1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Nature of Operations
New Century Companies, Inc. and Subsidiary (collectively, the
"Company"), a California corporation, was incorporated March 1996 and is located
in Southern California. The Company provides after-market services, including
rebuilding, retrofitting and remanufacturing of metal cutting machinery.
The Company currently sells its services by direct sales and
through a network of machinery dealers across the United States. Its customers
are generally medium to large sized manufacturing companies in various
industries where metal cutting is an integral part of their businesses. The
Company grants credit to its customers who are predominately located in the
western United States.
The Company trades on the Over-the-Counter Bulletin Board under
the symbol “NCNC.”
Principles of Consolidation
The consolidated financial statements include the accounts of New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing (collectively, the “Company”). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. As of December 31, 2004, the
Company has negative working capital of approximately $3,317,000, an accumulated
deficit of approximately $7,472,000, recurring losses from operations and is in
default on certain notes payable. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company
intends to fund operations through anticipated increased sales and debt and
equity financing arrangements which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements for
the year ending December 31, 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.
In response to these problems, management has taken the following
actions:
· |
The
Company continues its aggressive program for selling
inventory. |
· |
The
Company continues to implement plans to further reduce operating
costs. |
· |
The
Company is seeking investment capital through the public and private
markets. |
The consolidated financial statements do not include any
adjustments related to recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Going Concern (continued)
During 2004 management negotiated with several vendors and was
able to obtain a fifty percent reduction in the amounts due to those specific
vendors. As a result, the accompanying consolidated statements of operations
include a gain on forgiveness of accounts payable totaling approximately
$544,000 for the year ended December 31, 2004.
Concentrations of Credit Risks
Cash is maintained at various financial institutions. The Federal
Deposit Insurance Corporation (“FDIC”) insures accounts at each financial
institution for up to $100,000. At times, cash may be in excess of the FDIC
insurance limit of $100,000. The Company’s uninsured bank balances at December
31, 2004 totaled approximately $200,000.
The Company sells products to customers throughout the United
States. The Company’s ability to collect receivables is affected by economic
fluctuations in the geographic areas served by the Company. Although the Company
does not obtain collateral with which to secure its contracts receivable,
management periodically reviews contracts receivable and assesses the financial
strength of its customers and, as a consequence, believes that the receivable
credit risk exposure could, at times, be material to the financial
statements.
During the year ended December 31, 2004, sales to two customers
approximated 19% of net sales. During the year ended December 31, 2003, sales to
three customers approximated 45% of net sales. As of December 31, 2004, 95% of
contracts receivable is over 90 days, and may be uncollectible. Accordingly,
contracts receivable are carried net of an allowance for losses totaling $39,000
at December 31, 2004.
Risks and Uncertainties
The Company operates in an industry that is subject to intense
competition. The Company's operations are subject to significant risks and
uncertainties including financial, operational, technological and other risks
associated with operating a business including the potential risk of business
failure.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Significant
estimates made by management are, among others, deferred tax asset valuation
allowances, realization of inventories, collectibility of contracts receivable
and the estimation of costs for long-term construction contracts. Actual results
could materially differ from those estimates.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Cash and Cash Equivalents
The Company considers all highly liquid fixed income investments
with maturities of three months or less at the time of acquisition, to be cash
equivalents. The Company had no cash equivalents at December 31, 2004.
Inventories
Inventories are stated at the lower of cost or net realizable
value. Cost is determined under the first-in, first-out method. Inventories
represent cost of work in process on units not yet under contract. Cost includes
all direct material and labor, machinery, subcontractors and allocations of
indirect overhead. Net realizable value is based on management's forecast for
sales of the Company's products or services in the ensuing years. The industry
in which the Company operates is characterized by technological advancement and
change. Should demand for the Company's products prove to be significantly less
than anticipated, the ultimate realizable value of the Company's inventories
could be substantially less than the amount shown in the accompanying
consolidated balance sheet. At December 31, 2004 and 2003, the Company had
inventory reserves approximating $486,000 and $300,000, respectively.
Property and Equipment
Property and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the related
assets ranging from three to five years. Equipment under capital lease
obligations are depreciated over the shorter of the estimated useful life or the
term of the lease. Maintenance and repairs are charged to expense as incurred.
