As filed with the Securities and Exchange Commission on August 9, 2006
An Exhibit List can be found on page II-6.
Registration No. 333-134863
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW CENTURY COMPANIES, INC.
(Name of small business issuer)
Delaware 3541 06-10345787
(State or other jurisdiction (Primary standard (IRS employer
of incorporation) industrial code number) identification number)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
(562) 906-8455
(Address and telephone number of principal executive offices
and principal place of business)
David Duquette
President
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
(562) 906-8455
(Name, address and telephone number of agent for service)
Copies to:
Marc Ross, Esq.
Marcelle S. Balcombe, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700 (212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.|_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
---------------------------------- ------------------ --------------------------- ---------------------------- --------------------
Title of each class of Amount to be Proposed maximum offering Proposed maximum aggregate Amount of
securities to be registered registered price per share (1) offering price registration fee
---------------------------------- ------------------ --------------------------- ---------------------------- --------------------
Common stock, $.10 par value per 310,000 $0.626 $194,137.50 $20.77
share
---------------------------------- ------------------ --------------------------- ---------------------------- --------------------
Common stock , $.10 par value (2) 15,427,544 $0.626 $ 9,661,499.43 $1,033.78
---------------------------------- ------------------ --------------------------- ---------------------------- --------------------
Total 15,737,544 $1,054.55*
---------------------------------- ------------------ --------------------------- ---------------------------- --------------------
* Previously paid.
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and 457(g) under the Securities Act of 1933, using
the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on June 5, 2006, which was $0.626 per share.
(2) Includes shares of our common stock, par value $0.10 per share, which may be
offered pursuant to this registration statement, which shares are currently
outstanding and are issuable upon conversion of convertible notes and the
exercise of warrants held by the selling stockholders. In addition to the shares
set forth in the table, the amount to be registered includes such additional
number of shares issuable upon conversion of the notes as such number may be
adjusted as a result of stock splits, stock dividends and similar transactions
in accordance with Rule 416.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
2
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 9, 2006
NEW CENTURY COMPANIES, INC.
15,737,544 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
15,737,544 shares of our common stock, including 10,728,816 shares of common
stock issuable upon conversion of convertible notes or as interest on the
convertible notes, 4,698,729 issuable upon the exercise of common stock purchase
warrants and, 310,000 shares of our common stock. The selling stockholders may
sell common stock from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock,
which they are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "NCNC.OB". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on August 4, 2006, was $0.54.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 9, 2006.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by New
Century Companies, Inc, with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
3
TABLE OF CONTENTS
Prospectus Summary........................................................................................ 1
Risk Factors.............................................................................................. 5
Forward Looking Statements................................................................................ 9
Use of Proceeds........................................................................................... 10
Management's Discussion and Analysis or Plan of Operation................................................. 10
Description of Property................................................................................... 15
Legal Proceedings......................................................................................... 15
Management................................................................................................ 15
Executive Compensation.................................................................................... 16
Certain Relationships and Related Transactions............................................................ 18
Market for Common Equity and Related Stockholder Matters.................................................. 18
Security Ownership of Certain Beneficial Owners and Management............................................ 19
Selling Stockholder....................................................................................... 20
Description of Securities................................................................................. 21
Plan of Distribution...................................................................................... 23
Legal Matters............................................................................................. 24
Experts................................................................................................... 24
Available Information..................................................................................... 24
Disclosure of Commission Position on Indemnification for Securities Act Liabilities....................... 24
Index to Consolidated Financial Statements................................................................F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
NEW CENTURY COMPANIES, INC.
We are engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. We
provide rebuilt, retrofit and remanufacturing services for numerous brands of
machine tools.
We also manufacture original equipment CNC large turning lathes and attachments
under the trade name 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.
The primary industry segments in which our 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, medical,
aerospace and mining fields. We sell our products to customers in the United
States, Canada and Mexico.
Over the last several years, we have designed and developed a large horizontal
CNC turning lathe with productivity features new to the metalworking industry.
We believe that a potential market for the Century Turn Lathe, in addition to
the markets mentioned above, is aircraft landing gear.
We are also engaged in assembling sound-wall modules made from Quilite(R), a
lightweight, graffiti resistant concrete alternative used in freeway sound
barriers and in other sound absorbing structures and non-weight bearing
applications where privacy or screening is necessary.
Our principal offices are located at 9835 Santa Fe Springs Rd. Santa Fe Springs,
CA 90670 and our telephone number is (562) 906-8455. We are a Delaware
corporation.
1
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The Offering
--------------------------------------------------- -----------------------------------------------------------------------
Common stock offered by selling stockholders....... Up to 15,737,544 shares of common stock, including 10,728,816 shares
of common stock issuable upon conversion of convertible notes or as
an interest on the convertible notes; 4,698,728 shares of common
stock underlying common stock purchase warrants and 310,000 shares.
This number represents 59% of our total number of shares outstanding
assuming the exercise of all common stock purchase warrants and
conversion of convertible notes, including interest.
--------------------------------------------------- -----------------------------------------------------------------------
Common stock to be outstanding after the offering.. Up to 26,787,199 shares*.
--------------------------------------------------- -----------------------------------------------------------------------
Use of proceeds We will not receive any proceeds from the sale of the common stock.
However, we may receive the exercise price for any shares of common
stock delivered in connection with the exercise of the common stock
purchase warrants. We expect to use the proceeds received from the
exercise of the common stock purchase warrants, if any, for general
working capital purposes.
--------------------------------------------------- -----------------------------------------------------------------------
OTCBB Symbol NCNC.OB
--------------------------------------------------- -----------------------------------------------------------------------
*The above information regarding common stock to be outstanding after the
offering is based on 11,359,655 shares of common stock outstanding as of August
8, 2006 and assumes the exercise of warrants and conversion of convertible
notes, including interest by our selling stockholders. This number does not
include 310,000 shares which are being offered by Selling Stockholders which
have been already issued and are included in our issued and outstanding as of
August 8, 2006.
FINANCING TRANSACTIONS
We are registering shares of common stock and shares of common stock underlying
common stock purchase warrants and convertible notes, including interest, in
connection with the following financing transactions, engaged in, pursuant to
Section 4(2) under the Securities Act of 1933 or Regulation D promulgated
hereunder:
MOTIVATED MINDS BRIDGE LOAN
On February 15, 2006, to obtain funding for our operations, we issued a Series A
Convertible Note (the "Note") in the principal amount of $300,000 to Motivated
Minds, LLC, an Arizona limited liability company (the "Lender"). The Note is
convertible into 454,545 shares of our common stock, par value $0.10, at a price
of $0.66 per share. In connection with the Note, we issued a warrant to
Motivated Minds to purchase up to 454,545 shares of our common Stock at a price
of $0.66 per share. Such Warrant is currently exercisable and expires on the
fifth anniversary of the date of issuance.
The Note bears interest as follows: (i) equal to twenty-four percent (24%) per
annum on the unpaid principal balance from the issue date to the sixtieth (60th)
day from the issue date; and (ii) twenty-seven percent (27%) per annum after the
sixtieth (60th) day from the Issue Date to the Maturity Date. The Note matured
on May 16, 2006. We are currently in negotiations to extend the due date of the
Note.
We have the right to prepay the Note, without penalty, in whole or in part, on
ten (10) days advance notice to the holder and subject to the right of the
holder to convert in advance of such prepayment date and provided that on such
prepayment date, we shall pay in respect of the redeemed Note, cash equal to the
face amount plus accrued interest on the Note (or portion thereof) redeemed.
Upon the occurrence of an event of default as defined in the Note, default
Interest will accrue on the unpaid principal or interest due thereunder at the
rate of thirty percent (30%) per annum until the Event of Default is cured.
Pursuant to the terms of the Note, an event of default shall be deemed to have
occurred if (i) we fail to pay principal of the Note when due; (ii) failure to
pay interest when due, and such failure continues for 30days; (iii) our failure
to perform any covenants, conditions and provisions of the Note and the other
ancillary documents executed in connection with the Note, which failure
continues for a period of 10 days after notice of default is given to the
Company. Default Interest is payable on a monthly basis commencing thirty (30)
days after default interest has begun accruing.
2
Motivated Minds has contractually agreed to restrict its ability to convert the
Note and receive shares of our common stock such that the number of shares of
our common stock held by its and its affiliates, after such conversion does not
exceed 4.99% of our then issued and outstanding shares of common stock.
In connection with the Note, we paid aggregate fees and expenses of $30,000 and
issued 30,000 restricted shares of our common stock to Motivated Minds and an
aggregate of 45,454 warrants to the Placement Agents, Source Capital Group, Inc.
and Ascendiant Securities, LLC, which warrants are exercisable at a price of
$.66 per share and expire on February 14, 2011.
The Note and the Warrants were offered and sold to Motivated Minds in a
transaction made in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated
thereunder.
CAMOFI PRIVATE PLACEMENT
On February 28, 2006, to obtain funding for our operations, we entered into a
Securities Purchase Agreement ("CAMOFI Purchase Agreement") with CAMOFI Master
LDC ("CAMOFI") for the sale of (i) $3,500,000 in 12% Senior Secured Convertible
Note (the "CAMOFI Note") which are convertible into common stock at a fixed
conversion price of $0.63 and (ii) stock purchase warrants (the "Warrant") to
purchase 3,476,190 shares of our common stock at a fixed exercise price of
$0.63. We closed the financing pursuant to the CAMOFI Purchase Agreement on
February 28, 2006.
The CAMOFI Note bears interest at 12% and matures on February 28, 2009. Interest
on the aggregate of unconverted and then outstanding principal amount is payable
monthly in arrears, in cash or registered shares of common stock at the
Company's election, or a combination thereof, beginning on the first day of the
first month after the issuance date of March 1, 2006. Notwithstanding the
foregoing, payment in shares of common stock can only occur if during the 20
trading days immediately prior to the payment date, the payment in shares of
common stock would not exceed 25% of the volume for any of the previous 20
trading days, we shall have given the holder notice and the following conditions
(the "Equity Conditions") have been met: (i) we have duly honored conversions
and redemptions; (ii) all liquidated damages and other amounts owing in respect
of the CAMOFI Note have been paid; (iii) there is an effective registration
statement pursuant to which the holder is permitted to resell all of the shares
issuable pursuant to the CAMOFI Purchase Agreement; (iv) our stock is listed or
quoted for trading on either of the Nasdaq SmallCap Market, the American Stock
Exchange, the New York Stock Exchange, the Nasdaq National Market or the OTC
Bulletin Board and the shares issuable pursuant to the CAMOFI Purchase Agreement
are listed for trading; (v) there is sufficient number of authorized but
unissued and unreserved shares for the issuance of shares issuable pursuant to
the CAMOFI Purchase Agreement; (vi) we are not in default under the CAMOFI
Purchase Agreement; (vii) the shares issued or issuable will not exceed 4.99%;
(viii) no public announcement of a pending or proposed fundamental transaction
(such as a merger or consolidation of the Company, any completed tender offer or
exchange, any reclassification of our common stock or compulsory share exchange
where our common stock is effectively converted into or exchanged for other
securities, cash or property) or change of control transaction has occurred that
has not been consummated; (ix) the closing price of our common stock is at lease
115% of the conversion price of the CAMOFI Note, (as adjusted).
