Unassociated Document
An
Exhibit List can be found on page II-6.
Registration
No. 333-_____
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
NEW
CENTURY COMPANIES, INC.
(Name
of
small business issuer)
Delaware
|
3541
|
06-10345787
|
(State
or other jurisdiction
|
(Primary
standard
|
(IRS
employer
|
of
incorporation)
|
industrial
code number)
|
identification
number)
|
9835
Santa Fe Springs Road
Santa
Fe
Springs, CA 90670
(562)
906-8455
(Address
and telephone number of principal executive offices
and
principal place of business)
David
Duquette, President
9835
Santa Fe Springs Road
Santa
Fe
Springs, CA 90670
(562)
906-8455
(Name,
address and telephone number of agent for service)
Copies
to:
Marc
Ross, Esq.
Marcelle
S. Balcombe, Esq.
Sichenzia
Ross Friedman Ference LLP
1065
Avenue of the Americas, 21st Floor.
New
York,
New York 10018
(212)
930-9700 (212) 930-9725 (fax)
APPROXIMATE
DATE OF PROPOSED SALE TO THE PUBLIC:
From
time
to time after this Registration Statement becomes effective.
If
any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the
Securities Act, check the following box and list the Securities Act registration
statement number
of
the
earlier effective registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number
of
the
earlier effective registration statement for the same offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
CALCULATION
OF REGISTRATION FEE
Title
of each class of securities to be registered
|
|
Amount
to be registered
|
|
Proposed
maximum offering price per share (1)
|
|
Proposed
maximum aggregate offering price
|
|
Amount
of registration fee
|
|
Common
stock, $.10 par value
|
|
|
385,000
|
|
$
|
0.70
|
|
$
|
269,500
|
|
$
|
8.27
|
|
Common
stock , $.10 par value (2)
|
|
|
3,850,000
|
|
$
|
0.70
|
|
$
|
2,695,000
|
|
$
|
82.74
|
|
Total
|
|
|
4,235,000
|
|
|
|
|
|
|
|
$
|
91.01*
|
|
(1)
Estimated solely for purposes of calculating the registration fee in accordance
with Rule 457(c) and 457(g) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board
on
May 23, 2007, which was $0.70 per share.
(2)
Includes shares of our common stock, par value $0.10 per share, which may be
offered pursuant to this registration statement, which shares are issuable
upon
conversion of convertible notes held by the selling stockholders.
*
Previously paid.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT
TO COMPLETION, DATED MAY 30, 2007
NEW
CENTURY COMPANIES, INC.
4,235,000
SHARES OF
COMMON
STOCK
This
prospectus relates to the resale by the selling stockholders of up to 4,235,000
shares of our common stock, including 3,850,000 shares of common stock issuable
upon conversion of convertible notes, and 385,000 shares of our common stock.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price
or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock, which they are offering. We will pay the expenses
of registering these shares.
Our
common stock is registered under Section 12(g) of the Securities Exchange Act
of
1934 and is listed on the Over-The-Counter Bulletin Board under the symbol
"NCNC.OB". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on May 29, 2007, was
$0.69.
Investing
in these securities involves significant risks. See "Risk Factors" beginning
on
page 6.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this Prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is May 30, 2007.
The
information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by New
Century Companies, Inc, with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities
and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
TABLE
OF CONTENTS
Prospectus
Summary
|
|
1
|
Risk
Factors
|
|
18
|
Forward
Looking Statements
|
|
22
|
Use
of Proceeds
|
|
23
|
Management's
Discussion and Analysis or Plan of Operation
|
|
|
Description
of Property
|
|
29
|
Legal
Proceedings
|
|
|
Management
|
|
|
Executive
Compensation
|
|
31
|
Certain
Relationships and Related Transactions
|
|
34
|
Market
for Common Equity and Related Stockholder Matters
|
|
34
|
Security
Ownership of Certain Beneficial Owners and Management
|
|
35
|
Selling
Stockholder
|
|
36
|
Description
of Securities
|
|
37
|
Plan
of Distribution
|
|
39
|
Legal
Matters
|
|
40
|
Experts
|
|
|
Available
Information
|
|
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
|
|
Index
to Consolidated Financial Statements
|
|
F-1
|
You
may
only rely on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with different
information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to
sell
or a solicitation of an offer to buy any common stock in any circumstances
in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under
any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained
by
reference to this prospectus is correct as of any time after its
date.
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the "risk factors" section,
the
financial statements and the notes to the financial statements.
NEW
CENTURY COMPANIES, INC.
We
are
engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. We
provide rebuilt, retrofit and remanufacturing services for numerous brands
of
machine tools.
We
also
manufacture original equipment CNC large turning lathes and attachments under
the trade name Century Turn. CNC machines use commands from onboard computers
to
control the movements of cutting tools and rotation speeds of the parts being
produced. Computer controls enable operators to program operations such as
part
rotation, tooling selection and tooling movement for specific parts and then
store the programs in memory for future use. The machines are able to produce
parts while left unattended. Because of this ability, as well as superior speed
of operation, a CNC machine is able to produce the same amount of work as
several manually controlled machines, as well as reduce the number of operators
required; generating higher profits with less re-work and scrap. Since the
introduction of CNC tooling machines, continual advances in computer control
technology have allowed for easier programming and additional machine
capabilities. A vertical turning machine permits the production of larger,
heavier and more oddly shaped parts on a machine, which uses less floor space
when compared to the traditional horizontal turning machine because the spindle
and cam are aligned on a vertical plane, with the spindle on the
bottom.
The
primary industry segments in which our machines are utilized to make component
parts are in aerospace, power generation turbines, military, component parts
for
the energy sector for natural gas and oil exploration, medical, aerospace and
mining fields.
We
sell
our products to customers in the United States, Canada and Mexico.
Over
the
last several years, we have designed and developed a large horizontal CNC
turning lathe with productivity features new to the metalworking industry.
We
believe that a potential market for the Century Turn Lathe, in addition to
the
markets mentioned above, is aircraft landing gear.
We
are
also engaged in assembling sound-wall modules made from Quilite(R), a
lightweight, graffiti resistant concrete alternative used in freeway sound
barriers and in other sound absorbing structures and non-weight bearing
applications, where privacy or screening is necessary.
Our
principal offices are located at 9835 Santa Fe Springs Rd. Santa Fe Springs,
CA
90670 and our telephone number is (562) 906-8455. We are a Delaware
corporation.
The
Offering
|
|
|
|
|
|
Common
stock offered by selling stockholders
|
|
Up
to 4,235,000 shares of common stock, including 3,850,000 shares of
common
stock issuable upon conversion of convertible notes. This number
represents 35% of our total number of shares
outstanding.
|
|
|
|
Common
stock to be outstanding after the offering
|
|
Up
to 16,214,656 shares.*
|
|
|
|
Use
of proceeds
|
|
We
will not receive any proceeds from the sale of the common stock.
|
|
|
|
OTCBB
Symbol
|
|
NCNC.OB
|
*The
above information regarding common stock to be outstanding after the offering
is
based on 12,364,656 shares of common stock outstanding as of May 23, 2007 and
assumes the issuance of 3,850,000 shares upon conversion of convertible notes
by
our selling stockholder. This number does not include 385,000 shares which
are
being offered by Selling Stockholders which have been already issued and are
included in our issued and outstanding as of May 23, 2007.
Dollar
Value of Securities Registered for Resale in this
Prospectus
The
total
dollar value of the securities underlying the convertible notes in the financing
transaction that we have registered for resale (using the number of underlying
securities that we have registered for resale and the market price per share
for
those securities on the date of the sale of the convertible note) are as
follows:
Securities
Underlying the Convertible
Notes
issued to CAMOFI Master LDC
|
|
Market
Price at February 28, 2006
|
|
Dollar
Value of Underlying Securities
|
|
3,850,000
|
|
$
|
0.63
|
|
$
|
2,425,500
|
|
FINANCING
TRANSACTIONS
We
are
registering shares of common stock and shares of common stock underlying
convertible notes, in connection with the following financing transactions:
MOTIVATED
MINDS BRIDGE LOAN
On
February 15, 2006, to obtain funding for our operations, we issued a Series
A
Convertible Note (the "Note") in the principal amount of $300,000 to Motivated
Minds, LLC, an Arizona limited liability company (the "Lender"). The Note is
convertible into shares of our common stock, at a fixed conversion price of
$0.66 per share.
The
Note
bears interest as follows: (i) equal to twenty-four percent (24%) per annum
on
the unpaid principal balance from the issue date to the sixtieth (60th) day
from
the issue date; and (ii) twenty-seven percent (27%) per annum after the sixtieth
(60th) day from the Issue Date to the Maturity Date.
In
connection with the Note, we entered into a Registration Rights Agreement dated
February 16, 2006, pursuant to which we granted piggy back registration rights
to Motivated Minds in connection with the shares that were issuable upon
conversion of the Note, the shares issued to Motivated Minds, and issuable
upon exercise of the warrants.
In
connection with the initial issuance of the Note, we issued 30,000 restricted
shares of our common stock, and 454,545 warrants to Motivated Minds. The Warrant
is exercisable at a price of $0.66 per share and will expire on February 14,
2011. Also, we issued an aggregate of 45,454 warrants to the Placement Agents,
Source Capital Group, Inc. and Ascendiant Securities, LLC, which warrants are
exercisable at a price of $.66 per share and expire on February 14, 2011, and
paid aggregate fees and expenses of $30,000.
Pursuant
to the terms of the Note, the Note matured on the earliest date of a closing
of
a debt or equity financing or May 16, 2006. On March 7, 2006, the Note holder
and the Company agreed to extend the Note until May 16, 2006. As a consideration
for the extension, we issued 30,000 shares of restricted common stock to the
Lender. On August 8, 2006, we entered into an Allonge to the Note pursuant
to
which Motivated Minds agreed to extend the maturity date of the Note to provide
that $150,000 shall be due and payable on August 16, 2006 and $150,000 shall
be
due on October 16, 2006. In connection with the Allonge, we agreed to issue
45,000 shares of restricted common stock to Motivated Minds. Pursuant to an
amendment to the Registration Rights Agreement dated February 15, 2006, the
Company granted Motivated
Minds
piggy
back registration rights with respect to the 45,000 shares of common stock.
On
August 16, 2006 we repaid $150,000 of principal and all accrued interest to
Motivated Minds. The due date on the remaining $150,000 principal was extended
through December 16, 2006 and we issued an additional 30,000 shares of
restricted common stock to Motivated Minds. On December 7, 2006, we repaid
$50,000 of principal and the due date on the $100,000 balance of the Note was
extended until January 31, 2007. Additionally, we agreed to add an additional
$5,000 to the interest due pursuant to the Note. On January 23, 2007, we repaid
the entire principal and interest in the aggregate amount of $105,000 due on
the
Note.
In
summary, we have issued to Motivated Minds an aggregate 135,000 restricted
shares of common stock, as inducements for the convertible note and extensions
of the maturity due date, which are being registered in this Registration
Statement of which this prospectus forms a part thereof. The shares were issued
in reliance upon an exemption from registration pursuant to Section 4(2) under
the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder.
Motivated
Minds has contractually agreed to restrict its ability to exercise the warrant
and convert the Note and receive shares of our common stock such that the number
of shares of our common stock held by it and its affiliates, after such
conversion does not exceed 4.99% of our then issued and outstanding shares
of
common stock.
The
Note
and the Warrants were offered and sold to Motivated Minds in a transaction
made
in reliance upon exemptions from registration pursuant to Section 4(2) under
the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
Motivated Minds is an accredited investor as defined in Rule 501 of Regulation
D
promulgated under the Securities Act of 1933.
Additional
Disclosure regarding the Motivated Minds Bridge loan
We
have
made payments of interest and principal to Motivated Minds. In addition, we
have
made payments to the placement agent in connection with the Note. The following
is a tabular disclosure of the dollar amount of each such payment (including
the
value of any payments to be made in common stock, and excluding any repayment
of
principal) in connection with the Motivated Minds Bridge Loan that we have
made
or may be required to make to Motivated Minds, any affiliate of Motivated Minds,
or any person with whom Motivated Minds has a contractual relationship regarding
the transaction (including any interest payments, liquidated damages, payments
made to "finders" or "placement agents" and any other payments or potential
payments):
Tabular
Disclosure of Payments Made In Connection With Motivated Minds Bridge
Loan
Name
|
|
|
Type
of Payment
|
|
|
Origins
of Payment
|
|
|
Date
of Payment
|
|
|
No
of shares or warrants
|
|
|
Fair
Value of Securities issued
*
|
|
|
Value
of Payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEBT
DISCOUNT
(See Note 6 to Consolidated Financials Statements for the Year Ended
December 31, 2006, included in this prospectus)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motivated
Minds, LLC, Noteholder
|
|
|
shares
of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
30,000
|
|
$
|
0.64
|
|
$
|
19,200
|
|
Motivated
Minds, LLC, sharesholder
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
454,545
|
|
$
|
0.64
|
|
$
|
290,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
Capital Group, Inc., placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
22,727
|
|
$
|
0.64
|
|
$
|
14,545
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
22,727
|
|
$
|
0.64
|
|
$
|
14,545
|
|
Source
Capital Group, Inc., placement agent
|
|
|
Cash
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
Cash
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with extension of the due date of Note
|
|
|
3/7/2006
|
|
|
30,000
|
|
$
|
0.63
|
|
$
|
18,900
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with extension of the due date of Note
|
|
|
7/25/2006
|
|
|
45,000
|
|
$
|
0.52
|
|
$
|
23,400
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with extension of the due date of Note
|
|
|
11/14/2006
|
|
|
30,000
|
|
$
|
0.20
|
|
$
|
6,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
3/30/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
6,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
conversion
of interest on the Note
|
|
|
4/15/2006
|
|
|
9,091
|
|
$
|
0.66
|
|
$
|
6,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
conversion
of interest on the Note
|
|
|
5/15/2006
|
|
|
10,227
|
|
$
|
0.66
|
|
$
|
6,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
7/13/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
8/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
6,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/17/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
6,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/14/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
3,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/18/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
3,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/23/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
payments that have been made in connection with the Motivated Minds
Bridge
Loan, excluding principal repayments
|
$
|
476,499
|
|
*
The
Fair Value of Securities issued was estimated using trading price of the
Company’s common stock on the date of grant for common stock and Black Scholes
option-pricing model to evaluate warrants to purchase common
stock.
