SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
September 30, 2005 0-7722
NEW CENTURY COMPANIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 061034587
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(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
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(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
1
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes _X_ No___
The number of shares of Common Stock, par value $ .10 per share, outstanding as
of November 9, 2005 was 10,197,334 .
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
2
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements are set forth at the end
of this document.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheet 14
Condensed Consolidated Statements of Operations 15
Condensed Consolidated Statements of Cash Flows 16
Notes to Condensed Consolidated Financial Statements 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS .........................................................4
ITEM 3. CONTROLS AND PROCEDURES ...............................................9
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING .....................................................10
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ..........10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................10
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS....................11
ITEM 5. OTHER INFORMATION.....................................................11
ITEM 6. EXHIBITS .............................................................11
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ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements are set forth at the end of
this document.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-QSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-QSB
are qualified in their entirety by this statement.
Plan of Operations
For the three months ended September 30, 2005, the Company experienced an
increase in sales due to continuing growth in demand of our machine tools. We
see several significant factors in the economy that should keep sales of large
metal-working machines such as vertical turning machines very robust. The
recently enacted federal highway and energy bills is expected to stimulate
demand for machine tools, such as ours, used in the manufacturing of equipment
for oil and gas production, power generation, and road and transit construction.
Meanwhile, the construction industry is entering a new boom with the massive
cleanup and reconstruction after hurricanes Katrina and Rita. This is expected
to create additional need for our vertical turning machines.
The Company's current strategy is to expand its customer sales base with
its present line of machine products.
Results Of Operations For the Three Months Ended September 30, 2005 Compared to
September 30, 2004.
Revenues. The Company generated revenues of $1,604,851 for the three
months ended September 30, 2005, which was a $437,904 or 38% increase from
$1,166,947 for
4
the three months ended September 30, 2004. 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.
Another indicator of increasing interest on the Company's machine-tool, is
the expanded volume of request for quotes.
Gross Profit. Gross profit for the three months ended September 30, 2005,
was $596,216 or 37% of revenues, compared to a gross loss of $205,924 or 17% for
the three months ended September 30, 2004. The $802,140 increase in gross profit
was generated by a decrease in cost of sales of $364,236, due to the increased
productivity. Additionally, management increased their effort in cutting
material losses and increased efficiency of labor.
Operating Income. Operating income increased to $347,625 for the three
months ended September 30, 2005 compared to an operating loss of $798,368 for
the three months ended September 30, 2004, an $849,128 increase. The increase is
as a result of reducing expenses, such us salaries and general and
administrative, based on the continued struggle of management to increase
operational productivity.
Net Income. Net income increased to $335,016 for the three months ended
September 30, 2005 compared to a net loss of $492,030 for the three months ended
September 30, 2004, an increase of $827,046. The increase is based on the
increase in operating income.
Interest Expense. Interest expense for the three months ended September
30, 2005, increased to $63,369 compared to $46,099, for the three months ended
September 30, 2004, primarily due to the accrual of interest on four default
notes payable due to the inability of the Company to pay off their notes
payable. The Company used these funds to pay old debt to vendors, in the
operation process.
Results Of Operations For the Nine Months Ended September 30, 2005 Compared to
September 30, 2004.
Revenues. The Company generated revenues of $4,244,719 for the nine
months ended September 30, 2005, which was a $516,703 or 14% increase from
$3,728,016 for the nine months ended September 30, 2004. The increase is the
result of improved market conditions with impact in the Company`s sales prices
and increased ability to sale larger machines.
Gross Profit. Gross profit for the nine months ended September 30, 2005,
was $1,354,403 or 32% of revenues, compared to a gross loss of $179,407 or 5%
for the nine months ended September 30, 2004. The $1,533,810 increase in gross
profit was generated by a decrease in cost of sales of $1,017,107, due to the
increased productivity. Management increased their effort in cutting material
losses and increased efficiency of labor.
5
Operating Income. Operating income increased to $449,193 for the nine
months ended September 30, 2005 from a loss of $1,610,044 for the nine months
ended September 30, 2004, a $1,660,804 increase. The increase is primarily as a
result of increased gross profit, and secondarily as a result of reducing
expenses, such us salaries and general and administrative, based on the continue
struggle of the management to increase the operations productivity.