We have the right to prepay in cash, all, or a portion of the CAMOFI Note, at
120% of the principal amount plus accrued interest at the date of prepayment. In
addition, we are required to repay the CAMOFI Note at 120% of the principal
amount thereof plus accrued interest to the date of repayment in the event we
shall (A) sell all or a portion of the our assets, (B) become subject to change
in control transaction, or (C) Quilite International, LLC's audited financial
statement are materially worse than its unaudited financial statements. In
determining whether Qulite's audited financial statements are materially worse
than its unaudited financial statements, we will rely on a qualified third party
accounting expert to determine the differences. The comparison will take place
prior to the closing of any transaction between the Company and Quilite.
Presently, the Company has not set time for the consummation of any transactions
with Quilite.
On the first day of each month, commencing September 1, 2006, we are required to
redeem 1/30th of the original principal amount of the CAMOFI Note plus accrued
but unpaid interest, the sum of all liquidated damages and any other amounts
then owing to such Holder in respect of the Note which shall be paid in cash,
equal to 105% of such amount; provided, however, upon 10 trading days' prior
written irrevocable notice, in lieu of a cash redemption payment, we may elect
to pay 100% of such amount due in shares of our common stock based on a
conversion price equal to 85% of the average of the 10 consecutive VWAPs
immediately prior to the applicable payment.
Upon the occurrence of an event of default, at the Holder's election, the full
principal amount of the Note, together with interest and any other amounts owed
pursuant to the CAMOFI Note shall become immediately due and payable in cash.
The aggregate amount payable upon an event of default shall be equal to 120% of
the principal amount of the CAMOFI Note, plus all accrued and unpaid interest
thereon and all other costs, expenses, and liquidated damages due with respect
to such CAMOFI Note. Commencing 5 days after the occurrence of any event of
default that results in the eventual acceleration of the CAMOFI Note, the
interest rate on the Note shall accrue at the rate of 20% per annum, or such
lower maximum amount of interest permitted to be charged under applicable law.
Pursuant to the terms of the Note, an event of default means (subject to any
applicable grace or cure period) (i) any default in the payment of any principal
interest or liquidated damages in connection with the Note; (ii) failure to
observe any covenant or agreement contained in the Note; (iii) a default under
any of the other documents executed in connection with the CAMOFI Purchase
Agreement or any other material agreement, lease document or instrument to which
the Company or any subsidiary is bound which default is not cured within 10
trading days; (iv) any representation or warranty made in any of the documents
or in any written statement delivered to CAMOFI shall be untrue in all material
respects as of the date made or deemed made; (v) any proceeding under applicable
bankruptcy or insolvency laws commenced against the Company or its subsidiaries,
which remains un-dismissed after 60 days or any adjudication of the Company or
any of its subsidiaries is adjudicated insolvent or bankrupt.
3
In connection with the CAMOFI Purchase Agreement, we entered into an escrow
agreement by and among, CAMOFI, Katten Muchin Rosenman, as Escrow Agent, and us
and a letter agreement with CAMOFI, pursuant to which $1,500,000 was deposited
into escrow by CAMOFI. Pursuant to the terms of the letter agreement, the
$1,500,000 will be released to us upon consummation of the acquisition of
Quilite International LLC, provided however, (v) the terms of such acquisition
are satisfactory to CAMOFI; (w) CAMOFI shall be satisfied, in its sole
discretion, with the progress of negotiations for the extension or renewal of
our Headquarters lease; (x) no default or Event of Default shall have occurred
or be continuing; (y) there shall have been no material adverse change in our
business and the business of our subsidiaries or results of operations; and (z)
the Equity Conditions shall have all been satisfied. Based upon changed
circumstances and the immediate need by the Company for the funds for working
capital purposes, the parties determined to release the funds held in escrow to
the Company as follows: (a) $750,000 on July 10, 2006 and (b) $750,000 on August
4, 2006. The Company has determined to utilize the funds for working capital.
The Warrant is exercisable at a price of $0.63 per share and will expire on
February 28, 2013. In the event that there is no effective registration
statement covering the resale of the shares underlying the Warrant, the Warrant
may be exercised by means of a cashless exercise. The Warrant provides for
certain adjustments upon the occurrence of certain events, including, but not
limited to, any payment of a stock dividend or distributions to our
shareholders; (2) subdivision of our common stock into a larger number of
shares; (3) reclassification of our common stock; and (4) the combination of our
common stock into a smaller number of shares.
The CAMOFI Note is secured by substantially all of our assets
CAMOFI has contractually agreed to restrict its ability to convert the CAMOFI
Note and exercise the Warrant and receive shares of our common stock such that
the number of shares of our common stock held by them and their affiliates after
such conversion or exercise does not exceed 4.99% of our then issued and
outstanding shares of common stock.
In connection with the CAMOFI Note, we paid aggregate fees and expenses of
$377,500 to CAMOFI. In addition, we issued 722,539 warrants to the Placement
Agent, Ascendiant Securities, LLC, and its assignee which warrants are
exercisable at price of $.63 and which expire on February 28, 2013. Ascendiant
also received 250,000 restricted shares of our common stock.
The CAMOFI Note and CAMOFI Warrant were offered and sold to CAMOFI in a private
placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated thereunder. CAMOFI is an accredited investor as defined in Rule 501
of Regulation D promulgated under the Securities Act of 1933.
4
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment. There are a number of factors that are not identified herein
that could have a negative effect. Among the factors that could cause actual
results to differ materially are the following:
o adverse changes in the conditions in the specific markets for our
products;
o visibility to, and the actual size and timing of, capital expenditures by
our customers;
o inventory practices, including the timing of deployment, of our customers;
o adverse changes in the public and private equity and debt markets and the
ability of our customers and suppliers to obtain financing or to fund
capital expenditures;
o adverse changes in the credit ratings of our 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.
RISKS RELATING TO OUR COMPANY
WE HAVE INCURRED LOSSES IN THE PAST AND HAVE A LIMITED OPERATING HISTORY ON
WHICH TO BASE AN EVALUATION OF OUR PROSPECTS, WHICH CAN HAVE A DETRIMENTAL
EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.
We have a limited operating history on which to base an evaluation of our
business and prospects. For the years ended December 31, 2005 and 2004, we had
net income (loss) of $668,359 and $(1,423,359), respectively, and net income
(loss) of $(1,212,380) for the three months ended March 31, 2006. As of March
31, 2006, we have a working capital deficit of $1,032,131. We cannot give any
assurance that we will generate significant revenue or always have profits. In
addition, we anticipate that we will require additional capital commitments
during 2006 to sustain our operations. This could have a detrimental effect on
the long-term capital appreciation of our stock.
THERE CAN BE NO ASSURANCE THAT WE WILL ACHIEVE PROFITABILITY.
There can be no assurance that we will achieve profitability. Our revenues and
operating results may fluctuate from quarter to quarter and from year to year
due to a combination of factors, including, but not limited to, cost of
production and volume of sales. There can be no guarantee that we will be able
to achieve profitability on a quarterly or annual basis. If we do not achieve
profitability, our business will be adversely affected and investors may lose
all or substantially all of their investment.
WE ARE DEPENDENT UPON A FEW KEY PERSONNEL AND THEIR LOSS MAY NEGATIVELY IMPACT
OUR RESULTS FROM OPERATIONS
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. Duquette 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.
WE MAY BE EXPOSED TO 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 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.
5
WE RELY ON EXTERNAL FINANCING TO MEET OUR CASH REQUIREMENTS
In February 2006, we received $300,000 from Motivated Minds and $3,500,000 in
debt financing from CAMOFI. However we will continue to rely upon external
financing sources to meet the cash requirements of our ongoing operations. In
the future, we may be required to raise additional funds, particularly if we
exhaust the funds advanced under that agreement, are unable to generate positive
cash flow as a result of our operations and are required to repay the
convertible debentures as a result of Motivated Mind's and CAMOFI's failure to
convert the debentures into common stock. To the extent that we are unable to
raise sufficient capital, our business plan will require substantial
modification and our operations curtailed. These conditions raise substantial
doubt about our ability to continue as a going concern. Our 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.
WE MAY NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL, WHICH MAY RESULT IN
DILUTION TO YOUR OWNERSHIP AND VOTING RIGHTS IN US.
Based upon our current cash reserves and forecasted operations, we may need to
obtain outside funding to implement our plan of operation over the next twelve
months. Our need for additional capital to finance our business strategy,
operations, and growth will be greater should, among other things, revenue or
expense estimates prove to be incorrect. If we fail to arrange for sufficient
capital in the future, we may be required to reduce the scope of our business
activities until we can obtain adequate financing. We may not be able to obtain
additional financing in sufficient amounts or on acceptable terms when needed,
which could adversely affect our operating results and prospects and force us to
curtail our business operations. Debt financing must be repaid regardless of
whether or not we generate profits or cash flows from our business activities.
Equity financing may result in dilution to existing stockholders. If we do not
receive funding at lower prices, this will have a dilutive effect on the value
of our securities issued at higher prices. Further, the sale, or potential sale
of large amounts of our securities will, in all likelihood, have a depressive
effect on the price of our securities which will affect the value of your
investment.