The
total
possible payments to Motivated Minds and its affiliates in the first
year
following the sale of the convertible notes are as follows:
Name
|
|
|
Type
of Payment
|
|
|
Origins
of Payment
|
|
|
Date
of Payment
|
|
|
No
of shares or warrants
|
|
|
Fair
Value of Securities issued
*
|
|
|
Value
of Payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEBT
DISCOUNT
(See Note 6 to Consolidated Financials Statements for the Year Ended
December 31, 2006, included in this prospectus)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
30,000
|
|
$
|
0.64
|
|
$
|
19,200
|
|
Motivated
Minds, LLC, shareholder
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
454,545
|
|
$
|
0.64
|
|
$
|
290,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
Capital Group, Inc., placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
22,727
|
|
$
|
0.64
|
|
$
|
14,545
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
22,727
|
|
$
|
0.64
|
|
$
|
14,545
|
|
Souce
Capital Group, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
2/15/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with extension of the due date of Note
|
|
|
3/7/2006
|
|
|
30,000
|
|
$
|
0.63
|
|
$
|
18,900
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with extension of the due date of Note
|
|
|
7/25/2006
|
|
|
45,000
|
|
$
|
0.52
|
|
$
|
23,400
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
in
connection with extension of the due date of Note
|
|
|
11/14/2006
|
|
|
30,000
|
|
$
|
0.20
|
|
$
|
6,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
3/30/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
6,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
conversion
of interest on the Note
|
|
|
4/15/2006
|
|
|
9,091
|
|
$
|
0.66
|
|
$
|
6,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
shares
of common stock
|
|
|
conversion
of interest on the Note
|
|
|
5/15/2006
|
|
|
10,227
|
|
$
|
0.66
|
|
$
|
6,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
7/13/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
8/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
6,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/17/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
6,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/14/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
3,750
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/18/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
3,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/23/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
principal
on the Note
|
|
|
8/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
150,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
principal
on the Note
|
|
|
12/7/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
50,000
|
|
Motivated
Minds, LLC, shareholder
|
|
|
cash
|
|
|
principal
on the Note
|
|
|
1/23/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
payments that have been made in connection with the Motivated Minds
Bridge
Loan in the first
year
following the sale of the convertible notes
|
$
|
776,499
|
|
*
The
Fair Value of Securities issued was estimated using trading price of the
Company’s common stock on the date of grant for common stock and Black Scholes
option-pricing model to evaluate warrants to purchase common
stock.
The
following calculation represent the gross proceeds from the Motivated Minds
Bridge Loan Transaction, less all total payments that have been made to selling
shareholder :
Gross
Proceeds
|
|
$
|
300,000
|
|
Less
cash payments
|
|
$
|
376,250
|
|
Less
fair market value of securities payments to the selling shareholders
|
|
$
|
400,249
|
|
Net
Loss
|
|
$
|
(476,499
|
)
|
Set
forth
below is tabular disclosure of the total possible profit to be realized by
Motivate Minds as a result of any conversion discounts regarding the securities
underlying the convertible notes and any other warrants, options, notes, or
other securities of the Company that are held by Motivated Minds or its
affiliates:
Name
|
|
Number
of Conversion Shares
|
|
Market
Price on the date of the sale of the convertible note (February 15,
2006)
|
|
Conversion
Price of Convertible Notes
|
|
Combined
Market Price of Shares underlying Convertible
Notes
|
|
Combined
Conversion Price of Shares underlying Convertible
Notes
|
|
Potential
Profit to be Realized
|
|
Motivated
Minds, LLC, shareholder
|
|
|
454,545
|
(1)
|
$
|
0.64
|
|
$
|
0.66
|
|
$
|
290,909
|
|
$
|
300,000
|
|
$
|
9,091
|
|
Motivated
Minds, LLC, shareholder
|
|
|
89,394
|
(2)
|
$
|
0.64
|
|
$
|
0.66
|
|
$
|
57,212
|
|
$
|
59,000
|
|
$
|
1,788
|
|
(1)
Represents shares issuable upon conversion of the principal amount of the Note.
(2)
Represents shares issuable upon conversion of interest accrued under the Note.
Combined
Total possible profit to be realized by the investors as a result
of any
conversion discounts regarding the securities underlying the convertible
notes and any other warrants, options, notes, or other securities
of the
Company that are held by the selling shareholders or any affiliates
of the
selling shareholders
|
|
$
|
1,788
|
|
The
following information presents the sum of all possible payments and the total
possible discounts to the market price of the shares underlying the convertible
notes as a percentage of the net proceeds to the Company from the sale of the
convertible notes to Motivated Minds, as well as the amount of that resulting
percentage averaged over the term of the convertible notes.
The
percentage computation methodology utilized considers the following
factors:
·
|
the
gross proceeds paid or payable to the Company in the convertible
note
transaction;
|
·
|
all
payments that have been made or that may be required to be made the
Company
|
·
|
the
resulting net proceeds to the Company;
and
|
·
|
the
combined total possible profit to be realized by the investors as
a result
of any conversion discounts regarding the securities underlying the
convertible notes and any other warrants, options, notes, or other
securities of the Company that are held by the selling shareholders
or any
affiliates of the selling
shareholders.
|
The
following calculation represent the gross proceeds from the Motivated Minds
Bridge Loan Transaction, less all total payments that have been made to selling
shareholder :
Gross
Proceeds paid to the Company in the convertible note
|
|
$
|
300,000
|
|
Less
all cash payments made or that may be required to be made by the
Company
(not including principal repayments)
|
|
$
|
76,250
|
|
Less
fair market value of securities payments to the selling
shareholders
|
|
$
|
400,249
|
|
|
|
$
|
(176,499
|
)
|
Percentage
of the total amount of all possible payments divided
by
the net proceeds to the Company from the sale of the convertible
notes
|
|
|
-270
|
%
|
|
|
|
|
|
Percentage
averaged over the term of the convertible notes (3 months term)
|
|
|
-270
|
%
|
|
|
|
|
|
Percentage
of the total possible discount (premium) to the market price of the
shares
underlying the convertible note divided by the net proceeds to the
issuer
from the sale of the convertible notes
|
|
|
-1
|
%
|
CAMOFI
PRIVATE PLACEMENT
On
February 28, 2006, to obtain funding for our operations, we entered into a
Securities Purchase Agreement ("CAMOFI Purchase Agreement") with CAMOFI Master
LDC ("CAMOFI") for the sale of (i) $3,500,000 in 12% Senior Secured Convertible
Note (the "CAMOFI Note") which is convertible into common stock at a fixed
conversion price of $0.63 and (ii) stock purchase warrants (the "Warrant")
to
purchase 3,476,190 shares of our common stock at a fixed exercise price of
$0.63. We closed the financing pursuant to the CAMOFI Purchase Agreement on
February 28, 2006.
The
CAMOFI Note bears interest at 12% and matures on February 28, 2009. Interest
on
the aggregate of the unconverted and then outstanding principal amount is
payable monthly in arrears, in cash or registered shares of common stock at
the
Company's election, or a combination thereof, beginning on the first day of
the
first month after the issuance date of March 1, 2006. Notwithstanding the
foregoing, payment in shares of common stock can only occur if during the 20
trading days immediately prior to the payment date, the payment in shares of
common stock would not exceed 25% of the volume for any of the previous 20
trading days, we shall have given the holder notice, and the following
conditions (the “Equity Conditions”) have been met: (i) we have duly honored
conversions and redemptions; (ii) all liquidated damages and other amounts
owing
in respect of the CAMOFI Note have been paid; (iii) there is an effective
registration statement pursuant to which the holder is permitted to resell
all
of the shares issuable pursuant to the CAMOFI Purchase Agreement; (iv) our
stock
is listed or quoted for trading on either of the Nasdaq SmallCap Market, the
American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market
or the OTC Bulletin Board and the shares issuable pursuant to the CAMOFI
Purchase Agreement are listed for trading; (v) there is sufficient number of
authorized but unissued and unreserved shares for the issuance of shares
issuable pursuant to the CAMOFI Purchase Agreement; (vi) we are not in default
under the CAMOFI Purchase Agreement; (vii) the shares issued or issuable will
not exceed 4.99%; (viii) no public announcement of a pending or proposed
fundamental transaction (such as a merger or consolidation of the Company,
any
completed tender offer or exchange, any reclassification of our common stock
or
compulsory share exchange where our common stock is effectively converted into
or exchanged for other securities, cash or property) or change of control
transaction has occurred that has not been consummated; (ix) the closing price
of our common stock is at lease 115% of the conversion price of the CAMOFI
Note,
(as adjusted).
The
CAMOFI Note is convertible into shares of the Company’s common stock at the
option of the Holder at a price of $0.63 per share. To effect conversions,
the
Holder is required to execute a notice of conversion specifying the principal
amount of the Note to be converted and the date the conversion is to be
effected. If the Company fails to timely deliver to the Holders certificates
by
the third trading day after the conversion date specified in the notice of
conversion, the Company shall be required to pay in cash for each $1,000 of
principal being converted, $10 per trading day (increased to $20 per trading
day
after 5 trading days after such damages begin to accrue) for each trading day
after such third trading day until such certificates are delivered. The Company
may also be required to compensate the Holder for a Buy-in, where the Holder
is
required by its brokerage firm to purchase common stock to deliver in
satisfaction of a sale by such holder of the conversion shares.
The
conversion price of the CAMOFI Note is subject to adjustment in the event the
Company (a) pays a stock dividend or makes a distribution of its shares, (b)
subdivides its common stock into a larger number of shares, (c) combines
outstanding shares of common stock into a smaller number of shares, (d) issues
by reclassification of shares of common stock of the Company, (e) offers, sells,
grant any option to purchase or offer sell, or grant any right to reprice its
securities or otherwise disposes of or issue any common stock or common stock
equivalents at an effective price per share less than the then conversion price.
Notwithstanding the foregoing, there shall be no adjustment of the conversion
price in the case of an issuance of (i) shares
of
Common Stock or options to employees, officers or directors of the Company
pursuant to any stock or option plan duly adopted by a majority of the
non-employee members of the Board of Directors of the Company or a majority
of
the members of a committee of non-employee directors established for such
purpose, or (ii) securities upon the exercise of or conversion of any securities
issued pursuant to the CAMOFI Note, convertible securities, options or warrants
issued and outstanding as of February 28, 2006, provided that such securities
have not been amended since such date to increase the number of such
securities.
We
have
the right to prepay in cash, all, or a portion of the CAMOFI Note, at 120%
of
the principal amount plus accrued interest at the date of prepayment. In
addition, we are required to repay the CAMOFI Note at 120% of the principal
amount thereof plus accrued interest to the date of repayment in the event
we
shall (A) sell all or a portion of the our assets, (B) become subject to change
in control transaction, or (C) Quilite International, LLC's audited financial
statement are materially worse than its unaudited financial statements. In
determining whether Quilite’s audited financial statements are materially worse
than its unaudited financial statements, we will rely on a qualified third
party
accounting expert to determine the differences. The comparison will take place
prior to the closing of any transaction between the Company and Quilite.
Presently, the Company has not set a time for the consummation of any
transactions with Quilite.
On
the
first day of each month, commencing September 1, 2006, we are required to redeem
1/30th of the original principal amount of the CAMOFI Note plus accrued but
unpaid interest, the sum of all liquidated damages and any other amounts then
owing to such Holder in respect of the Note which shall be paid in cash, equal
to 105% of such amount; provided, however, upon 10 trading days prior written
irrevocable notice, in lieu of a cash redemption payment, we may elect to pay
100% of such amount due in shares of our common stock based on a conversion
price equal to 85% of the average of the 10 consecutive VWAPs immediately prior
to the applicable payment. As of March 31, 2007, we have repaid approximately
$817,000 of the principal balance of the Note.
