SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-KSB
(MARK ONE)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF
1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________ TO____________
COMMISSION FILE NUMBER 000-09459
NEW CENTURY COMPANIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 0610345787
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
9835 SANTA FE SPRINGS RD.
SANTA FE SPRINGS, CA 90670
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(562) 906-8455
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $0.10
(TITLE OF CLASS)
1
Check whether the issuer is required to file reports pursuant to Section 13
15(d) of the Exchange Act. |_|
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Company was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-SKB or any amendment to
this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The issuer's revenue for its most recent fiscal year was $6,038,459.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, on the average bid and ask price of such common equity on April 6, 2006.
As of April 6, 2006 there were 11,350,338 shares of common stock issued and
outstanding.
2
NEW CENTURY COMPANIES, INC.
FORM 10-KSB
INDEX
PAGE
PART I
Item 1. Description of Business 4
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters To a Vote of Security Holders 8
PART II
Item 5. Market for Company's Common Equity, Related
Stockholder Matters, and Small Business Issuer
processes of Equity Securities 9
Item 6. Management's Discussion and Analysis or Plan of
Operation 13
Item 7. Financial Statements 16
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
Item 8A Controls and Procedures 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of The Exchange Act 18
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 20
Item 12. Certain Relationships and Related Transactions 21
Item 13. Exhibits 21
Item 14. Principal Accountant Fees and Services 22
Signatures 23
Financial Statements F-1
================================================================================
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the
Company's future financial performance. The Company has attempted to identify
forward-looking statements by terminology including "anticipates," "believes,"
"expects," "can," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predict," "should" or "will" or the negative of these
terms or other comparable terminology.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. The Company
expectations are as of the date this Form 10-KSB is filed, and the Company does
not intend to update any of the forward-looking statements after the date this
Annual Report on Form 10-KSB is filed to confirm these statements to actual
results, unless required by law.
OVERVIEW
Corporate History and Operations
The common stock of New Century Companies, Inc. ("New Century" or the "Company")
is quoted on the OTC Bulletin Board under the symbol "NCNC.OB". Prior to May 25,
2001, the Company was engaged in the business of marketing services to other
companies wanting to reach the Hispanic market. However, due to difficulty in
raising additional working capital to execute the business plan, the Company
ceased its operations and completed a reverse merger.
On May 25, 2001, the Company entered into a plan of Reorganization and Merger
with New Century Remanufacturing, Inc., ("NCR"). Pursuant to the merger, all of
the outstanding shares of NCR were exchanged for shares of the Company on a 1
to 833.33 basis. The Company issued a total of 4,195,942 shares of common stock.
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 operations and the related financial statements
are the results of operations for NCR.
Since the merger, the Company has been engaged in acquiring, re-manufacturing
and selling pre-owned Computer Numerically Controlled ("CNC") machine tools to
manufacturing customers. The Company provides rebuilt, retrofit and
remanufacturing services for numerous brands of machine tools. The
remanufacturing of a machine tool, typically consisting of replacing all
components, realigning the machine, adding updated CNC capability and electrical
and mechanical enhancements, generally takes two to four months to complete.
Once completed, a remanufactured machine is a "like new," state-of-the-art
machine with a price ranging from $275,000 to $1,000,000, which is approximately
40%-50% of the price of a new machine. The Company also manufactures original
equipment CNC large turning lathes and attachments under the tradename Century
Turn. CNC machines use commands from onboard computers to control the movements
of cutting tools and rotation speeds of the parts being produced. Computer
controls enable operators to program operations such as part rotation, tooling
selection and tooling movement for specific parts and then store the programs in
memory for future use. The machines are able to produce parts while left
unattended. Because of this ability, as well as superior speed of operation, a
CNC machine is able to produce the same amount of work as several manually
controlled machines, as well as reduce the number of operators required;
generating higher profits with less re-work and scrap. Since the introduction of
CNC tooling machines, continual advances in computer control technology have
allowed for easier programming and additional machine capabilities.
A vertical turning machine permits the production of larger, heavier and more
oddly shaped parts on a machine, which uses less floor space when compared to
the traditional horizontal turning machine because the spindle and cam are
aligned on a vertical plane, with the spindle on the bottom.
4
The primary industry segments in which NCR machines are utilized to make
component parts are in aerospace, power generation turbines, military, component
parts for the energy sector for natural gas and oil exploration and medical
fields. The Company sells its products to customers in the United States, Canada
and Mexico.
Over the last four years, the Company has designed and developed a large
horizontal CNC turning lathe with productivity features new to the metalworking
industry. The Company has applied for a patent for the Century Turn Lathe. The
Company believes that a potential market for the Century Turn Lathe, in addition
to the markets mentioned above, is aircraft landing gear.
INDUSTRY OVERVIEW
We provide our manufactured and remanufactured machines as part of the machine
tool industry. The machine tool industry worldwide is approximately a 30 billion
dollar business annually. The industry is sensitive to market conditions and
generally trends downward prior to poor economic conditions, and improves prior
to an improvement in economic conditions.
Our machines are utilized in a wide variety of industry segments as follows:
aerospace, energy, valves, fittings, oil and gas, machinery and equipment, and
transportation. With the recent downturn in the aerospace industry, we have seen
an increase in orders from new industries such as defense and medical
industries.
CUSTOMERS
Each year we have approximately 50% new customers and 50% repeat customers.
SUPPLIERS
Our three largest suppliers are GE Fanuc Automation, Bearings and Drives and
Sandvik Coromant.
MARKETING
We market our CNC turning lathes primarily through direct sales and independent
representatives throughout the United States. We also market our lathes through
advertising in industrial trade publications. We have recently engaged the
services of three independent sales representatives who have had a key impact on
the amount of direct sales.
We market our CNC vertical boring mills by advertising in regional and national
trade publications and distribute product literature explaining the differences
between used and remanufactured machinery.
BUSINESS STRATEGY AND MARKET DEVELOPMENT
Our business strategy is to capitalize on the opportunities for growth in our
core businesses by increasing our penetration of existing markets through
acquisitions and expanding into new markets by introducing new products and
services.
SEASONALITY
Our business is subject to certain seasonal fluctuations in sales, with a
pattern of net sales being lower in the second fiscal quarter, due to plant
closings in the summer months and vacations. The market for machine tools is
also sensitive to economic conditions, production capacity utilization and the
general level of business confidence.
COMPETITION
The market for remanufacturing services for the machine tools is competitive;
with competition from numerous independent rebuild suppliers with various sales
and resource levels. We believe that we have a competitive advantage because we
employ skilled personnel who have been trained for and have experience with
these products. Principal competitive factors for our products and services are
proprietary technology, customer service, technical support, delivery and price.
5
SOURCES AND AVAILABILITY OF RAW MATERIALS
Our products are manufactured from various raw materials, including cast iron,
sheet metal, bar steel and bearings. Although our operations are highly
integrated, we purchase a number of components from outside suppliers, including
the computer and electronic components for our CNC turning lathes. There are
multiple suppliers for virtually all of our raw material and components and we
have not experienced a supply interruption.
RESEARCH AND DEVELOPMENT
Our ongoing research and development program involves creating new products and
modifying existing products to meet market demands and redesigning existing
products to reduce the cost of manufacturing. The research and development
department is staffed with experienced design engineers. In the last year we did
not incur any cost of research and development.
PATENTS AND TRADEMARKS
The Company has applied for patents, trademarks and copyrights relating to its
manufactured products. However, the Company's business generally is not
dependent upon the protection of any patent, patent application or patent
license agreement, or group thereof, and would not be materially affected by the
expiration thereof.
EMPLOYEES
At December 31, 2005, we had 26 full-time employees. The Company believes its
relationships with its employees are good. The Company's employees are not
represented by a collective bargaining organization and the Company has not
experienced a work stoppage.
ENVIRONMENTAL MATTERS
The industry in which we compete is subject to environmental laws and
regulations concerning emissions to the air, discharges to waterways, and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. These laws and regulations are constantly evolving and we cannot
predict accurately the effect they will have on our business in the future. It
is our policy to comply with all applicable environmental, health and safety
laws and regulations. In many instances, the regulations have not been
finalized. Even where regulations have been adopted, they are subject to varying
and conflicting interpretations and implementation. In some cases, compliance
can only be achieved by capital expenditures. We cannot accurately predict what
capital expenditures, if any, may be required. We believe that our operations
are in compliance with all applicable laws and regulations relating to
environmental matters.
AVAILABLE INFORMATION
The Company files annual reports on Form 10-KSB, quarterly reports on Form
10-QSB, current reports on Form 8-K and proxy and information statements and
amendments to reports files or furnished pursuant to Sections 13(a) and 15(d) of
the Security Exchange Act of 1934, as amended. The public may read and copy this
materials at the SEC`s Public Reference Room at 450 Fifth St. NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
website (HTTP://WWW.SEC.GOV) that contains reports, proxy and information
statements and other information regarding the Company and other companies that
file materials with the SEC electronically.
6
RISK FACTORS
Operating Results Fluctuate
The Company's results of operations for any quarter or year are not necessarily
indicative of results to be expected in future periods. New Century's future
operating results may be affected by various trends and factors that must be
managed in order to achieve favorable operating results. The inability to
forecast these trends and factors could have a material adverse effect on its
business, results of operations, and financial condition. The Company's
operating results have historically been and are expected to continue to be
subject to quarterly and yearly fluctuations as a result of a number of factors.
These factors include:
o adverse changes in the conditions in the specific markets for its
products;
o visibility to, and the actual size and timing of, capital expenditures by
its customers;
o inventory practices, including the timing of deployment, of its customers;
o adverse changes in the public and private equity and debt markets and the
ability of its customers and suppliers to obtain financing or to fund
capital expenditures;
o adverse changes in the credit ratings of its customers and suppliers;
o a general downturn in the overall economy;
o a decline in government defense funding that lowers the demand for defense
equipment and retrofitting;
o competitive pricing and availability of competitive products; and
o adverse changes in the ability of the company to obtain financing or to
fund capital expenditures, mergers and acquisitions or growth.
As a consequence, operating results for a particular period are difficult to
predict. Any of the above factors could have a material adverse effect on New
Century's business, results of operations, and financial condition.
Reliance on External Financing to Meet Cash Requirements
The Company will continue to rely upon external financing sources to meet the
cash requirement of its ongoing operations. New Century is currently seeking
additional capital in the form of equity or debt, or a combination thereof.
