SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(_) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
June 30, 2004 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 Number)
Incorporation or organization)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
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(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, par value $ .10 per share, outstanding as
of August 13, 2004 was 6,995,265.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated Financial Statements are set forth at the end
of this document.
Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet 10
Condensed Consolidated Statements of Operations 11
Condensed Consolidated Statements of Cash Flows 12
Notes to Condensed Consolidated Financial Statements 13-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated Financial Statements are set forth at the end
of this document.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-QSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-QSB
are qualified in their entirety by this statement.
PLAN OF OPERATIONS
The earnings of the Company for the three months ended June 30, 2004 were
positive as a result of a decrease in operating expenses and a gain on
forgiveness of accounts payable. The Company's current strategy is to expand its
customer sales base with its present line of machine products. Plans for
expansion are expected to be funded through current working capital from ongoing
sales. However, significant growth will require additional funds in the form of
debt or equity, or a combination thereof. However, there can be no assurance
these funds will be available.
3
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE
30, 2003.
Revenues. The Company generated revenues of $1,581,761 for the three
months ended June 30, 2004, which was a $356,071 or 18% decrease from $1,937,832
for the three months ended June 30, 2003. The decrease is the result of a
deficiency in working capital, which has limited our ability to fulfill customer
orders. Additionally, the overall market for machine tools is cyclical,
reflecting economic conditions, production capacity utilization, changes in tax
and fiscal policies, corporate profitability and financial condition as well as
the general level of business confidence. The Company cannot predict for what
period of time the decreased level of customer purchases will continue, whether
the level of customer purchases will decline further, or the level at which
incoming orders will be.
Gross Profit. Gross profit for the three months ended June 30, 2004, was
$61,210 or 4% of revenues, compared to $(42,012) or negative 2% for the three
months ended June 30, 2003. The $103,222 increase in gross profit was generated
by a decrease in cost of sales of $459,293, due to the increased productivity.
The Company's management increased their effort in cutting material losses and
increased efficiency of labor.
Net Operating Loss. Net operating loss decreased to ($217,020) for the
three months ended June 30, 2004 compared to $(407,450) for the three months
ended June 30, 2003 as a result of management efforts to dramatically reduce
operating expenses, such us consulting, salaries and general and administrative
expenses, thereby increasing operational productivity.
Net Income. Net income increased to $283,034 for the three months ended
June 30, 2004 compared to a net loss of $(436,234) for the three months ended
June 30, 2003 as a result of a $545,058 gain on forgiveness of accounts payable.
Interest Expense. Interest expense for the three months ended June 30,
2004, increase to $45,004 compared to $28,784, for the three months ended June
30, 2003, primarily due to the accrual of interest on four default notes payable
due to the inability of the Company to pay off its notes payable. The Company
used these funds for the continuation of the operating activities.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE
30, 2003.
Revenues. The Company generated revenues of $2,561,069 for the six months
ended June 30, 2004, which was a $1,094,903 or 30% decrease from $3,655,972 for
the six months ended June 30, 2003. The decrease is the result of a deficiency
in working capital, which has limited our ability to fulfill customer orders.
Additionally, the overall market for machine tools is cyclical, reflecting
economic conditions, production capacity utilization, changes in tax and fiscal
policies, corporate profitability and financial condition as well as the general
level of business confidence. The Company cannot predict for what period of time
the decreased level of customer purchases will continue, whether the level of
customer purchases will decline further, or the level at which incoming orders
will be.
Gross Profit. Gross profit for the six months ended June 30, 2004, was
$26,517 or 1% of revenues, compared to $(127,600) or negative 3% for the six
months ended June 30, 2003. The $154,117 increase in gross profit was generated
by a decrease in cost of sales of $1,249,020, due to the increased productivity.
The Company's management increased their effort in cutting material losses and
increased efficiency of labor.
