Within 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company' s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of June 30,
2005, the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures over financial reports are not
effective to ensure that the information required to be disclosed in the reports
the Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls over financial
reporting during the quarter ended June 30, 2005 that are likely to affect those
controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended June 30,2005, the Company issued 900,000 shares.
The shares were issued pursuant to Section 4(2) of the Act.
On April 12, 2005, the Company and one if its noteholders (the "Noteholder")
executed a mutual agreement (the "Extension Agreement") whereby the Noteholder
agreed not to foreclose on the security interest of two notes payable, which
were in default, before the earlier of a funding (which has not occured as of
the filing of this Form 10-QSB) or August 13, 2005. As consideration to
effectively extend the due date of the two notes until August 13, 2005, the
Company issued the Noteholder 250,000 shares of the Company's restricted common
stock. Additionally, the Extension Agreement required the Company to register
the shares by August 13, 2005, or it would need to pay penalties of 1,000
additional shares being issued for each day of delay up to thirty days and 2,500
additional shares for each day thereafter. The estimated fair value of the
250,000 shares (based on the trading price of the Company's stock on the date of
issuance) totaling $47,500 was recorded on the date of issuance as a debt
discount against the face value of the notes and is being amortized to interest
expense over the extension period in accordance with EITF 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments." Amortization of
the discount to interest expense during the three months ended June 30, 2005
totaled $29,687.
On April 21, 2005, the Company entered into a six month corporate finance and
investor relations consulting agreement. As a commencement bonus for the
services to be provided by the consultant, the Company issued 100,000 shares of
restricted common stock in accordance with the contract. Additionally, the
contract requires the Company to pay the consultant a finder's fee of 2.5% under
any future Fee Transaction, as defined, occuring during the term of the contract
or within one year thereafter. The fair value of the 100,000 share commencement
bonus (based on the trading price of the Company's stock on the date of
issuance) totaling $20,000 was recorded as deferred consulting fees on the date
of issuance and is being amortized to consulting expense over the six month term
of the agreement. The remaining deferred consulting fees under this contract
totaled $6,667 at June 30, 2005.
9
On April 21, 2005, the Company issued 100,000 shares of restricted common stock
to one of its former customers as a partial legal settlement for a pending claim
related to the sale of one its machines. Accordingly, the Company immediately
expensed the fair value of such common stock totaling $20,000 (based on the
trading price of the Company's stock on the date of issuance).
On April 25, 2005 the Company issued 300,000 shares of restricted common stock
to a holder of the Company's Cumulative, Convertible, Series D preferred stock
("Series D") under a verbal agreement as the sole consideration and remedy for
failure to register the common shares underlying the Series D. Accordingly, the
Company expensed the fair value of the 300,000 common shares (based on the
trading price of the Company's stock on such date of issuance) totaling $90,000.
On April 25, 2005, the Company issued 150,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under a
six month verbal agreement. The Company recorded the fair value of the common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $45,000 as deferred consulting fees and is amortizing such
amount over the six month term of the agreement. The remaining deferred
consulting fees under this agreement totaled $14,100 at June 30, 2005.
Item 3. Defaults Upon Senior Securities
During the year ended December 31, 2001, the Company entered into an unsecured
note payable ("Note A") with a third party for $250,000. Note A accrues interest
at a fixed rate of 18% per annum and matured in December 2003, as amended. Note
A is personally guaranteed by a stockholder and is in default at December 31,
2004. At June 30, 2005, the total outstanding principal balance on Note A was
$250,000.
During the year ended December 31, 2001, the Company entered into a note payable
("Note B") with a third party for $215,000. Note B accrues interest at a fixed
rate of 15% per annum and matured in March 2002. Note B is secured by certain
assets of the Company, as defined, and is in default at December 31, 2004. At
June 30, 2005, the total outstanding principal balance on Note B was $215,000.
10
In January 2003, the Company entered into a note payable agreement ("Note C")
with two individuals in the amount of $500,000 with an interest rate of 11% per
annum, which matured in April 2003 and is in default at December 31, 2004. The
note was issued with a discount of $45,000, which the Company amortized to
interest expense in the accompanying consolidated statement of operation for
2003. In connection with Note C, the Company issued warrants to purchase 25,000
shares of common stock. Note C is secured by certain assets of the Company. At
June 30, 2005, the total outstanding principal balance on Note C was $500,000.