Upon
the
occurrence of an event of default, at the Holder's election, the full principal
amount of the Note, together with interest and any other amounts owed pursuant
to the CAMOFI Note shall become immediately due and payable in cash. The
aggregate amount payable upon an event of default shall be equal to 120% of
the
principal amount of the CAMOFI Note, plus all accrued and unpaid interest
thereon and all other costs, expenses, and liquidated damages due with respect
to such CAMOFI Note. Commencing 5 days after the occurrence of any event of
default that results in the eventual acceleration of the CAMOFI Note, the
interest rate on the Note shall accrue at the rate of 20% per annum, or such
lower maximum amount of interest permitted to be charged under applicable law.
Pursuant to the terms of the Note, an event of default means (subject to any
applicable grace or cure period) (i) any default in the payment of any principal
interest or liquidated damages in connection with the Note; (ii) failure to
observe any covenant or agreement contained in the Note; (iii) a default under
any of the other documents executed in connection with the CAMOFI Purchase
Agreement or any other material agreement, lease document or instrument to
which
the Company or any subsidiary is bound which default is not cured within 10
trading days; (iv) any representation or warranty made in any of the documents
or in any written statement delivered to CAMOFI shall be untrue in all material
respects as of the date made or deemed made; (v) any proceeding under applicable
bankruptcy or insolvency laws commenced against the Company or its subsidiaries,
which remains un-dismissed after 60 days or any adjudication of the Company
or
any of its subsidiaries is adjudicated insolvent or bankrupt.
The
Warrant to purchase 3,476,190 shares of our common stock issued in connection
with the purchase of the Note is exercisable at a price of $0.63 per share
and
will expire on February 28, 2013. In the event that there is no effective
registration statement covering the resale of the shares underlying the Warrant,
the Warrant may be exercised by means of a cashless exercise. The Warrant
provides for certain adjustments upon the occurrence of certain events,
including, but not limited to, any payment of a stock dividend or distributions
to our shareholders; subdivision of our common stock into a larger number of
shares; reclassification of our common stock; and the combination of our common
stock into a smaller number of shares.
In
connection with the CAMOFI Note, we issued 250,000 restricted shares of our
common stock to the Placement Agent, Ascendiant Securities, LLC. Also, we issued
Ascendiant Securities, LLC, and its assignee 722,539 warrants which warrants
are
exercisable at price of $0.63 and which expire on February 28, 2013. In
addition, we paid aggregate fees and expenses of $392,500 to
CAMOFI.
In
connection with the CAMOFI Purchase Agreement, we entered into an escrow
agreement by and among, CAMOFI, Katten Muchin Rosenman, as Escrow Agent , and
us
and a letter agreement with CAMOFI, pursuant to which $1,500,000 was deposited
into escrow by CAMOFI. Pursuant to the terms of the letter agreement, the
$1,500,000 will be released to us upon consummation of the acquisition of
Quilite International LLC, provided however, (v) the terms of such acquisition
are satisfactory to CAMOFI; (w) CAMOFI shall be satisfied, in its sole
discretion, with the progress of negotiations for the extension or renewal
of
our Headquarters lease; (x) no default or Event of Default shall have occurred
or be continuing; (y) there shall have been no material adverse change in our
business and the business of our subsidiaries or results of operations; and
(z)
the Equity Conditions shall have all been satisfied. Based upon changed
circumstances the parties determined to release the funds held in escrow to
the
Company as follows: (a) $750,000 on July 10, 2006, which was used for general
working capital purposes and (b) $750,000 on August 4, 2006, which was used
to repay a portion of the CAMOFI Note.
On
December 19, 2006, we entered into an Amended and Restated Registration Rights
Agreement (the “Amendment”) with CAMOFI. Pursuant to the Amendment we agreed to
file registration statements to cover the resale of the shares issuable upon
conversion of the CAMOFI Note and warrants as follows:
|
i)
|
on
or before January 31, prepare and file with the United States Securities
and Exchange Commission (“SEC”) a Registration Statement covering the
resale of all common Stock issuable upon conversion of the 12% Senior
Secured Convertible Note dated February 28, 2009, up to 33% of our
issued
and outstanding stock;
|
|
ii)
|
within
90 days from effectiveness of the Registration Statement referred
to in i)
above, prepare and file a Registration Statement covering the resale
of
all common Stock issuable upon conversion of the 12% Senior Secured
Convertible Note dated February 28, 2009 to the extent not registered
above plus all shares of common stock underlying the Purchaser Warrants,
up to 33% of our issued and outstanding stock;
|
|
iii)
|
within
90 days from effectiveness of the Registration Statement referred
to in
ii) above, prepare and file a Registration Statement covering the
resale
of all common Stock issuable upon conversion of the 12% Senior Secured
Convertible Note dated February 28, 2009 plus all shares of common
stock
underlying the Purchaser Warrants to extent not registered above,
up to
33% of our issued and outstanding stock;
|
|
iv)
|
within
90 days from effectiveness of the Registration Statement referred
to in
iii) above, prepare and file a Registration Statement covering the
resale
of all additional Purchaser Warrants to extent not registered above,
up to
33% of our issued and outstanding stock;
|
On
May 1,
2007, we entered into an Amended and Restated Registration Rights Agreement
(the
“2nd
Amendment”) with CAMOFI. Pursuant to the 2nd
Amendment we agreed to file, in 30 days from the date thereof, a Registration
Statement to register up to 33% of our issued and outstanding stock covering
the
resale of common stock issuable upon conversion of the 12% Senior Secured
Convertible Note dated February 28, 2009, and to use our best efforts to have
the registration statements mentioned above declared effective 90 days after
the
date of filing. In addition, we agreed to use our best efforts to keep each
registration statement continuously effective under the Securities Act until
all
the securities covered by such registration statement have been sold or may
be
sold without volume restriction pursuant to Rule 144(k).
Pursuant
to the Amended and Restated Registration Rights Agreement, CAMOFI agreed to
waive any liquidated damages accrued prior to the date of the Amendment.
However, the failure to timely file the Registration Statement and have the
registration statement declared effective, will subject us to liquidated damages
equal to 1.5% of the outstanding principal of the Notes for any registrable
securities then held by CAMOFI for the first 30 days (or part thereof) after
the
default date and an additional 1.5% for any subsequent 30-day period (or part
thereof), thereafter or a maximum of 10% of the remaining balance of the CAMOFI
Notes. If we fail to pay any partial liquidated damages within seven days after
the date payable, we will be required to pay interest thereon at a rate of
20%
per annum (or such lesser maximum amount that is permitted to be paid by
applicable law) to CAMOFI, accruing daily from the date such partial liquidated
damages are due until such amounts, plus all such interest thereon, are paid
in
full.
In
connection with the Amendment, we issued to CAMOFI warrants to purchase
1,500,000 shares of our common stock, at an exercise price of $0.35 for a term
of seven years.
The
CAMOFI Note is secured by substantially all of our assets.
CAMOFI
has contractually agreed to restrict its ability to convert the CAMOFI Note
and
exercise the Warrant and receive shares of our common stock such that the number
of shares of our common stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of our then issued and outstanding
shares of common stock.
The
CAMOFI Note and corresponding warrants were offered and sold to CAMOFI in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated thereunder. CAMOFI is an accredited investor as defined in Rule
501
of Regulation D promulgated under the Securities Act of 1933.
Additional
Disclosure regarding the CAMOFI Private Placement
We
have
made and may be required to make interest, financing and liquidated damages
payments in connection with the CAMOFI Private Placement. The following is
a
tabular disclosure of the dollar amount of each such payment (including the
value of any payments to be made in common stock, and excluding any repayment
of
principal) in connection with the Convertible Notes Transaction that we have
made or may be required to make to CAMOFI, any of its affiliates, or any person
with whom CAMOFI has a contractual relationship regarding the transaction
(including any interest payments, liquidated damages, payments made to "finders"
or "placement agents" and any other payments or potential
payments):
Tabular
Disclosure of Payments Made In Connection With CAMOFI Private
Placement
Name
|
|
|
Type
of Payment
|
|
|
Origins
of Payment
|
|
|
Date
of Payment Made or Required to Be Make
|
|
|
No
of shares or warrants
|
|
|
Fair
Value of
|
|
|
Value
of Payment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEBT
DISCOUNT
(See Note 6 to Consolidated Financials Statements for the Year Ending
December 31, 2006, included in this prospectus)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
3,476,190
|
|
$
|
0.63
|
|
$
|
2,190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
shares
of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
250,000
|
|
$
|
0.63
|
|
$
|
157,500
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
632,222
|
|
$
|
0.63
|
|
$
|
398,300
|
|
Michael
S. Cole, affiliate of placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
90,317
|
|
$
|
0.63
|
|
$
|
56,900
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
in
connection with issuance of the Note, due diligence
|
|
|
2/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
20,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
legal
fees
|
|
|
2/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
10,000
|
|
Oswald
& Yap legal office, contractual
|
|
|
cash
|
|
|
legal
fees
|
|
|
3/2/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
5,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
3/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
220,000
|
|
CAMOFI
Master, LDC
|
|
|
cash
|
|
|
in
connection with issuance of the Note, structuring fees
|
|
|
3/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
122,500
|
|
Katten
Muchin Rosenman, Escrow Agent
|
|
|
cash
|
|
|
legal
fees
|
|
|
3/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
7/10/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
8/4/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with the Amended Registration Rights Agreement dated
12/19/06
|
|
|
12/19/2006
|
|
|
1,500,000
|
|
$
|
0.20
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
4/20/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
29,167
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
5/10/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
33,833
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
6/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
36,167
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
7/11/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
35,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
8/8/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
36,167
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
9/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
34,961
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
32,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
32,550
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,333
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
7,206
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
22,933
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/16/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,139
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
3/9/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
26,133
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
4/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
27,728
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
5/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
25,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
6/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
25,317
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
7/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
23,333
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
8/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
22,906
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
9/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
21,700
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
19,833
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
19,289
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
17,500
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
16,878
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,672
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
3/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
13,533
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
4/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
13,261
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
5/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
11,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
6/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
10,850
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
7/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
9,333
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
8/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
8,439
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
9/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
7,233
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
5,833
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
4,822
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/1/2008
|
|
|
n/a
|
|
|
n/a
|
|
$
|
3,500
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/1/2009
|
|
|
n/a
|
|
|
n/a
|
|
$
|
2,411
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/1/2009
|
|
|
n/a
|
|
|
n/a
|
|
$
|
1,206
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
3/1/2009
|
|
|
n/a
|
|
|
n/a
|
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
payments that have been or may de required to be made in connection
with
the CAMOFI Private Placement, excluding principal
repayments
|
$
|
4,445,366
|
|
*
The
Fair Value of Securities issued was estimated using trading price of the
Company’s stock on the date of grant for common stock and Black Scholes
option-pricing model to evaluate warrants to purchase common stock.
**
We
have entered into registration rights agreements with selling shareholder
that
require us to file a registration statement covering shares underlying a
financing arrangement, become effective on the registration statement, and
maintain effectiveness of the registration statement of the underlying shares.
Certain of these registration rights agreements require our payment of
liquidating damages to the investors in the event we do not achieve the
requirements. We record estimated liquidated damages as liabilities and charges
to our income when the liquidated damages are probable and estimable under
Financial Accounting Standard No. 5 Accounting for Contingencies. Currently,
we
estimate $0 liquidated damages.
