SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2001
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OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to
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Commission file Number
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NEW CENTURY COMPANIES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware
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(State or other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
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(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
------------------- on Which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10
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(Title of Class)
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-SKB. [X]
State issuer's revenue for its most recent fiscal year $6,138,829.
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State the aggregate market value of the voting and non-voting common equity
held by no-affiliates computed by reference to the price at which the common
equity as sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days (See definition of affiliate in Rule
12b-2 of the Exchange Act.). $13,099,299.
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Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of share outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of April 10, 2001 there
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were 5,038,192 shares of common stock issued and outstanding
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Transitional Small Business Disclosure Format (check one):
Yes No X
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NEW CENTURY COMPANIES, INC.
FORM 10-KSB
INDEX
Page
----
PART I
Item 1. Description of Business .......................................... 1
Item 2. Description of Properties ........................................ 4
Item 3. Legal Proceedings ................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders .............. 5
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 5
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 6
Item 7. Financial Statements ............................................. 8
PART III
Item 8. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ................ 8
Item 9. Executive Compensation ........................................... 9
Item 10. Security Ownership of Certain Beneficial Owners and Management ... 10
Item 11. Certain Relationships and Related Transactions ................... 10
Item 12. Exhibits, List and Reports on Form 8-K ........................... 10
Signatures ................................................................. 12
Financial Statements ....................................................... F-1
PART I
ITEM 1. Description Of Business.
When used in this Form 10-KSB, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties, including
those set forth below under "Risks and Uncertainties," that could cause actual
results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based. This discussion should be read
together with the financial statements and other financial information included
in this Form 10-KSB.
OVERVIEW
New Century Companies, Inc. (the "Registrant", the "Company" or "New Century")
was incorporated in the State of Delaware on August 1, 1980 under the name Numex
Corporation. On April 12, 1999, the Registrant acquired all of the outstanding
stock of Jeffrey A. Stern & Associates, Inc., in exchange for 3,046,875 shares
of common stock in the Company (the "JSA Acquisition"). For accounting purposes,
the JSA Acquisition is treated as a re-capitalization of JSA with JSA as the
acquirer. Pursuant to the terms of the JSA Acquisition the Registrant changed
its name to InternetMercado.com, Inc. on September 27, 2000.
RECENT DEVELOPMENTS
On May 25, 2001, the Registrant, New Century Acquisition Corp., New Century
Remanufacturing, Inc., and certain individual shareholders of New Century
Remanufacturing entered into an Agreement and Plan of Merger pursuant to which
New Century Acquisition Corp. merged with and into New Century Remanufacturing.
Pursuant to the Merger Agreement, shareholders of New Century Remanufacturing
exchanged their shares for shares of common stock of the Registrant. New Century
shareholders converted their shares into shares of common stock of the
Registrant at the ratio of 83.33 shares of common stock of the Registrant for
each one share of New Century Remanufacturing. For accounting purposes, this
acquisition will be treated as a recapitalization of New Century
Remanufacturing, Inc. with New Century Remanufacturing, Inc. as the acquirer.
However, since the acquisition was completed after the end of the Registrant's
fiscal year, the discussion below provides information with respect to the
business operations of New Century Remanufacturing, Inc.
As part of the Merger, the former director of the Registrant, Jeffrey A.
Stern resigned and was replaced by the following directors: David Duquette and
Josef Czikmantori both of whom were selected by New Century Remanufacturing. The
former officers of the Registrant, Jeffrey A. Stern and Felix Telado, resigned
and were replaced by the following officers: David Duquette and Josef
Czikmantori. The Registrant has assumed the operations of New Century
Remanufacturing and changed its name to New Century Companies, Inc. on June 15,
2001. All references to "New Century", "us", "our" and "the Company" shall refer
to New Century Companies, Inc.
OPERATIONS
Prior to the Merger, the Company was in the business of developing a
Hispanic e-commerce web-site and providing business to business marketing
services to other internet companies wanting to reach the Hispanic market.
However, due to the difficulty in raising additional working capital to execute
its business plans, the Registrant ceased its publishing and marketing internet
operations in February 2001.
After the acquisition on May 25, 2001 with New Century Remanufacturing, the
Registrant began the manufacturing, remanfacturing and distribution of large
computer numerically controlled ("CNC") horizontal and vertical turning
machines. We provide rebuilt, retrofit and remanufacturing services for numerous
brands of machine tools. The remanufacture of a machine tool, typically
consisting of replacing all components, realigning the machine, adding updated
CNC capability and electrical and mechanical enhancements, generally takes two
to four months to complete. Once completed, a remanufactured machine is a "like
new," state-of-the-art machine costing approximately 40%-50% of the price of a
new machine. The warranty policy on a remanufactured machine covers all newly
manufactured and remanufactured products and generally provides a two-year parts
and labor warranty.
The Registrant manufactures original equipment CNC large turning lathes and
attachments under the trade name of "Century Turn". The Registrant also provides
rebuilt, retrofit and remanufacturing services predominantly for computer
numerically controlled horizontal and vertical turning machines.
Computer numerically controlled machines use commands from an on-board
computer to control the movement of cutting tools and rotation speeds of the
part being produced. The computer control enables the operator to program
operations such as part rotation, tooling selection and tooling movement for a
specific part and then store that program in memory for future use. The machine
is 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. Since the introduction of CNC turning machines, continual
advances in computer control technology have allowed for easier programming and
additional machine capabilities.
A vertical turning machine permits the customer to produce larger, heavier
and more oddly shaped parts on a machine that uses less floor space when
compared to a traditional horizontal turning machine because the spindle and ram
are aligned on a vertical plane, with the spindle on the bottom.
The primary industry segments in which New Century machines are utilized to
make component parts are: power generation for turbines, aerospace for jet
engines, and component parts for the energy sector for natural gas and oil
exploration. We sell our products in the United States, Canada and Mexico.
2
Over the last four years, we have designed and developed a large horizontal
CNC turning lathe with productivity features new to the metalworking industry.
New Century has applied for a patent for the Century Turn Lathe. New Century
believes that a potential market for the Century Turn Lathe, in addition to the
markets mentioned above, is aircraft landing gear.
INDUSTRY OVERVIEW
We provide our manufactured and remanufactured machines as part of the machine
tool industry. The machine tool industry worldwide is approximately a 30 billion
dollar business annually. The industry is sensitive to market conditions and
generally trends downward prior to poor economic conditions, and improves prior
to an improvement in economic conditions.