Net Income. Net income increased to $317,299 for the nine months ended
September 30, 2005 compared to a net loss of $743,882 for the nine months ended
September 30, 2004, an increase of $1,061,181. The increase is a result of 143%
increase in operating income for the analyzed period.
Interest Expense. Interest expense for the nine months ended September 30,
2005, increased to $182,654 compared to $132,901, for the nine months ended
September 30, 2004, primarily due to the accrual of interest on four default
notes payable due to the inability of the Company to pay off their notes
payable. The Company used these funds in operating activities.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
The net cash increase of the Company during the nine months ended September
30, 2005 was $153,923. The increase is due to $217,329 cash provided by
operating activities, based on the overall increase in sales. If the Company`s
increase in sales remains at the same levels with 2005 sales, the Company
predicts that its capital needs will be met internally, eliminating the high
cost of long term debt.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
GOING CONCERN
In the fiscal year 2005, the Company realized a significant increase in its
net income. However, The Company has incurred operating losses in the previous
years, and still has a working capital deficit and a significant stockholders'
deficit. These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in the condensed consolidated financial statements
and the accompanying
6
notes. The amounts of assets and liabilities reported on the balance sheet and
the amounts of revenues and expenses reported for each of the fiscal periods are
affected by estimates and assumptions, which are used for, but not limited to,
the accounting for revenue recognition, accounts receivable, doubtful accounts
and inventories. Actual results could differ from these estimates. The following
critical accounting policies are significantly affected by judgments,
assumptions and estimates used in the preparation of the financial statements:
Concentration of Credit Risk
The Company sells products to customers throughout the United States. The
Company's ability to collect receivables is affected by economic fluctuations in
the geographic areas served by the Company. Although the Company does not obtain
collateral with which to secure its contracts receivable, management
periodically reviews contracts receivable and assesses the financial strength of
its customers and, as a consequence, believes that the receivable credit risk
exposure is limited.
Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. If the cost basis of a long-lived asset
is greater than the projected future undiscounted net cash flows from such asset
(excluding interest), an impairment loss is recognized. Impairment losses are
calculated as the difference between the cost basis of an asset and its
estimated fair value. SFAS 144 also requires companies to separately report
discounted operations and extends that reporting to a component of an entity
that either has been disposed of (by sales, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. The
Company adopted SFAS 144 on January 1, 2002. The provision of this statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated commitments to plan to
sell such assets, as defined, by management. As a result, management cannot
determine the potential effects that adoption of SFAS 144 will have on the
Company's financial statements with respect to future disposal decision, if any.
To date, management has noted no indicators requiring review for impairment and
therefore, no adjustments have been made to the carrying values of long-lived
assets. There can be no assurance, however, that market conditions will not
change or demand for the Company's products or services will continue which
could result in impairment of long-lived assets in the future.
Revenue Recognition
Service revenues are billed and recognized in the period the services are
rendered.
7
The Company accounts for shipping and handling fees and costs in
accordance with EITF 00-10 "Accounting for Shipping and Handling Fees and
Costs." Such fees and costs incurred by the Company are immaterial to the
operations of the Company.
In accordance with SFAS 48, "Revenue Recognition when Right of Return
Exists," revenue is recorded net of an estimate of markdowns, price concessions
and warranty costs. Such reserve is based on management's evaluation of
historical experience, current industry trends and estimated costs.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition,", as amended and
superceded by SAB 104, which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the Securities and Exchange Commission. Management believes that the
Company's revenue recognition policy for services and product sales conforms to
SAB 104. The Company recognizes revenue of long-term contracts pursuant to
Statement of Position 81-1, "Accounting for Performance of Construction - Type
and Certain Production - Type Contracts."
Method of Accounting for Long-Term Contracts
The Company uses the percentage-of-completion method of accounting to
account for long-term contracts and, therefore, takes into account the cost,
estimated earnings and revenue to date on fixed-fee contracts not yet completed.
The percentage-of-completion method is used because management considers total
cost to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.
The amount of revenue recognized at the statement date is the portion of
the total contract price that the cost expended to date bears to the anticipated
final cost, based on current estimates of cost to complete. It is not related to
the progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect overhead.
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.
8
Contracts that are substantially complete are considered closed for
consolidated financial statement purposes. Revenue earned on contracts in
progress in excess of billings (under billings) is classified as a current
asset. Amounts billed in excess of revenue earned (overbillings) are classified
as a current liability.