***
Placement Agent
The
net
proceeds from the sale of the convertible notes in the CAMOFI Private Placement
and the total possible payments to all selling shareholders and any of their
affiliates in the first
year
following the sale of the convertible notes are as follows:
Tabular
Disclosure of Payments Made In Connection With CAMOFI Private
Placement
Selling
Shareholder, Affiliate or Contractual
|
|
|
Type
of Payment
|
|
|
Origins
of Payment
|
|
|
Date
of Payment Made or Required to Be Make
|
|
|
No
of shares or warrants
|
|
|
Fair
Value of Securities issued
*
|
|
|
Value
of Payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEBT
DISCOUNT
(See Note 6 to Consolidated Financials Statements for the Year
Ending
December 31, 2006, included in this prospectus)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
3,476,190
|
|
$
|
0.63
|
|
$
|
2,190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ascendiant
Securities, Inc., placement agent (2)
|
|
|
shares
of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
250,000
|
|
$
|
0.63
|
|
$
|
157,500
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
632,222
|
|
$
|
0.63
|
|
$
|
398,300
|
|
Michael
S. Cole, affiliate of placement agent
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with issuance of the Note
|
|
|
2/28/2006
|
|
|
90,317
|
|
$
|
0.63
|
|
$
|
56,900
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
in
connection with issuance of the Note, due diligence
|
|
|
2/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
20,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
legal
fees
|
|
|
2/16/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
10,000
|
|
Oswald
& Yap legal office, contractual
|
|
|
cash
|
|
|
legal
fees
|
|
|
3/2/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
5,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
3/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
220,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
in
connection with issuance of the Note, structuring fees
|
|
|
3/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
122,500
|
|
Katten
Muchin Rosenman, Escrow Agent
|
|
|
cash
|
|
|
legal
fees
|
|
|
3/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
15,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
7/10/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,000
|
|
Ascendiant
Securities, Inc., placement agent
|
|
|
cash
|
|
|
in
connection with issuance of the Note
|
|
|
8/4/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
warrants
to purchase shares of common stock
|
|
|
in
connection with the Amended Registration Rights Agreement dated
12/19/06
|
|
|
12/19/2006
|
|
|
1,500,000
|
|
$
|
0.20
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
4/20/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
29,167
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
5/10/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
33,833
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
6/6/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
36,167
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
7/11/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
35,000
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
8/8/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
36,167
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
9/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
34,961
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
32,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
32,550
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,333
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
7,206
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
22,933
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/16/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
30,139
|
|
INTEREST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
principal
on the Note
|
|
|
9/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
116,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
10/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
116,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
11/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
116,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
12/1/2006
|
|
|
n/a
|
|
|
n/a
|
|
$
|
116,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
1/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
116,667
|
|
CAMOFI
Master, LDC, shareholder
|
|
|
cash
|
|
|
interest
on the Note
|
|
|
2/1/2007
|
|
|
n/a
|
|
|
n/a
|
|
$
|
116,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
payments that have been or may be required to be made in connection
with
the CAMOFI Private Placement in the first year following the sale
of the convertible notes
|
$
|
4,616,322
|
|
*
The
Fair Value of Securities issued was estimated using trading price of the
Company’s stock on the date of grant for common stock and Black Scholes
option-pricing model to evaluate warrants to purchase common
stock.
The
following calculation represent the gross proceeds from the CAMOFI Private
Placement, less all total possible payments to selling shareholder
:
Gross
Proceeds
|
|
$
|
3,500,000
|
|
Less
cash payments
|
|
$
|
1,513,662
|
|
Less
fair market value of securities possible payments
|
|
|
|
|
to
the selling shareholders
|
|
$
|
3,102,699
|
|
Net
Loss
|
|
$
|
(1,116,322
|
)
|
· |
The
Senior Secured Convertible Note has a fixed conversion price of $0.63.
The
market price per share of the securities underlying the convertible
notes
on February 28, 2006, the date of the sale of the convertible note,
was
$0.63. Based upon the foregoing, no conversion discount or possible
profit
for the selling shareholder derives from the conversion of convertible
notes.
|
· |
If
CAMOFI Master LDC chooses not to convert the CAMOFI Note, and the
Company
is required to pay monthly redemption amounts pursuant to section
6 of the
note, the total possible profit the selling shareholders could realize
as
a result of the Company redeeming the CAMOFI Note in cash is as follows:
|
Selling
Shareholder
|
|
Principal
Amount
|
|
Redemption
Amount *
|
|
Potential
Profit to be Realized
|
|
CAMOFI
Master, LDC
|
|
$
|
3,500,000
|
|
$
|
3,675,000
|
|
$
|
175,000.00
|
|
*
105% of the prime amount redeemed
|
·
|
If
CAMOFI Master LDC chooses not to convert the CAMOFI Note, and the
Company
is required to pay monthly redemption amounts pursuant to section
6 of the
CAMOFI Note, the total possible profit the selling shareholders could
realize as a result of the Company redeeming CAMOFI Note in shares
of its
common stock is as follows:
|
Selling
Shareholder
|
|
Principal
Amount
|
|
Redemption
Amount **
|
|
Potential
Profit to be Realized
|
|
Maximum
Potential Profit to be Realized from Redeeming in Cash or
Stock
|
|
CAMOFI
Master, LDC
|
|
$
|
3,500,000
|
|
$
|
4,025,000
|
|
$
|
525,000.00
|
|
$
|
525,000.00
|
|
**
Redemption in stock with a conversion price equal to 85% of the average
of
the VWAP for the 10 consecutive days immediately prior to the applicable
payment
|
·
|
The
total possible profit to be realized by CAMOFI as a result of any
conversion discounts regarding the securities underlying any other
securities of the Company that are held by the selling shareholders
or any
affiliates of the selling shareholders is disclosed in the following
table:
|
Selling
Shareholder
|
|
Date
of Sale
|
|
Securities
Underlying Warrants
|
|
Market
Price of Common Stock on Date of Sale
|
|
Exercise
Price of Warrants
|
|
Combined
Market Price of Shares underlying Warrants
|
|
Combined
Exercise Price of Shares underlying Warrants
|
|
Potential
Profit to be Realized
|
|
CAMOFI
Master, LDC
|
|
|
2/28/2006
|
|
|
4,198,729
|
|
$
|
0.63
|
|
$
|
0.63
|
|
$
|
2,645,199
|
|
$
|
2,645,199
|
|
$
|
-
|
|
CAMOFI
Master, LDC
|
|
|
12/19/2006
|
|
|
1,500,000
|
|
$
|
0.20
|
|
$
|
0.35
|
|
$
|
300,000
|
|
$
|
525,000
|
|
$
|
(225,000
|
)
|
Combined
Total possible profit to be realized by the investors as a result
of any
conversion discounts regarding the securities underlying the convertible
notes and any other warrants, options, notes, or other securities
of the
Company that are held by the selling shareholders or any affiliates
of the
selling shareholders
|
|
$
|
300,000
|
|
The
following information presents the sum of all possible payments and the total
possible discounts to the market price of the shares underlying the convertible
notes as a percentage of the net proceeds to the issuer from the sale of the
convertible notes, as well as the amount of that resulting percentage averaged
over the term of the convertible notes.
The
percentage computation methodology utilized considers the following
factors:
·
|
the
gross proceeds paid or payable to the Company in the convertible
note
transaction;
|
·
|
all
payments that have been made or that may be required to be made the
Company
|
·
|
the
resulting net proceeds to the Company;
and
|
·
|
the
combined total possible profit to be realized by the investors as
a result
of any conversion discounts regarding the securities underlying the
convertible notes and any other warrants, options, notes, or other
securities of the Company that are held by the selling shareholders
or any
affiliates of the selling
shareholders.
|
The
following calculation represent the gross proceeds from the CAMOFI Private
Placement, less all total possible payments to selling shareholder
:
Gross
Proceeds paid to the Company in the convertible note
|
|
$
|
3,500,000
|
|
Less
all cash payments made or that may be required to be made by the
Company
(not including principal repayments)
|
|
$
|
1,342,667
|
|
Less
fair market value of securities possible payments to the selling
shareholders
|
|
$
|
1,538,414
|
|
|
|
$
|
(945,366
|
)
|
Percentage
of the total amount of all possible payments divided
by
the net proceeds to the Company from the sale of the convertible
notes
|
|
|
-470
|
%
|
|
|
|
|
|
Percentage
averaged over the term of the convertible notes (3 year term)
|
|
|
-157
|
%
|
|
|
|
|
|
Percentage
of the total possible discount (premium) to the market price of the
shares
underlying the convertible note divided by the net proceeds to the
issuer
from the sale of the convertible notes
|
|
|
-32
|
%
|
|
|
|
|
|
Percentage
averaged over the term of the convertible notes (3 year term)
|
|
|
-32
|
%
|
The
Company has the intention, and a reasonable basis to believe that it will have
the financial ability, to make payments on the overlying securities. The Company
has duly accounted for such payments in its 2007 - 2009 comprehensive strategy
and financial plan.
Existing
Short Positions By Selling Shareholders
Based
upon information provided by the selling shareholders, to the best of
management's knowledge, the Company is not aware of any of the selling
shareholders having an existing short position in the Company's common
stock.
Relationships
Between the Company and Selling Shareholders and
Affiliates
The
Company hereby confirms that a description of the relationships and arrangements
between and among those parties already is presented in the prospectus and
that
all agreements between and/or among those parties are included as exhibits
to
the registration statement by incorporation by reference.
RISK
FACTORS
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of
our
stock could go down. This means you could lose all or a part of your investment.
There are a number of factors that are not identified herein that could have
a
negative effect. Among the factors that could cause actual results to differ
materially are the following:
|
·
|
adverse
changes in the conditions in the specific markets for our
products;
|
|
·
|
visibility
to, and the actual size and timing of, capital expenditures by our
customers;
|
|
·
|
inventory
practices, including the timing of deployment, of our customers;
|
|
·
|
adverse
changes in the public and private equity and debt markets and the
ability
of our customers and suppliers to obtain financing or to fund capital
expenditures;
|
|
·
|
adverse
changes in the credit ratings of our customers and suppliers;
|
|
·
|
a
general downturn in the overall
economy;
|
|
·
|
a
decline in government defense funding that lowers the demand for
defense
equipment and retrofitting;
|
|
·
|
competitive
pricing and availability of competitive products; and
|
|
·
|
adverse
changes in the ability of the company to obtain financing or to fund
capital expenditures, mergers and acquisitions or growth.
|
RISKS
RELATING TO OUR COMPANY
WE
HAVE INCURRED LOSSES IN THE PAST AND HAVE A LIMITED OPERATING HISTORY ON WHICH
TO BASE AN EVALUATION OF OUR PROSPECTS, WHICH CAN HAVE A DETRIMENTAL EFFECT
ON
THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.
We
have a
limited operating history on which to base an evaluation of our business and
prospects. For the three month ended March 31, 2007 and 2006, we had net loss
of
$(10,963) and, $(1,212,380), respectively. As of March 31, 2007, we had an
accumulated deficit
of $(7,819,079). We cannot give any assurance that we will generate significant
revenue or always have profits.
THERE
CAN BE NO ASSURANCE THAT WE WILL ACHIEVE PROFITABILITY.
There
can
be no assurance that we will achieve profitability. Our revenues and operating
results may fluctuate from quarter to quarter and from year to year due to
a
combination of factors, including, but not limited to, cost of production and
volume of sales. There can be no guarantee that we will be able to achieve
profitability on a quarterly or annual basis. If we do not achieve
profitability, our business will be adversely affected and investors may lose
all or substantially all of their investment.
WE
ARE DEPENDENT UPON A FEW KEY PERSONNEL AND THEIR LOSS MAY NEGATIVELY IMPACT
OUR
RESULTS FROM OPERATIONS
Our
ability to operate our businesses and implement our strategies depends, in
part,
on the efforts of our executive officers and other key employees particularly
Messrs. Duquette and Czikmantori. In addition, our future success will depend
on, among other factors, our ability to attract and retain qualified personnel,
particularly research professionals, technical sales professionals and
engineers. The loss of the services of any key employee or the failure to
attract or retain other qualified personnel could have a material adverse effect
on our business or business prospects.
WE
MAY BE EXPOSED TO PRODUCT LIABILITY AND WARRANTY CLAIMS
We
may be
exposed to product liability and warranty claims in the event that the use
of
our products results, or is alleged to result, in bodily injury and/or property
damage or our products actually or allegedly fail to perform as expected. While
we maintain insurance coverage with respect to certain liability claims, we
may
not be able to obtain such insurance on acceptable terms in the future, if
at
all, and any such insurance may not provide adequate coverage against product
liability claims. In addition, product liability claims can be expensive to
defend and can divert the attention of management and other personnel for
significant periods of time, regardless of the ultimate outcome. An unsuccessful
defense of a product liability claim could have an adverse affect on our
business, results of operations and financial condition and cash flows. Even
if
we are successful in defending against a claim relating to our products, claims
of this nature could cause our customers to lose confidence in our products
and
our company. Warranty claims are not covered by insurance, and we may incur
significant warranty costs in the future for which we would not be
reimbursed.
WE
RELY ON EXTERNAL FINANCING TO MEET OUR CASH REQUIREMENTS
In
February 2006, we received $300,000 from Motivated Minds and $3,500,000 in
debt
financing from CAMOFI. However we will continue to rely upon external financing
sources to meet the cash requirements of our ongoing operations. In the future,
we may be required to raise additional funds, particularly if we exhaust the
funds advanced under that agreement, are unable to generate positive cash flow
as a result of our operations and are required to repay the convertible
debentures as a result of Motivated Mind's and CAMOFI's failure to convert
the
debentures into common stock. To the extent that we are unable to raise
sufficient capital, our business plan will require substantial modification
and
our operations curtailed. These conditions raise substantial doubt about our
ability to continue as a going concern. Our continuation as a going concern
is
dependent upon our ability to ultimately attain profitable operations, generate
sufficient cash flow to meet our obligations, and obtain additional financing
as
may be required.
WE
MAY NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL, WHICH MAY RESULT IN
DILUTION TO YOUR OWNERSHIP AND VOTING RIGHTS IN US.
Based
upon our current cash reserves and forecasted operations, we may need to obtain
outside funding to implement our plan of operation over the next twelve months.