Net Loss. Net loss decreased to ($251,852) for the six months ended June
30, 2004 compared to $(1,504,456) for the six months ended June 30, 2003 as a
result of management efforts to dramatically reduce operating expenses, such as
consulting, salaries and general and administrative expenses, thereby increasing
operational productivity and the $545,058 gain on vendors' forgiveness.
4
Interest Expense. Interest expense for the six months ended June 30, 2004,
decrease to $86,802 compared to $142,217, for the six months ended June 30,
2003, primarily due to the repayment of $900,000 short-term loan in January
2003. In January 2003, the Company paid $60,000 additional interest for $900,
000 and $500,000 short-term loans.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
At June 30, 2004, cash was $0 as compared to $20,660 at June 30, 2003.
The decrease is due to net cash used in operating activities of ($648,043). The
Company has a substantial working capital deficit and requires an infusion of
funds in the form of equity and/or debt. However, there is no guarantee that the
Company will raise sufficient funds to execute its business plan. To the extent
that the Company is unable to raise sufficient funds, the Company's business
plan will be required to be substantially modified, its operations curtailed or
protection under bankruptcy/reorganization laws sought.
The Company is currently addressing its liquidity issue by the following
actions: The Company continues its aggressive program for selling inventory that
has been produced or is currently in production. The Company continues to
implement plans to further reduce operating costs. The Company is continually
seeking investment capital through the public markets. However, there is no
guarantee that any of these strategies will enable the Company to meet its
obligations for the foreseeable future.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
GOING CONCERN
The Company has incurred operating losses in the last two years, has a
working capital deficit and a significant stockholders' deficit. These
conditions 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 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.
5
Long-Lived Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 144 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 determined that no such impairment
exists 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.
The Company accounts for shipping and handling fees and costs in
accordance with EITF 00-10 "Accounting for Shipping and Handling Fees and
Costs." Such fees and costs incurred by the Company are immaterial to the
operations of the Company.
In accordance with SFAS 48, "Revenue Recognition when Right of Return
Exists," revenue is recorded net of an estimate of markdowns, price concessions
and warranty costs. Such reserve is based on management's evaluation of
historical experience, current industry trends and estimated costs.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. Management believes that the Company's revenue recognition policy
for services and product sales conforms to SAB 101. The Company recognizes
revenue on 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 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.
6
The amount of revenue recognized at the statement date is the portion of
the total contract price that the cost expended to date bears to the anticipated
final cost, based on current estimates of cost to complete. It is not related to
the progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect overhead.
Because long-term contracts may extend over a period of time, changes in
job performance, changes in job conditions and revisions of estimates of cost
and earnings during the course of the work are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract becomes known, the entire amount of the estimated ultimate
loss is recognized in the consolidated financial statements.
Contracts that are substantially complete are considered closed for
consolidated financial statement purposes. Revenue earned on contracts in
progress in excess of billings (under billings) is classified as a current
asset. Amounts billed in excess of revenue earned (overbillings) are classified
as a current liability.
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
Our Chief Executive Officer who is also our Chief Financial Officer has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures in accordance with Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on his evaluation, he concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective in enabling us to record, process,
summarize and report in a timely manner the information required to be disclosed
in reports we file under the Exchange Act.
No change in our internal control over financial reporting occurred during
the three months ended June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended June 30, 2004, we issued 23,640 shares of Series
D Convertible Preferred Stock in a private placement to three accredited
investors. The shares were issued pursuant to an exemption provided by
Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
1. A note payable to an unaffiliated third party in the amount of
$500,000 with an interest rate of 10% per annum, matured in April
2003 and is currently in default.
2. A note payable to an unaffiliated third party in the amount of
$250,000 that was extended until December 31, 2003. Originally, the
Company issued to the note holder warrants to purchase 100,000
shares of the Company's restricted common stock at an exercise price
of $2.00 valued at $106,000 (based on the Black-Scholes option
pricing model), which the Company amortized to interest expense
during the year ended December 31, 2002. As part of an extension
agreement, the Company effectively cancelled the original 100,000
warrants and issued warrants to purchase 200,000 shares of common
stock at an exercise price of $1.00, which vested upon grant and
expired in December 2003.