However, there is no guarantee that it will raise sufficient capital to execute
its business plan. To the extent that the Company are unable to raise sufficient
capital, its business plan will require substantial modification and its
operations curtailed. These conditions raise substantial doubt about New
Century's ability to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to ultimately attain profitable
operations, generate sufficient cash flow to meet its obligations, and obtain
additional financing as may be required.
Volatile Share Price
The Company's Common Stock has experienced, and may continue to experience,
substantial price volatility, particularly as a result of variations between its
actual or anticipated financial results and the published expectations of
analysts and as a result of announcements by its competitors and itself. In
addition, the stock market has experienced extreme price fluctuations that have
affected the market price of many companies and that have often been unrelated
to the operating performance of these companies. A major decline in the capital
markets generally, or in the market price of New Century's securities may
negatively impact its ability to make future strategic acquisitions, raise
capital, issue debt, or retain employees. These factors, as well as general
economic and political conditions, may in turn have a material adverse effect
the market price of the Company's Common Stock.
7
Seasonality
The Company's business is subject to certain seasonal fluctuations in sales,
with a pattern of net sales being lower in the second fiscal quarter, due to
plant closings in the summer months and vacations. The market for machine tools
is also sensitive to economic conditions, production capacity utilization and
the general level of business confidence.
Competition
The market for remanufacturing services for the machine tools is competitive
with competition from numerous independent rebuild suppliers with various sales
and resource levels. The Company's believes it possesses a competitive advantage
in that it employs skilled personnel who have been trained for and have
experience with these products. Principal competitive factors for the Company's
products and services are proprietary technology, customer service, technical
support, delivery, and price.
Product Liability And Warranty Claims
We may be exposed to product liability and warranty claims in the event that the
use of our products results, or is alleged to result, in bodily injury and/or
property damage or our products actually or allegedly fail to perform as
expected. While we maintain insurance coverage with respect to certain product
liability claims, we may not be able to obtain such insurance on acceptable
terms in the future, if at all, and any such insurance may not provide adequate
coverage against product liability claims. In addition, product liability claims
can be expensive to defend and can divert the attention of management and other
personnel for significant periods of time, regardless of the ultimate outcome.
An unsuccessful defense of a product liability claim could have an adverse
affect on our business, results of operations and financial condition and cash
flows. Even if we are successful in defending against a claim relating to our
products, claims of this nature could cause our customers to lose confidence in
our products and our company. Warranty claims are not covered by insurance, and
we may incur significant warranty costs in the future for which we would not be
reimbursed.
Key Personnel
Our ability to operate our businesses and implement our strategies depends, in
part, on the efforts of our executive officers and other key employees
particularly Messrs. Duquatte and Czikmantori. In addition, our future success
will depend on, among other factors, our ability to attract and retain qualified
personnel, particularly research professionals, technical sales professionals
and engineers. The loss of the services of any key employee or the failure to
attract or retain other qualified personnel could have a material adverse effect
on our business or business prospects.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease our headquarters in Santa Fe Springs, California, which expires in
12/31/06, and conduct our operations at such facilities. We believe that our
facilities are in good condition and provide adequate capacity to meet our needs
for the foreseeable future.
The following table sets forth certain information relating to the Company's
principal facilities:
LOCATION PRINCIPAL USES APPROX SQ. FT.
------------------------- ------------------- -------------------
9835 Santa Fe Springs Rd.
Santa Fe Springs, CA 90670 Manufacturing 44,000
ITEM 3. LEGAL PROCEEDINGS.
The Company may be involved from time to time in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination or
breach of contract actions incidental in the normal course of business
operations. The Company is currently not involved in any such litigation or any
pending legal proceedings that management believes could have a material adverse
effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to security holder for the quarter ended
December 31, 2005.
8
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock trades on the Over-The-Counter Bulletin Board under the symbol
"NCNC.OB". The following table sets forth the high and low bid prices for the
shares of common stock as reported on the Over-The-Counter Bulletin Board for
each quarterly period of the last two fiscal years. The bid prices listed below
represent prices, adjusted for stock splits, between dealers without adjustments
for retail markups, breakdowns or commissions and may not represent actual
transactions.
For Year Ended 2005
HIGH LOW
December 31 $ 0.77 0.38
September 30 0.73 0.21
June 30 0.33 0.13
March 31 0.51 0.15
For Year Ended 2004
HIGH LOW
December 31 $ 0.29 0.06
September 30 0.32 0.15
June 30 0.65 0.18
March 31 0.85 0.40
We have not declared any cash dividends on our common stock since inception.
Declaration of dividends with respect to the common stock is at the discretion
of the Board of Directors. Any determination to pay dividends will depend upon
the financial condition, capital requirements, results of operations and other
factors deemed relevant by the Board of Directors.
At December 31, 2005 we had approximately 1,500 shareholders of our common
stock. This figure does not include beneficial holders or common stockholder's
nominee co-trust name, as we cannot accurately estimate the number of these
beneficial holders.
The transfer agent and registrar for our common stock is U.S. Stock Transfer,
Los Angeles, California.
9
PENNY STOCK
Until the Company's shares qualify for inclusion in the NASDAQ system, the
public trading, if any, of the Company's common stock will be on the OTC
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the common stock
offered. The Company's common stock is subject to provisions of Section 15(g)
and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), commonly referred to as the "penny stock rule." Section 15(g) sets forth
certain requirements for transactions in penny stocks, and Rule 15g-9(d)
incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the
Exchange Act. The SEC generally defines "penny stock" to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If the Company's common stock is deemed to be a penny stock, trading
in the shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors. "Accredited investors" are persons with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse. For transactions covered by these rules, broker-dealers must
make a special suitability determination for the purchase of such security and
must have the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document, prepared by the SEC, relating to the penny stock
market. A broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in the Company's
common stock and may affect the ability of the Company's shareholders to sell
their shares.
RECENT SALES OF UNREGISTERED SECURITIES
PREFERRED STOCK
In September 2005, holders of the Company's Preferred C converted 31,800 shares
into 530,001 shares of common stock.
In August 2005, holders of the Company's Preferred D converted 12,000 shares
into 600,000 shares of common stock.
COMMON STOCK
On October 27, 2005, the Company issued 300,000 shares of restricted common
stock to a consultant for corporate finance and investor relations services
under a one year consulting 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 $132,000 as deferred consulting fees and is amortizing
such amount over the twelve month term of the agreement. Due to a significant
increase of the Company's stock price from issuance to the end of the reporting
period, in accordance with the EITF 96-18, the Company performed a recalculation
of the deferred consulting fees based on the December 31, 2005 fair value stock
price, and adjusted the fees to $186,000. The additional $54,000 difference was
recorded as deferred consulting fees and is being amortized over the remaining
term of the contract. At December 31, 2005, the remaining deferred consulting
fees under this contract totaled $155,000.
On October 26, 2005, the Company issued 100,000 shares of restricted common
stock to a consultant for corporate finance and investor relations services
under a one year consulting 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 $42,000 as deferred consulting fees and is amortizing such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company's stock price from issuance to the end of the reporting
period, in accordance with the EITF 96-18, the Company performed a recalculation
of the deferred consulting fees based on the December 31, 2005 fair value stock
price, and adjusted the fees to $62,000. The additional $20,000 difference was
recorded as deferred consulting fees and is being amortized over the remaining
term of the contract. At December 31, 2005, the remaining deferred consulting
fees under this contract totaled $50,633.
10
On October 11, 2005, the Company issued 100,000 shares of restricted common
stock to a consultant for corporate finance and investor relations services
under a one year consulting 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 $41,000 as deferred consulting fees and is amortizing such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company's stock price from issuance to the end of the reporting
period, in accordance with the EITF 96-18, the Company performed a recalculation
of the deferred consulting fees based on the December 31, 2005 fair value stock
price, and adjusted the fees to $62,000. The additional $21,000 difference was
recorded as deferred consulting fees and is being amortized over the remaining
term of the contract. The remaining deferred consulting fees under this contract
totaled $49,083 at December 31, 2005.
On July 14, 2005, the Company issued 300,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under a
one year consulting 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 $75,000 as deferred consulting fees and started to amortize
such amount over the twelve month term of the agreement. Due to a significant
increase of the company stock price from issuance to the ending of reported
period, in accordance with the EITF 96-18, the company did a recalculation of
the deferred consulting fees based on December 31, 2005 fair value stock price,
and evaluate the fees at $132,000. The additional $57,000 difference was
recorded as deferred consulting fees and amortized entirely at October 27, 2005,
when a new agreement was executed, which nullified the previous contract, and
the services (which originally were to be completed in July 2006) were deemed
completed.
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 amortized such amount
over the six month term of the agreement. The services were completed in April
2005 and no reevaluation under EITF 96-18 was necessary.
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, occurring 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 was being amortized to consulting expense over the six
month term of the agreement. Due to a significant increase of the Company's
stock price from issuance to the period when the services were completed, in
accordance with EITF 96-18, the Company performed a recalculation of the
deferred consulting fees. The Company reevaluated the stock at October 20, 2005,
$12,000 of additional amortization was expensed.
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 October 31,
2005 the dispute was fully settled. As part of this settlement, it was
stipulated that the customer shall not exercise the option to receive the
Company's shares of stock, and agreed to assign the shares to our legal
counselor, without representation or warranty.
11
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 occurred 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 penalty right was waived by the
noteholders on November 10, 2005. 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 was 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." At the end of December 31, 2005,
Amortization of the discount to interest expense during the twelve months ended
December 31, 2005 totaled $47,500.
STOCK OPTIONS AND WARRANTS
Under the terms of the Company's Incentive Stock Option Plan ("ISOP"), options
to purchase an aggregate of 1,000,000 shares of common stock may be issued to
key employees, as defined. The exercise price of any option may not be less than
the fair market value of the shares on the date of grant. No options granted may
be exercisable more than 10 years after the date of grant. The options granted
generally vest evenly over a one-year period, beginning from the date of grant.
Under the terms of the Company's non-statutory stock option plan ("NSSO"),
options to purchase an aggregate of 1,350,000 shares of common stock may be
issued to non-employees for services rendered. These options are non-assignable
and non-transferable, are exercisable over a five-year period from the date of
grant, and vest on the date of grant.
During the year ended December 31, 2005, the Company did not grant any warrants
or stock options.