Other Significant Accounting Policies
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. The policies related to
consolidation and loss contingencies require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under reexamination by
accounting standards setters and regulators. Although no specific conclusions
reached by these standards setters appear likely to cause a material change in
the Company's accounting policies, outcomes cannot be predicted with confidence.
Also see Note 1 of the Notes to Condensed Consolidated Financial Statements,
Organization and Significant Accounting Policies, which discusses accounting
policies that must be selected by management when there are acceptable
alternatives.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures (as
defined in Rules 13(a)-15(c) of the Exchange Act) include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company' s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of September
30, 2005, the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures over financial reports are not
effective to ensure that the information required to be disclosed in the reports
the Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.
9
(b) Changes in Internal Controls
There were no changes in the Company's internal controls over financial
reporting during the quarter ended September 30, 2005 that are likely to affect
those controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2005, the Company issued 300,000
shares to Investor Relations International Inc., for consulting services The
shares were issued pursuant to Section 4(2) of the Act.
On August 2005, a shareholder converted 12,000 Preferred Shares Series D into
600,000 shares of common stock.
On September 2005, a shareholder converted 31,800 Preferred Shares Series C into
530,010 shares of common stock.
On July 14, 2005, the Company issued 3000,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under a
one year consulting agreement. The Company recorded the fair value of the common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $75,000 as deferred consulting fees and is amortizing such
amount over the six month term of the agreement. Due to a significant increase
of the company stock price from issuance to the ending of reported period, in
accordance with the EITF 96-18, the company did a recalculation of the deferred
consulting fees based on September 30, 2005 fair value stock price, and evaluate
the fees at $180,000. The additional $105,000 difference was recorded as
deferred consulting fees and the quarterly amortization has been adjusted
correspondingly. The remaining deferred consulting fees under this contract
totaled $142,500 at September 30, 2005.
Item 3. Defaults Upon Senior Securities
During the year ended December 31, 2001, the Company entered into an unsecured
note payable ("Note A") with a third party for $250,000. Note A accrues interest
at a fixed rate
10
of 18% per annum and matured in December 2003, as amended. Note A is personally
guaranteed by a stockholder and is in default at December 31, 2004. At September
30, 2005, the total outstanding principal balance on Note A was $250,000.
During the year ended December 31, 2001, the Company entered into a note payable
("Note B") with a third party for $215,000. Note B accrues interest at a fixed
rate of 15% per annum and matured in March 2002. Note B is secured by certain
assets of the Company, as defined, and is in default at December 31, 2004. At
September 30, 2005, the total outstanding principal balance on Note B was
$215,000.
In January 2003, the Company entered into a note payable agreement ("Note C")
with two individuals in the amount of $500,000 with an interest rate of 11% per
annum, which matured in April 2003 and is in default at December 31, 2004. The
note was issued with a discount of $45,000, which the Company amortized to
interest expense in the accompanying consolidated statement of operation for
2003. In connection with Note C, the Company issued warrants to purchase 25,000
shares of common stock. Note C is secured by certain assets of the Company. At
September 30, 2005, the total outstanding principal balance on Note C was
$500,000.
In December 2002, the Company entered into a note payable agreement ("Note D")
with two individuals in the amount of $250,000 with an interest rate of 11% per
annum, which matured in February 2003. The note was issued with a discount of
$15,000, which the Company amortized to interest expense in the accompanying
consolidated statement of operations for 2003. In connection with Note D, the
Company issued warrants to purchase 5,000 shares of common stock related to the
extension of the maturity date of Note D to April 2004. On April 12, 2005, Note
D was extended through August 13, 2005 and had a total outstanding principal
balance of $250,000. For the consideration of the extension, the Company issued
250,000 common stock with a fair value of $47,500. The cost of the extension has
been amortized over 4 month. As of September 30, 2005, the Company amortized
$29,687 of the cost.