Our machines are utilized in a wide variety of industry segments as follows:
aerospace, energy, valves, fittings, oil and gas, machinery and equipment, and
transportation.
MARKETING
We market our CNC turning lathes primarily through direct sales and
independent representatives throughout the United States. We also market our
lathes through advertising in industrial trade publications.
We market our CNC vertical boring mills by advertising in regional and
national trade publications and distributes product literature explaining the
differences between used and remanufactured machinery.
BUSINESS STRATEGY AND MARKET DEVELOPMENT
Our business strategy is to capitalize on the opportunities for growth in
our core businesses by increasing our penetration of existing markets through
acquisitions and expanding into new markets by introducing new products and
services.
SEASONALITY
Our business is subject to certain seasonal fluctuations in sales, with a
pattern of net sales being lower in the second fiscal quarter, due to plant
closings in the summer months and vacations.
COMPETITION
The market for remanufacturing services for the machine tools is
competitive, with competition from numerous independent rebuild suppliers with
various sales and resource levels. We believe that we have a competitive
advantage because we employ skilled personnel who have been trained for and have
experience with these products. Principal competitive factors for our products
and services are proprietary technology, customer service, technical support,
delivery and price.
3
SOURCES AND AVAILABILITY OF RAW MATERIALS
Our products are manufactured from various raw materials, including cast
iron, sheet metal, bar steel and bearings. Although our operations are highly
integrated, we purchase a number of components from outside suppliers, including
the computer and electronic components for our CNC turning lathes. There are
multiple suppliers for virtually all of our raw material and components and we
have not experienced a supply interruption.
RESEARCH AND DEVELOPMENT
Our ongoing research and development program involves creating new products
and modifying existing products to meet market demands and redesigning existing
products to reduce the cost of manufacturing. The research and development
department is staffed with experienced design engineers. The cost of research
and development, all of which has been charged to operations, amounted to
approximately $1,000,000 over the last two years.
PATENTS AND TRADEMARKS
The Registrant has applied for patents, trademarks and copyrights relating
to its manufactured products. However, the Company's business generally is not
dependent upon the protection of any patent, patent application or patent
license agreement, or group thereof, and would not be materially affected by the
expiration thereof.
EMPLOYEES
At December 31, 2001, we had 30 employees.
ENVIRONMENTAL MATTERS
This industry in which we compete is subject to environmental laws and
regulations concerning emissions to the air, discharges to waterways, and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. These laws and regulations are constantly evolving and we cannot
predict accurately the effect they will have on our business in the future. It
is our policy to comply with all applicable environmental, health and safety
laws and regulations. In many instances, the regulations have not been
finalized. Even where regulations have been adopted, they are subject to varying
and conflicting interpretations and implementation. In some cases, compliance
can only be achieved by capital expenditures. We cannot accurately predict what
capital expenditures, if any, may be required. We believe that our operations
are in compliance with all applicable laws and regulations relating to
environmental matters.
ITEM 2. Description of Properties.
We are headquartered in Santa Fe Springs, California, and conduct our
operations at facilities located in Santa Fe Springs, California. We believe
that our facilities are in good condition and provide adequate capacity to meet
the our needs for the foreseeable future.
4
The following table sets forth certain information relating to the
Company's principal facilities:
Location Principal Uses Approx Sq. Ft.
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9835 Santa Fe Springs Road Manufacturing 44,000
Santa Fe Springs, CA 90670
ITEM 3. Legal Proceedings.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matter submitted to security holder for the quarter ended
December 31, 2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock trades on the over-the-counter Bulletin Board under the
symbol "NCNC." The following table sets forth the high and low sales 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. These bid prices also reflect a revenue stock split of %
10:1 effected on December 26, 2001.
For Fiscal Year 2000
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High Low
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December 31 $ 10.00 $ 5.00
September 30 11.60 6.30
June 30 20.60 6.30
March 31 33.80 9.40
For Fiscal Year 2001
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2.75 2.10
December 31 8.00 2.20
September 30 8.00 5.90
June 30 9.40 .70
March 31
5
We have not declared any cash dividends on our common stock since
inception. Declaration of dividends with respect to the common stock is at the
discretion of the Board of Directors. Any determination to pay dividends will
depend upon the financial condition, capital requirements, results of operations
and other factors deemed relevant by the Board of Directors.
At December 31, 2001 we had 359 holders of record (not including individual
participants in securities position listings) of its common stock as of
representing approximately 1,200 individual participants.
The transfer agent and registrar for our common stock is U.S. Stock
Transfer located in Glendale, California.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
Registrant's consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-KSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Registrant's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Registrant's believes that the assumptions on which these forward-looking
statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate and actual results could differ materially
from those discussed in the forward looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-KSB
are qualified in their entity by this statement.
OVERVIEW
On May 25, 2001, the Registrant acquired all of the outstanding capital
stock of New Century Remanufacturing, Inc. in exchange for 2,695,942 shares of
the Registrant's common stock. For accounting purposes, this acquisition will be
treated as a recapitalization of New Century Remanufacturing, Inc. with New
Century Remanufacturing, Inc. as the acquirer. However, since the acquisition
was completed after the end of the Registrant's fiscal year, the discussion
below provides information with respect to the separate results of operations of
each of the Registrant (pre-acquisition) and New Century Remanufacturing, Inc.
As a result of the acquisition, the Registrant is now engaged in the
business of manufacturing and remanufacturing machines as part of the machine
tool industry.
6
PLAN OF OPERATIONS
The earnings of New Century Companies for the year ended 2001 were negative
as a result of management's strategy for continued investment in research -
development of new projects and of the corporate expenses related to the public
company. The goal of these expenditures was to position New Century as a leading
manufacturer and remanufacturer of large horizontal and vertical turning
machines. New Century has completed the majority of this current development
effort and expects limited resources to be devoted to this area in the next
fiscal year.
Our current strategy is to expand its customer sales base with its present
line of machine products. Plans for expansion are expected to be funded through
current working capital from ongoing sales. However, significant growth will
require additional funds in the form of debt or equity, or a combination
thereof. However, there can be no assurance these funds will be available.
Our growth strategy also includes strategic acquisition in addition to
growing its current business. A significant acquisition will require additional
financing. There can be no assurance that the Company can obtain such financing.
RESULTS OF OPERATIONS
New Century generated revenues of $6,138,829 for fiscal year ended December
31, 2001, which was $935,318 decrease from $7,074,147 for the year ending
December 31, 2000. This decrease was primarily a result of the economic slow
down in 2001.