The following is a status of the stock options and warrants outstanding at
December 31, 2005 and the changes during the two years then ended:
Year Ended Year Ended
December 31, December 31,
2005 2004
--------------------------------- ------------------------------
Weighted
Options and Weighted Options and Average
Warrants Average Price Warrants Price
------------- ---------------- ------------- ------------
Outstanding, beginning of year 1,711,583 $ 1.75 1,821,583 $ 2.34
Granted - - 25,000 0.65
Exercised - - - -
Cancelled/Terminated (243,083) (9.88) (135,000) (9.54)
------------- ---------------- ------------- ------------
Outstanding and exercisable, end of year 1,468,500 $ 0.40 1,711,583 $ 1.75
============= ================ ============= ============
12
The following table summarizes information related to stock options outstanding
at December 31, 2005:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
(A) (B) (C)
-------------------------------------- -------------------------- -------------------- -------------------------
Equity compensation plans approved by
security holders 1,413,500 0.39 936,500
Equity compensation plans not approved
by security holders 55,000 0.86
Total 1,468,500 -- 936,500
>From time to time, the Company issues warrants to employees and to third
parties pursuant to various agreements, which are not approved by the
shareholders.
See discussion of Plan approval by the shareholders in the accompanying
financial statements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-KSB. 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-KSB
are qualified in their entirety by this statement.
OVERVIEW
The earnings of New Century Companies for the year ended 2005 were positive as a
result of an increase in sales, and an increase in gross profit, based on better
market conditions and the Company's strategy to sell its products at a higher
gross margin.
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. The Company's growth strategy also includes strategic acquisitions in
addition to growing the current business. A significant acquisition will require
additional financing. The Company obtained additional financing in 2006 for a
proposed acquisition. However, than can be no assurance the acquisition will
take place.
13
RESULTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2005 COMPARED TO
DECEMBER 31, 2004.
Revenues. New Century generated revenues of $6,038,459 for the fiscal year ended
December 31, 2005, which was a 31% increase from $4,605,813 for the fiscal year
ended December 31, 2004. The increase is the result of an increase in sales
based on better market conditions for New Century machines.
Gross Profit. There was a substantial increase in gross profit for the fiscal
year ended December 31, 2005, of $2,171,956, due to the increased revenues from
higher selling prices and a $739,310 decrease in cost of sales. The decrease in
cost of sales is principally related to more efficient use of material and labor
resources. Gross profit was $1,714,970, compared to a loss of $(456,986) from
the corresponding period in 2004.
Net Income . Net income increased to $668,359 for the fiscal year ended December
31, 2005 compared to a net loss of $1,423,359 for the fiscal year ended December
31, 2004. The increase in net income is primarily attributed to a $2,352,442
increase in operating income, the increase in revenues and the decrease in cost
of sales.
Interest Expense. Interest expense for the fiscal year ending December 31, 2005
increased to $235,592, compared to $181,468 for the period ended December 31,
2004. The increase of 30% is primarily the result of $47,500 amortization of
shares of common stock issued to a Note Payable holder as a consideration for
agreement to extend the repayment of the note.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2004 COMPARED TO
DECEMBER 31, 2003.
Revenues. New Century generated revenues of $4,605,813 for the fiscal year ended
December 31, 2004, which was a 33% decrease from $6,908,087 for the fiscal year
ending December 31, 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.
Gross Profit. There was a 32% decrease in gross profit for the fiscal year
ending December 31, 2004, due to lower revenues. Gross profit (loss) was
$(456,986), compared to $(667,657) from the corresponding period in 2004. This
decrease is a general result of decreased cost of sales based on reduced labor
and material costs due to the decrease in sales.
Net Loss . Net loss decreased to $1,423,359 for the fiscal year ended December
31, 2004 compared to a net loss of $2,937,616 for the fiscal year ended December
31, 2003. The decrease in net loss is primarily attributed to the fact that, in
2003, the Company recorded a loss on a deposit of $465,000, a $544,318 gain on
forgiveness of accounts payable from negotiations with vendors in 2004, and
increased cash flow problems which affected the Company's ability to complete
timely the remanufacture and shipment of machines.
Interest Expenses. Interest expense for the fiscal year ending December 31, 2004
decreased to $181,468, compared to $295,338 for the year ended December 31,
2003. The decrease of 39% is primarily the result of the repayment of a short
term loan of $900,000 during the first quarter of 2003.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
Net cash decrease during the fiscal year ended 2005 was $129,087. For the year
ended December 31, 2005, the Company used cash in financing activities of
$44,730, compared with $402,988 cash provided by financing activities in the
prior year. The $447,718 cash used in financing activities increase is primarily
due to $521,000 of proceeds from the issuance of preferred stock in 2004,
compared to no cash proceeds from debt or equity in 2005. The cash used in
investing activities decreased by $1,396, primarily due to reducing purchases of
property and equipment. The Company relies upon external financing sources to
meet the cash requirement of its ongoing operations. Currently, the Company's
management attracted additional funding in the form of subordinated debt.
However, there is no guarantee that the capital raised is sufficient to execute
its business plan. To the extent that the capital raised is not sufficient, the
Company's business plan will be required to be substantially modified and its
operations curtailed. The Company's auditors have issued their report which
contains an explanatory paragraph as to the Company's ability to continue as a
going concern.
14
The Company is currently addressing its liquidity issue by the following
actions:
o The Company continues to implement plans to increase revenues.
o The Company continues its program for selling inventory that has been produced
or is currently in production.
o The Company continues to implement plans to further reduce operating costs by
improved process control and greater productivity. o The Company is continually
seeking investment capital through the public markets.
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.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements, as defined in Regulation S-B Section
303.
GOING CONCERN
The Company's independent certified public accountants have stated in their
report included in this Form 10-KSB, that the Company has a working capital
deficit, a significant accumulated deficit and is in default in certain notes
payable. These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
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 our consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported on our
balance sheet and the amounts of revenues and expenses reported for each of our
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:
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.
15
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "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 101. The Company recognizes
revenue of long-term contracts pursuant to SOP 81-1.
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.
Estimates
Critical estimates made by management are, among others, deferred tax asset
valuation allowances, realization of inventories, collectibility of contracts
receivable and the estimating of costs for long-term construction contracts.
Actual results could materially differ from those estimates.
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
our accounting policies, outcomes cannot be predicted with confidence. Also see
Note 1 of Notes to Consolidated Financial Statements, Summary of Significant
Accounting Policies, which discusses accounting policies that must be selected
by management when there are acceptable alternatives.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements of the Company are set forth at the end hereof.
16
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. EVALUATION OF CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Exchange Act as of a date (the "Evaluation Date") within 90 days prior to filing
the Company's December 31, 2005 Form 10-KSB. Based upon that evaluation, the CEO
and CFO concluded that, as of December 31, 2005, our disclosure controls and
procedures were not effective in timely alerting management to the material
information relating to us (or our consolidated subsidiary) required to be
included in our periodic filings with the SEC.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes made in our internal controls over financial
reporting during the quarter ended December 31, 2005 that have materially
affected or are reasonably likely to materially affect these controls.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
17
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table and text sets forth the names and ages of all directors and
executive officers of the Company and the key management personnel as of
December 31, 2005. The Board of Directors of the Company is comprised of only
one class. All of the directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. Executive officers
serve at the discretion of the Board of Directors, and are appointed to serve
until the first Board of Directors meeting following the annual meeting of
stockholders. Also provided is a brief description of the business experience of
each director and executive officer and the key management personnel during the
past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the Federal
securities laws.
NAME AGE POSITION
---- --- --------
David Duquette 60 Chairman of the Board, Chief Financial Officer,
President and Director
Josef Czikmantori 51 Secretary and Director
DAVID DUQUETTE. Mr. Duquette has served as the Chairman of the Board, President,
Chief Financial Oficeer and Director of the Company since May 25, 2001. Mr.
Duquette has been in the CNC machine tool manufacturing and remanufacturing
business since 1967. From 1962 to 1965, he studied Electrical Engineering at the
University of Wisconsin. Mr. Duquette founded New Century Remanufacturing in
1996. Prior to that year, he managed Orange Coast Rebuilding for approximately 8
years. Mr. Duquette was President of U.S. Machine Tools from 1969 to 1985.
JOSEF CZIKMANTORI. Mr. Czikmantori has served as Secretary and Director of the
Company since May 25, 2001. Mr. Czikmantori was born in Romania. He completed 3
years of Technical College in Romania and then worked for United Machine Tool,
which manufactured metal cutting machinery. He joined Mr. David Duquette at
Orange Coast Machine Tools. He is a co-founder of New Century Remanufacturing.
Directors receive no compensation for serving on the Board of Directors.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of the Company's knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
18
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors and persons who own more than 10% of
a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial statements of beneficial ownership,
reports of changes in ownership and annual reports concerning their ownership of
common stock and other equity securities of the Company, on Forms 3, 4 and 5,
respectively. Executive officers, directors and greater than 10% shareholders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the best of the Company's knowledge (based
solely upon a review of the Forms 3, 4 and 5 filed), no officer, director or 10%
beneficial shareholder failed to file on a timely basis for the fiscal year
ended December 31, 2005 any reports required by Section 16(a) of the Securities
Exchange Act of 1934, as amended.
CODE OF ETHICS
The Company management communicates values and ethical standards during company
wide meetings. Such standards are outlined in the human resource manual of the
company, "Code of Business Practices and Ethics" section.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company does not have an audit committee. Since our securities are not
currently listed on or with a national securities exchange or national
securities association, we are not required to have an independent audit
committee. Therefore, the Company has not designated an audit committee
financial expert. The Company currently is in the process of identifying
independent audit committee members, including a financial expert to serve on
our audit committee and we expect to continue this process in 2006. Because of
our size, we do not have an audit committee, compensation committee or
nominating committee.
STOCKHOLDER COMMUNICATIONS
Stockholders interested in communicating directly with the Board of Directors,
or specified individual directors, my write to us at 9835 Santa Fe Springs Rd.,
Santa Fe Springs, CA 90670. Mr. David Duquette will review all such
correspondence and will regularly forward to the Board copies of all such
correspondence that deals with the functions of the Board.