Significant renewals and betterments are capitalized. At the time of retirement
or other disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the consolidated statement of operations.
Long-Lived Assets
The Company accounts for long-lived asset impairments under
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Consistent
with prior guidance, SFAS No. 144 requires a three-step approach for recognizing
and measuring the impairment of assets to be held and used. The Company
recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amounts. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Fair value is estimated based on discounted future cash flows.
Assets to be sold must be stated at the lower of the assets’ carrying amount or
fair value and depreciation is no longer recognized. The Company believes that
no impairment of property and equipment exists at December 31, 2004.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
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.
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.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Warranty
The Company provides a warranty on certain products sold.
Estimated future warranty obligations related to certain products and services
are provided by charges to operations in the period in which the related revenue
is recognized. At December 31, 2004, the warranty obligation was immaterial to
the accompanying consolidated balance sheet.
Advertising
The Company expenses the cost of advertising when incurred as
selling expense in the accompanying consolidated statements of operations.
Advertising expenses were approximately $84,000 and $64,000 for the years ended
December 31, 2004 and 2003, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Under SFAS 109, "Accounting for Income Taxes," deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
Basic and Diluted Loss Per Common Share
Under SFAS 128, “Earnings Per Share,” basic earnings per
common share is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive (under the treasury stock method, there were 179,000
and 940,000 additional potential common shares as of December 31, 2004 and 2003,
respectively). Because the Company has incurred net losses, basic and diluted
loss per share are the same since additional potential common shares would be
anti-dilutive (see Note 8).
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Comprehensive Income
SFAS 130, “Reporting Comprehensive Income,” establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. For the years ended
December 31, 2004 and 2003, the Company had no items of comprehensive
income.
Segments of Business
SFAS 131, “Disclosures about Segments of an Enterprise and
Related Information,” changes the way public companies report information
about segments of their business in their quarterly reports issued to
stockholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. The Company currently operates in one
segment, as disclosed in the accompanying consolidated statements of operations.
Stock Based Compensation
The Company accounts for stock-based compensation issued to
employees using the intrinsic value based method as prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock issued to
Employees." Under the intrinsic value based method, compensation expense is the
excess, if any, of the fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.
SFAS 123, "Accounting for Stock-Based Compensation," if fully
adopted, changes the method of accounting for employee stock-based compensation
plans to the fair value based method. For stock options and warrants, fair value
is determined using an option pricing model that takes into account the stock
price at the grant date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.
The adoption of the accounting methodology of SFAS 123 is optional
and the Company has elected to continue accounting for stock-based compensation
issued to employees using APB 25; however, pro forma disclosures, as the Company
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
123.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Stock Based
Compensation (continued)
FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB 25"
clarifies the application of APB 25 for (a) the definition of employee for
purpose of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a non compensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award and (d)
the accounting for an exchange of stock compensation awards in a business
combination. Management believes that the Company accounts for transactions
involving stock compensation in accordance with FIN 44.
SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123," provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.
At December 31, 2004, the Company has one stock-based employee
compensation plan and one stock-based non-employee compensation plan, which are
described more fully in Note 7. There was no employee stock-based compensation
cost recognized in net loss for fiscal years 2004 and 2003, respectively. The
following table illustrates the effect on net loss and loss per common share if
the Company had applied the fair value recognition provisions of SFAS 123, as
amended, to stock-based employee compensation.
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Net
loss applicable to common stockholders: |
|
|
|
|
|
As reported |
|
$ |
(1,791,594 |
) |
$ |
(3,074,866 |
) |
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards |
|
|
- |
|
|
(247,000 |
) |
Pro forma |
|
$ |
(1,791,594 |
) |
$ |
(3,321,866 |
) |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share: |
|
|
|
|
|
|
|
As reported |
|
$ |
(0.25 |
) |
$ |
(0.42 |
) |
Pro forma |
|
$ |
(0.25 |
) |
$ |
(0.45 |
) |
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Stock Based Compensation
(continued)
The above pro forma effects of applying SFAS 123 are not
necessarily representative of the impact on reported net loss for future years
(see Significant Recent Accounting Pronouncements).