Our need for additional capital to finance our business strategy, operations,
and growth will be greater should, among other things, revenue or expense
estimates prove to be incorrect. If we fail to arrange for sufficient capital
in
the future, we may be required to reduce the scope of our business activities
until we can obtain adequate financing. We may not be able to obtain additional
financing in sufficient amounts or on acceptable terms when needed, which could
adversely affect our operating results and prospects and force us to curtail
our
business operations. Debt financing must be repaid regardless of whether or
not
we generate profits or cash flows from our business activities. Equity financing
may result in dilution to existing stockholders. If we do not receive funding
at
lower prices, this will have a dilutive effect on the value of our securities
issued at higher prices. Further, the sale, or potential sale of large amounts
of our securities will, in all likelihood, have a depressive effect on the
price
of our securities which will affect the value of your investment.
OUR
AUDITORS HAVE INCLUDED A GOING CONCERN MATTER IN THEIR
OPINION
Our
auditors opinion regarding our financial statements includes concerns about
our
ability to continue as a going concern, which contemplates among other things,
the realization of assets and satisfaction of liabilities in the normal course
of business. These concerns arise from the fact that as of March 31, 2007 we
had
a net loss of approximately $(11,000), and an accumulated deficit of
approximately $(7,819,000). These factors raise substantial doubt about our
ability to continue as a going concern. We intend to fund our operations through
anticipated increased sales. If we are unable to continue as a going concern,
you may lose your entire investment.
WE
MAY BE SUBJECT TO FINES, SANCTIONS AND/OR PENALTIES OF AN INDETERMINABLE NATURE
AS A RESULT OF POTENTIAL VIOLATIONS OF FEDERAL SECURITIES LAWS.
In
view
of the fact that we may have taken action subsequent to the filing of the
registration statement that may cause the private placement offering to CAMOFI
and Motivated Minds to be deemed to have not been completed at the time of
the
filing. These actions may be inconsistent with Section 5 of the Securities
Act
of 1933, as amended, and we may be subject to fines, sanctions and/or penalties
of an indeterminable nature as a result of potential violations of federal
securities laws. If we are assessed fines and penalties our business will be
materially affected and we may be forced to curtain our operations.
RISKS
RELATING TO OUR COMMON STOCK
IF
WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS
TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES
IN
THE SECONDARY MARKET.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As
a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.
OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR
STOCK.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, the rules require:
|
·
|
that
a broker or dealer approve a person's account for transactions in
penny
stocks; and
|
|
·
|
the
broker or dealer receive from the investor a written agreement to
the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
|
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
|
·
|
obtain
financial information and investment experience objectives of the
person;
and
|
|
·
|
make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the risks
of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
|
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
that
the
broker or dealer received a signed, written agreement from the investor prior
to
the transaction. Generally, brokers may be less willing to execute transactions
in securities subject to the "penny stock" rules. This may make it more
difficult for investors to dispose of our common stock and cause a decline
in
the market value of our stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
OUR
SHARE PRICE IS VOLATILE
Our
Common Stock has experienced, and may continue to experience, substantial price
volatility, particularly as a result of variations between our actual or
anticipated financial results and the published expectations of analysts and
as
a result of announcements by us and our competitors. In addition, the stock
market has experienced extreme price fluctuations that have affected the market
price of many companies and that have often been unrelated to the operating
performance of these companies. A major decline in the capital markets
generally, or in the market price of our securities may negatively impact our
ability to make future strategic acquisitions, raise capital, issue debt, or
retain employees. These factors, as well as general economic and political
conditions, may in turn have a material adverse effect the market price of
our
Common Stock.
RISKS
RELATING TO OUR CURRENT FINANCING ARRANGEMENT
THERE
ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES
MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As
of
March 31, 2007, we had 12,264,656 shares of common stock issued and outstanding,
approximately $2,695,000 of convertible notes outstanding that may be converted
into an estimated 4,277,778 shares of common stock and outstanding warrants
and
options to purchase 9,653,728 shares of common stock. All of the shares,
including the shares issuable upon conversion of the convertible notes, may
be
sold without restriction upon effectiveness of a registration statement which
includes those shares. The sale of these shares may adversely affect the market
price of our common stock.
THE
ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE NOTES AND EXERCISE OF
OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR
EXISTING STOCKHOLDERS.
The
issuance of shares upon conversion of the secured convertible notes and exercise
of warrants may result in substantial dilution to the interests of other
stockholders since the selling stockholders may ultimately convert and sell
the
full amount issuable on conversion. Although Motivated Minds or CAMOFI may
not
convert their secured convertible notes and/or exercise their warrants if such
conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent Motivated Minds
or
CAMOFI from converting and/or exercising and selling some of their holdings,
selling shares of common stock obtained and then converting further. In this
way, Motivated Minds or CAMOFI could sell more than this limit while never
holding more than this limit.
IF
WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES,
IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE
SALE
OF SUBSTANTIAL ASSETS.
In
February 28, 2006, we entered into a Securities Purchase Agreement for the
sale
of an aggregate of $3,500,000 principal amount of secured convertible notes.
The
secured convertible notes are due and payable, with 12% interest, three years
from the date of issuance, unless sooner converted into shares of our common
stock. In addition, any event of default such as our failure to repay the
principal or interest when due, our failure to issue shares of common stock
upon
conversion by the holder, our failure to timely file a registration statement
or
have such registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the secured convertible notes, including a
default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. If we were required
to repay the secured convertible notes, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the
notes
when required, the note holders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action
would
require us to curtail or cease operations.
IF
AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS,
INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In
connection with the Securities Purchase Agreements we entered into in February
2006, we executed a Security Agreement in favor of CAMOFI granting them a first
priority security interest in all of our goods, inventory, contractual rights
and general intangibles, receivables, documents, instruments, chattel paper,
and
intellectual property. The Security Agreement states that upon the occurrence
of
an event of default as defined in the Notes and pursuant to the Security
Agreement, the Investors have the right to take possession of the collateral,
to
operate our business and the business of our subsidiaries using the collateral,
and have the right to assign, sell, lease or otherwise dispose of and deliver
all or any part of the collateral, at public or private sale or otherwise to
satisfy our obligations under these agreements.
FORWARD-LOOKING
STATEMENTS
We
and
our representatives may from time to time make written or oral statements that
are "forward-looking," including statements contained in this prospectus and
other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements within the
meaning of the Act. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements.
We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a)
volatility or decline of our stock price;
(b)
potential fluctuation in quarterly results;
(c)
our
failure to earn revenues or profits;
(d)
inadequate capital and barriers to raising the additional capital or to
obtaining the financing needed to implement its business plans;
(e)
inadequate capital to continue business;
(f)
changes in demand for our products and services;
(g)
rapid
and significant changes in markets;
(h)
litigation with or legal claims and allegations by outside parties;
(i)
insufficient revenues to cover operating costs.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any proceeds
from the sale of shares of common stock in this offering.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
OVERVIEW
We
are
engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. We
provide rebuilt, retrofit and remanufacturing services for numerous brands
of
machine tools.
We
also
manufacture original equipment CNC large turning lathes and attachments under
the trade name Century Turn. CNC machines use commands from onboard computers
to
control the movements of cutting tools and rotation speeds of the parts being
produced. Computer controls enable operators to program operations such as
part
rotation, tooling selection and tooling movement for specific parts and then
store the programs in memory for future use. The machines are able to produce
parts while left unattended. Because of this ability, as well as superior speed
of operation, a CNC machine is able to produce the same amount of work as
several manually controlled machines, as well as reduce the number of operators
required; generating higher profits with less re-work and scrap. Since the
introduction of CNC tooling machines, continual advances in computer control
technology have allowed for easier programming and additional machine
capabilities. A vertical turning machine permits the production of larger,
heavier and more oddly shaped parts on a machine, which uses less floor space
when compared to the traditional horizontal turning machine because the spindle
and cam are aligned on a vertical plane, with the spindle on the bottom.
The
primary industry segments in which our machines are utilized to make component
parts are in aerospace, power generation turbines, military, component parts
for
the energy sector for natural gas and oil exploration, medical, aerospace and
mining fields. We sell our products to customers in the United States, Canada
and Mexico.
Over
the
last several years, we have designed and developed a large horizontal CNC
turning lathe with productivity features new to the metalworking industry.
We
believe that a potential market for the Century Turn Lathe, in addition to
the
markets mentioned above, is aircraft landing gear.
PLAN
OF OPERATIONS
Our
current strategy is to expand our customer sales base with our 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. The
Company's growth strategy also includes strategic acquisitions in addition
to
growing the current business. A significant acquisition will require additional
financing.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO MARCH 31,
2006.
Revenues.
The Company generated revenues of $3,185,469 for the three months ended March
31, 2007, which was a $1,485,622 or 87% increase from $1,699,847 for the three
months ended March 31, 2006. The increase is the result of an increase in sales
volume and higher selling prices of New Century machines due to a decrease
in
availability for competitive machines.
Gross
Profit. Gross profit for the three months ended March 31, 2007, was $1,185,239
or 37% of revenues, compared to $403,239, or 24% of revenues for the three
months ended March 31, 2006, a 194% increase. The increase in gross profit
is
due to the increased volume of sales and higher selling prices.
Operating
Income. Operating income for the three months ended March 31, 2007, was $465,966
compared to an operating loss of ($51,790) for the three months ended March
31,
2006. The increase of $517,756 or 1000% in operating income is primarily due
to
the increase in sales revenues.
Interest
Expense. Interest expense for the three months ended March 31, 2007, was
$465,241 compared with $395,828 for the three months ended March 31, 2006.
The
18% increase in interest expense is due to a full three months of amortization
in the first quarter of year 2007 compared with one and a half months in the
quarter ended March 31, 2006 of following items:
|
|
Approximately
$84,000 of interest expense on convertible
note;
|
|
|
Approximately
$292,000 of amortization of debt discounts from beneficial conversion
feature, warrants and a conversion
option;
|
|
|
Approximately
$90,000 of amortization of deferred financing costs related to warrants
and common stock granted to third parties as financing cost on convertible
note;
|
all
associated to $3.5 million convertible notes payable issued on February 15,
2006.
FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
The
net
cash increase of the Company during the three months ended March 31, 2007 was
$264,488. The increase is due to net cash provided by operating activities
of
$611,272, offset by $346,784 net cash used in financing activities, cash used
to
pay down the Company’s convertible notes.
For
the
three months ended March 31, 2007, the cash provided by operating activities
was
$611,272, compared with $788,046 cash used in operating activities in the
corresponding period from 2006. The increase in cash provided by operating
activities is a result of increased sales.
For
the
three months ended March 31, 2007, the cash used in financing activities was
$346,784, compared with $1,075,851 cash provided by financing activities in
the
three months ended March 31, 2006. The decrease of cash provided by financing
activities is primarily due to $3,800,000 of proceeds from the issuance of
two
convertible notes in 2006, compared to no cash proceeds from debt or equity
in
2007.
RESULTS
OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2006 COMPARED TO DECEMBER 31,
2005.
Revenues.
New Century generated revenues of $8,318,959 for the fiscal year ended December
31, 2006, which was a 38% increase from $6,038,459 for the fiscal year ended
December 31, 2005. The increase is the result of an increase in sales based
on
higher selling prices of New Century machines and less availability for
competitive machines.
Gross
Profit. There was a 10% increase in gross profit for the fiscal year ended
December 31, 2006, of $166,228, due to the increased volume of sales and higher
selling prices.
Net
Loss.
Net income decreased to a loss of ($1,051,744) for the fiscal year ended
December 31, 2006 compared to net income of $668,359 for the fiscal year ended
December 31, 2005. The decrease in net income is primarily attributed to
approximately $2,150,000 increase in interest including debt discount
amortization and a $910,074 increase in general and administrative expenses,
due
to bad debt expenses, legal expenses associated with SB2 filings, investor
relations cost, and penalties on late payments on accounts payable.
Interest
Expense. Interest expense for the fiscal year ending December 31, 2006 increased
to $2,363,187, compared to $215,827 for the period ended December 31, 2005.
The
increase of approximately $2.1 million is primarily the result of $1,320,522
debt discount amortization, $347,980 deferred financing cost, and $300,000
fair
value of 1.5 million warrants granted as a consideration for waiver of accrued
the liquidated damages, all related to $3.8 million convertible notes issued
in
the first quarter of 2006.
FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
Net
cash
increase during the fiscal year ended 2006 was $53,318. For the year ended
December 31, 2006, the cash provided from financing activities was $1,696,058,
compared with $44,730 used cash in financing activities in the prior year.
The
increase of cash provided by financing activities is primarily due to $3,800,000
proceeds from the issuance of two convertible notes in 2005, compared to no
cash
proceeds from debt or equity in 2005. No cash was used in or provided by
investing activities in 2005 or 2006.
Net
cash
used in operating activities increase from approximately $84,000 in 2005 to
approximately $1,643,000 in 2006. The increase is primarily due to principal
and
interest repayments on convertible debt. The Company` management believes that
the cash flow from operations will be sufficient to meet the Company` capital
needs.
The
Company does not foresee any adverse effects on its earnings as a result of
inflation or changing prices.