Gross profit for the year ending December 31, 2001, was $1,004,241 or 16%
of revenues, compared to $357,875, or 5% in 2000, an increase of 180%, primarily
due to product development and research reflected in productivity improvement.
Net operating loss increased to $478,666 for the year December 31, 2001
compared to $395,075 for year ended December 31, 2000 due to the non-recurring
corporate expenses related to the public company.
Interest expense for the year ended December 31, 2001, decreased to
$66,507, compared to $67,839, year ended December 31, 2000, primarily due to a
decrease of the prime lending rate.
Financial Condition, Liquidity, Capital Resources
-------------------------------------------------
Net cash used in the operations of New Century during fiscal year 2001 was
($483,855), which was a $1,044,154 decrease from fiscal year 2000. The decrease
is due to corporate expenses related to the public company. New century financed
its cash flow deficiency by securing financing through the placement of common
stock and Notes payable. Total cash provided by financing activities of $375,736
for the fiscal year 2001.
The Registrant plans to continue to rely upon external financing sources to
meet the cash requirement of its ongoing operations. Management is currently
7
seeking to raise additional funding on the form of equity or debt, or a
combination thereof. However, there is no guarantee that it will raise
sufficient capital to execute its business plan. To the extent that the
Registrant is unable to raise sufficient capital, the Registrant's business plan
will be required to be substantially modified and its operations curtailed.
The company's auditors have issued their report which contains an
explanatory paragraph as to the company's ability to continue as a going
concern. The company is currently addressing its liquidity problem by the
following actions:
.. The company continues its aggressive program for selling inventory that has
been produced or is currently in production.
.. The Company continues to implement plans to further reduce operating costs.
.. The Company is continually seeking investment capital through the public
markets.
However, there is no guarantee that any of these strategies will enable the
company to meet its obligations for the foreseeable future.
Inflation and Changing Prices
-----------------------------
The Registrant does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
Critical Account Policies
-------------------------
The Company uses the percentage-of-completion method of accounting to
account for long-term contracts and, therefore, take 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 extend over one or more years, 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 financial statements.
Contracts that are substantially complete are considered closed for
financial statement purposes. Revenue earned on contracts in progress in excess
of billings (underbillings) is classified as a current asset. Amounts billed in
excess of revenue earned (overbillings) are classified as a current liability.
ITEM 7. Financial Statements.
The Financial Statements of the Company are set forth at the end hereof.
PART III
ITEM 8. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The following table and text sets forth the names and ages of all directors
and executive officers of the Company and the key management personnel as of
December 31, 2001. The Board of Directors of the Company is comprised of only
one class. All of the directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. Executive officers
serve at the discretion of the Board of Directors, and are appointed to serve
until the first Board of Directors meeting following the annual meeting of
stockholders. Also provided is a brief description of the business experience of
each director and executive officer and the key management personnel during the
past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the Federal
securities laws.
Name Age Position
---- --- --------
David Duquette 58 Chairman of the Board, President and Director
Josef Czikmantori 49 Secretary and Director
DAVID DUQUETTE. Mr. Duquette has served as the Chairman of the Board,
President 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
8
metal cutting machinery. In 1986, Mr. Czikmantori defected from communist
Romania and traveled to Los Angeles. He joined Mr. David Duquette at Orange
Coast Machine Tools. He is a co-founder of New Century Remanufacturing.
Section 16(a) Beneficial Ownership Compliance
---------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors and persons who own more than 10%
of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial statements of beneficial ownership,
reports of changes in ownership and annual reports concerning their ownership of
common stock and other equity securities of the Company, on Forms 3, 4 and 5
respectively. Executive officers, directors and greater than 10% shareholders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the best of the Company's knowledge (based
solely upon a review of the Form 3, 4 and 5 filed), no officer, director or 10%
beneficial shareholder failed to file on a timely basis any reports required by
Section 16(a) of the Securities Exchange Act of 1934, as amended.
ITEM 9. Executive Compensation.
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the three other most highly
compensated executive officers who were serving as such as of December 31, 2001,
whose aggregate compensation for fiscal year 2001 exceeded $100,000 for services
rendered in all capacity for that fiscal year.
Summary Compensation Table
--------------------------
Annual Compensation Long-Term
Compensation Awards Shares of
Name Year Salary Bonus Other Compensation Common Stock Underlying Options
---- ---- ------ ----- ------------------ -------------------------------
David Duquette 2001 197,600 0 0 --
Josef Czikmantori 2001 127,400 0 0 --
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Option Grants in Last Fiscal Year
----------------------------------------------------------------------------------------------------------------------
Name Number of Percent of Total Exercise or Base Market Price on Expiration Date
Securities Options Granted Price Grant Date
Underlying to Employees in
Options Granted Fiscal Year
------------------------- ----------------- ------------------ ------------------ ----------------- ------------------
David Duquette -- --
Josef Czikmantori -- --
----------------------------------------------------------------------------------------------------------------------
9
ITEM 10. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of common stock
beneficially owned as of December 31, 2001 by (i) those persons or groups known
to the Registrant who will beneficially own more than 5% of the Registrant's
common stock; (ii) each director and director nominee; (iii) each executive
officer whose compensation exceeded $100,000 in the fiscal year ended December
31, 2001; and, (iv) all directors and executive officers as a group. The
information is determined in accordance with Rule 13(d)-3 promulgated under the
Exchange Act based upon information furnished by persons listed or contained in
filings made by them with the Securities and Exchange Commission by information
provided by such persons directly to the Registrant. Except as indicated below,
the stockholders listed possess sole voting and investment power with respect to
their shares.
Name of Beneficial Owner No. of Shares Percentage of Ownership(l)
------------------------ ------------- -----------------------
David Duquette 1,029,000 21%
Josef Czikmantori 506,000 10%
Officers and Directors as a Group (2 persons) 1,535,557 31%
5% or More Beneficial Ownership
-------------------------------
Jeffrey A. Stern(2) 400,571 8%
Bastion Capital Fund L.P.(3) 400,000 8%
------------------------------
(1) Based on 5,038,192 shares outstanding. Common stock subject to options or
warrants that are currently exercisable or exercisable within 60 days of
December 31, 2001 are deemed to be outstanding and to be beneficially owned by
the holder thereof for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes options to purchase 150,000 shares.
(3) Includes warrants to purchase 100,000 shares.