3. A note payable to an unaffiliated third party in the amount of
$250,000 that was extended until May 2, 2003. As part of an
extension agreement, the Company issued warrants to purchase 5,000
shares of common stock at an exercise price of $1.25, which vested
upon grant and expire in March 2008.
4. A promissory note to an unaffiliated third party in the amount of
$215,000 with an interest rate of 15% per annum, matured in March
2002 and is currently in default.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 302 Sarbanes Oxley Certification of David Duquette, Chief
Executive Officer and Chief Financial Officer
32.1 906 Sarbanes Oxley Certification
(b) Reports on Form 8-K:
None.
8
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
August 16, 2004 /s/ David Duquette
----------------------------------
Name: David Duquette
Title: Chief Executive Officer and
Chief Financial Officer
9
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2004 (unaudited)
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ASSETS
Current Assets
Cash $ --
Contracts receivable 39,767
Inventories, net 1,171,640
Costs in excess of billings on uncompleted contracts 493,182
Prepaid expenses and other current assets 20,310
-----------
Total current assets 1,724,899
Property and Equipment, net 469,125
-----------
$ 2,194,024
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank overdraft $ 138,237
Accounts payable and accrued expenses 1,930,752
Dividends payable 274,500
Billings in excess of costs on uncompleted contracts 303,259
Notes payable 1,215,000
Current portion of obligations under capital lease 79,575
-----------
Total current liabilities 3,941,323
Obligations Under Capital Lease, net of current portion 25,865
-----------
Total Liabilities 3,967,188
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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, 63,600 shares issued and outstanding
(liquidation preference of $1,865,000) 63,600
Cumulative, convertible, Series D preferred stock, $25 par value,
75,000 shares authorized, 23,640 shares issued and outstanding
(liquidation preference of $591,000) 591,000
Common stock, $0.10 par value, 50,000,000 shares authorized;
6,995,265 shares issued and outstanding 699,527
Subscriptions receivable (462,500)
Notes receivable from stockholders (466,159)
Deferred consulting fees (6,563)
Additional paid-in capital 3,972,854
Accumulated deficit (6,164,923)
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Total stockholders' deficit (1,773,164)
-----------
$ 2,194,024
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See accompanying notes to the condensed consolidated financial statements.
10
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2004 and 2003
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For the Three Months For the Six Months
Ended June 30, 2004 Ended June 30, 2004
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
NET SALES $ 1,581,761 $ 1,937,832 $ 2,561,069 $ 3,655,972
COST OF SALES 1,520,551 1,979,844 2,534,552 3,783,572
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) 61,210 (42,012) 26,517 (127,600)
----------- ----------- ----------- -----------
OPERATING EXPENSES
Consulting and other compensation 18,654 86,781 186,513 165,337
Salaries and related 73,784 99,214 128,748 202,733
Selling, general and administrative 185,792 179,015 421,364 401,141
Loss of deposit -- 428 -- 465,428
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 278,230 365,438 736,625 1,234,639
----------- ----------- ----------- -----------
OPERATING LOSS (217,020) (407,450) (710,108) (1,362,239)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on forgiveness of accounts payable 545,058 -- 545,058 --
Interest Income -- -- -- --
Interest Expense (45,004) (28,784) (86,802) (142,217)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 500,054 (28,784) 458,256 (142,217)
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 283,034 (436,234) (251,852) (1,504,456)
PROVISION FOR INCOME TAXES -- -- -- 1,600
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 283,034 $ (436,234) $ (251,852) $(1,506,056)
=========== =========== =========== ===========
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 243,284 $ (465,109) $ (331,352) $(1,563,806)
=========== =========== =========== ===========
Basic net income (loss) available to
common stockholders per common share $ 0.03 $ (0.08) $ (0.05) $ (0.26)
=========== =========== =========== ===========
Diluted net income (loss) available to
common stockholders per common share $ 0.03 $ (0.08) $ (0.05) $ (0.26)
=========== =========== =========== ===========
Basic weighted average common shares
outstanding 6,995,265 5,946,383 6,953,598 5,935,433
=========== =========== =========== ===========
Diluted weighted average common shares
outstanding 8,816,848 5,946,383 6,953,598 5,935,433
=========== =========== =========== ===========
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See accompanying notes to the condensed consolidated financial statements.