During November 2004, the Company borrowed $80,816 on two notes payable ("Note
E") to one individual. Note E in unsecured, matured in January 2005, has an
interest rate of 6% and is currently in default. At September 30, 2005 the total
outstanding principal balance on Note E was $80,816.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
11
(a) Exhibits:
31.1 302 Sarbanes Oxley Certification of David Duquette, Chief
Executive Officer and Chief Financial Officer
32.1 906 Sarbanes Oxley Certification
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November 14, 2005 /s/ David Duquette
----------------------------------------
Name: David Duquette
Title: Chief Executive Officer and Chief
Financial Officer
13
================================================================================
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2005
(unaudited)
================================================================================
ASSETS
Current Assets
Cash $ 283,010
Contracts receivable 50,787
Inventories, net 965,418
Costs and estimated earnings in excess of billings on uncompleted contracts 615,695
Prepaid expenses and other current assets 9,601
-----------
Total current assets 1,924,511
Property and Equipment, net 136,743
-----------
$ 2,061,254
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 2,330,350
Dividends payable 515,100
Billings in excess of costs and estimated earnings on uncompleted contracts 405,190
Notes payable 1,295,816
Current portion of obligations under capital lease 8,973
-----------
Total current liabilities 4,555,429
-----------
Commitments and Contingencies
Stockholders' Deficit
Cumulative, convertible, Series B preferred stock, $1 par value,
15,000,000 shares authorized, no shares issued and outstanding --
Cumulative, convertible, Series C preferred stock, $1 par value,
75,000 shares authorized, 28,980 shares issued and outstanding
(liquidation preference of $1,151,000) 28,980
Cumulative, convertible, Series D preferred stock, $25 par value,
75,000 shares authorized, 11,640 shares issued and outstanding
(liquidation preference of $380,000) 291,000
Common stock, $0.10 par value, 50,000,000 shares authorized;
9,622,266 shares issued and outstanding 962,227
Subscriptions receivable (462,500)
Notes receivable from stockholders (485,924)
Deferred consulting fees (142,500)
Additional paid-in capital 4,574,274
Accumulated deficit (7,259,732)
-----------
Total stockholders' deficit (2,494,175)
-----------
$ 2,061,254
===========
================================================================================
See accompanying notes to the condensed consolidated financial statements.
14
===================================================================================================================
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2005 and 2004
(unaudited)
===================================================================================================================
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September September September September
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET SALES $ 1,604,851 $ 1,166,947 $ 4,244,719 $ 3,728,016
COST OF SALES 1,008,635 1,372,871 2,890,316 3,907,423
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) 596,216 (205,924) 1,354,403 (179,407)
----------- ----------- ----------- -----------
OPERATING EXPENSES
Consulting and other compensation 153,418 16,306 351,797 202,819
Salaries and related 27,701 78,689 125,253 207,437
Selling, general and administrative 64,472 149,824 428,160 571,188
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 248,591 244,819 905,210 981,444
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 347,625 (450,743) 449,193 (1,160,851)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on forgiveness of accounts payable 50,760 4,812 50,760 549,870
Interest expense (63,369) (46,099) (182,654) (132,901)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (12,609) (41,287) (131,894) 416,969
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 335,016 (492,030) 317,299 (743,882)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 335,016 $ (492,030) $ 317,299 $ (743,882)
=========== =========== =========== ===========
NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS $ 335,016 $ (531,780) $ 211,774 $ (863,132)
=========== =========== =========== ===========
Basic and diluted net income (loss) available to
common stockholders per common share $ 0.04 $ (0.08) $ 0.03 $ (0.12)
=========== =========== =========== ===========
Basic weighted average common
shares outstanding 8,741,821 7,018,765 7,912,876 6,975,321
=========== =========== =========== ===========
Diluted weighted average common
shares outstanding 9,268,011 7,018,765 8,439,066 6,975,321
=========== =========== =========== ===========
===================================================================================================================
See accompanying notes to the condensed consolidated financial statements.