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the compensation earned by
the Company's Chief Executive Officer and the other most highly compensated
executive officer(s) who were serving as such as of December 31, 2005, whose
aggregate compensation for the 2005 fiscal year exceeded $100,000 for services
rendered in all capacity for that fiscal year.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- ----------------------------------------------------
AWARDS PAYOUTS
---------------------------- ---------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK AWARD(S) OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION ($) SARS PAYOUTS COMPEN-
PRINCIPAL POSITION YEAR ($) ($) ($) (F) (#) ($) SATION ($)
(A) (B) (C) (D) (E) S (G) (H) (I)
------------------------------------------------------------------------------------------------------------------------------------
David David Duquette, Chairman of the
Board, President,
Cief Financial Oficeer and Director 2003 $ 127,200 -- -- -- 400,000 -- --
------------------------------------------------------------------------------------------------------------------------------------
19
OPTIONS/SAR GRANTS IN FISCAL YEAR 2005
NONE
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercises of stock options
during the year ended December 31, 2005, by each of the Named Executive Officers
and the value of in-the-money unexercised options at December 31, 2005.
SHARES
ACQUIRED ON VALUE NUMBER OF SECURITIES
EXERCISE REALIZED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE
NAME (#) ($) (1) OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT FISCAL YEAR END
-------------------------------------------------------------------------------------------------------------------
EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/UNEXERCISABLE ($) (2)
-------------------------------------------------------------------------------------------------------------------
David Duquette, CEO $0.00 400,000 / 0 148,000 / 0
Josef Czikmantori, $0.00 150,000 / 0 55,500 / 0
Director
(1) Value realized is based on estimated fair market value of Common Stock on
the date of exercise minus the exercise price ($0.25).
(2) Value is based on estimated fair market value of Common Stock as of December
31, 2005 ($0.62) minus the exercise price.
None of our Named Executive Officers exercised any of their options during 2005.
LONG-TERM INCENTIVE PLANS
As of December 31, 2005 there is no long-term incentive plan. The Company have
no employment agreements with its executive officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth the number of shares of common stock beneficially
owned as of December 31, 2005 by (i) those persons or groups known to the
Company who will beneficially own more than 5% of the Company's common stock;
(ii) each director and director nominee; (iii) each executive officer and,
(iv) all directors and executive officers as a group. The information is
determined in accordance with Rule 13(d)-3 promulgated under the Exchange Act
based upon information furnished by persons listed or contained in filings made
by them with the Securities and Exchange Commission by information provided by
such persons directly to the Company. Except as indicated below, the
stockholders listed possess sole voting and investment power with respect to
their shares.
20
PERCENTAGE OF
NAME OF BENEFICIAL OWNER NO. OF SHARES OWNERSHIP
------------------------ ------------- -------------
David Duquette (1) 1,433,334 13%
Josef Czikmantori (2) 650,000 6%
Officers and Directors as a
Group (2 persons) 2,083,334 19%
Based on 10,697,266 shares outstanding. Common stock subject to options or
warrants that are currently exercisable or exercisable within 60 days of
December 31, 2005 are deemed to be outstanding and to be beneficially owned by
the holder thereof for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(1) Includes options to purchase 400,000 shares (ISOP).
(2) Includes options to purchase 150,000 shares (ISOP).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
NOTES RECEIVABLE FROM STOCKHOLDERS
As of December 31, 2005, the Company had loans to two stockholders $505,639,
including accrued interest. The loans accrue interest at 6% and are due on
demand. The Company has reclassified the notes receivable from stockholders to
stockholders' equity as such amounts have not been repaid during the current
year. The stockholders have shown the ability to repay the loans and intend on
repaying such amounts in the future. For the years ended December 31, 2005,
2004, 2003 and 2002, total interest income from notes receivable from
stockholders' approximated $19,715, $22,500, $12,500 and $6,250, respectively.
ITEM 13. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Share Exchange Agreement dated as of December 18, 2000. Incorporated
herein by reference from the Company's filing on Form 8-K filed on
August 23, 2000.
3.1 Certificate of Incorporation as filed with the Delaware Secretary of
State, as amended. incorporated by reference to Exhibit 2.1 to
Company's Registration Statement on Form C-18, filed on August 14,
1980. I S
3.2 Certificate of Amendment to the Certificate of Incorporation as filed
with the Delaware Secretary of State. Incorporated by reference to
8-K filed June 4, 2003.
3.2 Bylaws. Incorporated by reference to Exhibit 2.2 to the Registration
Statement on Form S-18, filed on August 14, 1980.
10.1 Agreement and Plan of Merger, dated as of May 25, 2003, by and among
Internetmercado.com, Inc., New Century Remanufacturing, Inc., New
Century Acquisition Corporation, David Duquette and Josef
Czikmantori; Incorporated by reference to the Exhibit 2.1 of the 8-K
filed June 4, 2003.
21.1 Subsidiaries of the Company.
31.1 Certification required by Rule 13a-14(a) or rule 15d-14(d) and under
Section 302 of the Sarbanes-Oxley act of 2002.
31.2 Certification required by Rule 13a-14(a) or rule 15d-14(d) and under
Section 906 of the arbanes-Oxley act of 2002. C S
21
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by Squar,
Milner, Reehl & Williamson LLP ("Squar Milner") for the annual audit of our
consolidated financial statements as of and for the years ended December 31,
2005, and 2004 and fees billed for other services rendered by Squar Milner
during such years:
For the Years Ended December 31,
2005 2004
------- -------
Audit Fees (1) $87,500 $54,000
Audit Related Fees - -
Tax Fees $7,500 $7,500
All Other Fees (2) $3,900 -
---------------------------
$98,900 $61,500
---------------------------
(1) Such billings include the quarterly reviews.
(2) Such billings were in connection with review of SEC Comment letter dated
November 30, 2005.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
The Company does not have an audit committee. Therefore, the Board of Directors
is responsible for pre-approving all audits and permitted non-audit services to
be performed for us by our independent auditor.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 14, 2006 NEW CENTURY COMPANIES, INC.
/s/ DAVID DUQUETTE
---------------------------------------
Name: David Duquette
Title: Chairman, President and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date: April 14, 2006 /s/ DAVID DUQUETTE
----------------------------------------
Name: David Duquette
Title: Chairman, President and Director
Date: April 14, 2006 /s/ JOSEF CZIKMANTORI
----------------------------------------
Name: Josef Czikmantori
Title: Secretary and Director
23
NEW CENTURY COMPANIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .................... F-1
Consolidated Balance Sheet.................................................. F-2
Consolidated Statements of Operations....................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)................... F-4
Consolidated Statements of Cash Flows....................................... F-5
Notes to Consolidated Financial Statements.................................. F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
New Century Companies, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of New Century
Companies, Inc. and Subsidiary (the "Company") as of December 31, 2005,
and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the two years in the period
ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New
Century Companies, Inc. and Subsidiary as of December 31, 2005, and the
results of their operations and their cash flows for each of the two years
in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company has
negative working capital of approximately $2,083,000, an accumulated
deficit of approximately $6,959,000 and is in default on certain notes
payable. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
April 7, 2006
Newport Beach, California
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2005
--------------------------------------------------------------------------------
ASSETS
Current Assets
Contract receivables $ 287,569
Inventories, net 928,947
Costs and estimated earnings in excess of billings on uncompleted contracts 417,755
Prepaid expenses and other current assets 1,560
-----------
Total current assets 1,635,831
Property and Equipment, net 411,651
-----------
$ 2,047,482
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank overdraft $ 27,649
Accounts payable and accrued expenses 1,649,080
Dividends payable 565,875
Billings in excess of costs and estimated earnings on uncompleted contracts 501,384
Notes payable 974,816
-----------
Total current liabilities 3,718,804
Notes Payable, net of current portion 36,000
Commitments and Contingencies
Stockholders' Deficit
Cumulative, convertible, Series B preferred stock, $1 par value,
15,000,000 shares authorized, no shares issued and outstanding --
(liquidation preference of $25 per share)
Cumulative, convertible, Series C preferred stock, $1 par value,
75,000 shares authorized, 28,980 shares issued and outstanding
(liquidation preference of $1,187,000) 28,980
Cumulative, convertible, Series D preferred stock, $25 par value,
75,000 shares authorized, 11,640 shares issued and outstanding
(liquidation preference of $394,000) 291,000
Common stock, $0.10 par value, 50,000,000 shares authorized;
10,697,266 shares issued and outstanding 1,069,727
Subscriptions receivable (462,500)
Notes receivable from stockholders (505,639)
Deferred consulting fees (254,717)
Additional paid-in capital 5,085,274
Accumulated deficit (6,959,447)
-----------
Total stockholders' deficit (1,707,322)
-----------
$ 2,047,482
===========
--------------------------------------------------------------------------------
Page F-2 See accompanying notes to the consolidated financial statements.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------
2005 2004
----------- -----------
CONTRACT REVENUES $ 6,038,459 $ 4,605,813
COST OF SALES 4,323,489 5,062,799
----------- -----------
GROSS PROFIT (LOSS) 1,714,970 (456,986)
----------- -----------
OPERATING EXPENSES
Consulting and other compensation 579,921 319,700
Salaries and related 218,249 245,688
Selling, general and administrative 350,787 764,055
----------- -----------
TOTAL OPERATING EXPENSES 1,148,957 1,329,443
----------- -----------
OPERATING INCOME (LOSS) 566,013 (1,786,429)
----------- -----------
OTHER INCOME (EXPENSE)
Gain on forgiveness of accounts and notes payable 318,973 544,318
Interest income 19,765 1,020
Interest expense (235,592) (181,468)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 103,146 363,870
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 669,159 (1,422,559)
PROVISION FOR INCOME TAXES 800 800
----------- -----------
NET INCOME (LOSS) $ 668,359 $(1,423,359)
=========== ===========
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 512,059 $(1,791,594)
=========== ===========
Basic net income (loss) available to
common stockholders per common share $ 0.06 $ (0.25)
=========== ===========
Diluted net income (loss) available to
common stockholders per common share $ 0.05 $ (0.25)
=========== ===========
Basic weighted average common
shares outstanding 9,186,987 7,038,209
=========== ===========
Diluted weighted average common
shares outstanding 9,836,987 7,038,209
=========== ===========
--------------------------------------------------------------------------------
Page F-3 See accompanying notes to the consolidated financial statements.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------
Conversion of Preferred Preferred Preferred
Stock, Series B Stock, Series C Stock, Series D
---------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2004 -- $ -- 63,600 $ 63,600 -- $ --
Issuance of convertible preferred
stock at a discount -- -- -- -- 23,640 591,000
Isssuance of common stock for
consulting services rendered -- -- -- -- -- --
Amortization of deferred consulting
fees -- -- -- -- -- --
Issuance of common stock in
connection with the conversion
of preferred stock -- -- (2,820) (2,820) -- --
Accumulated dividends on preferred
stock -- -- -- -- -- --
Interest on notes receivable from