In December 2002, the Company entered into a note payable agreement ("Note D")
with two individuals in the amount of $250,000 with an interest rate of 11% per
annum, which matured in February 2003. The note was issued with a discount of
$15,000, which the Company amortized to interest expense in the accompanying
consolidated statement of operations for 2003. In connection with Note D, the
Company issued warrants to purchase 5,000 shares of common stock related to the
extension of the maturity date of Note D to April 2004. On April 12, 2005, Note
D was extended through August 13, 2005 and had a total outstanding principal
balance of $250,000. For the consideration of the extension, the Company issued
250,000 common stock with a fair value of $47,500. The cost of the extension has
been amortized over 4 month. As of June 30, 2005, the Company amortized $29,687
of the cost.
During November 2004, the Company borrowed $80,816 on two notes payable ("Note
E") to one individual. Note E in unsecured, matured in January 2005, has an
interest rate of 6% and is currently in default. At June 30, 2005 the total
outstanding principal balance on Note E was $80,816.
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
11
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
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ASSETS
Current Assets
Cash $ 32,847
Contracts receivable 2,867
Inventories, net 930,612
Costs and estimated earnings in excess of billings on uncompleted contracts 507,528
Other current assets 1,560
-----------
Total current assets 1,475,414
Property and Equipment, net 203,464
-----------
$ 1,678,878
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 2,201,135
Dividends payable 515,100
Billings in excess of costs and estimated earnings on uncompleted contracts 553,250
Notes payable, net of discount 1,278,003
Capital lease obligations 30,848
-----------
Total current liabilities 4,578,336
-----------
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 $1,946,000) 60,780
Cumulative, convertible, Series D preferred stock, $25 par value
75,000 shares authorized; 23,640 shares issued and outstanding
(liquidation preference of $680,000) 591,000
Common stock, $0.10 par value, 50,000,000 shares authorized;
8,192,265 shares issued and outstanding 819,227
Subscriptions receivable (462,500)
Notes receivable from stockholders (485,924)
Deferred consulting fees (20,767)
Additional paid-in capital 4,193,474
Accumulated deficit (7,594,748)
-----------
Total stockholders' deficit (2,899,458)
-----------
$ 1,678,878
===========
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See accompanying notes to condensed consolidated financial statements.
12
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
---------------------------------------------------------------------------------------------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET SALES $ 1,207,979 $ 1,581,761 $ 2,639,868 $ 2,561,069
COST OF SALES 835,811 1,520,551 1,881,681 2,534,552
----------- ----------- ----------- -----------
GROSS PROFIT 372,168 61,210 758,187 26,517
----------- ----------- ----------- -----------
OPERATING EXPENSES
Consulting and other compensation 153,407 18,654 198,379 186,513
Salaries and related 40,362 73,784 97,552 128,748
Selling, general and administrative 237,031 185,792 360,688 421,364
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 430,800 278,230 656,619 736,625
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (58,632) (217,020) 101,568 (710,108)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (70,218) (45,004) (119,285) (86,802)
Gain on forgiveness of accounts payable -- 545,058 -- 545,058
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (70,218) 500,054 (119,285) 458,256
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (128,850) 283,034 (17,717) (251,852)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (128,850) $ 283,034 $ (17,717) $ (251,852)
=========== =========== =========== ===========
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (234,375) $ 243,284 $ (123,242) $ (331,352)
=========== =========== =========== ===========
Basic net income (loss) available to common stockholders
per common share $ (0.03) $ 0.03 $ (0.02) $ (0.05)
=========== =========== =========== ===========
Diluted net income (loss) available to common stockholders
per common share $ (0.03) $ 0.03 $ (0.02) $ (0.05)
=========== =========== =========== ===========
Basic weighted average common shares
outstanding 7,978,932 6,995,265 7,635,598 6,953,598
=========== =========== =========== ===========
Diluted weighted average common shares
outstanding 7,978,932 8,816,848 7,635,598 6,953,598
=========== =========== =========== ===========
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
13
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
--------------------------------------------------------------------------------------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net loss $ (17,717) $(251,852)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and equipment 127,487 138,128
Amortization of deferred consulting fees 52,566 103,250
Gain on forgiveness of accounts payable -- 545,058
Amortization of debt discount 29,687 --
Estimated fair market value of common stock
issued as partial legal settlement 20,000 50,000
Estimated fair market value of common stock issued for
penalty of failure to register convertible preferred shares 90,000 --
Changes in operating assets and liabilities:
Contracts receivable -- 110,684
Inventories 49,630 (14,697)
Costs in excess of billings on uncompleted contracts (255,696) (172,650)