15
====================================================================================================
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
(unaudited)
====================================================================================================
2005 2004
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 317,299 $(743,882)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 194,208 207,215
Gain on forgiveness of accounts payable 50,760 545,058
Amortization of deferred consulting fees 122,833 109,813
Amortization of debt discount 47,500 --
Estimated fair market value of common stock issued for
consulting services -- 50,000
Estimated fair market value of common stock issued for
partial legal settlement 20,000 --
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 (47,920) 21,434
Inventories 14,824 (67,728)
Costs and estimated earnings in excess of billings
on uncompleted contracts (363,863) 37,349
Prepaid expenses and other current assets (8,041) 5,381
Accounts payable and accrued expenses 134,925 (834,682)
Billings in excess of costs and estimated earnings
on uncompleted contracts (355,196) 69,804
--------- ---------
Net cash provided by (used in) operating activities 217,329 (600,238)
--------- ---------
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 -- (9,516)
Proceeds from issuance of preferred stock 521,000
Principal repayments on obligations under capital lease (63,406) (62,607)
--------- ---------
Net cash (used in) provided by financing activities (63,406) 448,877
--------- ---------
Net increase (decrease) in cash 153,923 (152,757)
Cash at beginning of period 129,087 155,969
--------- ---------
Cash at end of period $ 283,010 $ 3,212
========= =========
Supplemental disclosure of non-cash activities:
Debt discount on note payable extension $ 47,500 $ --
========= =========
Accrued cumulative dividends on preferred stock $ 105,525 $ 79,500
========= =========
Conversion of preferred stock to common stock $ 331,800 $ 4,700
========= =========
Preferred stock issued in lieu of accounts payable $ -- $ 40,000
========= =========
====================================================================================================
See accompanying notes to the condensed consolidated financial statements.
16
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
New Century Companies, Inc. and Subsidiary (collectively, the "Company"), a
California corporation, was incorporated March 1996 and is located in Southern
California. The Company provides after-market services, including rebuilding,
retrofitting and remanufacturing of metal cutting machinery. Once completed, a
remanufactured machine is "like new" with state-of-the-art computers, and the
cost to the Company's customers is approximately 40% to 50% of that of a new
machine.
The Company currently sells its services by direct sales and through a network
of machinery dealers across the United States. Its customers are generally
medium to large sized manufacturing companies in various industries where metal
cutting is an integral part of their businesses. The Company grants credit to
its customers who are predominately located in the western United States.
The Company completed a reverse merger in May 2001 and trades on the OTC
Bulletin Board under the symbol "NCNC.OB".
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to such SEC rules and regulations; nevertheless, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements and the notes hereto should
be read in conjunction with the financial statements, accounting policies and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2004, filed with the SEC. In the opinion of management,
all adjustments necessary to present fairly, in accordance with accounting
principles generally accepted in the United States of America, the Company's
financial position as of September 30, 2005, and the results of operations and
cash flows for the interim periods presented, have been made. Such adjustments
consist only of normal recurring adjustments. The results of operations for the
three and nine months ended September 30, 2005 are not necessarily indicative of
the results for the full year.
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of September 30, 2005, the Company has negative
working capital $2,630,918 and an accumulated deficit of $7,259,732, and
recurring losses. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The Company intends to fund
operations through increased sales and debt and equity financing arrangements
which management believes may be insufficient to fund its capital expenditures,
working capital and other cash requirements for the fiscal year ending December
31, 2005. Therefore, the Company will be required to seek additional funds to
finance its long-term operations. The successful outcome of future activities
cannot be determined at this time and there is no assurance that if achieved,
the Company will have sufficient funds to execute its intended business plan or
generate positive operating results.
17
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 of contracts pursuant to
SOP 81-1.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final cost, based on current estimates of cost to complete. It is not related to
the progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect overhead.
Because contracts may extend over a period of time, changes in job performance,
changes in job conditions and revisions of estimates of cost and earnings during
the course of the work are reflected in the accounting period in which the facts
that require the revision become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is recognized in the
consolidated financial statements.
Contracts that are substantially complete are considered closed for consolidated
financial statement purposes. Costs incurred and revenue earned on contracts in
progress in excess of billings (under billings) is classified as a current
asset. Amounts billed in excess of costs and revenue earned (overbillings) are
classified as a current liability.
The Company accounts for shipping and handling fees and costs in accordance with
Emerging Issues Task Force ("EITF") Issue No. 00-10 "Accounting for Shipping and
Handling Fees and Costs." Such fees and costs incurred by the Company are
immaterial to the operations of the Company.
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In accordance with Statement of Financial Accounting Standards ("SFAS") 48,
"Revenue Recognition when Right of Return Exists," revenue is recorded net of an
estimate of markdowns, price concessions and warranty costs. Such reserve is
based on management's evaluation of historical experience, current industry
trends and estimated costs.