Fair Value of Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments when it is practicable to estimate that value. The carrying amount
of the Company's cash, contracts receivable, inventories, accounts payable and
accrued expenses, capital lease obligations, and notes payable approximates
their estimated fair values due to the short-term maturities of those financial
instruments and because related interest rates offered to the Company
approximate current offered rates. The fair value of the notes receivable from
stockholders are not determinable as these transactions are with related
parties.
Significant Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51." The primary objectives
of FIN No. 46 are to provide guidance on the identification of entities for
which control is achieved through means other than voting rights (variable
interest entities, or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity for which either: (1) the equity investors do not have a
controlling financial interest; or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN No. 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures.
As amended in December 2003, the effective dates of FIN No. 46 for
public entities that are small business issuers, as defined ("SBIs"), are as
follows: (a) For interests in special-purpose entities ("SPEs"): periods ended
after December 15, 2003; and (b) For all other VIEs: periods ended after
December 15, 2004. The December 2003 amendment of FIN No. 46 also includes
transition provisions that govern how an SBI which previously adopted the
pronouncement (as it was originally issued) must account for consolidated VIEs.
Management has concluded that the Company does not have an interest in any SPEs,
and is evaluating the other effects of FIN No. 46 (as amended) on its future
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs -
an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. In Chapter 4 of ARB 43, paragraph 5 previously stated that “…under
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to require treatment
as current
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Significant Recent Accounting
Pronouncements (continued)
period charges….” SFAS No. 151 requires that such items be
recognized as current-period charges, regardless of whether they meet the
criterion of so abnormal (an undefined term). This pronouncement also
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred in years beginning after June 15, 2005.
Management is evaluating the effect of this pronouncement, if any, on its future
financial statements.
In December 2004, the FASB issued SFAS No. 123-R, “Share-Based
Payment,” which requires that the compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No.
123-R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No.123-R replaces
SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees.” As originally issued, SFAS No. 123 established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that pronouncement permitted entities to continue applying
the intrinsic-value model of APB Opinion 25, provided that the financial
statements disclosed the pro forma net income or loss based on the preferable
fair-value method.
Small Business Issuers are required to apply SFAS No. 123-R in the
first interim or annual reporting period that begins after December 15, 2005.
Thus, the Company’s consolidated financial statements will reflect an expense
for (a) all share-based compensation arrangements granted on or after January 1,
2006 and for any such arrangements that are modified, cancelled, or repurchased
on or after that date, and (b) the portion of previous share-based awards for
which the requisite service has not been rendered as of that date, based on the
grant-date estimated fair value.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are
not believed by management to have a material impact on the Company's present or
future consolidated financial statements.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
2. CONTRACTS IN PROGRESS
Contracts in progress as of December 31, 2004 approximate:
Cumulative
costs to date |
|
$ |
5,859,000 |
|
Cumulative
gross profit to date |
|
|
4,873,000 |
|
|
|
|
|
|
Cumulative
revenue earned |
|
|
10,732,000 |
|
|
|
|
|
|
Less
progress billings to date |
|
|
(11,240,000) |
|
|
|
|
|
|
Net
over billings |
|
$ |
(508,000 |
) |
The following approximate amounts are included in the accompanying
consolidated balance sheet under these captions as of December 31, 2004:
Costs
in excess of billings on uncompleted contracts |
|
$ |
252,000 |
|
|
|
|
|
|
Billings
in excess of costs on uncompleted contracts |
|
|
(760,000 |
) |
|
|
|
|
|
Net
over billings |
|
$ |
(508,000 |
) |
3. PROPERTY AND EQUIPMENT
Property and equipment approximate the following at December 31,
2004:
|
|
|
|
Machinery
and equipment |
|
$ |
1,089,000 |
|
Computer
equipment |
|
|
22,000 |
|
Capital
lease equipment |
|
|
271,000 |
|
Leasehold
improvements |
|
|
123,000 |
|
|
|
|
1,505,000 |
|
|
|
|
|
|
Less
accumulated depreciation and amortization |
|
|
(1,174,000 |
) |
|
|
|
|
|
|
|
$ |
331,000 |
|
4. RELATED PARTY TRANSACTIONS
Notes Receivable from Stockholders
As of December 31, 2004, the Company had loans to two stockholders
approximating $503,750, including accrued interest. The loans accrue interest at
6% and are due on demand. The Company has included the notes receivable from
stockholders in stockholders’ equity (deficit) as such amounts have not been
repaid
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
4. RELATED PARTY TRANSACTIONS (continued)
Notes Receivable from Stockholders
(continued)
during the current year. For each of the years ended December 31,
2004 and 2003, total interest income from notes receivable from stockholders'
approximated $20,000.