ITEM 11. Certain Relationships and Related Transactions.
None.
ITEM 12. Exhibits, List and Reports on Form 8-K.
Exhibit Number Description
2.1 Share Exchange Agreement dated as of December 18, 2000,
Incorporated herein by reference from the Company's filing on
Form 8-K filed on August 23, 2000.
10
3.1 Certificate of Incorporation as filed with the Delaware
Secretary of State, as amended. Incorporated by reference to
exhibit 2.1 to Company's Registration Statement on Form S-18,
filed on August 14, 1980.
3.2 Certificate of Amendment to the Certificate of Incorporation as
filed with the Delaware Secretary of State, Incorporated by
reference to 8-K filed June 4, 2001.
3.2 Bylaws. Incorporated by reference to exhibit 2.2 to the
Registration Statement on Form S-18, filed on August 14, 1980.
10.1 Agreement and Plan of Merger, dated as of May 25, 2001, by and
among Internetmercado.com, Inc., New Century Remanufacturing,
Inc., New Century Acquisition Corporation, David Duquette and
Josef Czikmantori; Incorporated by reference to the Exhibit 2.1
of the 8-K filed June 4, 2001
21.1 Subsidiaries of the Registrant*
------------------
*Filed herewith
(b) Reports on Form 8-K
None.
11
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 15, 2002 NEW CENTURY COMPANIES, INC.
/s/ David Duquette
----------------------------------------
Name: David Duquette
Title: Chairman, President and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and ill the capacities and on
the dates indicated.
Date: April 15, 2002 /s/ David Duquette
----------------------------------------
Name: David Duquette
Title: Chairman, President and Director
Date: April 15, 2002 /s/ Josef Czikmantori
----------------------------------------
Name: Josef Czikmantori
Title: Secretary and Director
12
NEW CENTURY COMPANIES, INC.
CONTENTS
December 31, 2001
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Page
INDEPENDENT AUDITOR'S REPORT F-2
FINANCIAL STATEMENTS
Balance Sheet F-3 - F-4
Statements of Operations F-5
Statements of Shareholders' Deficit F-6
Statements of Cash Flows F-7 - F-8
Notes to Financial Statements F-9 - F-24
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
New Century Companies, Inc.
Santa Fe Springs, California
We have audited the accompanying balance sheet of New Century Companies, Inc. as
of December 31, 2001, and the related statements of operations, shareholders'
deficit, and cash flows for each of the two years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in
all material respects, the financial position of New Century Companies, Inc. as
of December 31, 2001, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's current liabilities exceed its current
assets. This raises substantial doubt about the Company's ability to continue as
a going concern. Management's plan in regard to these matters is also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 1, 2002
F-2
NEW CENTURY COMPANIES, INC.
BALANCE SHEET
December 31, 2001
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 43,764
Contracts receivable 306,176
Inventory 1,193,204
Costs and estimated earnings on contracts in
progress in excess of billings 106,554
Prepaid expenses and other current assets 97,933
----------
Total current assets 1,747,631
Property and equipment, net 700,865
Deposits 259,177
----------
Total assets $2,707,673
==========
The accompanying notes are an integral part of these financial statements
F-3
NEW CENTURY COMPANIES, INC.
BALANCE SHEET
December 31, 2001
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Book overdraft $ 88,079
Notes payable, net of discount of $106,000 391,013
Current portion of capital lease obligations 44,537
Accounts payable 1,097,473
Accrued expenses 315,385
Billings in excess of costs and estimated earnings on
contracts in progress 921,584
----------------
Total current liabilities 2,858,071
Capital lease obligations, net of current portion 50,014
----------------
Total liabilities 2,908,085
----------------
Commitments and contingencies
Shareholders' deficit
Cumulative, convertible, Series B preferred stock, $1 par value
15,000,000 shares authorized
56,900 shares issued and outstanding 56,900
Common stock, $0.10 par value
6,000,000 shares authorized
4,940,527 shares issued and outstanding 494,053
Additional paid-in capital 1,410,927
Treasury stock, at cost, 7,750 shares (7,750)
Subscription receivable (1,087,500)
Loans to shareholders (433,345)
Deferred consulting fees (155,031)
Accumulated deficit (478,666)
----------------
Total shareholders' deficit (200,412)
----------------
Total liabilities and shareholders' deficit $ 2,707,673
================
The accompanying notes are an integral part of these financial statements
F-4
NEW CENTURY COMPANIES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------------------------------------------
2001 2000
----------- -----------
Net sales $ 6,138,829 $ 7,074,147
Cost of sales 5,134,588 6,716,272
----------- -----------
Gross profit 1,004,241 357,875
Operating expenses 1,437,918 819,350
----------- -----------
Loss from operations (433,677) (461,475)
----------- -----------
Other income (expense)
Interest expense (66,507) (67,839)
Interest income 17,916 11,621
Other income 4,402 123,418
----------- -----------
Total other income (expense) (44,189) 67,200
----------- -----------
Loss before provision for income taxes (477,866) (394,275)
Provision for income taxes 800 800
----------- -----------
Net loss (478,666) (395,075)
Cumulative preferred dividends 71,125 -
----------- -----------
Net loss available to common shareholders $ (549,791) $ (395,075)
=========== ===========
Basic and diluted loss per share $ (0.16) $ (0.26)
=========== ===========
Basic and diluted weighted-average shares outstanding 3,451,109 1,500,000
=========== ===========
The accompanying notes are an integral part of these financial statements
F-5
NEW CENTURY COMPANIES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Years Ended December 31,
--------------------------------------------------------------------------------
Cumulative, Convertible
Series B Preferred Stock Common Stock Additional
------------------------ ------------------------ Paid-in Treasury Subscription Loans to
Shares Amount Shares Amount Capital Stock Receivable Shareholders
--------- ----------- ----------- ----------- ----------- ---------- ------------ ------------
Balance, December 31,
1999 - $ - 1,500,000 $ 150,000 $ (60,000) $ - $ - $ (106,500)
Loan to shareholder (251,824)
Net loss
--------- ----------- ----------- ----------- ----------- ---------- ------------ ------------
Balance, December 31,
2000 - - 1,500,000 150,000 (60,000) - - (358,324)
Merger with Internet-
Mercado.com, Inc. 100,900 100,900 2,695,942 269,594 (146,739) (7,750) (87,500)
Issuance of common
stock for
subscription
receivable 400,000 40,000 960,000 (1,000,000)
Issuance of common
stock for cash 200,000 20,000 230,000
Issuance of common
stock for consulting
services 71,250 7,125 285,000
Amortization of
deferred
consulting fees
Loan to shareholder (75,021)
Discount on debt
attributable to stock
purchase warrants 106,000
Conversion of
preferred stock to
common stock (44,000) (44,000) 73,335 7,334 36,666
Net loss