stockholders -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 -- -- 60,780 60,780 23,640 591,000
Issuance of common stock in
connection with debt extention -- -- -- -- -- --
Isssuance of common stock for
consulting services -- -- -- -- -- --
Isssuance of common stock as a
penalty for not registering
preferred shares -- -- -- -- -- --
Issuance of common stock in
connection with legal settlment -- -- -- -- -- --
Accrued dividends payable -- -- -- -- -- --
Issuance of common stock in
connection with the conversion
of preferred stock -- -- (31,800) (31,800) -- --
Issuance of common stock in
connection with the conversion
of preferred stock -- -- -- -- (12,000) (300,000)
Issuance of common stock in
connection with settlement of
debt -- -- -- -- -- --
Issuance of common stock in
connection with settlement of
accounts payable -- -- -- -- -- --
Amortization of deferred consulting
fees -- -- -- -- -- --
Interest on notes receivable from
stockholders -- -- -- -- -- --
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 -- $ -- 28,980 $ 28,980 11,640 $ 291,000
============ ============ ============ ============ ============ ============
Common Stock Notes
----------------------------- Additional Receivable
Paid In From Deferred
Shares Amount Capital Stockholders Consulting Fees
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2004 6,895,265 689,527 $ 3,809,194 $ (466,159) $ (109,813)
Issuance of convertible preferred
stock at a discount -- -- 123,660 -- --
Isssuance of common stock for
consulting services rendered 350,000 35,000 130,000 -- (10,000)
Amortization of deferred consulting
fees -- -- -- -- 111,480
Issuance of common stock in
connection with the conversion
of preferred stock 47,000 4,700 (1,880) -- --
Accumulated dividends on preferred
stock -- -- -- -- --
Interest on notes receivable from
stockholders -- -- -- (19,765) --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 7,292,265 729,227 4,060,974 (485,924) (8,333)
Issuance of common stock in
connection with debt extention 250,000 25,000 22,500 -- --
Isssuance of common stock for
consulting services 1,050,000 105,000 414,000 -- (519,000)
Isssuance of common stock as a
penalty for not registering
preferred shares 300,000 30,000 60,000 -- --
Issuance of common stock in
connection with legal settlment 100,000 10,000 10,000 -- --
Accrued dividends payable -- -- -- -- --
Issuance of common stock in
connection with the conversion
of preferred stock 530,001 53,000 (21,200) -- --
Issuance of common stock in
connection with the conversion
of preferred stock 600,000 60,000 240,000 -- --
Issuance of common stock in
connection with settlement of
debt 500,000 50,000 260,000 -- --
Issuance of common stock in
connection with settlement of
accounts payable 75,000 7,500 39,000 -- --
Amortization of deferred consulting
fees -- -- -- -- 272,616
Interest on notes receivable from
stockholders -- -- -- (19,715) --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 10,697,266 $ 1,069,727 $ 5,085,274 $ (505,639) $ (254,717)
============ ============ ============ ============ ============
Total
Stockholders'
Subscriptions (Accumulated Equity
Receivable Deficit) (Deficit)
------------ ------------ ------------
Balance, January 1, 2004 $ (462,500) $ (5,679,912) $ (2,156,063)
Issuance of convertible preferred
stock at a discount -- (153,660) 561,000
Isssuance of common stock for
consulting services rendered -- -- 155,000
Amortization of deferred consulting
fees -- -- 111,480
Issuance of common stock in
connection with the conversion
of preferred stock -- -- --
Accumulated dividends on preferred
stock -- (214,575) (214,575)
Interest on notes receivable from
stockholders -- -- (19,765)
Net loss -- (1,423,359) (1,423,359)
------------ ------------ ------------
Balance, December 31, 2004 (462,500) (7,471,506) (2,986,282)
Issuance of common stock in
connection with debt extention -- -- 47,500
Isssuance of common stock for
consulting services -- -- --
Isssuance of common stock as a
penalty for not registering
preferred shares -- -- 90,000
Issuance of common stock in
connection with legal settlment -- -- 20,000
Accrued dividends payable -- (156,300) (156,300)
Issuance of common stock in
connection with the conversion
of preferred stock -- -- --
Issuance of common stock in
connection with the conversion
of preferred stock -- -- --
Issuance of common stock in
connection with settlement of
debt -- -- 310,000
Issuance of common stock in
connection with settlement of
accounts payable -- -- 46,500
Amortization of deferred consulting
fees -- -- 272,616
Interest on notes receivable from
stockholders -- -- (19,715)
Net income -- 668,359 668,359
------------ ------------ ------------
Balance, December 31, 2005 $ (462,500) $ (6,959,447) $ (1,707,322)
============ ============ ============
--------------------------------------------------------------------------------
Page F-4 See accompanying notes to the consolidated financial statements.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 668,359 $ (1,423,359)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment 194,300 276,302
Gain on settlement of legal dispute (275,000) --
Gain on forgiveness of accounts payable (102,597) (544,318)
Gain on forgiveness of notes payable (216,375) --
Amortization of debt discount 47,500 --
Amortization of deferred consulting fees 272,616 111,480
Bad debt expense (credit) (5,334) 39,000
Inventory reserve -- 186,352
Estimated fair market value of common stock issued for
consulting services -- 155,000
Estimated fair market value of common stock issued for
partial legal settlement 20,000 --
Interest income on notes receivable from stockholders (19,715) (19,765)
Estimated fair market value of common stock issued for
penalty on failure to register convertible preferred stock 90,000 --
Changes in operating assets and liabilities:
Contracts receivable (554,368) 108,584
Inventories 51,295 (9,651)
Costs and estimated earnings in excess of billings on uncompleted contracts (165,923) 68,700
Prepaid expenses and other current assets -- 24,131
Accounts payable and accrued expenses 169,887 406,298
Billings in excess of costs and estimated earnings on uncompleted contracts (259,002) 192,772
------------ ------------
Net cash used in operating activities (84,357) (428,474)
------------ ------------
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 27,649 (124,558)
Proceeds of issuance of notes payable -- 80,816
Proceeds from issuance of preferred stock -- 521,000
Principal repayments on obligations under capital lease (72,379) (74,270)
------------ ------------
Net cash (used in) provided by financing activities (44,730) 402,988
------------ ------------
Net decrease in cash (129,087) (26,882)
Cash at beginning of period 129,087 155,969
------------ ------------
Cash at end of period $ -- $ 129,087
============ ============
Supplemental disclosure of non-cash activities:
Debt discount on note payable extension $ 47,500 $ --
============ ============
Accrued cumulative dividends on preferred stock $ 156,300 $ 214,575
============ ============
Conversion of preferred stock to common stock $ 331,800 $ 4,700
============ ============
Common stock issued for settlement of notes payable $ 310,000 $ --
============ ============
Common stock issued for settlement of accounts payable $ 46,500 $ --
============ ============
Equipment acquired in legal settlement $ 275,000 $ --
============ ============
Preferred stock issued in lieu of accounts payable $ -- $ 40,000
============ ============
--------------------------------------------------------------------------------
Page F-5 See accompanying notes to the consolidated financial statements.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF 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.
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 Over-the-Counter Bulletin Board under the symbol
"NCNC.OB."
Principles of Consolidation
The 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 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 December 31, 2005, the Company has negative working
capital of approximately $2,083,000, an accumulated deficit of approximately
$6,959,000 and is in default on certain notes payable. 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 anticipated
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, 2006. 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 and private
markets (see Note 10).
--------------------------------------------------------------------------------
F-6
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
The 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.
--------------------------------------------------------------------------------
F-7
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Going Concern (continued)
During 2004 and 2005, management settled with several vendors and was able to
obtain a fifty percent reduction in the amounts due to those specific vendors.
Additionally, the Company converted certain notes payable to common stock during
December 2005 resulting in approximately $216,000 of credits to earnings (see
Note 5). As a result, the accompanying consolidated statements of operations
include a gain on forgiveness of accounts and notes payable totaling
approximately $319,000 and $544,000 for the years ended December 31, 2005 and
2004, respectively. The effect on basic and diluted earnings (loss) per share
was $0.03 and $0.08 for the years ended December 31, 2005 and 2004,
respectively.
Concentrations of Credit Risks
Cash is maintained at various financial institutions. The Federal Deposit
Insurance Corporation ("FDIC") insures accounts at each financial institution
for up to $100,000. At times, cash may be in excess of the FDIC insurance limit
of $100,000. The Company had no uninsured bank balances at December 31, 2005.
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 could, at times, be material to the financial statements.
During the year ended December 31, 2004, sales to two customers approximated 19%
of net sales. No single customer net sales were more than 10% for the year ended
December 31, 2005. Management reviews the collectibility of contract receivables
periodically and believes no allowance for losses was needed at December 31,
2005.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition. The
Company's operations are subject to significant risks and uncertainties
including financial, operational, technological and other risks associated with
operating a business including the potential risk of business failure.
--------------------------------------------------------------------------------
F-8
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates made by management are,
among others, deferred tax asset valuation allowances, realization of
inventories, collectibility of contracts receivable and the estimation of costs
for long-term construction contracts. Actual results could materially differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid fixed income investments with maturities
of three months or less at the time of acquisition, to be cash equivalents. The
Company had no cash equivalents at December 31, 2005.
Inventories
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. Net realizable value is based on management's forecast for sales of
the Company's products or services in the ensuing years. The industry in which
the Company operates is characterized by technological advancement and change.
Should demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's inventories could be
substantially less than the amount shown in the accompanying consolidated
balance sheet. At December 31, 2005 and 2004, the Company had inventory reserves
approximating $418,000 and $486,000, respectively.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from three to five years. Equipment under capital lease obligations are
depreciated over the shorter of the estimated useful life or the term of the
lease. Maintenance and repairs are charged to expense as incurred. Significant
renewals and betterments are capitalized. At the time of retirement or other
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the consolidated statement of operations.
--------------------------------------------------------------------------------
F-9
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
The Company accounts for long-lived asset impairments under Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 requires a
three-step approach for recognizing and measuring the impairment of assets to be
held and used. The Company recognizes impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. The impairment loss is measured by comparing the
fair value of the asset to its carrying amount. Fair value is estimated based on
discounted future cash flows. Assets to be sold must be stated at the lower of
the assets' carrying amount or fair value and depreciation is no longer
recognized. The Company believes that no impairment of property and equipment
exists at December 31, 2005.