5. NOTES PAYABLE
During the year ended December 31, 2001, the Company entered into
an unsecured note payable (“Note A”) with a third party for $250,000. Note A
accrues interest at a fixed rate of 18% per annum and matured in December 2003,
as amended (see Note 7). Note A is personally guaranteed by a stockholder and is
in default at December 31, 2004. At December 31, 2004, 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 December 31, 2004, 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 December 31, 2004, 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. At December 31, 2004, Note D was in default and had a total outstanding
principal balance of $250,000.
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 December 31,
2004 the total outstanding principal balance on Note E was $80,816.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
6. INCOME TAXES
During fiscal 2004 and 2003, the provision for taxes
(substantially all deferred) differs from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before provision for taxes as a
result of the following:
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Computed
“expected” tax (benefit) expense |
|
$ |
(484,000 |
) |
$ |
(998,000 |
) |
|
|
|
|
|
|
|
|
Addition
to (reduction) in income taxes resulting from: |
|
|
|
|
|
|
|
State
income taxes, net of federal benefit |
|
|
(57,000 |
) |
|
(171,000 |
) |
Change
in deferred tax asset valuation allowance |
|
|
533,000 |
|
|
1,140,000 |
|
Non-deductible
expenses |
|
|
8,800 |
|
|
31,467 |
|
|
|
|
|
|
|
|
|
|
|
$ |
800 |
|
$ |
2,467 |
|
The effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2004 are
presented below:
Deferred
tax assets: |
|
|
|
Tax
net operating loss carryforwards |
|
$ |
4,194,000 |
|
Accrued
inventory reserve |
|
|
194,000 |
|
Accrued
expenses |
|
|
19,000 |
|
|
|
|
|
|
Total
gross deferred tax asset |
|
|
4,407,000 |
|
Less
valuation allowance |
|
|
(4,407,000 |
) |
|
|
|
|
|
Total
net deferred tax asset |
|
$ |
- |
|
The valuation allowance increased by $533,000 and $1,140,000
during the years ended December 31, 2004 and 2003, respectively. The current
provision for income taxes for the years ended December 31, 2004 and 2003 is not
significant and due primarily to certain state taxes.
At December 31, 2004, the Company had net tax operating loss
carryforwards of approximately $10,961,000 and $7,794,000 available to offset
future taxable federal and state income, respectively. If not utilized to offset
future taxable income, the federal and state carryforwards will expire in
various years through 2024 and 2014, respectively. In the event the Company were
to experience a greater than 50% change in ownership as defined in Section 382
of the Internal Revenue Code, the utilization of the Company’s tax net operating
loss carryforwards could be severely restricted.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
7. EQUITY TRANSACTIONS
Preferred Stock
The Company has authorized 15,000,000 shares of cumulative,
convertible Series B Preferred Stock (“Series B”) with a par value of $1 per
share. The Series B has a mandatory cumulative dividend of $1.25 per share,
which is payable on a semi-annual basis, and convertible into 1.67 shares of the
Company’s common stock, does not have any voting rights, and has liquidation
preferences, as defined. As of December 31, 2001, in accordance with the
conversion terms of the Series B, 95,023 shares of the common stock remained
unissued and committed, which the Company has reclassified to common stock
during the year ended December 31, 2002 because the stock had constructively
been issued.
In March 2002, the Board of Directors authorized 75,000 shares of
5% cumulative, convertible Series C Preferred Stock (“Series C”) with a par
value of $1 per share. The Series C has a mandatory cumulative dividend of $1.25
per share, which is payable on a semi-annual basis in June and December each
year to holders of record on November 30 and May 31, does not have any voting
rights and has liquidation preferences, as defined. Each share of Series C is
convertible at the option of the holder into 16.667 shares of the Company’s
common stock.