BASIC AND DILUTED LOSS PER COMMON SHARE
Under SFAS 128, "Earnings Per Share," basic earnings per common share is
computed by dividing income available to common stockholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive (there were 526,190 and 1,821,583 additional potential common shares as
of September 30, 2005 and 2004, respectively). In 2004, the Company incurred net
losses and basic and diluted loss per share are equal because additional
potential common shares would be anti-dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three and nine month
periods ended September 30, 2005 and 2004:
For the Three Months Ended
September 30,
2005 2004
----------- -----------
Net income (loss) $ 335,016 $ (492,030)
Current cumulative preferred dividends - (39,750)
----------- -----------
Numerator for basic income (loss) per share:
Net income (loss) available to common stockholders 335,016 (531,780)
Denominator for basic income (loss) per share:
Weighted average shares 8,741,821 7,018,765
----------- -----------
Denominator for diluted income (loss) per share:
Weighted average shares 9,268,011 7,018,765
----------- -----------
Basic and diluted income (loss) per share $ 0.04 $ (0.08)
=========== ===========
For the Nine Months Ended
September 30,
2005 2004
----------- -----------
Net income (loss) $ 317,299 $ (743,882)
Current cumulative preferred dividends (105,525) (119,250)
----------- -----------
Numerator for basic income (loss) per share:
Net income (loss) available to common stockholders 211,774 (863,132)
Denominator for basic (income) loss per share:
Weighted average shares 7,912,876 6,975,321
----------- -----------
Denominator for diluted (income) loss per share:
Weighted average shares 8,439,066 6,975,321
----------- -----------
Basic and diluted income (loss) per share $ 0.03 $ (0.12)
=========== ===========
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STOCK BASED COMPENSATION
At September 30, 2005, the Company has one stock-based employee compensation
plan and one stock-based non-employee compensation plan. The Company accounts
for the employee compensation plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. ("APB") 25, and related
interpretation. The Company accounts for the non-employee compensation plan
under the recognition measurement principles of SFAS 123. There was no employee
stock-based compensation cost recognized in net loss for the nine month periods
ended September 30, 2005 and 2004. Hence, the disclosure requirements under SFAS
148 are not required. However, the above pro forma non-effects of applying SFAS
123 are not necessarily representative of the impact on reported net loss for
future periods.
The Company accounts for stock-based compensation to non-employees in accordance
with the fair value recognition requirements of SFAS No. 123 and Emerging Issues
Task Force 96-18 "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
("EITF 96-18").
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2004
financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB that were required to be adopted during the year ended
December 31, 2005 did not have a significant impact on the Company's financial
statements.
RECLASSIFICATIONS
No reclassification has been made from the prior period presentation.
2. CONTRACTS IN PROGRESS
Contracts in progress as of September 30, 2005, which include completed
contracts that have not been completely billed, were as follows:
Cumulative costs to date $ 4,111,835
Cumulative gross profit to date 3,672,064
-----------
Cumulative revenue earned 7,783,899
Less progress billings to date (7,573,394)
-----------
Net underbillings $ 210,505
===========
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The following is included in the accompanying condensed consolidated balance
sheet under these captions as of September 30, 2005:
Costs and estimated earnings on contracts in
progress in excess of billings $ 615,695
Billings in excess of costs and estimated earnings
on contracts in progress (405,190)
---------
Net underbillings $ 210,505
=========
3. EQUITY TRANSACTIONS
On July 14, 2005, the Company entered into a retail investor marketing campaign
under a one year consulting agreement. The Company issued 300,000 shares of
restricted common stock in accordance with the contract. Additionally, the
contract requires the Company to pay the consultant $25,000 per month for the
first two months and $15,000 per month thereafter through completion. The
contract does not contain a "performance commitment" as defined in EITF 96-18
and, therefore, a measurement date will not exist until the services have been
completed. As a result, the fair value of the 300,000 shares was recorded as
deferred consulting fees on the date of grant, based on the then-current fair
value, and was adjusted to the fair value of the common stock on September 30,
2005 totaling $180,000. Such deferred consulting fees are being amortized to
consulting expense over the one year term of the agreement. The remaining
deferred consulting fees under this contract totaled $142,500 at September 30,
2005.
In July, 2005 the Company issued 530,000 shares of restricted common stock upon
conversion of 31,800 shares of Series C preferred stock at a conversion rate of
16.667-to-1.
In July, 2005 the Company issued 600,000 shares of restricted common stock upon
conversion of 12,000 shares of Series D preferred stock at a conversion rate of
50-to-1.
4. SUBSEQUENT EVENTS
In October 2005, the Company issued 500,000 shares of common stock in exchange
of services.
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