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 Securities and Exchange Commission ("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 (over billings) are
classified as a current liability.
--------------------------------------------------------------------------------
F-10
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
Revenue Recognition (continued)
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.
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.
Warranty
The Company provides a warranty on certain products sold. Estimated future
warranty obligations related to certain products and services are provided by
charges to operations in the period in which the related revenue is recognized.
At December 31, 2005, the warranty obligation was immaterial to the accompanying
consolidated balance sheet.
Advertising
The Company expenses the cost of advertising when incurred as selling expense in
the accompanying consolidated statements of operations. Advertising expenses
were approximately nil and $84,000 for the years ended December 31, 2005 and
2004, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Under SFAS 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not be
recovered.
--------------------------------------------------------------------------------
F-11
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basic and Diluted Income (Loss) Per Common Share
Under SFAS 128, "Earnings Per Share," basic earnings per common share is
computed by dividing income (loss) 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 (under the treasury stock method, there were 650,000 and 179,000
additional potential common shares at December 31, 2005 and 2004, respectively).
Comprehensive Income
SFAS 130, "Reporting Comprehensive Income," establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. For the years ended December 31, 2005 and
2004, the Company had no items of comprehensive income.
Segments of Business
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information,"
changes the way public companies report information about segments of their
business in their quarterly reports issued to stockholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues and its major
customers. The Company currently operates in one segment.
Stock Based Compensation
The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair value of the stock at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Compensation expense, if any,
is recognized over the applicable service period, which is usually the vesting
period.
SFAS 123, "Accounting for Stock-Based Compensation," if fully adopted, changes
the method of accounting for employee stock-based compensation plans to the fair
value based method. For stock options and warrants, fair value is determined
using an option pricing model that takes into account the stock price at the
grant date, the exercise price, the expected life of the option or warrant,
stock volatility and the annual rate of quarterly dividends. Compensation
expense, if any, is recognized over the applicable service period, which is
usually the vesting period.
--------------------------------------------------------------------------------
F-12
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Based Compensation (continued)
The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as the Company
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
123.
Financial Accounting Standards Board ("FASB") Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purpose of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. Management believes that the
Company accounts for transactions involving stock compensation in accordance
with FIN 44.
SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
At December 31, 2005, the Company has one stock-based employee compensation plan
and one stock-based non-employee compensation plan, which are described more
fully in Note 7. There was no employee stock-based compensation cost recognized
in net income (loss) for the years ended December 31, 2005 and 2004.
Additionally, there was no unvested portion of previous grants for which the
requisite service has not been rendered as of December 31, 2005. Accordingly,
the Company had no pro forma expense when applying the fair value recognition
provisions of SFAS 123, as amended, to stock-based employee compensation.
However, the above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net income (loss) for future years (see
below).
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payments," as
subsequently interpreted by SEC Staff Accounting Bulletin No. 107, "Share-Based
Payments," which replaces SFAS No. 123, and supersedes APB Opinion No. 25. As
originally issued, SFAS 123 established as preferable a fair-value-based method
of accounting for share-based payment transactions with employees. However, that
pronouncement permitted entities to continue applying the intrinsic-value-based
model of APB Opinion No. 25, provided that the financial statements disclosed
the pro forma net income or loss based on the fair-value method. The Company
will be required to apply SFAS 123-R as of January 1, 2006. Thus, the Company's
financial statements will reflect an expense for (a) all share-based
compensation arrangements granted beginning January 1, 2006 and for any such
arrangements that are modified, cancelled, or repurchased after that date, and
(b) the portion of previous share-based awards for which the requisite service
has not been rendered as of that date, based on the grant-date estimated fair
value of those awards.
--------------------------------------------------------------------------------
F-13
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation" (as
intepreted by EITF 96-18, "Accounting for Equity Instruments That Are Issued To
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ) to account for transactions involving services provided by third
parties where the Company issues equity instruments as part of the total
consideration.
Pursuant to paragraph 8 of SFAS No. 123, the Company accounts for such
transactions using the fair value of the consideration received (i.e. the value
of the goods or services) or the fair value of the equity instruments issued,
whichever is more reliably measurable. The Company applies EITF 96-18, in
transactions, when the value of the goods and/or services are not readily
determinable and (1) the fair value of the equity instruments is more reliably
measurable and (2) the counterparty receives equity instruments in full or
partial settlement of the transactions, using the following methodology:
(a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
(b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the
date of the contract.
(c) For any transactions not meeting the criteria in (a) or (b) above, the
Company re-measures the consideration at each reporting date based on its
then current stock value.
Fair Value of Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments when it is
practicable to estimate that value. The carrying amount of the Company's cash
(bank overdraft), contracts receivable, accounts payable and accrued expenses,
and notes payable approximates their estimated fair values because related
interest rates offered to the Company approximate current offered rates. The
fair value of the notes receivable from stockholders are not determinable as
these transactions are with related parties.
Significant Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion 29, Accounting for Nonmonetary
Transactions". The amendments made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary assets should be measured using the estimated fair
value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has "commercial substance" if the
future cash flows of the entity are expected to change significantly as a result
of the transaction. This pronouncement is effective for nonmonetary exchanges in
fiscal periods beginning after June 15, 2005. The adoption of this pronouncement
is not expected to have a material impact on the Company's consolidated
financial statements.
--------------------------------------------------------------------------------
F-14
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant Recent Accounting Pronouncements (continued)
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes" and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements."
This pronouncement applies to all voluntary changes in accounting principle, and
revises the requirements for accounting for and reporting a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle, unless it is
impracticable to do so. This pronouncement also requires that a change in the
method of depreciation, amortization, or depletion for long-lived, non-financial
assets be accounted for as a change in accounting estimate that is affected by a
change in accounting principle. SFAS No. 154 retains many provisions of APB
Opinion No. 20 without change, including those related to reporting a change in
accounting estimate, a change in the reporting entity, and correction of an
error. The pronouncement also carries forward the provisions of FASB No. 3 which
govern reporting accounting changes in interim financial statements. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements, including those
that are in a transition phase as of the effective date of SFAS No. 154. The
adoption of this pronouncement is not expected to have a material impact on the
Company's future consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155 entitled "Accounting for Certain
Hybrid Financial Instruments," an amendment of SFAS No. 133 ("Accounting for
Derivative Instruments and Hedging Activities") and SFAS No. 140 ("Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities"). In this context, a hybrid financial instrument refers to certain
derivatives embedded in other financial instruments. SFAS No. 155 permits fair
value re-measurement of any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation under SFAS No. 133.
SFAS No. 155 also establishes a requirement to evaluate interests in securitized
financial assets in order to identify interests that are either freestanding
derivatives or "hybrids" which contain an embedded derivative requiring
bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips
are subject to SFAS No. 133, and provides that concentrations of credit risk in
the form of subordination are not embedded derivatives. SFAS No. 155 amends SFAS
No. 140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative. When SFAS No. 155 is adopted, any difference
between the total carrying amount of the components of a bifurcated hybrid
financial instrument and the fair value of the combined "hybrid" must be
recognized as a cumulative-effect adjustment of beginning deficit/retained
earnings.
--------------------------------------------------------------------------------
F-15
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant Recent Accounting Pronouncements (continued)
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. Earlier adoption is permitted only as of the beginning of a fiscal year,
provided that the entity has not yet issued any annual or interim financial
statements for such year. Restatement of prior periods is prohibited.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
--------------------------------------------------------------------------------
F-16
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
2. CONTRACTS IN PROGRESS
Contracts in progress at December 31, 2005, which include completed contracts
not completely billed, approximate:
Cumulative costs to date $ 5,196,000
Cumulative gross profit to date 4,380,000
--------------
Cumulative revenue earned 9,576,000
Less progress billings to date (9,659,000)
--------------
Net over billings $ (83,000)
==============
The following approximate amounts are included in the accompanying consolidated
balance sheet under these captions as of December 31, 2005:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 418,000
Billings in excess of costs and estimated
earnings on uncompleted contracts (501,000)
--------------
Net over billings $ (83,000)
==============
3. PROPERTY AND EQUIPMENT
Property and equipment approximate the following at December 31, 2005:
Machinery and equipment $ 1,364,000
Computer equipment 23,000
Capital lease equipment 272,000
Leasehold improvements 123,000
--------------
1,782,000
Less accumulated depreciation and amortization (1,370,000)
--------------
$ 412,000
==============
At December 31, 2004, the Company had $206,000 accrued as an estimated legal
settlement for a dispute with a former customer who had purchased a machine
during 2001. Such claim was settled in December 2005. The settlement required
the former customer to return the machine to the Company and the Company to pay
$275,000 to the former customer. The Company decided to utilize the machine to
manufacture materials used in its production. As a result, the Company recorded
the $275,000 cost of the machine (which management believes equals the fair
value) as machinery and equipment and recorded a corresponding credit
(reduction) to selling, general and administrative expenses in the accompanying
consolidated statements of operations for the year ended December 31, 2005.
--------------------------------------------------------------------------------
F-17
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
As of December 31, 2005, the Company had loans to two stockholders approximating
$506,000, including accrued interest. The loans accrue interest at 6% and are
due on demand. The Company has included the notes receivable from stockholders
in stockholders' equity (deficit) as such amounts have not been repaid during
2005 or 2004. For each of the years ended December 31, 2005 and 2004, total
interest income from notes receivable from stockholders approximated $20,000.
5. NOTES PAYABLE
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 was in default at December 31,
2004. At December 31, 2004, the total outstanding principal balance on Note A
was $250,000. In December 2005, the Company entered into an agreement with the
note holder to settle the entire principal balance of $250,000 plus accrued
interest of approximately $125,000 in exchange for 400,000 shares of restricted
common stock. As a result of this conversion and final settlement, the Company
recorded a gain on forgiveness of notes payable totaling approximately $127,000.
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 was in default at December 31, 2004.
During 2005, the Company and the note holder executed a mutual agreement to
fully settle the debt whereby by the Company agreed to make fifteen monthly
installments of $12,000 (totaling $180,000) beginning January 2006 and to issue
100,000 shares of restricted common stock valued at $62,000 (estimated based on
the market price of the stock on the date of the agreement) to the holder.