During the year ended December 31, 2002, the Company completed a
Private Placement Memorandum (“PPM”) in which the Company offered to eligible
investors, as defined, a maximum of 60,000 shares of Series C, with a required
minimum offering of 30,000 shares of Series C to be sold at $25 per share.
During fiscal 2002 and pursuant to the PPM, the Company sold 44,000 shares of
Series C to eligible investors for proceeds of $956,605 (net of commissions and
offering costs of $143,395). In addition, the Company issued 2,200 shares of
Series C and 40,000 restricted shares of common stock (see below) to the
placement agent for services provided in connection with the PPM.
The Series C issued in fiscal 2002 was issued with a beneficial
conversion feature as the issuance date trading value of the Company’s common
stock was greater than the conversion price. Accordingly, the Company has
recorded a deemed dividend to the Series C shareholders of $308,029. As of
December 31, 2004, the Company had a total of $63,600 shares of Series C issued
and outstanding, with accumulated dividends totaling $195,000, which is recorded
in the accompanying consolidated balance sheet.
In September 2003, the Company issued 31,800 shares of series C,
valued at approximately $111,000 (based on the estimated fair market value on
the date of grant) to consultants for services to be rendered through March
2004. The Company has expensed approximately $46,000 and $65,000 during the
years ended December 31, 2004 and 2003, respectively, related to such issuance.
During the year ended December 31, 2003, certain holders of Series
C converted 14,400 shares into 240,006 shares of common stock.
In September 2004, the Company issued 47,000 shares of restricted
common stock upon conversion of 2,820 shares of Series C at a conversion rate of
16.667.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
7. EQUITY TRANSACTIONS (continued)
Preferred Stock (continued)
During the year ended December 31, 2004, the Company issued a PPM
in which the Company offered to eligible investors, as defined, a maximum of
30,000 shares of Series D Preferred Stock (“Series D”), with a required minimum
offering of 1,000 shares of Series D to be sold at $25 per share. During the
year ended December 31, 2004 and pursuant to the PPM, the Company issued 23,640
shares of Series D to eligible investors for proceeds totaling $521,000, net of
$30,000 paid to the broker/dealer and $40,000 of accounts payable which were
exchanged for shares. Such offering costs were included as an offset to
additional paid-in capital in the accompanying consolidated financial
statements. Since the related conversion rate is 50:1, the effective conversion
rate of $0.50 resulted in a deemed dividend of $153,660, which was included in
accumulated deficit. The deemed dividend is also reflected as an increase in the
net loss attributable to common shareholders (see Note 8). Additionally, the
broker/dealer was granted Three-Year Placement Warrants, as defined in the PPM,
with a cashless exercise feature to purchase 25,000 shares of the Company’s
common stock at prices ranging from $0.50 to $1.00. No expense was recorded
related to the granting of such warrants as they were considered an offering
cost. The warrants vested immediately and expire in February 2007.
Common Stock
During the year ended December 31, 2001, the Company received a
$87,500 subscription receivable from a member of the Board of Directors in
exchange for shares of the Company’s restricted common stock. The subscription
receivable bears interest at an annual rate of 6%. Principal and any unpaid
interest were due on October 6, 2001. As of December 31, 2004, the subscription
receivable remains unpaid.
During the year ended December 31, 2002, the Company received two
subscriptions receivable totaling $375,000 in exchange for 250,000 restricted
shares of common stock. The receivables bear interest at an annual rate of 5%.
Principal and any unpaid interest on both subscriptions receivable were due on
August 22, 2003, and are in default as of December 31, 2004. The Company is
currently in negotiations related to the outstanding principal balance. The
related accrued interest receivable and interest income are insignificant to the
consolidated financial statements.
During the year ended December 31, 2003, the Company amortized
$55,833 of deferred consulting fees to consulting expense in the accompanying
consolidated statements of operations, which was related to the issuance of
restricted shares of common stock during the year ended December 31, 2002 to
three consulting firms for services rendered in relation to corporate
finance.