--------- ----------- ----------- ----------- ----------- ----------- ------------ ------------
Balance, December 31,
2001 56,900 $ 56,900 4,940,527 $ 494,053 $ 1,410,927 $ (7,750) $ (1,087,500) $ (433,345)
========= =========== =========== =========== =========== ========== ============ ============
Retained
Deferred Earnings
Consulting (Accumulated
Fees Deficit) Total
------------ ------------ -----------
Balance, December 31,
1999 $ - $ 523,580 $ 507,080
Loan to shareholder (251,824)
Net loss (395,075) (395,075)
------------- ------------ -----------
Balance, December 31,
2000 - 128,505 (139,819)
Merger with Internet-
Mercado.com, Inc. (128,505) -
Issuance of common
stock for
subscription
receivable -
Issuance of common
stock for cash 250,000
Issuance of common
stock for consulting
services (292,125) -
Amortization of
deferred
consulting fees 137,094 137,094
Loan to shareholder (75,021)
Discount on debt
attributable to stock
purchase warrants 106,000
Conversion of
preferred stock to
common stock -
Net loss (478,666) (478,666)
------------ ------------ -----------
Balance, December 31,
2001 $ (155,031) $ (478,666) $ (200,412)
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-6
NEW CENTURY COMPANIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------------------------------------------
2001 2000
------------ ------------
Cash flows from operating activities
Net loss $ (478,666) $ (395,075)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization of property and equipment 216,490 129,500
Amortization of consulting fees 137,094 -
Interest income (17,916) (11,621)
Inventory reserves for obsolescence - (50,000)
(Increase) decrease in
Contracts receivable (47,176) (156,500)
Inventory (503,365) 590,348
Costs and estimated earnings on contracts in
progress in excess of billings (14,414) 43,806
Prepaid expenses and other current assets (52,085) (16,001)
Deposits (250,000) -
Increase (decrease) in
Accounts payable 223,531 (182,482)
Accrued expenses 230,873 (68,224)
Billings in excess of costs and estimated earnings on
contracts in progress 71,779 676,548
------------ ------------
Net cash provided by (used in) operating activities (483,855) 560,299
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (4,041) (34,042)
Loans to shareholders (75,021) (251,824)
------------ ------------
Net cash used in investing activities (79,062) (285,866)
------------ ------------
Cash flows from financing activities
Book overdraft 88,079 -
Proceeds from notes payable 250,000 -
Principal payments on notes payable (176,834) (116,208)
Principal payments on capital lease obligations (35,509) (26,358)
Issuance of common stock 250,000 -
------------ ------------
Net cash provided by (used in) financing activities 375,736 (142,566)
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-7
NEW CENTURY COMPANIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------------------------------------------
2001 2000
--------------- ----------------
Net increase (decrease) in cash $ (187,181) $ 131,867
Cash, beginning of year 230,945 99,078
--------------- ----------------
Cash, end of year $ 43,764 $ 230,945
=============== ================
Supplemental disclosures of cash flow information
Interest paid $ 66,507 $ 67,839
=============== ================
Income taxes paid $ 800 $ 800
=============== ================
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 2001, the Company entered into the following
non-cash transactions:
.. issued 2,695,942 shares of common stock in connection with the merger of
InternetMercado.com.
.. issued 400,000 shares of common stock in exchange for a $1,000,000
subscription receivable.
.. issued 71,250 shares of common stock in exchange for $292,125 of consulting
services.
.. converted 44,000 shares of preferred stock in exchange for 73,335 shares of
common stock.
.. acquired $31,452 of property and equipment under capital lease obligations.
During the year ended December 31, 2000, the Company entered into the following
non-cash transactions:
.. acquired $88,000 of property and equipment under capital lease obligations.
.. transferred $730,710 of inventory to property and equipment.
The accompanying notes are an integral part of these financial statements.
F-8
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND ORGANIZATION
General
-------
New Century Companies, Inc. (the "Company"), a California corporation,
was incorporated March 1996 and is located in Southern California. The
Company provides after-market services, including rebuilding,
retrofitting, and remanufacturing of metal cutting machinery. Once
completed, a remanufactured machine is "like new" with state-of-the-art
computers, and the cost to the Company's customers is approximately 40%
to 50% of that of a new machine.
The Company currently sells its services by direct sales and through a
network of machinery dealers across the United States. Its customers
are generally medium- to large-sized manufacturing companies in various
industries where metal cutting is an integral part of their businesses.
The Company grants credit to its customers who are predominately
located in the western United States.
Stock Split
-----------
On November 26, 2001, the Company authorized a one-for-10 reverse stock
split. All share and per share data have been retroactively restated to
reflect the split.
Merger with InternetMercado.com, Inc.
-------------------------------------
On May 25, 2001, the Company entered into a merger agreement (the
"Agreement") in which the Company was merged with InternetMercado.com,
Inc. ("InternetMercado"). In accordance with the terms of the
Agreement, the following conversions occurred:
. Each issued and outstanding share of common stock of the new
entity's newly formed, wholly owned subsidiary was converted into
one share of the Company's common stock.
. Each share of the Company's common stock was converted into shares
of InternetMercado's common stock, par value $0.10 per share (the
"InternetMercado Shares") at the rate of 83.33 InternetMercado
Share for each of the Company's shares amounting to an aggregate
1,500,000 InternetMercado Shares.
The transaction has been accounted for as a reverse acquisition,
whereby the Company is the accounting acquirer, and the equity section
has been restated to reflect the Company's current capital structure.
Name Change
-----------
In June 2001, the Company's name was changed from InternetMercado.com,
Inc. to New Century Companies, Inc.
F-9
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN AND RISKS AND UNCERTAINTIES
Going Concern
-------------
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As of December 31, 2001, the Company had high levels of
inventory, its current liabilities exceeded its current assets, and it
is not in compliance with loan terms, which caused the Company
liquidity issues.
In response to these problems, management has taken the following
actions:
. The Company continues its aggressive program for selling
inventory.
. The Company continues to implement plans to further reduce
operating costs.
. The Company merged with a public company in May 2001 (see Note 1)
and is in the process of issuing a private placement.