OUR AUDITORS HAVE INCLUDED A GOING CONCERN MATTER IN THEIR OPINION
Our auditors opinion regarding our financial statements includes concerns about
our ability to continue as a going concern, which contemplates among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business. These concerns arise from the fact that as of December 31,
2005 we had a negative working capital of approximately $2,083,000, an
accumulated deficit of approximately $6,959,000 and we are in default on certain
notes payable. These factors raise substantial doubt about our ability to
continue as a going concern. We intend to fund our operations through
anticipated increased sales and debt and equity financing arrangements which
management believes may be insufficient to fund our capital expenditures,
working capital and other cash requirements for the year ending December 31,
2006. We will be required to seek addition funds to finance our long-term
operations. There can be no assurance that we will be able to able to obtain
additional financing. If we are unable to continue as a going concern, you may
lose your entire investment.
RISKS RELATING TO OUR COMMON STOCK
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
6
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
that the broker or dealer received a signed, written agreement from the investor
prior to the transaction. Generally, brokers may be less willing to execute
transactions in securities subject to the "penny stock" rules. This may make it
more difficult for investors to dispose of our common stock and cause a decline
in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
OUR SHARE PRICE IS VOLATILE
Our Common Stock has experienced, and may continue to experience, substantial
price volatility, particularly as a result of variations between our actual or
anticipated financial results and the published expectations of analysts and as
a result of announcements by us and our competitors. 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 our securities may negatively impact our
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 our
Common Stock.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of August 8, 2006, we had 11,359,655 shares of common stock issued and
outstanding, $3,800,000 of convertible notes outstanding that may be converted
into an estimated 6,010,100 shares of common stock and outstanding warrants to
purchase 4,698,729 shares of common stock. All of the shares, including all of
the shares issuable upon conversion of the convertible notes and upon exercise
of our warrants, may be sold without restriction upon effectiveness of a
registration statement which includes those shares. The sale of these shares may
adversely affect the market price of our common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE NOTES AND EXERCISE OF
OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR
EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although Motivated Minds or CAMOFI
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent Motivated Minds or
CAMOFI from converting and/or exercising and selling some of their holdings,
selling shares of common stock obtained and then converting further. In this
way, Motivated Minds or CAMOFI could sell more than this limit while never
holding more than this limit.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
7
In February 28, 2006, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $3,500,000 principal amount of secured convertible
notes. The secured convertible notes are due and payable, with 12% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. In addition, any event of default such as our failure to repay
the principal or interest when due, our failure to issue shares of common stock
upon conversion by the holder, our failure to timely file a registration
statement or have such registration statement declared effective, breach of any
covenant, representation or warranty in the Securities Purchase Agreement or
related convertible note, the assignment or appointment of a receiver to control
a substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the secured convertible notes, including a
default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. If we were required
to repay the secured convertible notes, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the notes
when required, the note holders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action would
require us to curtail or cease operations.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS,
INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Securities Purchase Agreements we entered into in
February 2006, we executed a Security Agreement in favor of CAMOFI granting them
a first priority security interest in all of our goods, inventory, contractual
rights and general intangibles, receivables, documents, instruments, chattel
paper, and intellectual property. The Security Agreement states that upon the
occurrence of an event of default as defined in the Notes and pursuant to the
Security Agreement, the Investors have the right to take possession of the
collateral, to operate our business and the business of our subsidiaries using
the collateral, and have the right to assign, sell, lease or otherwise dispose
of and deliver all or any part of the collateral, at public or private sale or
otherwise to satisfy our obligations under these agreements.
8
FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make written or oral statements
that are "forward-looking," including statements contained in this prospectus
and other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements within the
meaning of the Act. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital or to
obtaining the financing needed to implement its business plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
(i) insufficient revenues to cover operating costs.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
could receive funds upon exercise of the common stock purchase warrants held by
the selling stockholders. We expect to use the proceeds received from the
exercise of the common stock purchase warrants, if any, for general working
capital purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our current strategy is to expand our customer sales base with our 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. Our growth strategy also includes strategic acquisitions in addition to
growing the current business. A significant acquisition will require additional
financing. We obtained additional financing in 2006 for a proposed acquisition.
However, than can be no assurance the acquisition will take place.
PLAN OF OPERATIONS
The earnings of the Company for the three months ended March 31, 2006 were
negative as a result of an increase in operating expenses.
The Company's current strategy is to expand its customer sales base with its
present line of machine products. The Company's growth strategy also includes
strategic acquisitions in addition to growing the current business. Plans for
expansion are funded through current working capital from ongoing sales and
additional funds in the form of debt or equity. 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.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005
Revenues. The Company generated revenues of $1,699,847 for the three months
ended March 31, 2006, which was a $267,958 or 19% increase from $1,431,889 for
the three months ended March 31, 2005. The increase is the result of a growth in
customer orders, based on the overall enlarged market for machine tools and on
capability to sell the Company's product at higher contact amounts.
Gross Profit. Gross profit for the three months ended March 31, 2006, was
$403,239 or 24% of revenues, compared to $386,019, or 27% of revenues for the
three months ended March 31, 2005, a 3% increase. The increase of gross profit
is the result of increased sales.
Operating Loss. Operating loss for the three months ended March 31, 2006, was
$(51,790) compared to an operating income of $160,200 for the three months ended
March 31, 2005. The decrease of $211,990 or 132% in operating loss is due to
approximately $158,000 increased cost of consulting expenses such us investor
relations, business and financial consultants, and approximately $64,000
increase in selling, general and administrative expenses due primarily to
approximately $40,000 increase in accounting and auditing fees.
Interest Expense. Interest expense for the three months ended March 31, 2006,
was $395,828 compared with $49,067 for the three months ended March 31, 2005.
The $346,761 increase in interest expense is due primarily to $249,123
amortization of beneficial conversion future and discount on warrants and
conversion option associated to two convertible notes payable and amortization
of deferred financing costs totaling $57,466 related to warrants and common
stock granted to third parties as financing cost on convertible notes.
Secondarily, the increase in interest expense is due to $43,500 liquidated
damages on $3.5 million convertible debt.
Derivative liability expense. As of March 31, 2006, an increase in fair value of
the derivative liability associated with the warrants to purchase common stock,
granted in connection with $3.5 million convertible debenture, was calculated
and a resulting amount of $764,762 was recorded as derivate liability expense.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
The net cash increase of the Company during the three months ended March 31,
2006 was $267,805. The increase is due to net cash provided by financing
activities of $1,075,851. 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 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 financial obligations for the foreseeable future.
FISCAL YEARS 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.
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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.
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. We rely upon external financing sources to meet the cash
requirement of our ongoing operations. Currently, our management attracted
additional funding in the form of subordinated debt. However, there is no
guarantee that the capital raised is sufficient to execute our business plan. To
the extent that the capital raised is not sufficient, our business plan will be
required to be substantially modified and its operations curtailed. Our auditors
have issued their report which contains an explanatory paragraph as to our
ability to continue as a going concern.
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 us to
meet our obligations for the foreseeable future.
INFLATION AND CHANGING PRICES
We do not foresee any adverse effects on our 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
Our independent certified public accountants have stated in their report, that
we have a working capital deficit, a significant accumulated deficit and are in
default on certain notes payable. These conditions raise substantial doubt about
our 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.
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.
11
METHOD OF ACCOUNTING FOR LONG-TERM CONTRACTS
We use 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.
CLASSIFICATION OF WARRANT OBLIGATION
In connection with the issuance of the 12% Senior Secured Convertible Notes (See
Note 3 of the Company's financial statements for the quarter ended March 31,
2006), the Company has an obligation to file a registration statement covering
the resale of 125% of the Registrable Securities, as defined in the Registration
Rights Agreement. The obligation to file the registration statement meets the
criteria of an embedded derivative to be bifurcated pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended.
Under this transaction, the Company is obligated to register for resale the
common shares underlying the warrants, and as a result, the embedded derivative
associated with this warrant obligation does not meet the scope exception of
paragraph 11(a) of SFAS No. 133. Specifically, at March 31, 2006, the Company
did not have any uncommitted registered shares to settle the warrant obligation
and accordingly, such obligation has been classified as a liability (outside of
stockholders' deficit) in accordance with EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock." The classification of the warrant obligation will be
evaluated at each reporting date and as such, it will continue to be reported as
a liability until a registration statement which includes the shares underlying
the warrants becomes effective.
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, Organization and Summary
of Significant Accounting Policies, which discusses accounting policies that
must be selected by management when there are acceptable alternatives.
BUSINESS
SUMMARY
We are engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. We
provide rebuilt, retrofit and remanufacturing services for numerous brands of
machine tools.
We also manufacture 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.
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The primary industry segments in which our 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 , medical,
aerospace and mining fields.. We sell our products to customers in the United
States, Canada and Mexico.
Over the last four years, we have designed and developed a large horizontal CNC
turning lathe with productivity features new to the metalworking industry. We
believe that a potential market for the Century Turn Lathe, in addition to the
markets mentioned above, is aircraft landing gear.
We are also engaged in the assembling sound-wall modules made from Quilite(R). A
lightweight, graffiti resistant concrete alternative used in freeway sound
barriers and in other sound absorbing structures and non-weight bearing
applications where privacy or screening is necessary.
CORPORATE HISTORY
On May 25, 2001, the Company entered into a merger with New Century
Remanufacturing, Inc. Pursuant to the merger, all of the outstanding shares of
New Century Remanufacturing, Inc., a California corporation, were exchanged for
shares of the Company on a 1/833.33 basis. After the reverse merger, the Company
changed its name to New Century Companies, Inc.
PRODUCTS
QUILITE
We assemble, on a subcontractor basis, and ship proprietary, privacy/sound-wall
modules from Quilite(R) throughout the U.S. and Canada. Quilite(R) is a material
that is lighter than standard concrete, graffiti-resistant, available in 16x16
inch blocks with superior sound blocking capability. This material has been used
in a number of noise-blocking applications, including airports, community pools,
road barriers, residential surroundings, electrical transformer shelters, and
others. Quilite(R) can also be used in non-weight bearing applications where
privacy or screening is necessary. These include guarded-gate residential
communities barriers at sports stadiums and privacy screens on highway medians
to prevent driver distraction from oncoming traffic and rubbernecking due to
accidents.
REMANUFACTURED MACHINES
Our machine tools services are provided to a variety of customers, where the
machine remanufacturing typically consists of replacing all components
(CASTINGS), realigning the machine, adding updated CNC capability, and
electrical and mechanical enhancements. Machines, which create circular
products, are all within the scope' of our machines' capabilities. Our machines
(Horizontal Turning Lathes, Vertical Turning Lathes, Vertical Boring Mills, and
Horizontal Boring Mills etc.) are used to manufacture jet-engine components;
airplane landing gear parts; power generation equipment; oil and gas production
components; construction materials; casks that store nuclear materials; and
bearings for windmills turrets guns, or torpedo tubes in submarines and ship
vessels and countless other parts.