GOING
CONCERN
The
Company has an accumulated deficit of approximately $7,800,000. This condition,
among others, raises substantial doubt about the Company's ability to continue
as a going concern. The Company intends to fund operations through anticipated
increased sales along with debt and equity financing arrangements. 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.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the
amounts reported in our consolidated financial statements and the accompanying
notes. The amounts of assets and liabilities reported on our balance sheet
and
the amounts of revenues and expenses reported for each of our 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:
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," as amended 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 Securities and
Exchange Commission. Management believes that the Company's revenue recognition
policy for services and product sales conforms to SAB 101 amended by SAB 104.
The Company recognizes revenue of long-term contracts pursuant to SOP 81-1.
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.
Estimates
Critical
estimates made by management are, among others, deferred tax asset valuation
allowances, realization of inventories, collectibility of contracts receivable
and the estimating of costs for long-term construction contracts. Actual results
could differ from those estimates.
Classification
Of Warrant Obligation
In
connection with the issuance of the 12% Senior Secured Convertible Notes, the
Company has an obligation to file registration statements covering the
Registrable Securities underlying the warrants issued in connection with the
convertible note, as defined in the Amended and 2nd
Amended
Registration Rights Agreements. We evaluated the warrants in accordance with
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock”, and concluded that the warrants
meet all the criteria required to be classified as equity as of March 31,
2007.
Other
Significant Accounting Policies
Other
significant accounting policies not involving the same level of measurement
uncertainties as those discussed above, are nevertheless important to an
understanding of the financial statements. The policies related to consolidation
and loss contingencies require difficult judgments on complex matters that
are
often subject to multiple sources of authoritative guidance. Certain of these
matters are among topics currently under reexamination by accounting standards
setters and regulators. Although no specific conclusions reached by these
standards setters appear likely to cause a material change in our accounting
policies, outcomes cannot be predicted with confidence. Also see Note 1 of
Notes
to Consolidated Financial Statements, Summary of Significant Accounting
Policies, which discusses accounting policies that must be selected by
management when there are acceptable alternatives.
BUSINESS
SUMMARY
We
are
engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. We
provide rebuilt, retrofit and remanufacturing services for numerous brands
of
machine tools.
We
also
manufacture original equipment CNC large turning lathes and attachments under
the tradename Century Turn. CNC machines use commands from onboard computers
to
control the movements of cutting tools and rotation speeds of the parts being
produced. Computer controls enable operators to program operations such as
part
rotation, tooling selection and tooling movement for specific parts and then
store the programs in memory for future use. The machines are able to produce
parts while left unattended. Because of this ability, as well as superior speed
of operation, a CNC machine is able to produce the same amount of work as
several manually controlled machines, as well as reduce the number of operators
required; generating higher profits with less re-work and scrap. Since the
introduction of CNC tooling machines, continual advances in computer control
technology have allowed for easier programming and additional machine
capabilities. A vertical turning machine permits the production of larger,
heavier and more oddly shaped parts on a machine, which uses less floor space
when compared to the traditional horizontal turning machine because the spindle
and cam are aligned on a vertical plane, with the spindle on the
bottom.
The
primary industry segments in which our machines are utilized to make component
parts are in aerospace, power generation turbines, military, component parts
for
the energy sector for natural gas and oil exploration , medical, aerospace
and
mining fields.. We sell our products to customers in the United States, Canada
and Mexico.
Over
the
last four years, we have designed and developed a large horizontal CNC turning
lathe with productivity features new to the metalworking industry. We believe
that a potential market for the Century Turn Lathe, in addition to the markets
mentioned above, is aircraft landing gear.
We
are
also engaged in assembling sound-wall modules made from Quilite(R), a
lightweight, graffiti resistant concrete alternative used in freeway sound
barriers and in other sound absorbing structures and non-weight bearing
applications where privacy or screening is necessary.
Corporate
History
On
May
25, 2001, the Company entered into a merger with New Century Remanufacturing,
Inc. Pursuant to the merger, all of the outstanding shares of New Century
Remanufacturing, Inc., a California corporation, were exchanged for shares
of
the Company on a 1/833.33 basis. After the reverse merger, the Company changed
its name to New Century Companies, Inc.
PRODUCTS
Remanufactured
Machines
Our
machine tools services are provided to a variety of customers, where the machine
remanufacturing typically consists of replacing all components (CASTINGS),
realigning the machine, adding updated CNC capability, and electrical and
mechanical enhancements. Machines, which create circular products, are all
within the scope' of our machines' capabilities. Our machines (Horizontal
Turning Lathes, Vertical Turning Lathes, Vertical Boring Mills, and Horizontal
Boring Mills etc.) are used to manufacture jet-engine components; airplane
landing gear parts; power generation equipment; oil and gas production
components; construction materials; casks that store nuclear materials; and
bearings for windmills, turrets, guns, or torpedo tubes in submarines and ship
vessels and countless other parts.
The
machines take raw steel, which in its natural shape needs to be refined into
a
specific round part, and by utilizing a computer-directed tool, shapes the
steel
into very precise measurements. Once completed within two to four months, a
remanufactured machine becomes a "like new," state-of-the-art machine, which
often contains more iron ore and superior standards of strength than a new
machine, at a price substantially less than that of a new machine. We pass
these
savings on to our customers, which include such manufacturers as General
Electric Co., General Dynamics Corp., Siemens AG and Gardner Denver
Inc.
New
Machines (Century Turn)
We
manufacture original equipment under our "Century Turn" brand name. Century
Turn
products include, but are not limited to lathes and vertical boring mills.
These
machines are used to machine products such as landing gear and machine valve
bodies.
Growth
Strategy
Our
goal
is to become a leading provider of high precision Computer Numerically
Controlled turning centers through organic growth as well as through strategic
acquisitions
We
market
our products and services primarily through direct sales and independent
distributors throughout the U S Canada and Mexico. We also intend to advertise
our products and services in the industrial trade publications, industry trade
shows, and on the Internet. Our focus is also to increase the sales of our
proprietary "new" horizontal boring mills and remanufactured vertical boring
mills. Our "new" vertical boring mills are designed around our proprietary
tooling changer that allows the machinist to utilize a wider range of lighter
weight tooling heads increasing the efficiency precision and dependability
of
the machine and ultimately creating a superior and timely finished
product.
As
a
natural extension of our precision machine tool business, we plan to capitalize
on numerous opportunities in the fragmented machining industry by implementing
a
(vertical integration) roll-up strategy, where we could merge with and/or
acquire high precision large metal ring manufacturing companies. This strategy
is intended to attract the attention of the leading manufacturing companies
by
ramping up revenue and income. In addition to our organic growth strategies,
we
also plan to make tactical and accretive acquisitions.
MACHINE
TOOL INDUSTRY
We
manufacture both new and refurbished machines that are used across a variety
of
industries. These machines are sold to companies who produce various "round"
products and parts in different but extremely precise measurements, depending
on
the industry. These products can be anything from large jet engines, casks
that
store nuclear materials, bearings for windmills, turrets, guns, or torpedo
tubes
in submarines and ship vessels, and more. The machines take raw steel, which
in
its natural shape needs to be refined into a specific round part, and by
utilizing a computer-directed tool, shapes the steel into very precise
measurements.
Many
measurements must be so precise that when removing the metal, it must be round
within 1/10,000 of an inch (approximately the equivalent of splitting an average
hair 30 times). The machines must be able to repeatedly furnish these precise
measurements for its products. For example, a jet engine must be precise to
1/10,000 of an inch due to the speed at which it operates. The engine, when
in
use, is going over 10,000 revolutions per minute (rpms). If the engine itself
were not perfectly round, it would vibrate and could detach from the
aircraft.
We
service companies such as General Electric, Rolls Royce, Pratt & Whitney
(and all of these companies' respective sub-tier support contractors), who
are
manufacturers of the jet engines. These companies specify the dimensions and
we
employ our large machines to create the parts. We have larger machines, which
span approximately 25 feet in diameter, and are used primarily for the housings
that go around nuclear reactors on submarines or aircraft carriers.
Employees
At
May
23, 2007, we had approximately 40 full time employees working in the following
departments: shop, clerical, engineering and management.
None
of
our employees are represented by a labor union or covered by a collective
bargaining agreement. We have not experienced work stoppages and consider our
employee relations to be good. Our business is not highly automated and we
do
not outsource specialized, repetitive functions such as cash delivery and
security. As a result, our labor requirements for operation of the network
are
relatively modest.
DESCRIPTION
OF PROPERTY
We
lease
our headquarters in Santa Fe Springs, California, which expires on December
31,
2007, and conduct our operations at such facilities. We believe that our
facilities are in good condition and provide adequate capacity to meet our
needs
for the foreseeable future.
The
following table sets forth certain information relating to the Company's
principal facilities:
LOCATION
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|
PRINCIPAL
USES
|
|
APPROX
SQ. FT.
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9835
Santa Fe Springs Rd.
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|
|
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Santa
Fe Springs, CA 90670
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Manufacturing
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44,000
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LEGAL
PROCEEDINGS
We
may be
involved from time to time in various claims, lawsuits, disputes with third
parties, actions involving allegations of discrimination or breach of contract
actions incidental in the normal course of business operations. We are currently
not involved in any such litigation or any pending legal proceedings that
management believes could have a material adverse effect on our financial
position or results of operations.
MANAGEMENT
The
following table and text sets forth the names and ages of all directors and
executive officers of the Company and the key management personnel as of
December 31, 2006. The Board of Directors of the Company is comprised of only
one class. All of the directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. Executive officers
serve at the discretion of the Board of Directors, and are appointed to serve
until the first Board of Directors meeting following the annual meeting of
stockholders. Also provided is a brief description of the business experience
of
each director and executive officer and the key management personnel during
the
past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the Federal
securities laws.
NAME
|
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AGE
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POSITION
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David
Duquette Officer,
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63
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|
Chairman
of the Board, Chief Executive Officer,
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|
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Chief
Financial President and Director
|
|
|
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Josef
Czikmantori
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56
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|
Secretary
and Director
|
DAVID
DUQUETTE. Mr. Duquette has served as the Chairman of the Board, President,
Chief
Financial Officer and Director of the Company since May 25, 2001. Mr. Duquette
has been in the CNC machine tool manufacturing and remanufacturing business
since 1967. From 1962 to 1965, he studied Electrical Engineering at the
University of Wisconsin. Mr. Duquette founded New Century Remanufacturing in
1996. Prior to that year, he managed Orange Coast Rebuilding for approximately
8
years. Mr. Duquette was President of U.S. Machine Tools from 1969 to
1985.
JOSEF
CZIKMANTORI. Mr. Czikmantori has served as Secretary and Director of the Company
since May 25, 2001. Mr. Czikmantori was born in Romania. He completed 3 years
of
Technical College in Romania and then worked for United Machine Tool, which
manufactured metal cutting machinery. He joined Mr. David Duquette at Orange
Coast Machine Tools. He is a co-founder of New Century Remanufacturing.
Directors receive no compensation for serving on the Board of
Directors.
FAMILY
RELATIONSHIPS
There
are
no family relationships between or among the directors, executive officers
or
persons nominated or charged by the Company to become directors or executive
officers.
INVOLVEMENT
IN LEGAL PROCEEDINGS.
To
the
best of the Company's knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
CODE
OF ETHICS
The
Company management communicates values and ethical standards during company
wide
meetings. Such standards are outlined in the human resource manual of the
company, "Code of Business Practices and Ethics" section.
BOARD
COMMITTEES
Because
of our size, we presently do not have an audit committee, compensation committee
or nominating committee. We are currently in the process of identifying
independent audit committee members, including a financial expert and we expect
to continue this process in 2007.
EXECUTIVE
COMPENSATION
The
following Summary Compensation Table sets forth the compensation earned by
the
Company's Chief Executive Officer and the other executive officer who were
serving as such as of December 31, 2006, for services rendered in all capacities
for that fiscal year. There no other employees having responsibility for
significant policy decisions within the Company.
Name
and Principal
Position
|
|
Year
|
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Salary
($)
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|
Bonus ($)
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Option
Awards
(1)
($)
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All
Other
Compensation
($)
|
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Total
($)
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|
David
Duquette,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Chief
Executive Officer,
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|
|
2006
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155,000
|
|
|
0
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21,600
|
(2)
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0
|
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176,600
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|
Chief
Financial Officer
|
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|
2005
|
|
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101,273
|
|
|
0
|
|
|
0
|
|
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0
|
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101,273
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|
and
President
|
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2004
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180,000
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0
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0
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0
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180,000
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Josef
Czikmantory
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|
|
|
|
|
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|
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Vice
President,
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2006
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88,350
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0
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10,800
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0
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99,150
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|
Secretary
Officer
|
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2005
|
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25,650
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|
0
|
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0
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0
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25,650
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|
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2004
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76,950
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|
|
0
|
|
|
0
|
|
|
0
|
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76,950
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|
(1)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to
2006.
(2)
Mr.
David Duquette received a stock option grant of 1,000,000 shares on November
13,
2006 at an exercise price of $0.20 per share, none of which were vested and
exercisable as of December 31, 2006.
(3)
Mr.