During the year ended December 31, 2003, the Company issued
719,918 shares of restricted common stock valued at $202,500 (estimated based on
the market price on the date of grant) to consultants for services to be
rendered through September 2004. The Company recorded the entire value to
deferred consulting fees and amortized the amount to consulting expense over the
periods of service. During the years ended December 31, 2004 and 2003,
approximately $138,000 and $64,000, respectively, was amortized to consulting
expense.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
7. EQUITY TRANSACTIONS (continued)
Common Stock (continued)
During the year ended December 31, 2003, the Company issued
100,000 shares of restricted common stock to a shareholder as penalty for not
registering shares previously issued under Form SB-2 in a timely manner. The
common stock was valued at $21,000 (estimated based on the market price on the
date of grant).
During the year ended December 31, 2003, the Company issued 64,720
shares of restricted common stock in reconciliation with the reverse merger in
2001.
In January 2004, the Company issued 150,000 shares of restricted
common stock valued at $105,000 (estimated based on the market price on the date
of grant) to a consultant for services rendered during 2004. In March 2004, due
to some disagreements between the consultant and the Company in relation to the
services, the Company requested the cancellation of the shares. In December
2004, the Company and the consultant reached an agreement, and the shares were
reissued. The $105,000 value of the transaction, based on the value on the
measurement date in January 2004 (above), was recorded as consulting expense
during the year ended December 31, 2004.
In March 2004, the Company issued 100,000 shares of restricted
common stock value 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. Such amount was recorded as consulting expense
during the year ended December 31, 2004.
In December 2004, the Company issued 100,000 shares of restricted
common stock valued at $10,000 (estimated based on the market price on the date
of grant) to a consultant for services to be rendered through May 2005. The
Company recorded the entire value to deferred consulting fees and is amortizing
the amount to consulting expense over the period of service. As of December 31,
2004, the total unamortized consulting fees approximated $8,300, which is
recorded as an increase to stockholders equity (deficit).
Stock Options and Warrants
Under the terms of the Company's Incentive Stock Option Plan
(“ISOP”), options to purchase an aggregate of 1,000,000 shares of common stock
may be issued to key employees, as defined. The exercise price of any option may
not be less than the fair market value of the shares on the date of grant. No
options granted may be exercisable more than 10 years after the date of grant.
The options granted generally vest evenly over a one-year period, beginning from
the date of grant.
Under the terms of the Company’s Non-Statutory Stock Option Plan
("NSSO"), options to purchase an aggregate of 1,350,000 shares of common stock
may be issued to non-employees for services rendered. These options are
non-assignable and non-transferable, are exercisable over a five-year period
from the date of grant, and vest on the date of grant.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
7. EQUITY TRANSACTIONS (continued)
Stock Options and Warrants
(continued)
In December 2001, the Company issued 100,000 warrants to purchase
common stock for $2 per share, which is exercisable for two years from the date
of issuance. The warrants were issued in connection with a six-month, short-term
note payable and cancelled during fiscal 2003. In accordance with GAAP, the
proceeds of the financing have been allocated to the debt and the warrants,
based on their relative fair values. Accordingly, a discount of $106,000 was
recorded as a reduction in the debt balance, and the off-setting credit was
recorded as additional paid-in capital. The debt discount was amortized and
charged to interest expense over the life of the debt during the year ended
December 31, 2002. As part of an extension agreement (see “Note A” at Note 5),
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. As the pro-rata
value of the 200,000 warrants issued approximates the amounts expensed in 2002,
no additional expense has been recorded. Note A is personally guaranteed by a
stockholder and is in default at December 31, 2003.
In September 2002, the Company granted 100,000 stock options to a
third party for services rendered valued at $68,000 (estimated based on the
Black-Scholes option pricing model pursuant to SFAS 123). The stock options had
an exercise price of $1.10, vested immediately and expired in September
2003.
During the year ended December 31, 2003, the Company granted a
warrant to purchase 25,000 shares of the Company’s restricted common stock in
connection with the issuance of a note payable (see “Note C” at Note 5). The
pro-rata value of the warrant was $13,000 (estimated based on the Black-Scholes
option pricing model pursuant to SFAS 123). The warrant has an exercise price of
$1.00, vests immediately and is exercisable through January 2008.