The machines take raw steel, which in its natural shape needs to be refined into
a specific round part, and by utilizing a computer-directed tool, shapes the
steel into very precise measurements. Once completed within two to four months,
a remanufactured machine becomes a "like new," state-of-the-art machine, which
often contains more iron ore and superior standards of strength than a new
machine, at a price substantially less than that of a new machine. We pass these
savings on to our customers, which include such manufacturers as General
Electric Co., General Dynamics Corp., Siemens AG and Gardner Denver Inc.
NEW MACHINES (CENTURY TURN)
We manufacture original equipment under our "Century Turn" brand name. Century
Turn products include, but are not limited to lathes and vertical boring mills.
These machines are used to machine products such as landing gear and machine
valve bodies.
GROWTH STRATEGY
Our goal is to become a leading provider of high precision Computer Numerically
Controlled turning centers through organic growth as well as through strategic
acquisitions. In addition, we intend to engage in the production of Quilite(R).
13
We market our products and services primarily through direct sales and
independent distributors throughout the U S Canada and Mexico. We also intend to
advertise our products and services in the industrial trade publications,
industry trade shows, and on the Internet. Our focus is also to increase the
sales of our proprietary "new" horizontal boring mills and remanufactured
vertical boring mills. Our "new" vertical boring mills are designed around our
proprietary tooling changer that allows the machinist to utilize a wider range
of lighter weight tooling heads increasing the efficiency precision and
dependability of the machine and ultimately creating a superior and timely
finished product
As a natural extension of our precision machine tool business, we plan to
capitalize on numerous opportunities in the fragmented machining industry by
implementing a (vertical integration) roll-up strategy, where we could merge
with and/or acquire high precision large metal ring manufacturing companies This
strategy is intended to attract the attention of the leading manufacturing
companies by ramping up revenue and income. In addition to our organic growth
strategies, we also plan to make tactical and accretive acquisitions.
MACHINE TOOL INDUSTRY
We manufacture both new and refurbished machines that are used across a variety
of industries. These machines are sold to companies who produce various "round"
products and parts in different but extremely precise measurements, depending on
the industry. These products can be anything from large jet engines, casks that
store nuclear materials, bearings for windmills, turrets, guns, or torpedo tubes
in submarines and ship vessels, and more. The machines take raw steel, which in
its natural shape needs to be refined into a specific round part, and by
utilizing a computer-directed tool, shapes the steel into very precise
measurements.
Many measurements must be so precise that when removing the metal, it must be
round within 1/10,000 of an inch (approximately the equivalent of splitting an
average hair 30 times). The machines must be able to repeatedly furnish these
precise measurements for its products. For example, a jet engine must be precise
to 1/10,000 of an inch due to the speed at which it operates. The engine, when
in use, is going over 10,000 revolutions per minute (rpms). If the engine itself
were not perfectly round, it would vibrate and could detach from the aircraft.
We service companies such as General Electric, Rolls Royce, Pratt & Whitney (and
all of these companies' respective sub-tier support contractors), who are
manufacturers of the jet engines. These companies specify the dimensions and we
employ our large machines to create the parts. We have larger machines, which
span approximately 25 feet in diameter, and are used primarily for the housings
that go around nuclear reactors on submarines or aircraft carriers.
EMPLOYEES
At June 7, 2006, we had approximately 40 full time employees working in the
following departments: shop, clerical, engineering and management.
None of our employees are represented by a labor union or covered by a
collective bargaining agreement. We have not experienced work stoppages and
consider our employee relations to be good. Our business is not highly automated
and we do not outsource specialized, repetitive functions such as cash delivery
and security. As a result, our labor requirements for operation of the network
are relatively modest.
DESCRIPTION OF PROPERTY
We lease our headquarters in Santa Fe Springs, California, which expires on
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
LEGAL PROCEEDINGS
We 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. We are
currently not involved in any such litigation or any pending legal proceedings
that management believes could have a material adverse effect on our financial
position or results of operations.
MANAGEMENT
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 May 26,
2006. 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.
14
NAME AGE POSITION
---- --- --------
David Duquette 62 Chairman of the Board, Chief Executive Officer,
Officer, Chief Financial President and Director
Josef Czikmantori 55 Secretary and Director
DAVID DUQUETTE. Mr. Duquette has served as the Chairman of the Board, President,
Chief Financial Officer 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.
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.
BOARD COMMITTEES
Because of our size, we presently do not have an audit committee, compensation
committee or nominating committee. We are currently in the process of
identifying independent audit committee members, including a financial expert
and we expect to continue this process in 2006.
15
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 Duquette, Chairman of the
Board, President 2002 $ 193,800 -- -- -- -- -- --
David Duquette, Chairman of the
Board, President and Director 2003 $ 127,200 -- -- -- 400,000 -- --
David Duquette, Chairman of the 2004 $ 180,000
Board, President and Director
David Duquette, Chairman of the 2005 $ 101,273
Board, President and Director
----------------------------------------------------------------------------------------------------------------------------------
OPTIONS/SAR GRANTS IN FISCAL YEAR 2003
----------------------------------------------------------------------------------------------------------------
Number of Percent of total
securities options/SARs
underlying granted to
options/SARs employees in fiscal Exercise or base
Name granted (#) year price ($/Share) Expiration date
----------------------------------------------------------------------------------------------------------------
David Duquette, CEO 400,000 0% $0.25 9/12/08
Josef Czikmantori, Director 150,000 0% $0.25 9/12/08
----------------------------------------------------------------------------------------------------------------
There were no options/SAR grants in 2004 or 2005.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercises of stock options
during the year ended December 31, 2005, by each of the Named Executive Officers
and the value of in-the-money unexercised options at December 31, 2005.
SHARES
ACQUIRED ON VALUE NUMBER OF SECURITIES
EXERCISE REALIZED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE
NAME (#) ($) (1) OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT FISCAL YEAR END
-------------------------------------------------------------------------------------------------------------------
EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/UNEXERCISABLE ($) (2)
-------------------------------------------------------------------------------------------------------------------
David Duquette, CEO 400,000 / 0 $0.00 400,000 / 0 148,000 / 0
Josef Czikmantori, 150,000 / 0 $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.
(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.
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.
16
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
============= ================ ============= ============
17
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTES RECEIVABLE FROM STOCKHOLDERS
As of December 31, 2005, the Company had loans to two stockholders totaling
$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 $20,000, $22,000, $12,000 and $6,000, respectively.
MARKET FOR 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.
High Low
FISCAL YEAR 2006
----------------
March 31, 2006 $0.87 0.53
FISCAL YEAR 2005
----------------
December 31 $0.77 0.38
September 30 0.73 0.21
June 30 0.33 0.13
March 31 0.51 0.15
FISCAL YEAR 2004
----------------
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 our 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 June 7, 2006, 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.
18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of August 8, 2006:
o by each person who is known by us to beneficially own more than 5% of our
common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Unless otherwise indicated, the shareholders listed in the table have sole
voting and investment power with respect to the shares indicated.
PERCENTAGE OF
NAME OF BENEFICIAL OWNER NO. OF SHARES(1) OWNERSHIP (1)
------------------------ ------------- -------------
David Duquette (2) 1,433,334 13%
Josef Czikmantori (3) 650,000 6%
Officers and Directors as a Group (2 persons) 2,083,334 19%
The securities "beneficially owned" by a person are determined in accordance
with the definition of "beneficial ownership" set forth in the rules and
regulations promulgated under the Securities Exchange Act of 1934. Beneficially
owned securities may include securities owned by and for, among others, the
spouse and/or minor children of an individual and any other relative who has the
same home as such individual. Beneficially owned securities may also include
other securities as to which the individual has or shares voting or investment
power or which such person has the right to acquire within 60 days of August 8,
2006 pursuant to the conversion of convertible equity, exercise of options, or
otherwise. Beneficial ownership may be disclaimed as to certain of the
securities.
(1) Based on 11,359,656 shares of common stock outstanding as of August 8, 2006.
(2) Includes options to purchase 400,000 shares (ISOP) which are exercisable at
a price of $0.25 and which expire on September 12, 2008.
(3) Includes options to purchase 150,000 shares (ISOP) which are exercisable at
a price of $0.25 and which expire on September 12, 2008.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Percentage of Percentage of
Beneficial Common Stock Owned Shares of Common Beneficial Common Stock Owned
Ownership Before before the Stock Included in Ownership after after the Offering
Name the Offering (1) Offering (1) the Prospectus (2) the Offering(3) (3)
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Motivated Minds, LLC 564,601 4.99% 988,408 -0- -0-
(4)
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
CAMOFI Master LDC (5) 564,601 4.99% 13,731,143 -0- -0-
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Source Capital 22,727 * 22,727 -0- -0-
Group, Inc. (6)
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Ascendiant 904,949 7.99% 904,949 -0- -0-
Securities, LLC (7)
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Michael S. Cole (8) 90,317 * 90,317 -0- -0-
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
15,737,544
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
*Less than 1%
19
(1) Applicable percentage ownership is based on 11,359,655 shares of common
stock issued as of August 8, 2006. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
August 8, 2006 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the convertible notes and exercise of the related
warrants by reason of any stock split, stock dividend or similar transaction
involving the common stock, in accordance with Rule 416 under the Securities Act
of 1933.
(3) Beneficial ownership after the offering assumes that all securities
registered will be sold and that all shares of common stock underlying
outstanding warrants will be issued.
(4) Ira Gaines, the Managing Member, holds final voting and investment power
over securities owned by Motivated Minds. Represents 454,545 shares issuable in
connection with the Series A Convertible Note dated February 15, 2006 (the
"Series A Convertible Note"), calculated as follows: principal amount of
$300,000 divided by conversion price of $0.66 = 454,545. Also includes 19,318
shares underlying interest in the amount of $12,750, 454,545 shares issuable
upon exercise of warrants at an exercise price of $0.66, issued in connection
with the Series A Convertible Note, 30,000 shares of common stock issued
pursuant to the Series A Convertible Note and 30,000 shares of common stock
issued as consideration for extending the initial due date of the Series A
Convertible Note.