. The Company is seeking investment capital through the public
markets.
. The Company has secured approximately $1,815,500 worth of new
orders from January 2002 through March 2002.
The financial statements do not include any adjustments that might be
necessary should the Company be unable to implement any or all of these
plans.
Listing and Maintenance Criteria for NASDAQ Securities
------------------------------------------------------
The Company intends to apply for listing of its common stock on NASDAQ
for the Small-Cap Market. The initial listing standards for the NASDAQ
Small-Cap Market require that the Company have total assets of at least
$4,000,000, total shareholders' equity of at least $2,000,000, a public
float of at least 100,000 shares with a market value of at least
$1,000,000, at least 300 shareholders, a minimum bid price for its
common stock of $3 per share, and at least two market makers. To
maintain its listing on the NASDAQ Small-Cap Market, the Company must
continue to be registered under Section 12(g) of the Securities and
Exchange Act of 1934 and have total assets of at least $2,000,000,
total shareholders' equity of at least $1,000,000, a public float of at
least 100,000 shares with a market value of at least $200,000, at least
300 shareholders, a minimum bid price for its common stock of $1 per
share, and at least two market makers. There is not an assurance that
the Company will be able to obtain or maintain the standards for NASDAQ
Small-Cap Market listing.
F-10
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN AND RISKS AND UNCERTAINTIES (Continued)
Concentrations of Risk
----------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and contracts receivable.
The Company places its cash with high credit, quality financial
institutions. At times, such cash may be in excess of the Federal
Deposit Insurance Corporation insurance limit of $100,000. At December
31, 2001, the uninsured portions held at the financial institutions
aggregated to $118,573. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit
risk on cash. With respect to contracts receivable, the Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that the receivable credit risk exposure is
limited.
Major Customers
---------------
During the year ended December 31, 2001, the Company conducted business
with three customers whose sales comprised 28%, 22%, and 10% of net
sales. As of December 31, 2001, three customers accounted for 44%, 36%,
and 15% of total contracts receivable.
Major Suppliers
---------------
During the years ended December 31, 2001 and 2000, the Company
conducted business with one supplier who accounted for 32% and 27% of
total purchases, respectively. As of December 31, 2001, two suppliers
accounted for 21% and 12% of total accounts payable.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
-------------------
Service Revenue
Service revenues are billed and recognized in the period the services
are rendered.
Method of Accounting for Long-Term Contracts
The Company uses the percentage-of-completion method of accounting to
account for long-term contracts and, therefore, take 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.
F-11
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
-------------------
Method of Accounting for Long-Term Contracts (Continued)
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 extend over one or more years, 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 financial
statements.
Contracts that are substantially complete are considered closed for
financial statement purposes. Revenue earned on contracts in progress
in excess of billings (underbillings) is classified as a current asset.
Amounts billed in excess of revenue earned (overbillings) are
classified as a current liability.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the Company did not have any
of the items of comprehensive income in any period presented.
Inventory
---------
Inventory is comprised primarily of work in process and is valued at
the lower of cost (first-in, first-out method) or market. Cost
components include material, direct labor, machinery, subcontracts, and
allocations of indirect overhead.
F-12
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the
estimated useful lives of the various classes of property and equipment
as follows:
Machinery and equipment 5 years
Computer equipment 5 years
Capital lease equipment 5 years
Leasehold improvements 5 years
Maintenance and repair costs are expensed as they are incurred while
renewals and improvements of a significant nature are capitalized. At
the time of retirement or disposal of property and equipment, the cost
and related accumulated depreciation or amortization are removed from
the accounts, and any resulting gain or loss is reflected in the
results of operations.
Fair Value of Financial Instruments
-----------------------------------
The Company measures financial assets and liabilities in accordance
with generally accepted accounting principles. For the Company's
financial instruments, including cash, contracts receivable, accounts
payable, and accrued expenses, the carrying amounts approximate fair
value due to their short maturities. The amounts shown for notes
payable and capital lease obligations also approximate fair value
because current interest rates offered to the Company for debt of
similar maturities are substantially the same.
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation issued to employees.
The Company has elected to use the implicit value based method and has
disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation. For stock-based compensation
issued to non-employees, the Company uses the fair value method of
accounting under the provisions of SFAS No. 123.
F-13
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
-----------
Advertising expenses are charged to expense as incurred. For the years
ended December 31, 2001 and 2000, total advertising expense was $83,812
and $204,832, respectively.
Income Taxes
------------
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes are provided on a
liability method, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion of all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
As of April 30, 2001, the Company's federal filing status was changed
from "S" corporation to "C" corporation status. Under its "S"
corporation status, any profits or losses in the Company were passed on
to its shareholders and were not taxed at the corporate level. Taxes
recorded on the accompanying financial statements are only those for
the period from May 1, 2001 through December 31, 2001 and may not be
indicative of future tax provisions.
The pro forma effects of taxes as if the Company had been taxed as a
"C" corporation during the years ended December 31, 2001 and 2000 would
not have an effect on pro forma basic and diluted loss per share as a
full valuation allowance was made on the deferred tax benefit.
Loss per Share
--------------
Loss per share is presented according to SFAS No. 128, "Earnings Per
Share." Basic loss per share excludes dilution and is computed by
dividing net loss available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised
or converted into common stock. For the years ended December 31, 2001
and 2000, because the Company incurred net losses, basic and diluted
loss per share are the same. In addition, the Company had certain
convertible preferred stock and common stock, including options and
warrants, which were not included in diluted loss per share as their
effects would have been anti-dilutive.
F-14
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
-----------------
Certain amounts included in the prior year financial statements have
been reclassified to conform with the current year presentation. Such
reclassification did not have any effect on reported net loss.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." This
statement applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except
for certain obligations of lessees. The Company does not expect
adoption of SFAS No. 143 to have a material impact, if any, on its
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The Company does not expect adoption of SFAS No. 144 to have
a material impact, if any, on its financial position or results of
operations.
F-15
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 4 - CONTRACTS IN PROGRESS
Contracts in progress as of December 31, 2001 were as follows:
Cumulative costs to date $ 1,023,205
Cumulative gross profit to date 481,684
------------
Cumulative revenue earned 1,504,889
Less progress billings to date 2,319,919
------------
Net overbillings $ (815,030)
============
The following is included in the accompanying balance sheet under these
captions as of December 31, 2001:
Costs and estimated earnings on contracts in
progress in excess of billings $ 106,554
Billings in excess of costs and estimated earnings
on contracts in progress 921,584
------------
Net overbillings $ (815,030)
============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 consisted of the following:
Machinery and equipment $ 876,781
Computer equipment 26,506
Capital lease equipment 159,652
Leasehold improvements 106,107
------------
1,169,046
Less accumulated depreciation and amortization 468,181
------------
Total $ 700,865
============
For the years ended December 31, 2001 and 2000, depreciation and
amortization expense amounted to $216,490 and $129,500, respectively.