During the year ended December 31, 2003, the Company granted a
warrant to purchase 5,000 shares of the Company’s restricted common stock in
connection with the deferral of the maturity date of a note payable (see “Note
D” at Note 5). The value of the warrant was $4,500 (estimated based on the
Black-Scholes option pricing model pursuant to SFAS 123). The warrant has an
exercise price of $1.25, vests immediately and is exercisable through March
2008.
In September 2003, the Company granted options to purchase an
aggregate of 1,300,000 shares of restricted common stock, at an exercise price
of $0.25 per share (the fair market value of the Company's common stock on the
date of grant), to various employees of the Company. The options vested
immediately and are exercisable through September 2008.
During the year ended December 31, 2004, the Company did not grant
any stock options or warrants.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
7. EQUITY TRANSACTIONS (continued)
Stock Options and Warrants
(continued)
The following is a status of the stock options and warrants
outstanding at December 31, 2004 and the changes during the three years then
ended:
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December
31, 2004 |
|
Year
Ended
December
31, 2003 |
|
|
|
Options and Warrants |
|
Weighted Average Price |
|
Options and Warrants |
|
Weighted Average Price |
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year |
|
|
1,821,583 |
|
$ |
2.34 |
|
|
741,583 |
|
$ |
8.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
- |
|
|
1,530,000 |
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Terminated |
|
|
(135,000 |
) |
|
(9.54 |
) |
|
(450,000 |
) |
|
(5.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, end of year |
|
|
1,686,583 |
|
$ |
1.77 |
|
|
1,821,583 |
|
$ |
2.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted |
|
|
|
|
$ |
- |
|
|
|
|
$ |
0.17 |
|
The following table summarizes information related to stock
options outstanding at December 31, 2004:
|
|
Options
Outstanding |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Contractual |
|
Exercise |
|
Exercise
Price |
|
Number |
|
Life
(Years) |
|
Price |
|
$0.25 |
|
|
1,300,000 |
|
|
3.7 |
|
$ |
0.25 |
|
$1.00-
$1.25 |
|
|
130,000 |
|
|
2.8 |
|
|
1.09 |
|
$5.00-
$6.56 |
|
|
10,000 |
|
|
1.8 |
|
|
5.78 |
|
$9.80-
$10.00 |
|
|
246,583 |
|
|
0.3 |
|
|
9.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686,583 |
|
|
|
|
$ |
1.77
|
|
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
7. EQUITY TRANSACTIONS (continued)
Stock Options and Warrants
(continued)
The following outlines the significant assumptions used to
calculate the fair market value information presented utilizing the
Black-Scholes pricing model during fiscal years 2004 and 2003:
|
Year
Ended
December
31, 2004 |
|
Year
Ended
December
31, 2003 |
|
|
|
|
|
|
Discount
rate |
- |
|
2%-
3% |
|
|
|
|
|
|
Volatility |
- |
|
253% |
|
|
|
|
|
|
Expected
life |
- |
|
4
years |
|
|
|
|
|
|
Expected
dividend yield |
- |
|
- |
|
8. LOSS PER SHARE
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
years ended December 31, 2004 and 2003:
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Net
loss |
|
$ |
(1,423,359 |
) |
$ |
(2,937,616 |
) |
|
|
|
|
|
|
|
|
Cumulative
preferred dividends (See Note 7) |
|
|
(214,575 |
) |
|
(137,250 |
) |
|
|
|
|
|
|
|
|
Deemed
dividends on preferred stock (See Note 7) |
|
|
(153,660 |
) |
|
- |
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted loss per share: Net loss applicable to
common stockholders |
|
|
(1,791,594 |
) |
|
(3,074,866 |
) |
|
|
|
|
|
|
|
|
Denominator
for basic and diluted loss per share: Weighted average
shares |
|
|
7,038,209 |
|
|
7,355,214 |
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share |
|
$ |
(0.25 |
) |
$ |
(0.42 |
) |
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
9. COMMITMENTS AND CONTINGENCIES
Service Agreements
Periodically, the Company enters into various agreements for
services including, but not limited to, public relations, financial consulting
and manufacturing consulting. Generally, the agreements are ongoing until such
time they are terminated, as defined. Compensation for services is paid either
at a fixed monthly rate or based on a percentage, as specified, and may be
payable in shares of the Company’s common stock. The Company's policy is that
expenses related to these types of agreements are valued at the fair market
value of the services or the shares granted, whichever is more realistically
determinable. Such expenses are amortized over the period of service.