Josef Czikmantory received a stock option grant of 500,000 shares on November
13, 2006 at an exercise price of $0.20 per share, none of which were vested
and
exercisable as of December 31, 2006.
2006
GRANTS OF PLAN-BASED AWARDS TABLE
|
|
|
|
Estimated Future Payouts Under
Equity
Incentive Plan Awards
|
|
Exercise or
Base
Price
of
Option
|
|
|
|
Grant
Date Fair
Value
of Stock and Option
|
|
Name
|
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Grant
Date
|
|
Threshold
($)
|
|
Target
($)
|
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Maximum
($)
|
|
Awards
($ / Sh)
|
|
Date
($ / Sh)
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|
Awards
($)
|
|
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|
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|
(1)
|
|
(2)
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|
(3)
|
|
|
|
|
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David
Duquette
|
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|
09/12/03
|
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72,000
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|
|
-
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100,000
|
|
|
0.25
|
|
|
-
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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11/13/06
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158,400
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158,400
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178,400
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0.20
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0.18
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0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Josef
Czikmantory
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09/12/03
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27,000
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-
|
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37,500
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0.25
|
|
|
-
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0.18
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
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|
|
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11/13/06
|
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79,200
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|
|
169,200
|
|
|
189,200
|
|
|
0.20
|
|
|
0.18
|
|
|
0.18
|
|
(1)
December 31, 2006 remaining compensation expense of options evaluated using
fair
value at grant date.
(2)
December 31, 2006 remaining compensation expense of options evaluated using
closing price on grant date.
(3)
December 31, 2006 unexercised options valued at exercise price of
options.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option
Awards
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
(1)
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
(2)
|
|
Equity
Incentive
Plan Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
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|
David
Duquette
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
400,000
|
|
|
0
|
|
|
0
|
|
|
0.25
|
|
|
09/12/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
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|
1,000,000
|
|
|
0
|
|
|
0.20
|
|
|
11/13/11
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Josef
Czikmantory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
0
|
|
|
0
|
|
|
0.25
|
|
|
09/12/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
500,000
|
|
|
0
|
|
|
0.20
|
|
|
11/13/11
|
|
(1)
These
options were fully vested as of December 31, 2006.
(2)
These
options will vest in one installment on December 1, 2007.
Pension
Benefits
We
do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We
do not
maintain any non-qualified defined contribution or deferred compensation
plans.
As
of
December 31, 2006 there is no long-term incentive plan.
The
Company has no employment agreements with its executive
officers.
STOCK
OPTIONS AND WARRANTS
Under
the
terms of the Company's Incentive Stock Option Plan ("ISOP"), options to purchase
an aggregate of 5,000,000 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.
During
the year ended December 31, 2006, the Company granted 2,000,000 stock options
under the terms of the Company's Incentive Stock Option Plan ("ISOP"). Also,
the
Company granted 6,371,455 warrants, related to financing activities or
consulting services.
The
following is a status of the stock options and warrants outstanding at December
31, 2006 and the changes during the two years then ended:
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Options
and
|
|
Weighted
|
|
Options
and
|
|
Average
|
|
|
|
Warrants
|
|
Average
Price
|
|
Warrants
|
|
Price
|
|
Outstanding,
beginning of year
|
|
|
1,468,500
|
|
$
|
0.40
|
|
|
1,711,583
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,371,455
|
|
$
|
0.48
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Terminated
|
|
|
(186,227
|
)
|
|
(0.87
|
)
|
|
(243,083
|
)
|
|
(9.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Outstanding, end of year
|
|
|
9,653,728
|
|
$
|
0.46
|
|
|
1,468,500
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
7,653,728
|
|
|
0.53
|
|
|
1,468,500
|
|
|
0.40
|
|
The
following table summarizes information related to stock options outstanding
at
December 31, 2006:
|
|
Equity
Compensation Plan Information
|
|
Number
Of Securities
Remaining
Available For
Future
Issuance Under
|
|
|
|
Number
Of Securities To Be
Issued
Upon Exercise Of
Outstanding
Options,
Warrants
And Rights
|
|
Weighted-Average
Exercise
Price Of
Outstanding
Options,
Warrants
And Rights
|
|
Equity
Compensation Plans
(Excluding
Securities Reflected
In
Column(A))
|
|
|
|
(A)
|
|
(B)
|
|
(C)
|
|
Equity
compensation plans approved by
|
|
|
|
|
|
|
|
|
|
|
security
holders
|
|
|
3,250,000
|
|
|
0.25
|
|
|
1,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved
|
|
|
|
|
|
|
|
|
|
|
by
security holders
|
|
|
6,403,728
|
|
|
0.57
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,653,728
|
|
|
0.46
|
|
|
1,750,000
|
|
From
time
to time, the Company issues warrants to employees and to third parties pursuant
to various agreements, which are not approved by the shareholders.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
As
of
December 31, 2006, the Company had loans to our officers for $525,402, including
accrued interest. The loans accrue interest at 6% and are due on demand. The
Company has reclassified the notes receivable from stockholders to stockholders'
equity as such amounts have not been repaid during the current year. The
stockholders have shown the ability to repay the loans and intend on repaying
such amounts in the future. For each of the years ended December 31, 2006 and
2005, total interest income from notes receivable from stockholders approximated
$20,000.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
|
HIGH
|
|
LOW
|
|
March
31
|
|
$
|
0.51
|
|
$
|
0.15
|
|
June
30
|
|
|
0.33
|
|
|
0.13
|
|
September
30
|
|
|
0.73
|
|
|
0.21
|
|
December
31
|
|
|
0.77
|
|
|
0.38
|
|
For
Year Ended 2006
|
|
HIGH
|
|
LOW
|
|
March
31
|
|
$
|
0.87
|
|
$
|
0.53
|
|
June
30
|
|
|
1.21
|
|
|
0.45
|
|
September
30
|
|
|
0.66
|
|
|
0.38
|
|
December
31
|
|
|
|
|
|
|
|
|
|
HIGH
|
|
LOW
|
|
March
31
|
|
$
|
0.48
|
|
$
|
0.20
|
|
We
have
not declared any cash dividends on our common stock since inception. Declaration
of dividends with respect to the common stock is at the discretion of our Board
of Directors. Any determination to pay dividends will depend upon the financial
condition, capital requirements, results of operations and other factors deemed
relevant by the Board of Directors.
At
December 31, 2006, we had approximately 1,500 shareholders of our common stock.
This figure does not include beneficial holders or common stockholder's nominee
co-trust name, as we cannot accurately estimate the number of these beneficial
holders.
The
transfer agent and registrar for our common stock is U.S. Stock Transfer, Los
Angeles, California.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the number of shares of common stock beneficially
owned as of December 31, 2005 by (i) those persons or groups known to the
Company who will beneficially own more than 5% of the Company's common stock;
(ii) each director and director nominee; (iii) each executive officer; and,
(iv)
all directors and executive officers as a group. The information is determined
in accordance with Rule 13(d)-3 promulgated under the Exchange Act based upon
information furnished by persons listed or contained in filings made by them
with the Securities and Exchange Commission by information provided by such
persons directly to the Company. Except as indicated below, the stockholders
listed possess sole voting and investment power with respect to their shares.
|
|
|
|
PERCENTAGE
|
|
NAME
OF BENEFICIAL OWNER
|
|
NO.
OF SHARES
|
|
OF
OWNERSHIP
|
|
David
Duquette
|
|
|
1,433,334
|
|
|
12
|
%
|
Josef
Czikmantori
|
|
|
650,000
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
Officers
and Directors as a Group (2 persons)
|
|
|
2,083,334
|
(2)
|
|
17
|
%
|
Based
on
12,264,656 shares outstanding. Common stock subject to options or warrants
that
are currently exercisable or exercisable within 60 days of December 31, 2006
are
deemed to be outstanding and to be beneficially owned by the holder thereof
for
the purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership
of
any other person.
(1)
Includes options to purchase 400,000 shares (ISOP) exercisable at a price of
$0.25 per share and which expire on September 12, 2008.
(2)
Includes options to purchase 150,000 shares (ISOP) exercisable at price of
$0.25
per share and which expire on September 12, 2008.
The
table
below sets forth information concerning the resale of the shares of common
stock
by the selling stockholders. We will not receive any proceeds from the resale
of
the common stock by the selling stockholders. We will receive proceeds from
the
exercise of the warrants. Assuming all the shares registered below are sold
by
the selling stockholders, none of the selling stockholders will continue to
own
any shares of our common stock.
The
following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common
stock
each person will own after the offering, assuming they sell all of the shares
offered.
Name
|
|
Beneficial
Ownership Before the Offering (1)
|
|
Percentage
of Common Stock Owned before the Offering (1)
|
|
Shares
of Common Stock Included in the Prospectus (2)
|
|
Beneficial
Ownership after the Offering(3)
|
|
Percentage
of Common Stock Owned after the Offering (3)
|
|
Motivated
Minds, LLC (4)
|
|
|
135,000
|
|
|
*
|
%
|
|
135,000
|
|
|
-0-
|
|
|
-0-
|
|
CAMOFI
Master LDC (5)
|
|
|
580,819
|
|
|
4.69
|
%
|
|
3,850,000
|
|
|
-0-
|
|
|
-0-
|
|
Ascendiant
Securities, LLC (6)
|
|
|
250,000
|
|
|
2.02
|
%
|
|
250,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
4,235,000
|
|
|
|
|
|
|
|
*Less
than 1%
(1)
Applicable percentage ownership is based on 12,364,656 shares of common stock
issued as of May 23, 2007. Beneficial ownership is determined in accordance
with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common stock
that are currently exercisable or exercisable within 60 days of May 23, 2007are
deemed to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership
of
any other person.
(2)
The
actual number of shares of common stock offered in this prospectus, and included
in the registration statement of which this prospectus is a part, includes
such
additional number of shares of common stock as may be issued or issuable upon
conversion of the convertible notes
(3)
Beneficial ownership after the offering assumes that all securities registered
will be sold and that all shares of common stock underlying outstanding warrants
will be issued.
(4)
Ira
Gaines, the Managing Member, holds final voting and investment power over
securities owned by Motivated Minds. Represents 30,000 shares of common stock
issued pursuant to the Series A Convertible Note and 105,000 shares of common
stock issued as consideration for extending the due date of the Series A
Convertible Note.
The
Selling Stockholder is not a registered broker-dealer under Section 15 of the
Securities Exchange Act of 1934, as amended.
(5)
Richard Smithline serves as a director of CAMOFI Master Fund LDC and holds
final
voting and investment power over securities owned by it. Represents 3,850,000
shares issuable for conversion of principal on 12% Senior Convertible Note
dated
February 28, 2006 (the “Senior Convertible Note”), representing approximately
33% of the outstanding stock in accordance with the Amended and Restated
Registration Rights Agreement dated December 19, 2006.The Selling Stockholder
is
not a registered broker-dealer under Section 15 of the Securities Exchange
Act
of 1934, as amended.
(6)
Includes 250,000 shares of common stock received as compensation for placement
agency services in connection with the CAMOFI Purchase Agreement. Bradley J
Wilhite, the Managing Director, holds final voting and investment power over
the
securities owned by the Selling Stockholder.
Ascendiant
Securities, LLC is a registered broker-dealer under Section 15 of the Securities
Exchange Act of 1934, as amended.
The
number of shares included in this prospectus was determined by the Company
and
the Selling Shareholders through arms length discussions. The Company has
consistently made payments of principal and interest to CAMOFI and as of March
31, 2007 has repaid approximately $1,204,000 in principal and interest. The
Company continues to make payments to CAMOFI and currently intends to repay
the
entire principal balance on the CAMOFI Note. While the CAMOFI Note is
convertible at the option of CAMOFI, based upon the conversion price and the
current market price of the Company’s common stock, the Company has made a good
faith estimate of the maximum number of shares it believes will be converted
into shares of the Company’s common stock and accordingly is including 4,235,000
shares of its common stock in this prospectus to allow for conversions under
the
CAMOFI Note. The Company is also including shares of common stock issued to
Ascendiant Securities for placement agent services in connection with the CAMOFI
Note and shares issued to Motivated Minds in connection with the Convertible
Note.
DESCRIPTION
OF SECURITIES
COMMON
STOCK
The
authorized capital stock of the Company includes 50,000,000 shares of $.10
par
value Common Stock. All shares have equal voting rights. Voting rights are
not
cumulative, and, therefore, the holders of more than 50% of the Common Stock
of
the Company could, if they chose to do so, elect all of the
Directors.
Upon
liquidation, dissolution or winding up of the Company, the assets of the
Company, after the payment of liabilities and any distributions to the holders
of outstanding shares of Series C Convertible Preferred Stock, will be
distributed pro rata to the holders of the Common Stock. The holders of the
Common Stock do not have preemptive rights to subscribe for any securities
of
the Company and have no right to require the Company to redeem or purchase
their
shares.
Holders
of Common Stock are entitled to share equally in dividends when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor. The Company has not paid any cash dividends on its Common
Stock, and it is unlikely that any such dividends will be declared in the
foreseeable future.