For purposes of calculating Motivated Minds' beneficial ownership before the
offering, beneficial ownership reflected does not include 423,807 shares
issuable upon conversion of Series A convertible Note. The selling stockholder
has contractually agreed to restrict its ability to convert its convertible
notes or exercise its warrants and receive shares of our common stock such that
the number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for this selling stockholder exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(5) Richard Smithline serves as a director of CAMOFI Master Fund LDC and holds
final voting and investment power over securities owned by it.
Represents 5,555,555 shares issuable in connection with the 12% Senior
Convertible Note dated February 28, 2006 (the "Senior Convertible Note"),
calculated as follows: principal amount of $3,500,000 divided by conversion
price of $0.63 = 5,555,555. Also includes 1,953,170 shares underlying interest
in the amount of $1,962,295, (calculated by dividing the interest amount by
interest conversion rate of $0.61285 Interest conversion rate is defined as 85%
of the volume-weighted average closing price for the 10 trading days immediately
prior to the applicable interest payment date. In calculating the interest, the
Company calculated the interest conversion rate as of May 19, 2006, the date of
filing of this registration statement of which this prospectus forms a part).
Also includes 1,877,181 shares included in the Registration Statement in
accordance with the Registration Rights Agreement, pursuant to which we are
required to register an additional 25% shares that may be issuable upon
conversion of the Senior Convertible Note, as such number may be adjusted as a
result of stock splits, stock dividends and similar transactions in accordance
with Rule 416. Also includes 3,476,190 shares issuable upon exercise of warrants
at an exercise price of $0.63, issued in connection with the Senior Convertible
Note. Also includes 869,047 shares included in the Registration Statement in
accordance with the Registration Rights Agreement, pursuant to which we are
required to register an additional 25% of shares that may be issuable upon
exercise of the Warrants, as such number may be adjusted as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
For purposes of calculating the beneficial ownership of CAMOFI before the
offering, beneficial ownership reflected does not include 13,166,542 shares
included in this prospectus on behalf of CAMOFI, as follows: (i) 9,000,000
shares issuable upon conversion of Senior Convertible Note; and (ii) 4,166,541
shares issuable upon exercise of warrants. The selling stockholder has
contractually agreed to restrict its ability to convert its convertible notes or
exercise its warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for this selling stockholder exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
20
(6) Includes 22,727 shares of common stock issuable upon exercise of common
stock purchase warrants at a price of $0.66 issued to Source Capital, as
compensation for placement agency services, in connection with the Motivated
Minds Note. The warrants expire February 14, 2011. David Harris, its President,
holds final voting and investment power over the securities owned by the Selling
Stockholder.
(7) Includes 632,222 shares of common stock issuable upon exercise of common
stock purchase warrants at a price of $0.63, issued to Ascendiant Securities,
LLC, as compensation for placement agency services, in connection with the
CAMOFI Purchase Agreement. The warrants expire on February 28, 2013. Also
includes 22,727 shares of common stock issuable upon exercise of common stock
purchase warrants at a price of $0.66 issued to Ascendiant Securities, LLC, the
placement agent, in connection with the Motivated Minds Note. These warrants
expire on February 14, 2011. Also includes 250,000 shares of common stock
received as compensation for placement agency services in connection with the
CAMOFI Purchase Agreement. Bradley J Wilhite, the Managing Director, holds final
voting and investment power over the securities owned by the Selling
Stockholder.
(8) Includes 90,317 shares of common stock issuable upon exercise of common
stock purchase warrants at a price of $0.63 issued to the assignee of the
placement agent, in connection with the CAMOFI Note. The warrants expire on
February 28, 2013.
Except for Source Capital, LLC, and Ascendiant Securities, LLC who are
registered broker-dealers, none of the Selling Stockholders is a registered
broker-dealer under Section 15 of the Securities Exchange Act of 1934, as
amended.
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company includes 50,000,000 shares of $.10
par value Common Stock. All shares have equal voting rights. Voting rights are
not cumulative, and, therefore, the holders of more than 50% of the Common Stock
of the Company could, if they chose to do so, elect all of the Directors.
Upon liquidation, dissolution or winding up of the Company, the assets of the
Company, after the payment of liabilities and any distributions to the holders
of outstanding shares of Series C Convertible Preferred Stock, will be
distributed pro rata to the holders of the Common Stock. The holders of the
Common Stock do not have preemptive rights to subscribe for any securities of
the Company and have no right to require the Company to redeem or purchase their
shares.
Holders of Common Stock are entitled to share equally in dividends when, as and
if declared by the Board of Directors of the Company, out of funds legally
available therefor. The Company has not paid any cash dividends on its Common
Stock, and it is unlikely that any such dividends will be declared in the
foreseeable future.
PREFERRED STOCK
The Company has authority to issue 15,075,000 shares of preferred stock, $1.00
par value and 75,000 shares of preferred stock, $25 par value. The preferred
stock may be issued in series from time to time with such designation, rights,
preferences and limitations as the Board of Directors of the Company may
determine by resolution. The rights, preferences and limitations of separate
series of preferred stock may differ with respect to such matters as may be
determined by the Board of Directors, including, without limitation, the rate of
dividends, method and nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions (if any), conversion
rights (if any), and voting rights. The potential exists, therefore, that
preferred stock might be issued which would grant dividend preferences and
liquidation preferences to preferred shareholders. Unless the nature of a
particular transaction and applicable statutes require such approval, and
subject to the required approval of the Series C Preferred Stockholders for
issuances of preferred stock which has liquidation or dividend rights senior to
theirs, the Board of Directors has the authority to issue these shares without
shareholder approval. The issuance of preferred stock may have the affect of
delaying or preventing a change in control of the Company without any further
action by shareholders.
SERIES B CONVERTIBLE PREFERRED STOCK
The authorized capital stock of the Company includes 15,150,000 shares of
preferred stock of which 15,000,000 shares were designated as Series B 5%
Convertible Preferred Stock. Holders of the Preferred Shares will receive, when
as and if declared by the Board of Directors, a dividend of $1.25 share per
annum payable semi-annually in cash. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, the holders of the Series B Convertible Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Stock or on the shares of the Series D Preferred Stock, an amount per share
equal to $25.00. The holders of Series B Convertible Preferred Stock have no
voting rights except that any change to the rights, preference and privilege
thereof requires the approval of 2/3 in liquidation amount of the holders .Each
share of the Series B Convertible Preferred Stock may be converted at any time
into 16.667 shares of the Company's Common Stock. The Conversion Ratio will be
subject to adjustment in the event of a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock.
21
SERIES C 5% CONVERTIBLE PREFERRED STOCK
The authorized capital stock of the Company includes 15,150,000 shares of
preferred stock of which 75,000 shares were designated as Series C 5%
Convertible Preferred Stock. Holders of the Preferred Shares will receive, when
as and if declared by the Board of Directors, a dividend of $1.25 share per
annum payable semi-annually in cash. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, the holders of the Series C Convertible Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Stock or on the shares of the Series C Preferred Stock, an amount per share
equal to $25.00. The holders of Series C 5% Convertible Preferred Stock have no
voting rights except that any change to the rights, preference and privilege
thereof requires the approval of 2/3 in liquidation amount of the holders .
Each share of the Series C Convertible Preferred Stock may be converted at any
time into 16.667 shares of the Company's Common Stock representing a Common
Stock purchase price of $1.50 per share. The Conversion Ratio will be subject to
adjustment in the event of a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. The Preferred
Shares will be subject to mandatory conversion on the effective date of the
registration statement covering the resale of the Common Shares.
SERIES D 5% CONVERTIBLE PREFERRED STOCK
The authorized capital stock of the Company includes 15,150,000 shares of
preferred stock of which 75,000 shares were designated as Series D 5%
Convertible Preferred Stock. Subject to Delaware law, holders of the Preferred
Shares will receive a dividend of $1.25 share per annum payable semi-annually in
cash provided that no payment may be made unless and until all dividends accrued
on the Series C Preferred Stock have been paid. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, the holders of the Series D Convertible Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Stock (but only after payment on the Series C Preferred Stock), an amount per
share equal to $25.00. The holders of Series D 5% Convertible Preferred Stock
have the right to vote with the holders of the Common Stock on all matters on an
as converted basis voting rights except that any change to the rights,
preference and privilege thereof will require the approval of 2/3 in liquidation
amount of the holders.
Each share of the Series D Convertible Preferred Stock may be converted at any
time into 50 shares of the Company's Common Stock representing a Common Stock
purchase price of $.50 per share. The Conversion Ratio will be subject to
adjustment in the event of a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. Additionally,
the Conversion Ratio will be adjusted if the Company in the future issues shares
of Common Stock below $.50 or securities convertible into Common Stock with an
exercise conversion price per share below $.50. Any adjustment will be on a
"weighted average" basis. The Preferred Shares will be subject to mandatory
conversion on the effective date of the registration statement covering the
resale of the Common Shares. The holders of the Series D Convertible Preferred
Stock will share ratably with the holders of the Series C Preferred Stock upon
liquidation, dissolution or winding up of the affairs of the Company.
COMMON STOCK PURCHASE WARRANTS
We currently have 4,903,728 common stock purchase warrants outstanding. The
common stock purchase warrants are each exercisable into one share of common
stock at the holder's option at various exercise prices and for various periods
of duration.
TRANSFER AGENT
Our transfer agent is US Stock Transfer Corporation and their telephone number
is (818) 502-1404.
PLAN OF DISTRIBUTION
Each Selling Stockholder and any of their pledgees, assignees and
successors-in-interest selling shares received from the named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be a selling
stockholder) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. These sales may be at fixed or negotiated prices. A Selling
Stockholder may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits Purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
22
o privately negotiated transactions;
o settlement of short sales entered into after the date of this prospectus;
o broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Stockholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the Common Stock.
We are required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
Selling Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
23
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
EXPERTS
Squar, Milner, Reehl & Williamson, LLP has audited, as set forth in their report
thereon appearing elsewhere herein, our financial statements as of December 31,
2005, and for the years ended December 31, 2005 and 2004 that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the auditors' opinion based on their expertise in
accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of our company filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. We are
subject to the informational requirements of the Securities Exchange Act of 1934
that require us to file reports, proxy statements and other information with the
Securities and Exchange Commission. Such reports, proxy statements and other
information may be inspected at public reference facilities of the SEC at 100 F
Street N.E., Washington D.C. 20549. Copies of such material can be obtained from
the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates. The public could obtain
information on the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers. Our By Laws also provide that the Board of Directors may also
authorize us to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet as of December 31, 2005 F-3
Consolidated Statements of Operations for the years ended December 31, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2005 and 2004 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-8
INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) F-31
Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (Unaudited) F-32
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (Unaudited) F-33
Notes to Unaudited Condensed Consolidated Financial Statements F-34
F-1
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.