Accrued interest on the note totaled approximately $116,000 on the date of the
transaction. As a result of the effective reduction in principal balance of
$35,000, the forgiveness of approximately $116,000 of accrued interest and the
issuance of restricted common stock valued at $62,000, the Company recorded a
gain on forgiveness of notes payable totaling approximately $89,000 for the year
ended December 31, 2005.
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. Note C is secured by certain assets of the
Company. At December 31, 2005, the total outstanding principal balance on Note C
was $500,000 and accrued interest totaled approximately $172,000.
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. Note D is secured by certain assets of
the Company. At December 31, 2005, the total outstanding principal balance on
Note C was $250,000 and accrued interest totaled approximately $104,000.
--------------------------------------------------------------------------------
F-18
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
5. NOTES PAYABLE (continued)
In April, 2005, the Company and the note holders of Notes C and D (the
"Noteholder") executed a mutual agreement (the "Extension Agreement") whereby
the Noteholder agreed not to foreclose on the security interest of the two notes
payable, before the earlier of a funding or August 13, 2005. As consideration to
effectively extend the due date of the two notes until August 13, 2005, the
Company issued 250,000 shares of the Company's restricted common stock to the
Noteholder. 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 was 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." Subsequently,
the Noteholder waived its right to the penalty shares and has not attempted to
foreclose on the notes. Such notes are in default at December 31, 2005.
During November 2004, the Company borrowed $80,816 on two notes payable ("Note
E") to one individual. Note E is unsecured, matured in January 2005, has an
interest rates of 6% and is currently in default. At December 31, 2005 the total
outstanding principal balance on Note E was approximately $81,000 and accrued
interest totaled approximately $6,000.
Principal amounts due on the notes payable approximate the following for the
years ending December 31, 2006 and 2007:
2006 $ 975,000
2007 36,000
-------------
$ 1,011,000
=============
--------------------------------------------------------------------------------
F-19
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
6. INCOME TAXES
During 2005 and 2004, the provision for taxes differs from the amounts computed
by applying the U.S. Federal income tax rate of 34% to income before provision
for taxes as a result of the following:
2005 2004
---------- ----------
Computed "expected" tax (benefit) expense $ 227,000 $ (484,000)
Addition to (reduction) in income taxes resulting from:
State income taxes, net of federal benefit 40,800 (57,000)
Change in deferred tax asset valuation allowance (267,000) 533,000
Non-deductible expenses -- 8,800
---------- ----------
$ 800 $ 800
========== ==========
The effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31, 2005 and 2004 are presented
below:
Deferred tax assets:
Tax net operating loss carryforwards $ 3,955,000 $ 4,194,000
Accrued inventory reserve 167,000 194,000
Accrued expenses 18,000 19,000
------------ ------------
Total gross deferred tax asset 4,140,000 4,407,000
Less valuation allowance (4,140,000) (4,407,000)
------------ ------------
Total net deferred tax asset $ -- $ --
============ ============
The valuation allowance decreased by $267,000 and increased by $533,000 during
the years ended December 31, 2005 and 2004, respectively. The current provision
for income taxes for the years ended December 31, 2005 and 2004 is not
significant and due primarily to certain state taxes.
At December 31, 2005, the Company had net tax operating loss carryforwards of
approximately $10.4 million and $7.2 million available to offset future taxable
federal and state income, respectively. If not utilized to offset future taxable
income, the federal and state carryforwards will expire in various years through
2025 and 2015, respectively. In the event the Company were to experience a
greater than 50% change in ownership as defined in Section 382 of the Internal
Revenue Code, the utilization of the Company's tax net operating loss
carryforwards could be severely restricted.
--------------------------------------------------------------------------------
F-20
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS
Preferred Stock
The Company has authorized 15,000,000 shares of cumulative, convertible Series B
Preferred Stock ("Series B") with a par value of $1 per share. The Series B has
a mandatory cumulative dividend of $1.25 per share, which is payable on a
semi-annual basis, and convertible into 1.67 shares of the Company's common
stock, does not have any voting rights, and has liquidation preference equal to
$25 per share before any payment or distribution shall be made on common stock.
As of December 31, 2001, in accordance with the conversion terms of the Series
B, 95,023 shares of the common stock remained un-issued and committed, which the
Company has reclassified to common stock during the year ended December 31, 2002
because the stock had constructively been issued.
In March 2002, the Board of Directors authorized 75,000 shares of 5% cumulative,
convertible Series C Preferred Stock ("Series C") with a par value of $1 per
share. The Series C has a mandatory cumulative dividend of $1.25 per share,
which is payable on a semi-annual basis in June and December each year to
holders of record on November 30 and May 31, does not have any voting rights and
has liquidation preferences, as defined. Each share of Series C is convertible
at the option of the holder into 16.667 shares of the Company's common stock.
During the years ended December 31, 2005 and 2004, the Company issued 530,001
and 47,000 shares of restricted common stock, respectively, upon conversion of
31,800 and 2,820 shares of Series C, respectively, at a conversion rate of
16.667-to-1.
At December 31, 2005, the Company had a total of 28,980 shares of Series C
issued and outstanding, with accumulated dividends totaling approximately
$463,000, which is included in dividends payable in the accompanying
consolidated balance sheet.
During the year ended December 31, 2004, the Company issued a Private Placement
Memorandum ("PPM") in which the Company offered to eligible investors, as
defined, a maximum of 30,000 shares of Series D Preferred Stock ("Series D"),
with a required minimum offering of 1,000 shares of Series D to be sold at $25
per share. During the year ended December 31, 2004 and pursuant to the PPM, the
Company issued 23,640 shares of Series D to eligible investors for proceeds
totaling $521,000, net of $30,000 paid to the broker/dealer and $40,000 of
accounts payable which were exchanged for shares. Such offering costs were
included as an offset to additional paid-in capital in the accompanying
consolidated financial statements. Since the related conversion rate is 50:1,
the effective conversion rate of $0.50 resulted in a deemed dividend of
$153,660, which was included in accumulated deficit. The deemed dividend is also
reflected as an increase in the net loss attributable to common shareholders for
2004 (see Note 8). Additionally, the broker/dealer was granted Three-Year
Placement Warrants, as defined in the PPM, with a cashless exercise feature to
purchase 25,000 shares of the Company's common stock at prices ranging from
$0.50 to $1.00. No expense was recorded related to the granting of such warrants
as they were considered an offering cost. The warrants vested immediately and
expire in February 2007.
--------------------------------------------------------------------------------
F-21
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
Preferred Stock (continued)
In July 2005, the Company issued 600,000 shares of restricted common stock upon
conversion of 12,000 shares of Series D at a conversion rate of 50-to-1.
At December 31, 2005, the Company had a total of 11,640 shares of Series D
issued and outstanding, with accumulated dividends totaling approximately
$103,000, which is included in dividends payable in the accompanying
consolidated balance sheet.
Common Stock
During the year ended December 31, 2001, the Company received a subscription
receivable of $87,500 from a member of the Board of Directors in exchange for
shares of the Company's restricted common stock. The subscription receivable
bears interest at an annual rate of 6%. Principal and any unpaid interest were
due on October 6, 2001. As of December 31, 2005, the subscription receivable
remains unpaid.
During the year ended December 31, 2002, the Company received two subscriptions
receivable totaling $375,000 in exchange for 250,000 restricted shares of common
stock. The receivables bear interest at an annual rate of 5%. Principal and any
unpaid interest on both subscriptions receivable were due on August 22, 2003,
and are in default as of December 31, 2005. As of December 31, 2005, the
subscription receivable remains unpaid. The related accrued interest receivable
and interest income are insignificant to the consolidated financial statements.
During the year ended December 31, 2004, the Company issued 350,000 shares of
restricted common stock valued at $165,000 (estimated based on the market price
on the dates of grant) to three consultants for services rendered in relation to
corporate finance, investor relations and management services that were
substantially completed during 2004. Approximately $157,000 was recorded as
consulting expense during the year ended December 31, 2004 and approximately
$8,000 remained unamortized as deferred consulting fees at December 31, 2004,
which was recorded as an offset to stockholders equity (deficit). Such
unamortized amount was entirely amortized to consulting expense during the year
ended December 31, 2005.
In April 2005, the Company issued 250,000 shares of restricted common stock,
valued at $47,500 (estimated based on the market price on the dates of grant) to
one of its creditors (see Note 5) as consideration to extend the maturity date
of certain notes payable.
On April 25, 2005 the Company issued 300,000 shares of restricted common stock
to a holder of the Company's 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. The extent of the registration rights of the Series
D was that the Company would use its best efforts to file a registration
statement underlying the conversion shares, however, the Company's board of
directors decided to issue the penalty shares as a good faith measure to
maintain a good relationship with the investor.
In April 2005, the Company issued 100,000 shares of restricted common stock to
one of its former customers as an inducement and partial legal settlement for a
pending claim related to the sale of one its machines. The former customer then
refused to accept the shares and the Company then granted the shares to the
attorney which was representing the Company in the lawsuit. Accordingly, the
Company immediately expensed the fair value of such common stock totaling
$20,000 (estimated based on the trading price of the Company's stock on the date
of grant) and the attorney agreed to accept the shares as payment for
outstanding fees of such amount. At December 31, 2004, the Company had $206,000
accrued as an estimated legal settlement for this dispute. Such claim was
settled in December 2005. The settlement required the former customer to return
the machine to the Company and the Company to pay $275,000 to the former
customer. The Company decided to utilize the machine to manufacture materials
used in its production. As a result, the Company recorded the $275,000 cost of
the machine (which management believes equals the fair value) as machinery and
equipment and recorded a corresponding credit (reduction) to selling, general
and administrative expenses in the accompanying consolidated statements of
operations for the year ended December 31, 2005.
--------------------------------------------------------------------------------
F-22
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
In December 2005, the Company issued 400,000 and 100,000 shares of restricted
common stock to the holders of Notes A and B (see Note 5), respectively, to
settle the outstanding debt and recorded the stock at fair value (estimated
based on the trading price of the Company's stock on the date of grant) totaling
$310,000.
In December 2005, The Company issued 75,000 shares of restricted common stock to
its securities counsel as payment for past due legal fees totaling $46,500,
which equaled the fair value of the stock on the date of settlement (estimated
based on the trading price of the Company's stock on the date of settlement).
