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:
March 31, 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
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
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 March 31, 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 13
Condensed Consolidated Statements of Operations 14
Condensed Consolidated Statements of Cash Flows 15
Notes to Condensed Consolidated Financial Statements 16-21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATERS 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.
OVERVIEW
On May 25, 2001, the Company entered into a plan of Reorganization and
Merger with New Century Remanufacturing, Inc. ("NCR"). Immediately prior to the
merger, the Company had 50,000,000 shares authorized and 2,695,942 shares issued
and outstanding. Pursuant to the merger, all of the 1,800 outstanding shares of
NCR were exchanged for shares of the Company on a 1 to 833.33 basis or into
1,500,000 shares of common stock of the Company for a total of 4,195,942 shares
of common stock issued and outstanding. Immediately after the merger, all then
existing officers and directors of the Company resigned and the management of
NCR was elected and appointed to such positions; thereby effecting a change of
control. Although NCR became a wholly owned subsidiary of the Company following
the transaction, because the transaction resulted in a change of control, the
transaction was recorded as a "reverse merger" whereby NCR was considered to be
the accounting acquirer of the Company.
After the reverse merger the Company changed its name to New Century
Companies, Inc. The results of the Company previously filed in the past years
are not included herein. The related financial statements are the results of
operations for NCR.
PLAN OF OPERATIONS
The earnings of the Company for the three months ended March 31, 2004 were
negative as a result of a decrease in sales and the corporate expenses related
to compliance with the regulatory requirements of being a public company. 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 MARCH 31, 2004 COMPARED TO
MARCH 31, 2003.
Revenues. The Company generated revenues of $979,308 for the three months
ended March 31, 2004, which was a $738,832 or 43% decrease from $1,718,140 for
the three months ended March 31, 2003. The decrease is the result of a
deficiency in working capital, which has limited our ability to fulfill customer
orders. Additionally, the overall market for machine tools is cyclical,
reflecting economic conditions, production capacity utilization, changes in tax
and fiscal policies, corporate profitability and financial condition as well as
the general level of business confidence. 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 Loss. Gross loss for the three months ended March 31, 2004, was
$(34,693) or -3.5% of revenues, compared to $(85,588), or -4.9% of revenues for
the three months ended March 31, 2003.
Net Loss. Net operating loss decreased to ($493,088) for the three months
ended March 31, 2004 compared to $(954,789) for the three months ended March 31,
2003. The primary reason for the decrease relates to a one-time charge related
to a write-off of a deposit of $465,000 in fiscal 2003.
Interest Expense. Interest expense for the three months ended March 31,
2004, decreased to $41,798 compared to $113,433, for the three months ended
March 31, 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
The net cash decrease of the Company during the three months ended March
31, 2004 was ($155,969). The decrease is due to net cash used in operating
activities of ($175,207). 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 additional funds to
execute its business plan. To the extent that the Company is unable to raise
sufficient additional funds, the Company's business plan will substantially
modified, its operations curtailed or protection under bankruptcy/reorganization
laws sought.
During the period ended March 31, 2004, the Company issued a Private
Placement Memorandum ("PPM") in which the Company offered to eligible investors,
as defined, a maximum of 30,000 shares of Series D preferred stock (Series D"),
with a required minimum offering of 1,000 shares of Series D to be sold at $25
per share. As of April 30, 2004 and pursuant to the PPM, the Company sold 20,000
shares of Series D to eligible investors for proceeds approximating $470,000
(net of commissions and offering costs of $30,000). In addition, the Company
issued 1,000 shares of series D and a warrant to purchase 20,000 shares of
restricted common stock at exercise prices ranging from $0.50 to $1.00,
immediately vesting and expiring in February 2007.
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 including through its PPM
discussed above. 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, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
4
CRITICAL ACCOUNT 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.
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.
5
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."
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.
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.
6
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 March 31,
2004, the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures over financial reports are
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.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls over financial
reports during the quarter ended March 31, 2004 that are likely to affect those
controls. Thus, no corrective actions with regard to significant deficiencies or
material weakness were necessary.
7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
During the quarter ended March 31, 2004, the Company issued 100,000
shares. The shares were issued pursuant to 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 in default 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 has 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 expire in December 2003.
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.
May 20, 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
March 31, 2004 (unaudited)
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ASSETS
Current Assets
Cash $ --
Contracts receivable 268,917
Inventories, net 1,182,015
Costs in excess net of billings on uncompleted contracts 334,530
Prepaid expenses and other current assets 23,001
-----------
Total current assets 1,808,463
PROPERTY AND EQUIPMENT, NET 537,535
-----------
$ 2,345,998
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ 164,672
Accounts payable and accrued expenses 2,597,663
Dividends payable 234,750
Billings in excess of costs on uncompleted contracts 592,745
Notes payable 1,215,000
Current portion of obligations under capital lease 79,575
-----------
Total current liabilities 4,884,405
OBLIGATIONS UNDER CAPITAL LEASE, NET OF CURRENT PORTION 46,916
-----------
TOTAL LIABILITIES 4,931,321
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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 $1,825,000) 63,600
Common stock, $0.10 par value, 50,000,000 shares authorized;
6,995,265 shares issued and outstanding 699,527
Subscriptions receivable (462,500)
Notes receivable from stockholders (466,159)
Deferred consulting fees (14,438)
Additional paid-in capital 3,849,194
Accumulated deficit (6,254,547)
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Total stockholders' deficit (2,585,323)
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$ 2,345,998
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Page 13
See accompanying notes to the condensed consolidated financial statements.