/s/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP
April 7, 2006
Newport Beach, California
F-2
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
===========
See accompanying notes to the consolidated financial statements.
F-3
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
=========== ===========
See accompanying notes to the consolidated financial statements.
F-4
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
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)
============ ============ ============ ============ ============
F-5
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)
============ ============ ============
See accompanying notes to the consolidated financial statements.
F-6
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
============ ============
See accompanying notes to the consolidated financial statements.
F-7
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).
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-8
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-9
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-10
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-11
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-12
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-13
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-14
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-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)
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
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-24
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-25
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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
============== ============
F-26
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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.
F-27
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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
============
F-28
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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 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
F-29
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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.
F-30
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
ASSETS
Current Assets
Cash $ 267,805
Restricted cash 1,500,000
Contract receivables 912,574
Inventories, net 1,041,932
Costs and estimated earnings in excess of billings on uncompleted contracts 285,133
Deferred financing costs, net 336,691
Prepaid expenses and other current assets 3,643
-----------
Total current assets 4,347,778
Property and Equipment, net 392,623
Deferred Financing Costs, net 670,133
-----------
$ 5,410,534
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 1,214,124
Dividends payable 278,000
Billings in excess of costs and estimated earnings on uncompleted contracts 563,207
Warrant liability 2,954,762
Notes payable, net of discount 219,816
Convertible notes payable, net of discount 150,000
-----------
Total current liabilities 5,379,909
Convertible Notes Payable, net of discount 97,223
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;
11,275,336 shares issued and outstanding 1,127,534
Subscriptions receivable (462,500)
Notes receivable from stockholders (505,639)
Deferred consulting fees (360,178)
Additional paid-in capital 7,698,157
Accumulated deficit (7,883,952)
-----------
Total stockholders' deficit (66,598)
-----------
$ 5,410,534
===========
See accompanying notes to the condensed consolidated financial statements.
F-31
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
2006 2005
------------ ------------
CONTRACT REVENUES $ 1,699,847 $ 1,431,889
COST OF SALES 1,296,608 1,045,870
------------ ------------
GROSS PROFIT 403,239 386,019
------------ ------------
OPERATING EXPENSES
Consulting and other compensation 203,058 44,972
Salaries and related 64,331 57,190
Selling, general and administrative 187,640 123,657
------------ ------------
TOTAL OPERATING EXPENSES 455,029 225,819
------------ ------------
OPERATING INCOME (LOSS) (51,790) 160,200
------------ ------------
OTHER EXPENSES
Derivative liability expense 764,762 --
Interest expense, including debt discount amortization 395,828 49,067
------------ ------------
TOTAL OTHER EXPENSES 1,160,590 49,067
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,212,380) 111,133
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET INCOME (LOSS) $ (1,212,380) $ 111,133
============ ============
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (924,505) $ 111,133
============ ============
Basic and diluted net income (loss) available to
common stockholders per common share $ (0.09) $ 0.02
============ ============
Basic and diluted weighted average common
shares outstanding 10,803,611 7,292,265
============ ============
See accompanying notes to the condensed consolidated financial statements.
F-32
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
2006 2005
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,212,380) $ 111,133
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment 39,028 66,744
Amortization of deferred financing costs 57,466 --
Amortization of deferred consulting fees 137,039 5,000
Amortization of BCFs and other debt discounts 249,123 --
Derivative liability expense 764,762 --
Changes in operating assets and liabilities:
Contracts receivable (625,005) --
Inventories (112,985) 65,363
Costs and estimated earnings in excess of billings on
uncompleted contracts 132,622 (193,530)
Prepaid expenses and other current assets (2,083) --
Accounts payable and accrued expenses (277,456) (97,313)
Billings in excess of costs and estimated earnings on
uncompleted contracts 61,823 3,567
----------- -----------
Net cash used in operating activities (788,046) (39,036)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (20,000) --
----------- -----------
Net cash used in investing activities (20,000) --
----------- -----------
Cash flows from financing activities:
Restricted cash (1,500,000) --
Bank overdraft (27,649) --
Proceeds of issuance of convertible notes payable 3,800,000 --
Principal payments on notes payable (774,000) --
Deferred financing costs (422,500) --
Principal repayments on obligations under capital lease -- (20,405)
----------- -----------
Net cash provided by (used in) financing activities 1,075,851 (20,405)
----------- -----------
Net increase (decrease) in cash 267,805 (59,441)
Cash at beginning of period -- 129,087
----------- -----------
Cash at end of period $ 267,805 $ 69,646
=========== ===========
Supplemental disclosure of non-cash activities:
Common stock and warrants issued for deferred financing costs $ 641,790 $ --
=========== ===========
Conversion of notes payable and interest to common stock $ 157,500 $ --
=========== ===========
BCF and other debt discount on convertible notes payable $ 3,800,000 $ --
=========== ===========
Debt discount on notes payable for note extension $ 18,900 $ --
=========== ===========
Fair value of common stock and warrants issued for
deferred consulting services $ 242,500 $ --
=========== ===========
Waived cumulative dividends on preferred stock $ (287,875) $ --
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
F-33
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
New Century Companies, Inc. and Subsidiary (collectively, the "Company"), a
California corporation, was incorporated March 1996 and is located in Southern
California. The Company provides after-market services, including rebuilding,
retrofitting and remanufacturing of metal cutting machinery. Once completed, a
remanufactured machine is "like new" with state-of-the-art computers, and the
cost to the Company's customers is subtantially less than the price of a new
machine.
The Company currently sells its services by direct sales and through a network
of machinery dealers across the United States. Its customers are generally
medium to large sized manufacturing companies in various industries where metal
cutting is an integral part of their businesses. The Company grants credit to
its customers who are predominately located in the western United States.
The Company completed a reverse merger in May 2001 and trades on the OTC
Bulletin Board under the symbol "NCNC.OB".
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by the Company, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") have been omitted pursuant to such SEC rules
and regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements and the notes hereto should be read in conjunction with the financial
statements, accounting policies and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2005, filed with
the SEC. In the opinion of management, all adjustments necessary to present
fairly, in accordance with GAAP, the Company's financial position as of March
31, 2006, and the results of operations and cash flows for the interim periods
presented, have been made. Such adjustments consist only of normal recurring
adjustments. The results of operations for the three moths ended March 31, 2006
are not necessarily indicative of the results for the full year.
F-34
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of March 31, 2006, the Company has negative
working capital $1,032,131 and an accumulated deficit of $7,883,952, and
recurring losses. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The Company fund operations
through increased sales and debt and equity financing arrangements which
management believes may be insufficient to fund its capital expenditures,
working capital and other cash requirements for the fiscal year ending December
31, 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 markets.
The condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of assets carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
INVENTORY
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Inventories represent cost of
work in process on units not yet under contract. Cost includes all direct
material and labor, machinery, subcontractors and allocations of indirect
overhead.
REVENUE RECOGNITION
The Company's revenues consist of contracts with vendors. The Company uses the
percentage-of-completion method of accounting to account for long-term contracts
and, therefore, takes into account the cost, estimated earnings and revenue to
date on fixed-fee contracts not yet completed. The percentage-of-completion
method is used because management considers total cost to be the best available
measure of progress on the contracts. Because of inherent uncertainties in
estimating costs, it is at least reasonably possible that the estimates used
will change within the near term.
In December 1999, the 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 on contracts pursuant to
SOP 81-1.
F-35
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) are classified as a current
asset. Amounts billed in excess of costs and revenue earned (over billings) are
classified as a current liability.
The Company accounts for shipping and handling fees and costs in accordance with
Emerging Issues Task Force ("EITF") Issue No. 00-10 "Accounting for Shipping and
Handling Fees and Costs." Such fees and costs incurred by the Company are
immaterial to the operations of the Company.
In accordance with Statements of Financial Accounting Standards ("SFAS") No. 48,
"Revenue Recognition when Right of Return Exists," revenue is recorded net of an
estimate of markdowns, price concessions and warranty costs. Such reserve is
based on management's evaluation of historical experience, current industry
trends and estimated costs.
BASIC AND DILUTED LOSS PER COMMON SHARE
Under SFAS No. 128, "Earnings Per Share," basic earnings per common share is
computed by dividing income available to common stockholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. There were 2,025,451 potentially dilutive and 13,392,330 potential
common shares as of March 31, 2006, which include common stock purchase warrants
and shares underlying convertible preferred stock and convertible notes payable.
At March 31, 2005, there were no potentially dilutive common shares.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three month periods
ended March 31, 2006 and 2005:
For the Three Months Ended March 31,
2006 2005
------------ ------------
Net income (loss) $ (1,212,380) $ 111,133
Waiver of accrued cumulative preferred
dividends 287,875 --
------------ ------------
Numerator for basic and diluted net income (loss) per common share:
Net income (loss) available to common stockholders (924,505) 111,133
Denominator for basic and diluted net income (loss) per common share:
Weighted average common shares outstanding 10,803,611 7,292,265
------------ ------------
Basic and diluted net income (loss)
per common share $ (0.09) $ 0.02
============ ============
STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), "Share-Based Payment." SFAS No. 123(R) requires employee stock options
and rights to purchase shares under stock participation plans to be accounted
for under the fair value method and requires the use of an option pricing model
for estimating fair value. Accordingly, share-based compensation is measured at
grant date, based on the fair value of the award. The Company previously
accounted for awards granted under its equity incentive plans under the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
and provided the required pro forma disclosures prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended. There was no employee
stock-based compensation cost recognized in net income (loss) for the three
months ended March 31, 2006 and 2005. Additionally, there was no unvested
portion of previous grants for which the requisite service had not been rendered
as of January 1, 2006.
F-36
The Company follows SFAS No. 123 (R) (as interpreted by EITF Issue No. 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 7 of SFAS No. 123 (R), 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 Issue No. 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.
DEFERRED FINANCING COSTS
Direct costs of securing debt financing are capitalized and amortized over the
term of the related debt using the straight-line method. When a loan is paid in
full, any unamortized financing costs are removed from the related accounts and
charged to operations. During the three months ended March 31, 2006, the Company
recorded approximately $1,007,000 of finance charges in relation to the
unamortized portion of deferred financing costs for the debt financings (see
Note 3).