During 2005, the Company issued 1,050,000 shares of restricted common stock
under several consulting contracts for management consulting and investor
relations. The contracts do not contain a "performance commitment" as defined in
EITF 96-18 and, therefore, a measurement date does not exist until the services
are complete. As a result, the fair value of each stock issuance (estimated
based on the trading price of the Company's stock on the dates of the respective
agreements) was recorded as deferred consulting fees on the initial measurement
dates and subsequently adjusted (based on the then-current fair value at each
reporting date) through deferred consulting fees and is being amortized to
consulting expense over the periods of service until such time the respective
agreements are complete. The terms of the agreements range from three months to
one year. Accordingly, the accompanying consolidated financial statements
include the marked-to-market fair value of the 1,050,000 shares of common stock
totaling $519,000 with amortization of the related deferred consulting fees
totaling approximately $265,000 for the year ended December 31, 2005. At
December 31, 2005, three of these contracts had not been completed and the
remaining deferred consulting fees approximated $255,000.
--------------------------------------------------------------------------------
F-23
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
Stock Options and Warrants
Under the terms of the Company's Incentive Stock Option Plan ("ISOP"), options
to purchase an aggregate of 1,000,000 shares of common stock may be issued to
key employees, as defined. The exercise price of any option may not be less than
the fair market value of the shares on the date of grant. No options granted may
be exercisable more than 10 years after the date of grant. The options granted
generally vest evenly over a one-year period, beginning from the date of grant.
Under the terms of the Company's Non-Statutory Stock Option Plan ("NSSO"),
options to purchase an aggregate of 1,350,000 shares of common stock may be
issued to non-employees for services rendered. These options are non-assignable
and non-transferable, are exercisable over a five-year period from the date of
grant, and vest on the date of grant.
During the years ended December 31, 2005 and 2004, the Company did not grant any
stock options or warrants and no stock options or warrants were exercised.
The following is a status of the stock options and warrants outstanding at
December 31, 2005 and the changes during the two years then ended:
Year Ended Year Ended
December 31, 2005 December 31, 2004
------------- ------------- ------------- -------------
Options and Weighted Options and Weighted
Warrants Average Price Warrants Average Price
------------- ------------- ------------- -------------
Outstanding, beginning of year 1,711,583 $ 1.75 1,821,583 $ 2.34
Granted -- -- 25,000 0.65
Exercised -- -- -- --
Cancelled/Terminated (243,083) (9.88) (135,000) (9.54)
------------- ------------- ------------- -------------
Outstanding and exercisable, end of
year 1,468,500 $ 0.40 1,711,583 $ 1.75
============= ============= ============= =============
--------------------------------------------------------------------------------
F-24
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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7. EQUITY TRANSACTIONS (continued)
Stock Options and Warrants (continued)
The following table summarizes information related to stock options outstanding
at December 31, 2005:
Options Outstanding
-------------------------------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Exercise Price Number Life (Years) Price
----------------------- -------------- ------------ ------------
$0.25- $0.75 1,320,000 2.7 $ 0.25
$1.00- $1.25 135,000 1.7 1.05
$5.00 5,000 2.0 5.00
$10.00 8,500 0.5 10.00
-------------- ------------
1,468,500 0.40
============== ============
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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8. LOSS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years ended December
31, 2005 and 2004:
2005 2004
--------------------------
Net income (loss) $ 668,359 $(1,423,359)
Cumulative preferred dividends (See Note 7) (156,300) (214,575)
Deemed dividends on preferred stock (See Note 7) -- (153,660)
Numerator for basic and diluted earning (loss) per share:
Net income (loss) applicable to common stockholders 512,059 (1,791,594)
Denominator for basic earnings (loss) per share:
Weighted average shares 9,186,987 7,038,209
Denominator for diluted earnings ( loss) per share:
Weighted average shares 9,836,987 7,038,209
Basic earnings (loss) per share $ 0.06 $ (0.25)
=========== ===========
Diluted earnings (loss) per share $ 0.05 $ (0.25)
=========== ===========
9. COMMITMENTS AND CONTINGENCIES
Service Agreements
Periodically, the Company enters into various agreements for services including,
but not limited to, public relations, financial consulting and manufacturing
consulting. Generally, the agreements are ongoing until such time they are
terminated, as defined. Compensation for services is paid either at a fixed
monthly rate or based on a percentage, as specified, and may be payable in
shares of the Company's common stock. The Company's policy is that expenses
related to these types of agreements are valued at the fair market value of the
services or the shares granted, whichever is more realistically determinable.
Such expenses are amortized over the period of service.
Leases
The Company leases equipment under various operating agreements which require
monthly payments ranging from approximately $250 to $600, and mature through
July 2006.
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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9. COMMITMENTS AND CONTINGENCIES (continued)
Leases (continued)
The Company leases its office and warehouse facility under a non-cancelable
operating lease agreement. The lease requires monthly lease payments of
approximately $33,000, with annual increases of 3% through December 2006. The
lease is personally guaranteed by one of the stockholders.
Future minimum lease payments on the operating lease obligations approximate
$400,000 for the year ended December 31, 2006. The Company currently has no
future lease commitments beyond such date.
Rental expense for operating leases approximated $410,000 for each of the years
ended December 31, 2005 and 2004. Interest expense incurred pursuant to capital
lease obligations, which expired during 2005, approximated $13,000 and $18,000
for the years ended December 31, 2005 and 2004, respectively.
Legal
From time to time, the Company may be involved in various claims, lawsuits, and
disputes with third parties, actions involving allegations or discrimination or
breach of contract actions incidental in the normal operations of the business.
The Company is currently not involved in any such litigation, which management
believes could have a material adverse effect on its financial position or
result of operations.
Backlog (Unaudited)
The following schedule approximates a reconciliation of backlog representing
signed contracts:
Balance, January 1, 2005 $ 3,471,000
New contracts, January 1, 2005 through December
31, 2005 5,941,000
------------
9,412,000
Less, contract revenue earned - January 1, 2005
through December 31, 2005 (6,038,000)
------------
Balance December 31, 2005 $ 3,374,000
============
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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10. SUBSEQUENT EVENTS
On February 15, 2006, the Company entered into a Series A Convertible Note with
a third party (the "Holder") for $300,000, which matures on the earlier of the
next debt or equity financing which the Company closes after the Issue Date or
on May 16, 2006. The Note accrues interest at a fixed rate of 24% per annum on
the unpaid principal balance from the Issue Date to the sixtieth day from the
Issue Date and bares interest at the rate 27% per annum after the sixtieth day
from the Issue Date to the Maturity Date. Under the term of the Note, the
company issued 30,000 restricted shares of its common stock to the Holder;
454,545 Warrants to the Holder, and 45,454 Warrants to the placement agents and
its designees. After the Company obtained the Financing described below, the
Company issued an additional 30,000 shares of common stock to the Holder, to
extend the Maturity Date of the Note to May 16, 2006. In conjunction with the
Note, the Company and the Holder entered into the following attendant
agreements, all dated February 15, 2006:
o Registration Rights Agreement whereby, all the securities issued in
connection with the Note have five years right to Piggyback (to be
included in the next Registration Statement);
o Common Stock Purchase Warrant granting the Holder warrants to
purchase 454,545 shares of common stock of the Company at an
exercise price of $0.66 for a term of five years (the "Warrants");
o Finder's Fee Agreement between the Company and a third party.
On February 28, 2006, the Company entered into a Securities Purchase Agreement
(the "Agreement") with CAMOFI Master LDC (the "Purchaser") whereby the Company
agreed to sell, and the Purchaser agreed to purchase, up to $5,000,000 aggregate
principal amount of 12% Senior Secured Convertible Notes due February 28, 2009
(up to $3,500,000 to be purchased at the Closing and up to an additional
$1,500,000 to be purchased pursuant to an Additional Investment Right), secured
by a first priority lien on all assets of the Company and its current and future
subsidiaries (including a pledge of the shares of the Company's current and
future Subsidiaries). In conjunction with the Agreement, the Company and the
Purchaser entered into the following attendant agreements, all dated February
28, 2006:
o 12% Senior Secured Convertible Note for $3,500,000 due February 28,
2009 (the "Notes");
o Security Agreement between the Company and its current and future
subsidiaries on the one hand and the Purchaser on the other hand;
o Subsidiary Guarantee;
o Common Stock Purchase Warrant granting the Purchaser warrants to
purchase 3,476,190 shares of common stock of the Company at an
exercise price of $0.63 for a term of seven years (the "Warrants");
o Twelve month lock-agreements with certain Company shareholders; o
o Registration Rights Agreement whereby, within 45 days, the Company
shall prepare and file with the SEC a Registration Statement
covering the resale of 125% of the following securities
(collectively, the "Registrable Securities") of the Purchaser for an
offering to be made on a continuous basis pursuant to Rule 415: (i)
all of the shares of common stock issuable upon conversion of the
Note or as interest on the Notes assuming all of the Notes are
converted and all permissible interest payments are made in shares
of common stock and the Notes are held until maturity, (ii) all
shares issuable as amortization payments on the Notes assuming all
permissible amortization payments are made in shares of common stock
and the Notes are held until maturity, (iii) all shares of common
stock underlying the Warrants, (iv) any securities issued or
issuable upon any stock split, dividend or other distribution
recapitalization or similar event with respect to the foregoing; and
(v) any additional shares issuable in connection with any
anti-dilution provisions in the Notes or the Warrants, including a
liquidated damages clause whereby if certain deadlines for filing,
responding and effectiveness of the Registration Statement (each, an
"Event Date") are not met, the Company shall pay to the Purchaser an
amount in cash equal to 1.5% of the outstanding principal of the
Notes for any Registrable Securities then held by the Purchaser for
the first 30 days (or part thereof) after the Event Date and an
additional 1.5% for any subsequent 30-day period (or part thereof),
thereafter; and
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F-28
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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o Escrow Agreement and side letter between the Purchaser and Katten
Muchin Rosenman LLP (the "Escrow Agent").
On March 7, 2006, the Company issued 250,000 shares of restricted common stock
to settle accrued interest totaling $157,500 on two notes payable with principal
balances totaling $750,000.
On March 9, 2006, the Company issued 150,000 warrants to purchase shares of
common stock with an exercise price of $0.63 to a consultant under an agreement
to write an Executive Informational Overview.
On March 17, 2006, the Company issued 200,000 shares of restricted common stock
to a consultant, under a 3 month consulting agreement, for investor relations
services.
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F-29