11
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 2004 and 2003
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2004 2003
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (251,852) $(1,506,056)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization of property and equipment 138,128 150,319
Gain on forgiveness of accounts payable 545,058 --
Amortization of consulting fees 103,250 27,668
Amortization of debt discount on notes payable -- 45,000
Estimated fair market value of common stock issued for
consulting services 50,000 72,000
Estimated fair market value of warrants issued in connection
with notes payable -- 17,350
Changes in operating assets and liabilities:
Contracts receivable 110,684 544,741
Inventories (14,697) 177,289
Costs in excess of billings on uncompleted contracts (172,650) (280,952)
Prepaid expenses and other current assets 5,381 (67,422)
Deposits -- 465,000
Accounts payable and accrued expenses (896,990) (47,964)
Billings in excess of costs on uncompleted contracts (264,355) 815,329
----------- -----------
Net cash (used in) provided by operating activities (648,043) 412,302
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,396) (10,257)
----------- -----------
Net cash used in investing activities (1,396) (10,257)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 521,000 --
Bank overdraft 13,679 37,524
Proceeds from the issuance of notes payable -- 455,000
Principal repayments on notes payable -- (900,000)
Principal repayments on obligations under capital lease (41,209) (54,185)
----------- -----------
Net cash provided by (used in) financing activities 493,470 (461,661)
----------- -----------
Net decrease in cash (155,969) (59,616)
Cash at beginning of period 155,969 80,276
----------- -----------
Cash at end of period $ -- $ 20,660
=========== ===========
Supplemental disclosure of non-cash activities -
Dividends payable $ 79,500 $ 28,875
=========== ===========
--------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
12
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
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."
BASIS OF PRESENTATION
The accompanying aunaudited 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, 2003, filed with
the SEC. In the opinion of the Company, all adjustments, including normal
recurring adjustments necessary of the Company for the interim periods have been
included. The results of operations for the interim period are not necessarily
indicative of the results for the full year.
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.
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of June 30, 2004, the Company has negative working
capital of approximately $2,200,000, an accumulated deficit of $6,100,000 and
recurring losses from operations. 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, 2004. 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.
13
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
GOING CONCERN (continued)
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.
o The Company has secured approximately $4,100,000 of new orders from
January 2004 through June 2004.
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
Service revenues are billed and recognized in the period the services are
rendered.
The Company accounts for shipping and handling fees and costs in accordance with
EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." Such fees and
costs incurred by the Company are immaterial to the operations of the Company.
In accordance with SFAS 48, "Revenue Recognition when Right of Return Exists,"
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management's evaluation of historical
experience, current industry trends and estimated costs.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. Management believes that the Company's revenue recognition policy
for services and product sales conforms to SAB 101. The Company recognizes
revenue of long-term contracts pursuant to Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (see below).
14
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
METHOD OF ACCOUNTING FOR LONG-TERM CONTRACTS
The Company uses the percentage-of-completion method of accounting to account
for long-term contracts and, therefore, takes into account the cost, estimated
earnings and revenue to date on fixed-fee contracts not yet completed. The
percentage-of-completion method is used because management considers total cost
to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final cost, based on current estimates of cost to complete. It is not related to
the progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect overhead.
Because long-term contracts may extend over a period of time, changes in job
performance, changes in job conditions and revisions of estimates of cost and
earnings during the course of the work are reflected in the accounting period in
which the facts that require the revision become known. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
recognized in the consolidated financial statements.