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company granted warrants in connection with the issuance of certain notes
payable. Under Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable. Such discounts are amortized to interest expense over the
term of the notes.
BENEFICAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of
EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.
CLASSIFICATION OF WARRANT OBLIGATION
In connection with the issuance of the 12% Senior Secured Convertible Notes (See
Note 3), the Company has an obligation to file a registration statement covering
the resale of 125% of the Registrable Securities, as defined in the Registration
Rights Agreement. The obligation to file the registration statement meets the
criteria of an embedded derivative to be bifurcated pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended.
Under this transaction, the Company is obligated to register for resale the
common shares underlying the warrants, and as a result, the embedded derivative
associated with this warrant obligation does not meet the scope exception of
paragraph 11(a) of SFAS No. 133. Specifically, at March 31, 2006, the Company
did not have any uncommitted registered shares to settle the warrant obligation
and accordingly, such obligation has been classified as a liability (outside of
stockholders' deficit) in accordance with EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock." The classification of the warrant obligation will be
evaluated at each reporting date and as such, it will continue to be reported as
a liability until a registration statement which includes the shares underlying
the warrants becomes effective.
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2005
financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB that are required to be adopted during the year ending
December 31, 2006 did not or will not have a significant impact on the Company's
financial statements.
2. CONTRACTS IN PROGRESS
Contracts in progress as of March 31, 2006 which include completed contracts not
completely billed, approximate:
F-37
Cumulative costs to date $ 2,037,000
Cumulative gross profit to date 3,416,000
-----------
Cumulative revenue earned 5,453,000
Less progress billings to date (5,731,000)
-----------
Net over billings $ (278,000)
===========
The following is included in the accompanying condensed consolidated balance
sheet under these captions as of March 31, 2006:
Costs and estimated earnings in excess of billings on uncompleted contracts $
285,000
Billings in excess of costs and estimated earnings on uncompleted contracts
(563,000) Net over billings $(278,000)
3. DEBT FINANCING TRANSACTIONS
On February 15, 2006 the Company entered into a convertible note payable
agreement ("Note A") with Motivated Minds, LLC (the "Holder") in the total
amount of $300,000. The principal balance, together with all accrued interest at
the rate of 24% per annum for the first 30 days, and 27% for the following 60
days, was to become due on the earlier of a) May 16, 2006, or b) the date which
the Company obtains additional financing. Note A is convertible into shares of
the Company's common stock at a fixed price of $0.66 at any time at the Holder's
option. In connection with Note A, the Company issued 30,000 shares of its
common stock and 454,545 warrants with a fixed exercise price of $0.66 to the
Holder. The warrants vested and became fully exercisable on the issuance date.
In accordance with EITF Issue No. 88-9 and Accounting Principles Board Opinion
("APB") No. 14, the Company allocated the $300,000 debt proceeds between the
relative fair values of the warrants, the common shares issued and the fair
value of the beneficial conversion feature ("BCF"). Pursuant to EITF Issue Nos.
98-5 and 00-27, the conversion feature of Note A provides for a rate of
conversion that is below market value. The resulting BCF and other debt discount
on Note A totaled $300,000 and is being amortized on a straight-line basis to
interest expense over the life of the loan. During the quarter ended March 31,
2006, amortization of the discount resulted in expense of $150,000, which is
included in interest expense in the accompanying condensed consolidated
statement of operations for the three months ended March 31, 2006. The remaining
$150,000 discount balance is presented net of the $300,000 principal balance of
Note A included in convertible notes payable balance in the accompanying
condensed consolidated balance sheet.
Additionally, due to the financing with CAMOFI (see below), Note A became due on
February 28, 2006 and the Company issued 30,000 shares of common stock to the
Holder to extend the maturity date of Note A to May 16, 2006. Such shares were
valued at approximately $18,900 (estimated to be the fair value based on the
trading price on the issuance date). Accordingly, the Company recorded $18,900
in debt issue discount and additional paid-in capital and is amortizing the debt
discount over the remaining life of Note A.
In connection with Note A, the Company issued 45,454 warrants and paid $30,000
in cash to third parties for financing charges. The warrants were valued, using
a Black Scholes option pricing model, at $29,090. Accordingly, the Company
recorded deferred financing costs of $59,090 and additional paid-in capital of
$29,090. The deferred financing cost is being amortized over the life of the
note resulting in expense of $29,545 for the quarter ended March 31, 2006, which
is included in interest expense in the accompanying condensed consolidated
statements of operations. The remaining balance of the deferred financing costs
associated with Note A totaled $29,545 at March 31, 2006.
On February 28, 2006, the Company entered into a Securities Purchase Agreement (
"Note B") with CAMOFI Master LDC ("CAMOFI") whereby the CAMOFI 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). Note B is convertible
into shares of the Company's common stock at a fixed price of $0.63 at any time
at CAMOFI's option. As of March 31, 2006, the Company had not received the
additional $1,500,000 under the Additional Investment Right. Additionally,
$1,500,000 of the $3,500,000 proceeds from the closing were placed into an
escrow account to be used for a potential private company business acquisition.
Accordingly, such amount has been recorded as restricted cash in the
accompanying condensed consolidated balance sheet. In connection with Note B,
the Company issued 3,476,190 warrants at an exercise price of $0.63 to CAMOFI.
The warrants vested and became fully exercisable on their issuance date.
CAMOFI has certain registration rights for the common stock underlying both the
warrants and the convertible debt. The related registration rights agreement
includes financial penalties because the Company failed to meet the registration
statement filing deadline, which was April 24, 2006, and expects to miss the
effectiveness deadline, which is May 29, 2006 if the registration statement is
not reviewed by the SEC, and June 28, 2006 if it is reviewed by the SEC. Such
penalties, which are 1.5% of the outstanding principal balance of Note B for the
first 30 days and an additional 1.5% for each 30 day period thereafter, can be
paid in common stock at the option of the Company. As of March 31, 2006, the
Company has accrued $43,500 for such liquidated damages, which are included in
accounts payable and accrued expenses in the accompanying condensed consolidated
balance sheet. As a result of not meeting these deadlines, this condition may
deemed to be an "Event of Default" if not cured to the satisfaction of CAMOFI
prior to the expiration of thirty days from the Event Date, as defined in the
registration rights agreement, and could possibly allow CAMOFI to call the debt
or seek other remedy at such time.
F-38
The Company's accounting for certain other elements of the debt financing
transaction is discussed below.
THE CONVERSION OPTION
SFAS No. 133 states that a contract issued by an entity that is both (a) indexed
to its own stock and (b) would be classified in stockholders' equity if it were
a freestanding financial instrument is not a derivative for purposes of that
pronouncement. Management has concluded that the CAMOFI debt financing
transaction's conversion option is "indexed to the Company's own stock" as that
term is defined by EITF Issue No. 01-6, "The Meaning of Indexed to a Company's
Own Stock". In addition, since the debt financing transaction has been
determined to be a "conventional convertible debt instrument" as defined in EITF
Issue No. 05-2, "The Meaning of "Conventional Convertible Debt Instrument" in
Issue 00-19", the requirements of EITF Issue No. 00-19 do not apply. Lastly, the
debt host contract is not a derivative in its entirety and (based on SFAS No.
133) the conversion option need not be bifurcated from such contract. Therefore,
the conversion option is not a derivative instrument as contemplated by EITF
Issue No. 00-19 or SFAS No. 133. As explained below, the Company has therefore
applied intrinsic value accounting to the BCF embedded in the conversion option.
INTRINSIC VALUE ACCOUNTING FOR THE BCF
As explained in the following paragraph, the Company has accounted for the BCF
in the CAMOFI debt financing transaction in accordance EITF Issue No. 98-5, EITF
Issue No. 00-27, and APB No. 14. The excess of the proceeds over the estimated
fair value of the warrants (see "Accounting for the Warrants" below) of
approximately $1,310,000 was used to calculate the effective conversion price of
$0.50 per share. The difference between the effective conversion price and the
fair value of the debt at the commitment date of $0.236 per share resulted in a
"theoretical" beneficial conversion feature of approximately $2,190,000. Since
the BCF cannot exceed the proceeds allocated to the debt, the Company recorded a
debt issuance discount on Note B of $1,310,000 which is being amortized to
interest expense (using the effective interest method) over the three-year term
of the note. The Company recorded interest expense on such BCF of approximately
$36,000 during the quarter ended March 31, 2006 in the accompanying condensed
consolidated statements of operations.
ACCOUNTING FOR THE WARRANTS
Under GAAP, accounting for certain warrants can be significantly affected by the
terms of a registration rights penalty. In the CAMOFI debt financing
transaction, once the registration statement required by the registration rights
agreement (the "Agreement") has been declared effective by the SEC, the
Company's liability for the registration rights penalty will cease if, among
other conditions described in the agreement, the registration statement's
effectiveness is maintained for the time period defined in the Agreement and the
Company otherwise complies with SEC Rule 415 (which governs continuous
offerings) during the time period set forth in the Agreement. However, the
Agreement limits the registration rights penalty to a specific time period only
when the continuing requirements of the agreement have been met, and it does not
explicitly limit the maximum dollar amount of any such penalty.
Based on the preceding paragraph, the registration rights penalty could exceed
the difference between the fair value of a registered share of the Company's
common stock and the estimated fair value of an unregistered share. According to
EITF Issue No. 00-19, the ability to register a company's securities is not
within the issuer's control. Furthermore, since payment of a penalty in an
indeterminate amount is considered an uneconomic settlement alternative, EITF
Issue No. 00-19 requires the Company to assume that the warrant will be net-cash
settled even though the warrant agreement does not include any such provision.
Therefore, the warrants (which are an embedded derivative) have been separated
from the convertible debt instrument, reported as a liability, and measured at
estimated fair value.
The fair value of the warrants in the debt financing transaction, based on the
Black-Scholes option-pricing model, was estimated at $2,190,000 on the
measurement date of February 28, 2006. Such amount was recorded as the
derivative warrant liability with a corresponding entry to debt discount against
the face of Note B. Such discount is being amortized to interest expense (using
the effective interest method) over the three-year term of the note. The Company
recorded interest expense on such discount of approximately $61,000 during the
quarter ended March 31, 2006 in the accompanying condensed consolidated
statements of operations. On March 31, 2006, the Company re-evaluated the
estimated fair value of the warrant liability at approximately $2,955,000. Such
increase in fair value totaling approximately $765,000 was recorded as
derivative liability expense in the accompanying condensed consolidated
statements of operations.