Included in accumulated depreciation is $31,930 for capital lease equipment
at December 31, 2001.
F-16
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 6 - LOANS TO SHAREHOLDERS
As of December 31, 2001, the Company had loans to certain of its
shareholders for $433,345, which bear interest at 5% per annum. There
is not a specified maturity date, and it is the Company's and
shareholders' intention not to reduce the balance before December 31,
2002. For the years ended December 31, 2001 and 2000, total interest
income from loans to shareholders was $17,916 and $11,621,
respectively.
NOTE 7 - NOTES PAYABLE
Notes payable at December 31, 2001 consisted of the following:
Notepayable - converted from line of credit, secured by all of the
Company's assets and personal guarantees of the shareholders.
Payable monthly at $8,500, plus interest at the Citibank,
N.A.'s base rate (4.75% at December 31, 2001), plus 1%. Debt
matured in February 2001, but was subsequently extended to
June 2002. $ 170,624
Notepayable - secured by all of the Company's assets and personal
guarantees of the shareholders. Payable monthly at $6,944,
plus interest at the Citibank, N.A.'s base rate (4.75% at
December 31, 2001), plus 1.25%. Debt matures in December 2002.
The Company must maintain certain financial covenants of which
the Company was not in compliance at December 31, 2001. 76,389
Notepayable - original principal of $250,000, unsecured, including
warrants to purchase the Company's common stock at an exercise
price of $0.20 per share. The note payable is personally
guaranteed by a shareholder of the Company. Payable on or
before June 21, 2002, accruing interest at 18% per annum. This
amount is net of a discount applicable to detachable warrants
of $106,000. 144,000
-----------
391,013
Less current portion 391,013
-----------
Long-term portion $ -
===========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases equipment under an operating lease requiring minimum
monthly payments of $273 per month through August 2005. For the year
ended December 31, 2001 and 2000, total equipment rent expense was
$3,277 and $3,277, respectively.
F-17
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
------
The Company leases a truck under an operating lease requiring minimum
monthly payments of $538 per month through July 2005. For the years
ended December 31, 2001 and 2000, truck lease expense was $6,460 and
$2,690, respectively.
The Company leases office and factory space under an operating lease
requiring minimum monthly payments of $6,800 through August 2003. The
agreement calls for annual increases. For the years ended December 31,
2001 and 2000, rent expense was $83,150 and $79,200, respectively.
On November 30, 2001, the Company entered into an agreement with a real
estate company to lease its office and warehouse facility, commencing
December 31, 2001. The lease requires initial monthly payments of
$28,515 and includes annual increases of 3% through December 2006. The
lease is personally guaranteed by one of the shareholders. The
agreement includes an option to purchase the land and building for
$3,550,000. As of December 31, 2001, the Company had placed $250,000 in
escrow to be used toward such purchase, which is included in deposits
in the accompanying balance sheet. These monies are non-refundable,
except for reasons specified in the agreement.
The Company also leases equipment under capital lease obligations that
expire through December 2005. Monthly payments of $5,201 are due,
including interest at rates ranging from 16% to 31%.
Future minimum lease payments under operating and capital lease
agreements at December 31, 2001 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ --------------- -----------
2002 $ 435,911 $ 62,405
2003 418,176 34,805
2004 372,750 14,155
2005 378,499 10,033
2006 385,120 -
------------ -----------
$ 1,990,456 121,398
============
Less amount representing interest 26,847
-----------
94,551
Less current portion 44,537
-----------
Long-term portion $ 50,014
===========
F-18
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
------
Interest expense related to capital lease obligations for the years
ended December 31, 2001 and 2000 was $26,896 and $19,062, respectively.
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. As of December 31, 2001, the Company was a party to two
such agreements. During the years ended December 31, 2001 and 2000, the
Company incurred $137,094 and $0, respectively, in connection with such
arrangements. Such is included in operating expenses in the
accompanying statements of operations.
NOTE 9 - SERIES B PREFERRED STOCK
The Company has 15,000,000 authorized shares of cumulative, convertible
Series B preferred stock. The preferred shares have a cumulative
dividend of $1.25 per share, which is payable on a semi-annual basis,
are convertible into 1.67 shares of the Company's common stock, and do
not have any voting rights. As of December 31, 2001, 56,900 shares were
issued and outstanding, and accumulated dividends amounted to $393,123.
Cumulative dividends attributable to the Company since May 25, 2001
were $71,125 and have been reflected as an increase in the loss
attributable to common shareholders. During the years ended December
31, 2001 and 2000, 44,000 and 0 preferred shares, respectively, were
converted into 73,335 and 0 common shares, respectively.
NOTE 10 - COMMON STOCK
Common Stock Issued for Subscription Receivable
-----------------------------------------------
The Company received an $87,500 subscription receivable from a member
of the Board of Directors in exchange for shares of the Company's
common stock. The receivable bears interest at an annual rate of 6%.
Principal and any unpaid interest is due on October 6, 2001. As of
December 31, 2001, the receivable remained unpaid, and management
expects full collection.
F-19
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
--------------------------------------------------------------------------------
NOTE 10 - COMMON STOCK (Continued)
Common Stock Issued for Subscription Receivable (Continued)
-----------------------------------------------
On May 25, 2001, the Company received a $1,000,000 subscription
receivable from five employees in exchange for 400,000 shares of the
Company's common stock. The receivable bears interest at 6% per annum.
The principal and accrued interest are payable in May 2002, with an
option to extend the due date for one year in return for an increase in
the interest rate to 10% per annum.
Common Stock Issued for Cash
----------------------------
During the year ended December 31, 2001, the Company issued 200,000
shares of common stock to a shareholder, valued at $1.25 per share, for
$250,000 in cash.
Common Stock Issued for Services
--------------------------------
On November 15, 2001, the Company issued 71,250 restricted shares of
common stock to two consultants for services in connection with a
private placement (see Note 14). The shares were valued at the fair
market value as of November 15, 2001, or $4.10 per share, totaling
$292,125 to be amortized over the term of the services, as specified in
the related agreements. The fair market value of the services received
was determined by management to be the value of such services had the
Company paid cash. As of December 31, 2001, the balance of deferred
consulting services totaled $155,031.