Contracts that are substantially complete are considered closed for consolidated
financial statement purposes. Revenue earned on contracts in progress in excess
of billings (under billings) is classified as a current asset. Amounts billed in
excess of revenue earned (overbillings) are classified as a current liability.
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 1,821,583 and 871,853 additional potential common shares of
June 30, 2004 and 2003, respectively). With the exception of the three months
ended June 30, 2004, the Company has incurred net losses and basic and diluted
loss per share are equal because additional potential common shares would be
anti-dilutive.
15
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
BASIC AND DILUTED LOSS PER COMMON SHARE (continued)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computations for the three month and
six month periods ended June 30, 2004 and 2004:
FOR THE THREE MONTHS ENDED
JUNE 30,
----------------------------
2004 2003
----------- -----------
Net income (loss) $ 283,034 $ (436,234)
Current cumulative preferred dividends (39,750) (28,875)
----------- -----------
Numerator for basic and diluted loss per share:
Net income (loss) applicable to common stockholders 243,284 (465,109)
Denominator for basic and diluted loss per share:
Weighted average shares 6,995,265 5,946,383
----------- -----------
Basic income (loss) per share $ 0.03 $ (0.08)
=========== ===========
Diluted income (loss) per share $ 0.03 $ (0.08)
=========== ===========
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
2004 2003
----------- -----------
Net loss $ (251,852) $(1,506,056)
Current cumulative preferred dividends (79,500) (57,750)
----------- -----------
Numerator for basic and diluted loss per share:
Net loss applicable to common stockholders (331,352) (1,563,806)
Denominator for basic and diluted loss per share:
Weighted average shares 6,953,598 5,935,433
----------- -----------
Basic and diluted loss per share $ (0.05) $ (0.26)
=========== ===========
16
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION
At June 30, 2004, 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
APB 25, and related interpretation. The Company accounts for the non-employee
compensation plan under the recognition measurement principles of SFAS 123.
There was no employee stock-based compensation cost recognized in net loss for
the six month periods ended June 30, 2004 and 2003. All options granted under
these plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. There was no stock based compenstation under
SFAS 123 for any of the periods included in these interim financial statements.
Hence, the disclosure requirements under SFAS 148 are not required.
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2003
and 2002 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, 2004 did not have a significant impact on the Company's financial
statements.
17
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 condensed consolidated
financial statements to conform to the 2004 presentation.
2. CONTRACTS IN PROGRESS
Contracts in progress as of June 30, 2004 were as follows:
Cumulative costs to date $ 5,281,395
Cumulative gross profit to date 3,444,003
-----------
Cumulative revenue earned 8,725,398
Less progress billings to date (8,535,475)
-----------
Net overbillings $ 189,923
===========
The following is included in the accompanying condensed consolidated balance
sheet as of June 30, 2004:
Costs and estimated earnings on contracts
in progress in excess of billings $ 493,182
Billings in excess of costs and estimated earnings
on contracts in progress (303,259)
---------
Net overbillings $ 189,923
=========
3. EQUITY TRANSACTIONS
During the quarter ended June 30, 2004, 23,640 shares of convertible Series D
preferred stock were issued in exchange for $521,000 in cash in connection with
a Private Placement Memorandum ("PPM"), net of $30,000 paid to the broker/dealer
and $40,000 of advances which were exchanged for shares. Such offering costs
were included as an offset to additional paid-in capital in the accompanying
condensed consolidated balance sheet. Since the related conversion rate is 50:1,
the effective conversion rate of $0.50 resulted in a deemed discount of
$153,660, which was included in accumulated deficit. Additionally, the
broker/dealer was granted Three-Year Placement Warrants, as defined in the PPM,
with a cashless exercise feature to purchase 25,000 shares of the Company's
common stock at prices ranging from $0.50 to $1.00. No expense was recorded
related to the granting of such warrants as they are considered an offering
cost.
18