F-39
TOTAL DEBT DISCOUNTS
The remaining BCF and debt discount balances on Note B associated with the
conversion option of the debt and the warrants, respectively, totaled
approximately $3,403,000 at March 31, 2006 and is presented net of the
$3,500,000 principal balance of Note B in the accompanying condensed
consolidated balance sheet.
ACCOUNTING FOR DEFERRED FINANCING COSTS
In connection with Note B, the Company paid $392,000 in cash and issued 250,000
shares of common stock and 722,539 warrants to third parties for financing
charges. The common stock was valued at approximately $157,000 (estimated based
on the trading price of the Company's stock on the date of grant). The warrants
were valued at approximately $455,000 (estimated based on the Black-Scholes
option-pricing model). Accordingly, the Company recorded deferred financing
costs and additional paid-in capital of approximately $1,005,000 and $588,000,
respectively. The deferred financing cost is being amortized over the life of
the note resulting in expense of approximately $28,000 for the quarter ended
March 31, 2006, which is included in interest expense in the accompanying
condensed consolidated statements of operations. The remaining balance of the
deferred financing costs associated with Note B totaled $977,000 at March 31,
2006.
4. EQUITY TRANSACTIONS
During the quarter ended March 31, 2006, the Company issued 150,000 warrants
valued at $127,500 (estimated using a Black-Scholes option pricing model on the
dates of grant) to a third party for consulting services. Approximately $10,000
was recorded as consulting expense during the quarter ended March 31, 2006 and
approximately $117,500 remained unamortized as deferred consulting fees at March
31, 2006, which was recorded as an offset to stockholders deficit.
During March 2006, the Company paid $900,000 in cash and issued 250,000 shares
of restricted common stock to one of its creditors to settle the outstanding
principal balance and accrued interest on two defaulted notes payable, totaling
approximately $1,041,000. The Company recorded the stock at fair value
(estimated based on the trading price of the Company's stock on the date of
grant) totaling $157,500. The value of the stock issued and the cash paid
exceeded the value of the amount of the outstanding debt and accrued interest by
approximately $17,000. Such amount which was recorded as a loss on debt
extinguishment and included in selling, general and administrative expenses in
the accompanying condensed consolidated statement of operations for the quarter
ended March 31, 2006.
As described in Note 1, the Company enters into equity based compensation
arrangements with non-employees where the value of the services are not readily
determinable and the fair value of the equity instruments is more reliably
measurable. Under most of these arrangements, the performance criteria required
for a measurement date is not reached until the service period has been
completed. As a result, the Company is required to re-measure the consideration
at each reporting date based on its then current stock value. During the quarter
ended March 31, 2006,the Company recorded net increases to the fair values of
such equity based compensation arrangements of approximately $115,000.
During the quarter ended March 31, 2006, the Company recorded approximately
$137,000 of consulting expense related to the amortization of deferred
consulting fees on equity based compensation arrangements with third parties.
At March 31, 2006, the Company had a total of 28,980 preferred shares Series C
and 11,640 preferred shares Series D issued and outstanding. As of December 31,
2005, the Company accumulated dividends totaling $565,875.
In March 2006, ten of the Company's preferred shareholders elected to waive
their rights to receive dividends. Therefore, the Company recorded a decrease in
dividends payable of $287,875.
5. SUBSEQUENT EVENTS
On April 25, 2006, the Company issued 9,091 shares of common stock for
conversion of $6,000 of interest due on Note A.
On May 15, 2006, the Company issued 10,227 shares of common stock for conversion
of $6,750 of interest due on Note A.
F-40
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by the corporate law of the State of Nevada, that our directors
or officers shall not be personally liable to us or our shareholders for damages
for breach of such director's or officer's fiduciary duty. The effect of this
provision on our Articles of Incorporation, as amended and restated, is to
eliminate our rights and our shareholders (through shareholders' derivative
suits on behalf of our company) to recover damages against a director or officer
for breach of the fiduciary duty of care as a director or officer (including
breaches resulting from negligent or grossly negligent behavior), except under
certain situations defined by statute. We believe that the indemnification
provisions in our Articles of Incorporation, as amended, are necessary to
attract and retain qualified persons as directors and officers.
Our By Laws also provide that the Board of Directors may also authorize the
Company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
------------------------------------------- ---------------------
SEC REGISTRATION FEE $1,054.55
------------------------------------------- ---------------------
ACCOUNTING FEES AND EXPENSES $ 5,000*
------------------------------------------- ---------------------
LEGAL FEES AND EXPENSES $40,000*
------------------------------------------- ---------------------
MISCELLANEOUS $3,945..45*
------------------------------------------- ---------------------
$50,000
------------------------------------------- ---------------------
------------------------------------------- ---------------------
* Estimated.
II-1
ITEM 26. 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 fair value of the common stock (based
on the trading price of the Company's stock on the date of issuance) was
$132,000.
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 fair value of the common stock (based
on the trading price of the Company's stock on the date of issuance) was
$42,000.
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 fair value of the common stock (based
on the trading price of the Company's stock on the date of issuance) was
$41,000.
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 fair value of the common stock (based on the
trading price of the Company's stock on the date of issuance) was $75,000.
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. The fair value of
the 300,000 common shares (based on the trading price of the Company's stock on
such date of issuance) was $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 fair value of the common stock (based on the
trading price of the Company's stock on the date of issuance) was $45,000.
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. 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) was $20,000.
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. The fair value of such common stock was
$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.
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. The estimated fair value of the 250,000 shares (based on the trading
price of the Company's stock on the date of issuance) was $47,500.
On February 16, 2006, we issued a convertible note to Motivated Minds, LLC in
the principal amount of $300,000. In connection with the Note we issued a
warrant to Motivated Minds to purchase up to 454,545 shares of Common Stock at a
price of $0.66 per share. Such Warrant will be exercisable immediately upon
issuance and will expire on the fifth anniversary of the date of issuance. In
addition, in connection with the Note, we issued 30,000 restricted shares of our
common stock to Motivated Minds and an aggregate of 45,454 warrants to the
Placement Agents, Source Capital Group, Inc. and Ascendiant Securities, LLC
which warrants are exercisable at a price of $.66 per share and which expire on
February 14, 2011.
II-2
On February 28, 2006, to obtain funding for our operations, we entered into a
Securities Purchase Agreement with CAMOFI Master LDC ("CAMOFI") for the sale of
(i) $3,500,000 in 12% Senior Secured Convertible Notes; and (ii) stock purchase
warrants to purchase 3,476,190 shares of our common stock. In connection with
the CAMOFI Note, we have issued 250,000 restricted shares of our common Stock
and 722,539 warrants to the Placement Agent, Ascendiant Securities, LLC, of
which 90,317 warrants were assigned to Michael S. Cole. The Warrants are
exercisable at a price of $.63 and expire on February 28, 2013.
* Unless indicated otherwise, all of the above offerings and sales were deemed
to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933, as amended. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors, business associates of Global
Axcess or executive officers of Global Axcess, and transfer was restricted by
Global Axcess in accordance with the requirements of the Securities Act of 1933.
In addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
II-3
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean New Century Companies, Inc.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Share Exchange Agreement dated as of December 18, 2000. (1)
3.1 Certificate of Incorporation as filed with the Delaware Secretary of
State, as amended.(2)
3.2 Certificate of Amendment to the Certificate of Incorporation as
filed with the Delaware Secretary of State.(3)
3.2 Bylaws. (2)
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (6)
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; (4)
10.2 Series A Convertible Note issued to Motivated Minds, LLC (6)
10.3 Common Stock Purchase Warrants issued to Motivated Minds, LLC (6)
10.4 Registration Rights Agreement dated February 15, 2006 (6)
10.5 Securities Purchase Agreement between New Century Companies, Inc.
and CAMOFI Master LDC (5)
10.6 12% Senior Secured Convertible Note issued by New Century Companies,
Inc. in favor of CAMOFI Master LDC (5)
10.7 Common Stock Purchase Warrant issued to CAMOFI Master LDC (5)
10.8 Registration Rights Agreement between New Century Companies, Inc.
and CAMOFI Master LDC (5)
10.9 Escrow Agreement between New Century Companies, Inc., CAMOFI Master
LDC and Katten Muchin Rosenman LLP, as Escrow Agent (5)
10.10 Security Agreement between New Century Companies, Inc. and its
current and future subsidiaries on the one hand, and CAMOFI Master
LDC on the other hand (5)
10.11 Subsidiary Guarantee provided by all current and future subsidiaries
of New Century Companies, Inc. to CAMOFI Master LDC (5)
10.12 Lock-up Agreement with certain shareholders of New Century
Companies, Inc. (5)
21.1 Subsidiaries of the Company (6).
23.1 Consent of Squar, Milner, Reehl & Williamson, LLP
23.2 Consent of Sichenzia Ross Friedman Ference LLP (6)
(1) Incorporated herein by reference from the Company's filing on Form
8-K filed on August 23, 2000.
(2) Incorporated by reference to Exhibit 2.1 the Company's Registration
Statement on Form C-18, filed on August 14, 1980. I S
(3) Incorporated by reference to 8-K filed June 4, 2003.
(4) Incorporated by reference to the Exhibit 2.1 of the 8-K filed June
4, 2003.
(5) Incorporated by reference to the Company's Form 8-K filed on March
13, 2006
(6) Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on June 8, 2006
II-4
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this amendment no. 2
to the registration statement to be signed on its behalf by the undersigned, in
the City of Santa Fe Springs, State of California, on August 9, 2006.
NEW CENTURY COMPANIES, INC.
By: /s/ David Duquette
-----------------------------------
David Duquette
Chief Executive Officer
and Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David Duquette as true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution and for him/her and in
his/her name, place and stead, in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement, as well as any new registration statement filed to
register additional securities pursuant to Rule 462(b) under the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof. In accordance with the requirements of the Securities Act of
1933, registration statement was signed by the following persons in the
capacities and on August 9, 2006.
Signature Title Date
/s/ David Duquette Chief Executive Officer August 9, 2006
----------------------- Chief Financial Officer
David Duquette and Director
/s/ Josef Czikmantori Secretary and Director August 9, 2006
----------------------
Josef Czikmantori