Leases
The Company leases equipment under various operating lease
agreements which require monthly payments ranging from approximately $250 to
$600, and maturing through July 2006.
The Company also leases its office and warehouse facility under a
non-cancelable operating lease agreement. The lease requires monthly lease
payments of approximately $33,000, with annual increases of 3% through December
2006. The lease is personally guaranteed by one of the stockholders. The lease
agreement included a provision in which the Company could purchase the land and
building (the “Property”) for $3,050,000 from the current landlord/owner, as
amended. During the year ended December 31, 2001, the Company entered into a
note payable with the prior landlord/owner of the Property in the amount of
$215,000, as a condition of sale of the Property to the current landlord/owner
and as a deposit toward the eventual purchase of the Property by the Company,
then subsequently deposited an additional $250,000 directly into escrow. The
deposits totaling $465,000 were non-refundable. In March 2003, a third party
purchased the Property. Therefore, since the Company had no legal claim for the
deposits, such amounts were expensed in the accompanying consolidated statement
of operations for the year ended December 31, 2003.
The Company was a sublessor in a sublease of an office and
warehouse facility under a non-cancelable operating sublease agreement which
expired in August 2003. In connection with the sublease, the Company recognized
approximately $167,000 of rental income, which has been included in operating
expenses in the accompanying consolidated statements of operations for the year
ended December 31, 2003. Of this amount, $148,000 represented the Company’s
obligation as the original lessee.
The Company leases certain equipment under capital lease
obligations that expire through December 2005. Monthly payments approximate
$9,000, including interest at rates ranging from 14% to 20%. The assets under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair market value.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
9. COMMITMENTS AND CONTINGENCIES
(continued)
Leases (continued)
Future minimum lease payments on the operating and capital lease
obligations approximates the following for the years ending December 31:
|
|
Operating Leases |
|
Capital
Leases |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
389,000 |
|
$ |
78,000 |
|
$ |
467,000 |
|
2006 |
|
|
397,000 |
|
|
- |
|
|
397,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
minimum lease payments |
|
$ |
786,000 |
|
$ |
78,000 |
|
$ |
864,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Less
imputed interest |
|
|
|
|
|
6,000 |
|
|
|
|
Present
value of minimum lease payments
|
|
|
|
|
|
72,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion |
|
|
|
|
|
72,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion |
|
|
|
|
$ |
- |
|
|
|
|
Rental expense for operating leases approximated $410,000 and
$380,000 (net of approximately $165,000 sublease rental income) for the years
ended December 31, 2004 and 2003, respectively. Interest expense incurred
pursuant to capital lease obligations approximated $18,000 and $25,000 for the
years ended December 31, 2004 and 2003, respectively.
Equipment under capital leases as of December 31, 2004, which is
included in property and equipment in the accompanying consolidated balance
sheet (see Note 3) approximates:
Machinery
and equipment |
|
$ |
271,000 |
|
Accumulated
depreciation |
|
|
(150,000 |
) |
|
|
|
|
|
|
|
$ |
121,000 |
|
Legal
From time to time, the Company may be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations or
discrimination or breach of contract actions incidental in the normal operations
of the business. The Company is currently not involved in any such litigation,
which management believes could have a material adverse effect on its financial
position or result of operations.
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
9. COMMITMENTS AND CONTINGENCIES
(continued)
Backlog (Unaudited)
The following schedule approximates a reconciliation of backlog
representing signed contracts:
Balance,
January 1, 2004 |
|
$ |
2,192,000 |
|
New
contracts, January 1, 2004 through December 31, 2004 |
|
|
5,885,000 |
|
|
|
|
8,077,000 |
|
|
|
|
|
|
Less,
contract revenue earned - January 1, 2004 through December 31,
2004 |
|
|
(4,606,000 |
) |
|
|
|
|
|
Balance
December 31, 2004 |
|
$ |
3,471,000 |
|