New Issuances of Common Stock
-----------------------------
Generally, all new issuances of common stock made by the Company carry
registration rights.
NOTE 11 - WARRANTS AND STOCK OPTIONS
Warrants
--------
On December 21, 2001, the Company issued 100,000 warrants to purchase
common stock for $2 per share, which is exercisable for two years from
the date of issuance. The warrants were issued in connection with a
six-month, short-term note payable. In accordance with accounting
principles generally accepted in the United States, the proceeds of the
financing have been allocated to the debt and the warrants, based on
their relative fair values. Accordingly, a discount of $106,000 has
been recorded as a reduction in the debt balance, and the off-setting
credit has been recorded as additional paid-in capital. The discount is
being amortized and charged to expense over the life of the debt.
During the year ended December 31, 2001, amortization of the discount
was not material.
Employee Stock Options
----------------------
In connection with the merger agreement with InternetMercado, the
Company assumed the Incentive Stock Option Plan ("ISOP") granted by
InternetMercado to its employees.
F-20
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 11 - WARRANTS AND STOCK OPTIONS (Continued)
Employee Stock Options (Continued)
----------------------
Under the terms of the Company's ISOP, options to purchase 1,000,000
shares of common stock may be issued to all key employees who are
eligible to receive non-assignable and non-transferable options to
purchase shares. 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. During the year ended December 31,
2001, the Company assumed 233,250 stock options in connection with the
merger agreement under the Company's ISOP.
Non-Employee Stock Options
--------------------------
The Company has also assumed a non-statutory stock option plan ("NSSO")
to purchase an aggregate of 1,350,000 shares of common stock granted to
three 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 vested on the date of grant. During
the year ended December 31, 2001 the Company assumed 308,333 stock
options in connection with the merger agreement under the Company's
NSSO plan.
Warrant and Stock Option Transactions
-------------------------------------
The following table summarizes all of the Company's warrant and stock
option transactions:
Number of Shares Weighted-
------------------------ Average
Non- Exercise
Employee Employee Total Price
----------- ----------- ----------- ----------
Assumed in connection
with merger agreement 233,250 308,333 541,583 $ 10.48
Granted - 100,000 100,000 $ 2.00
----------- ----------- -----------
Outstanding and
exercisable,
December 31, 2001 233,250 408,333 641,583 $ 9.15
=========== =========== ===========
F-21
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 11 - WARRANTS AND STOCK OPTIONS (Continued)
Warrant and Stock Option Transactions (Continued)
-------------------------------------
The weighted-average remaining contractual life of the warrants and
options outstanding at December 31, 2001 was 3.37 years. The exercise
prices of the warrants and options outstanding at December 31, 2001
ranged from $2 to $12.50, and information relating to these options is
as follows:
Weighted-
Average
Weighted- Exercise Price of
Stock Options Average Stock Options
Range of and Warrants Remaining and Warrants
Exercise Outstanding and Contractual Outstanding and
Prices Exercisable Life Exercisable
--------------- --------------- --------------- -----------------
$ 2.00 - 7.50 135,000 3.59 years $ 3.30
$ 9.80 64,750 3.36 years $ 9.80
$ 10.00 291,833 3.28 years $ 10.00
$ 12.50 150,000 3.36 years $ 12.50
---------------
641,583
===============
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of
the grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is not any related compensation expense
recorded in the Company's financial statements. Had compensation cost
for stock-based compensation been determined based on the fair value of
the grant dates consistent with the methods of SFAS No. 123, the
Company's net loss and loss per share for the years ended December 31,
2001 and 2000 would be the same since employee options were not issued
during those years. As such, no pro forma disclosure has been made.
The fair value of the warrants granted during the year ended December
31, 2001 for purposes of determining the discount to be applied to the
note payable issued with detachable warrants is estimated on the date
of grant utilizing the Black-Scholes option-pricing model with the
following weighted-average assumptions for the year ended December 31,
2001: dividend yield of 0%, expected volatility of 175%, risk-free
interest rate of 3.17%, and expected life of two years.
F-22
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 12 - BACKLOG
The following schedule summarizes changes in backlog on contracts
during the year ended December 31, 2001. Backlog represents the amount
of revenue the Company expects to realize from work to be performed on
uncompleted contracts in progress at December 31, 2001 and from
contractual agreements on which work has not yet begun:
Backlog balance at December 31, 2000 $ 2,438,165
New contracts and contract adjustments during the year 6,466,628
------------
Sub-total 8,904,793
Less contract revenue earned during the year 6,138,829
------------
Backlog balance at December 31, 2001 $ 2,765,964
============
NOTE 13 - INCOME TAXES
Significant components of the Company's deferred tax assets at December
31, 2001 were as follows:
Net operating loss carryforward $ 133,000
Reserve for warranty 12,900
Accrued compensated absences 12,000
------------
157,900
Less valuation allowance 157,900
------------
Total $ -
============
As of December 31, 2001, the valuation allowance for deferred tax
assets totaled $157,900. For the years ended December 31, 2001 and
2000, the net change in the valuation allowance was an increase of
$157,900 and a change of $0, respectively.
As of December 31, 2001, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately $426,900 and $212,900, respectively. The net operating
loss carryforwards begin expiring in 2021 and 2011, respectively. The
utilization of net operating loss carryforwards may be limited due to
the ownership change under the provisions of Internal Revenue Code
Section 382 and similar state provisions.
F-23
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
================================================================================
NOTE 14 - SUBSEQUENT EVENTS
Private Placement Memorandum
----------------------------
Subsequent to December 31, 2001, the Company authorized 60,000 shares
of Series C 5% convertible preferred stock (the "Series C"). Effective
March 20, 2002, the Company began the process of preparing for the
public offering of the Series C at a price of $25 a share, with a
minimum offering of 30,000 shares and a maximum of 60,000 shares. The
Series C has a par value of $1 per share and is convertible into 16.667
shares of the Company's common stock with a par value of $0.10 per
share, representing a purchase price of $1.50 per share.
Sublease Agreement
------------------
In January 2002, the Company entered into an agreement with an
unrelated party to sublease its office and factory space, expiring in
August 2003. The sublease agreement requires monthly rent of $8,200 and
a security deposit equal to the monthly rent.
F-24