Other current assets -- 5,381
Accounts payable and accrued expenses 56,470 (896,990)
Billings in excess of costs on uncompleted contracts (207,136) (264,355)
--------- ---------
Net cash used in operating activities (54,709) (648,043)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment -- (1,396)
--------- ---------
Net cash used in investing activities -- (1,396)
--------- ---------
Cash flows from financing activities:
Bank overdraft -- 13,679
Principal repayments on obligations under capital lease (41,531) (41,209)
Issuance of preferred stock, net of commissions
and offering costs -- 521,000
--------- ---------
Net cash (used in) provided by financing activities (41,531) 493,470
--------- ---------
Net decrease increase in cash (96,240) (155,969)
Cash at beginning of period 129,087 155,969
--------- ---------
Cash at end of period $ 32,847 $ --
========= =========
Supplemental disclosure of noncash investing and financing activities:
Dividends payable $ 105,525 $ 79,500
========= =========
Debt discount for note payable extension $ 47,500 $ --
========= =========
-------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
14
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 trades on the OTC Bulletin Board under the symbol "NCNC.OB".
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.
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, 2004, filed with the SEC. In the opinion of management,
all adjustments necessary to present fairly, in accordance with accounting
principles generally accepted in the United States of America, the Company's
financial position as of June 30, 2005, and the results of operations and cash
flows for the interim periods presented, have been made. Such adjustments
consist only of normal recurring adjustments. The results of operations for the
three and six months ended June 30, 2005 are not necessarily indicative of the
results for the full year.
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 June 30, 2005, the Company has negative working
capital of $3,102,922 and an accumulated deficit of $7,594,748, and recurring
losses. 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 fiscal 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.
15
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
The Company's revenues consist of contracts with vendors. 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.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition," as amended and superseded by SAB No. 104, 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 SEC. Management believes that
the Company's revenue recognition policy conforms to SAB No. 104. The Company
recognizes revenue of contracts pursuant to SOP 81-1.
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 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. Costs incurred and revenue earned on contracts in
progress in excess of billings (under billings) is classified as a current
asset. Amounts billed in excess of costs and revenue earned (overbillings) are
classified as a current liability.
The Company accounts for shipping and handling fees and costs in accordance with
Emerging Issues Task Force ("EITF") Issue No. 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.
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In accordance with Statement of Financial Accounting Standards ("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.
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 the additional common shares were
dilutive (there were 179,310 and 1,821,583 additional potential common shares as
of June 30, 2005 and 2004, respectively). With the exception of the three months
ended June 30, 2004, the Company incurred net losses and basic and diluted loss
per share are equal because additional potential common shares would be
anti-dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three and six month
periods ended June 30, 2005 and 2004:
For the Three Months Ended
June 30,
2005 2004
----------- -----------
Net income (loss) $ (128,850) $ 283,034
Current cumulative preferred dividends (105,525) (39,750)
----------- -----------
Numerator for basic income (loss) per share:
Net income (loss) available to common stockholders (234,375) 243,284
Denominator for basic income (loss) per share:
Weighted average shares 7,978,932 6,995,265
----------- -----------
Basic income (loss) per share $ (0.03) $ 0.03
=========== ===========
Denominator for diluted income (loss) per share:
Weighted average shares 7,978,932 8,816,848
----------- -----------
Diluted income (loss) per share $ (0.03) $ 0.03
=========== ===========
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For the Six Months Ended
June 30,
2005 2004
----------- -----------
Net loss $ (17,717) $ (251,852)
Current cumulative preferred dividends (105,525) (79,500)
----------- -----------
Numerator for basic and diluted loss per share:
Net loss available to common stockholders (123,242) (331,352)
Denominator for basic and diluted loss per share:
Weighted average shares 7,635,598 6,953,598
----------- -----------
Basic and diluted loss per share $ (0.02) $ (0.05)
=========== ===========
STOCK BASED EMPLOYEE COMPENSATION
At June 30, 2005, 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
Accounting Principles Board Opinion No. ("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 six month periods
ended June 30, 2005 and 2004. Hence, the disclosure requirements under SFAS 148
are not required. However, the above pro forma non-effects of applying SFAS 123
are not necessarily representative of the impact on reported net loss for future
periods.