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three
Months Ended March 31, 2004 and 2003
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2004 2003
----------- -----------
NET SALES $ 979,308 $ 1,718,140
COST OF SALES 1,014,001 1,803,728
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GROSS LOSS (34,693) (85,588)
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OPERATING EXPENSES
Consulting and other compensation 167,859 78,556
Salaries and related 54,964 103,519
Selling, general and administrative 235,572 222,126
Loss of deposit -- 465,000
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TOTAL OPERATING EXPENSES 458,395 869,201
----------- -----------
OPERATING LOSS (493,088) (954,789)
----------- -----------
INTEREST EXPENSE (41,798) (113,433)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (534,886) (1,068,222)
PROVISION FOR INCOME TAXES -- 1,600
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NET LOSS $ (534,886) $(1,069,822)
=========== ===========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (729,886) $(1,156,447)
=========== ===========
BASIC AND DILUTED NET LOSS AVAILABLE TO
COMMON STOCKHOLDERS PER COMMON SHARE $ (0.11) $ (0.20)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,911,932 5,853,883
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Page 14
See accompanying notes to the condensed consolidated financial statements.
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
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2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $ (534,886) $(1,069,822)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization of property and equipment 69,041 75,235
Amortization of consulting fees 95,375 18,750
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 (118,466) 225,371
Inventories (25,072) 222,839
Costs in excess of billings on uncompleted contracts (13,998) (196,261)
Prepaid expenses and other current assets 2,690 (148,658)
Deposits -- 465,000
Accounts payable and accrued expenses 274,978 148,623
Billings in excess of costs on uncompleted contracts 25,131 578,705
----------- -----------
Net cash (used in) provided by operating activities (175,207) 454,132
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (719) (8,449)
----------- -----------
Net cash used in investing activities (719) (8,449)
----------- -----------
Cash flows from financing activities:
Bank overdraft 40,114 (5,764)
Proceeds from the issuance of notes payable -- 455,000
Principal repayments on notes payable -- (900,000)
Principal repayments on obligations under capital lease (20,157) (32,194)
----------- -----------
Net cash provided by (used in) financing activities 19,957 (482,958)
----------- -----------
Net decrease in cash (155,969) (37,275)
Cash at beginning of period 155,969 80,276
----------- -----------
Cash at end of period $ -- $ 43,001
=========== ===========
Supplemental disclosure of non-cash activities -
Dividends payable $ 39,750 $ 28,875
=========== ===========
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Page 15
See accompanying notes to the condensed consolidated financial statements.
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NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
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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."
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 March 31, 2004, the Company has negative
working capital of $3,075,942, an accumulated deficit of $6,254,547 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.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 $3,000,000 of new orders from
January 2004 through April 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).
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 870,015 additional potential common shares of
March 31, 2004 and 2003, respectively). Because the Company has incurred net
losses, basic and diluted loss per share are the same as additional potential
common shares would be anti-dilutive.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 per share computations for the three month and nine
month periods ended March 31, 2004 and 2004:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
----------- -----------
Net loss $ (534,886) $(1,069,822)
Current cumulative preferred dividends (234,750) (86,625)
----------- -----------
Numerator for basic and diluted loss per share:
Net loss applicable to common stockholders (729,886) (1,546,447)
Denominator for basic and diluted loss per share:
Weighted average shares 6,911,932 5,853,883
----------- -----------
Basic and diluted loss per share $ (0.11) $ (0.20)
=========== ===========
STOCK BASED EMPLOYEE COMPENSATION
At March 31, 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 three month period ended March 31, 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. The following table illustrates the effect on
net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------ ------------
Net loss applicable to common stockholders:
As reported $ (729,886) $ (1,546,447)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- --
------------ ------------
Pro forma $ (729,886) $ (1,546,447)
============ ============
Basic and diluted net loss per share:
As reported $ (0.11) $ (0.20)
============ ============
Pro forma $ (0.11) $ (0.20)
============ ============
The above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net loss for future years.
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2003
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 condensed consolidated
financial statements to conform to the 2004 presentation.
--------------------------------------------------------------------------------
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
--------------------------------------------------------------------------------
2. CONTRACTS IN PROGRESS
Contracts in progress as of March 31, 2004 were as follows:
Cumulative costs to date $ 4,289,774
Cumulative gross profit to date 2,856,838
-----------
Cumulative revenue earned 7,146,612
Less progress billings to date (7,404,827)
-----------
Net overbillings $ (258,215)
===========
The following is included in the accompanying condensed consolidated balance
sheet under these captions as of March 31, 2004:
Costs and estimated earnings on contracts in progress in excess
of billings
$ 334,530
Billings in excess of costs and estimated earnings on contracts in
progress (592,745)
-----------
Net overbillings $ (258,215)
===========
3. EQUITY TRANSACTIONS
During the quarter ended March 31, 2004, the Company issued 100,000 shares of
restricted common stock valued at $50,000 (estimated based on the market price
on the date of grant) to a consulting firm for services rendered in relation to
corporate finance and investor relations. Since the service period was
substantially completed as of March 31, 2004, the Company recorded the entire
amount to consulting expense in the accompanying condensed consolidated
statements of operations.
During the period ended March 31, 2004, the Company issued a Private Placement
Memorandum ("PPM") in which the Company offered to eligible investors, as
defined, a maximum of 30,000 shares of Series D preferred stock (Series D"),
with a required minimum offering of 1,000 shares of Series D to be sold at $25
per share. As of April 30, 2004 and pursuant to the PPM, the Company sold 20,000
shares of Series D to eligible investors for proceeds approximating $470,000
(net of commissions and offering costs of $30,000). In addition, the Company
issued 1,000 shares of series D and a warrant to purchase 20,000 shares of
restricted common stock at exercise prices ranging from $0.50 to $1.00,
immediately vesting and expiring in February 2007.