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2004
financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB that were required to be adopted during the year ended
December 31, 2005 did not have a significant impact on the Company's financial
statements.
2. CONTRACTS IN PROGRESS
Contracts in progress as of June 30, 2005, which include completed contracts
that have not been completely billed, were as follows:
Cumulative costs to date $ 3,399,242
Cumulative gross profit to date 2,800,044
-----------
Cumulative revenue earned 6,199,286
Less progress billings to date (6,245,008)
-----------
Net overbillings $ (45,722)
===========
The following is included in the accompanying condensed consolidated balance
sheet under these captions as of June 30, 2005:
Costs and estimated earnings on contracts in
progress in excess of billings $ 507,528
Billings in excess of costs and estimated earnings
on contracts in progress (553,250)
---------
Net overbillings $ (45,722)
=========
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3. EQUITY TRANSACTIONS
On April 12, 2005, the Company and one if its noteholders (the "Noteholder")
executed a mutual agreement (the "Extension Agreement") whereby the Noteholder
agreed not to foreclose on the security interest of two notes payable, which
were in default, before the earlier of a funding (which has not occured as of
the filing of this Form 10-QSB) or August 13, 2005. As consideration to
effectively extend the due date of the two notes until August 13, 2005, the
Company issued the Noteholder 250,000 shares of the Company's restricted common
stock. Additionally, the Extension Agreement required the Company to register
the shares by August 13, 2005, or it would need to pay penalties of 1,000
additional shares being issued for each day of delay up to thirty days and 2,500
additional shares for each day thereafter. The estimated fair value of the
250,000 shares (based on the trading price of the Company's stock on the date of
issuance) totaling $47,500 was recorded on the date of issuance as a debt
discount against the face value of the notes and is being amortized to interest
expense over the extension period in accordance with EITF 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments." Amortization of
the discount to interest expense during the three months ended June 30, 2005
totaled $29,687.
On April 21, 2005, the Company entered into a six month corporate finance and
investor relations consulting agreement. As a commencement bonus for the
services to be provided by the consultant, the Company issued 100,000 shares of
restricted common stock in accordance with the contract. Additionally, the
contract requires the Company to pay the consultant a finder's fee of 2.5% under
any future Fee Transaction, as defined, occuring during the term of the contract
or within one year thereafter. The fair value of the 100,000 share commencement
bonus (based on the trading price of the Company's stock on the date of
issuance) totaling $20,000 was recorded as deferred consulting fees on the date
of issuance and is being amortized to consulting expense over the six month term
of the agreement. The remaining deferred consulting fees under this contract
totaled $6,667 at June 30, 2005.
On April 21, 2005, the Company issued 100,000 shares of restricted common stock
to one of its former customers as a partial legal settlement for a pending claim
related to the sale of one its machines. Accordingly, the Company immediately
expensed the fair value of such common stock totaling $20,000 (based on the
trading price of the Company's stock on the date of issuance).
On April 25, 2005 the Company issued 300,000 shares of restricted common stock
to a holder of the Company's Cumulative, Convertible, Series D preferred stock
("Series D") under a verbal agreement as the sole consideration and remedy for
failure to register the common shares underlying the Series D. Accordingly, the
Company expensed the fair value of the 300,000 common shares (based on the
trading price of the Company's stock on such date of issuance) totaling $90,000.
On April 25, 2005, the Company issued 150,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under a
six month verbal agreement. The Company recorded the fair value of the common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $45,000 as deferred consulting fees and is amortizing such
amount over the six month term of the agreement. The remaining deferred
consulting fees under this agreement totaled $14,100 at June 30, 2005.
4. SUBSEQUENT EVENTS
In July 2005, the Company issued 300,000 shares of restricted common stock to a
consultant for marketing campaign and investor relations services under a twelve
months agreement. The agreement requires payment in cash of $25,000 per month,
for the first two months, and $15,000 per month for the period thereafter.
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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.
August 22, 2005 /s/ David Duquette
----------------------------------------
Name: David Duquette
Title: Chief Executive Officer and Chief
Financial Officer
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