PREFERRED
STOCK
The
Company has authority to issue 15,075,000 shares of preferred stock, $1.00
par
value and 75,000 shares of preferred stock, $25 par value. The preferred stock
may be issued in series from time to time with such designation, rights,
preferences and limitations as the Board of Directors of the Company may
determine by resolution. The rights, preferences and limitations of separate
series of preferred stock may differ with respect to such matters as may be
determined by the Board of Directors, including, without limitation, the rate
of
dividends, method and nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions (if any), conversion
rights (if any), and voting rights. The potential exists, therefore, that
preferred stock might be issued which would grant dividend preferences and
liquidation preferences to preferred shareholders. Unless the nature of a
particular transaction and applicable statutes require such approval, and
subject to the required approval of the Series C Preferred Stockholders for
issuances of preferred stock which has liquidation or dividend rights senior
to
theirs, the Board of Directors has the authority to issue these shares without
shareholder approval. The issuance of preferred stock may have the affect of
delaying or preventing a change in control of the Company without any further
action by shareholders.
SERIES
B CONVERTIBLE PREFERRED STOCK
The
authorized capital stock of the Company includes 15,150,000 shares of preferred
stock of which 15,000,000 shares were designated as Series B 5% Convertible
Preferred Stock. Holders of the Preferred Shares will receive, when and if
declared by the Board of Directors, a dividend of $1.25 share per annum payable
semi-annually in cash. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of the
Series B Convertible Preferred Stock are entitled to receive out of the assets
of the Company available for distribution to its stockholders, before any
payment or distribution shall be made on the Common Stock or on the shares
of
the Series D Preferred Stock, an amount per share equal to $25.00. The holders
of Series B Convertible Preferred Stock have no voting rights except that any
change to the rights, preference and privilege thereof requires the approval
of
2/3 in liquidation amount of the holders .Each share of the Series B Convertible
Preferred Stock may be converted at any time into 16.667 shares of the Company's
Common Stock. The Conversion Ratio will be subject to adjustment in the event
of
a stock split of, stock dividend on, or a subdivision, combination or
recapitalization of the Common Stock.
The
authorized capital stock of the Company includes 15,150,000 shares of preferred
stock of which 75,000 shares were designated as Series C 5% Convertible
Preferred Stock. Holders of the Preferred Shares will receive, when as and
if
declared by the Board of Directors, a dividend of $1.25 share per annum payable
semi-annually in cash. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of the
Series C Convertible Preferred Stock are entitled to receive out of the assets
of the Company available for distribution to its stockholders, before any
payment or distribution shall be made on the Common Stock or on the shares
of
the Series C Preferred Stock, an amount per share equal to $25.00. The holders
of Series C 5% Convertible Preferred Stock have no voting rights except that
any
change to the rights, preference and privilege thereof requires the approval
of
2/3 in liquidation amount of the holders .
Each
share of the Series C Convertible Preferred Stock may be converted at any time
into 16.667 shares of the Company's Common Stock representing a Common Stock
purchase price of $1.50 per share. The Conversion Ratio will be subject to
adjustment in the event of a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. The Preferred
Shares will be subject to mandatory conversion on the effective date of the
registration statement covering the resale of the Common Shares.
SERIES
D 5% CONVERTIBLE PREFERRED STOCK
The
authorized capital stock of the Company includes 15,150,000 shares of preferred
stock of which 75,000 shares were designated as Series D 5% Convertible
Preferred Stock. Subject to Delaware law, holders of the Preferred Shares will
receive a dividend of $1.25 share per annum payable semi-annually in cash
provided that no payment may be made unless and until all dividends accrued
on
the Series C Preferred Stock have been paid. In the event of any voluntary
or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, the holders of the Series D Convertible Preferred Stock are entitled
to
receive out of the assets of the Company available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Stock (but only after payment on the Series C Preferred Stock), an amount per
share equal to $25.00. The holders of Series D 5% Convertible Preferred Stock
have the right to vote with the holders of the Common Stock on all matters
on an
as converted basis voting rights except that any change to the rights,
preference and privilege thereof will require the approval of 2/3 in liquidation
amount of the holders.
Each
share of the Series D Convertible Preferred Stock may be converted at any time
into 50 shares of the Company's Common Stock representing a Common Stock
purchase price of $.50 per share. The Conversion Ratio will be subject to
adjustment in the event of a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. Additionally,
the Conversion Ratio will be adjusted if the Company in the future issues shares
of Common Stock below $.50 or securities convertible into Common Stock with
an
exercise conversion price per share below $.50. Any adjustment will be on a
"weighted average" basis. The Preferred Shares will be subject to mandatory
conversion on the effective date of the registration statement covering the
resale of the Common Shares. The holders of the Series D Convertible Preferred
Stock will share ratably with the holders of the Series C Preferred Stock upon
liquidation, dissolution or winding up of the affairs of the
Company.
COMMON
STOCK PURCHASE WARRANTS
We
currently have 6,403,728 common stock purchase warrants outstanding. The common
stock purchase warrants are each exercisable into one share of common stock
at
the holder's option at various exercise prices and for various periods of
duration.
TRANSFER
AGENT
Our
transfer agent is US Stock Transfer Corporation and their telephone number
is
(818) 502-1404.
PLAN
OF DISTRIBUTION
Each
Selling Stockholder and any of their pledgees, assignees and
successors-in-interest selling shares received from the named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be a selling
stockholder) may sell the common stock offered by this prospectus from time
to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise,
at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. These sales may be at fixed or negotiated prices. A Selling
Stockholder may use any one or more of the following methods when selling
shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits Purchaser;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales entered into after the date of this prospectus;
|
|
·
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of
sale;
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
Selling Stockholder does not expect these commissions and discounts relating
to
its sales of shares to exceed what is customary in the types of transactions
involved.
In
connection with the sale of our common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the Common Stock.
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
Selling Stockholders may be deemed to be "underwriters" within the meaning
of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be
sold
under Rule 144 rather than under this prospectus. Each Selling Stockholder
has
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the Selling
Stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our common stock for a period of two business
days prior to the commencement of the distribution. In addition, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of our common stock by the Selling
Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
LEGAL
MATTERS
Sichenzia
Ross Friedman Ference LLP, New York, New York will issue an opinion with respect
to the validity of the shares of common stock being offered hereby.
EXPERTS
Squar,
Milner, Peterson, Miranda & Williamson, LLP has audited, as set forth
in their report thereon appearing elsewhere herein, our financial statements
as
of December 31, 2006, and for the years ended December 31, 2006 and 2005 that
appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the auditors' opinion based
on
their expertise in accounting and auditing.
AVAILABLE
INFORMATION
We
have
filed a registration statement on Form SB-2 under the Securities Act of 1933,
as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of our company filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance
with
the rules and regulations of the Securities and Exchange Commission. We are
subject to the informational requirements of the Securities Exchange Act of
1934
that require us to file reports, proxy statements and other information with
the
Securities and Exchange Commission. Such reports, proxy statements and other
information may be inspected at public reference facilities of the SEC at 100
F
Street N.E., Washington D.C. 20549. Copies of such material can be obtained
from
the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates. The public could obtain
information on the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State
of
Delaware, that our directors or officers shall not be personally liable to
us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation,
as
amended, are necessary to attract and retain qualified persons as directors
and
officers. Our By Laws also provide that the Board of Directors may also
authorize us to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, or otherwise, we have
been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
of
1933 and is, therefore, unenforceable.
Audited
Financial Statements for the Years ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
|
|
Consolidated
Balance Sheet as of December 31, 2006
|
|
F-3
|
|
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006 and
2005
|
|
F-4
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity (Deficit) for the years ended
December
31, 2006 and 2005
|
|
F-5
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006 and
2005
|
|
F-6
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
|
|
|
|
|
Interim
Financial Statements for the Three Month Periods ended March 31,
2007 and
2006 (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2007
(Unaudited)
|
|
F-37
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three months ended
March 31,
2007 and 2006 (Unaudited)
|
|
F-38
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31,
2007 and 2006 (Unaudited)
|
|
F-39
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
F-40
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
New
Century Companies, Inc. and Subsidiary
We
have
audited the accompanying consolidated balance sheet of New Century Companies,
Inc. and Subsidiary (the "Company") as of December 31, 2006, and the related
consolidated statements of operations, stockholders’ equity (deficit) and cash
flows for each of the two years in the period ended December 31, 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
was not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit includes consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of New Century Companies,
Inc.
and Subsidiary as of December 31, 2006, and the results of their operations
and
their cash flows for each of the two years in the period ended December 31,
2006
in conformity with accounting principles generally accepted in the United States
of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has an accumulated deficit of
approximately $7,808,000 and a history of losses from operations. These factors,
among others, raise substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans regarding these matters are also described
in Note 1. The accompanying consolidated financial statements do not include
any
adjustments that might result from the outcome of this uncertainty.
/s/
SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
March
12,
2007
Newport
Beach, California
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
|
CONSOLIDATED
BALANCE SHEET
|
December
31, 2006
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
|
$
|
53,318
|
|
Restricted
cash
|
|
|
123,898
|
|
Contracts
receivable
|
|
|
303,561
|
|
Inventories,
net
|
|
|
1,120,182
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
1,160,668
|
|
Deferred
financing costs, net
|
|
|
358,293
|
|
Prepaid
expenses and other current assets
|
|
|
20,205
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,140,125
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
285,088
|
|
Deferred
Financing Costs
|
|
|
418,009
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,843,222
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Bank
overdraft
|
|
|
18,772
|
|
Accounts
payable and accrued expenses
|
|
|
1,191,460
|
|
Dividends
payable
|
|
|
362,800
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
452,911
|
|
Notes
payable
|
|
|
48,000
|
|
Convertible
notes payable, net of discounts
|
|
|
332,556
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,406,499
|
|
|
|
|
|
|
Convertible
Notes Payable, net of discounts
|
|
|
273,000
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
Cumulative,
convertible, Series B preferred stock, $1 par value,
|
|
|
|
|
15,000,000
shares authorized, no shares issued and outstanding
|
|
|
|
|
(liquidation
preference of $25 per share)
|
|
|
-
|
|
Cumulative,
convertible, Series C preferred stock, $1 par value,
|
|
|
|
|
75,000
shares authorized, 27,780 shares issued and outstanding
|
|
|
|
|
(liquidation
preference of $933,000)
|
|
|
27,780
|
|
Cumulative,
convertible, Series D preferred stock, $25 par value,
|
|
|
|
|
75,000
shares authorized, 11,640 shares issued and outstanding
|
|
|
|
|
(liquidation
preference of $416,000)
|
|
|
291,000
|
|
Common
stock, $0.10 par value, 50,000,000 shares authorized;
|
|
|
|
|
11,714,654
shares issued and outstanding
|
|
|
1,171,466
|
|
Subscriptions
receivable
|
|
|
(462,500
|
)
|
Notes
receivable from stockholders
|
|
|
(525,402
|
)
|
Deferred
consulting fees
|
|
|
(333,069
|
)
|
Additional
paid-in capital
|
|
|
8,802,564
|
|
Accumulated
deficit
|
|
|
(7,808,116
|
)
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
1,163,723
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
3,843,222
|
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Years Ended December 31, 2006 and
2005
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CONTRACT
REVENUES
|
|
$
|
8,318,957
|
|
$
|
6,038,459
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
6,437,761
|
|
|
4,323,489
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,881,196
|
|
|
1,714,970
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Consulting
and other compensation
|
|
|
520,346
|
|
|
579,921
|
|
Salaries
and related
|
|
|
351,410
|
|
|
218,249
|
|
Selling,
general and administrative
|
|
|
1,260,861
|
|
|
350,787
|
|
TOTAL
OPERATING EXPENSES
|
|
|
2,132,617
|
|
|
1,148,957
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
(251,421
|
)
|
|
566,013
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
Gain
(loss) on forgiveness of debt
|
|
|
41,595
|
|
|
318,973
|
|
Change
in fair value of derivative liability
|
|
|
1,494,761
|
|
|
-
|
|
Interest
income
|
|
|
27,308
|
|
|
|
|
Interest,
including debt discount amortization
|
|
|
(2,363,187
|
)
|
|
(215,827
|
)
|
|
|
|
|
|
|
|
|
TOTAL
OTHER INCOME (EXPENSES)
|
|
|
(799,523
|
)
|
|
103,146
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION FOR
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
(1,050,944
|
)
|
|
669,159
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
800
|
|
|
800
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(1,051,744
|
)
|
$
|
668,359
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
|
|
$
|
(848,669
|
)
|
$
|
512,059
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) applicable to common
stockholders
|
|
|
|
|
|
|
|
per
common share
|
|
$
|
(0.07
|
)
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) applicable to common
stockholders
|
|
|
|
|
|
|
|
per
common share
|
|
$
|
(0.07
|
)
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
11,332,289
|
|
|
9,186,987
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
11,332,289
|
|
|
9,836,987
|
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
|
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT)
|
For
the Years Ended December 31, 2006 and
2005
|
|
|
Conversion
of
Preferred
Stock,
Series
B
|
|
Preferred
Stock,
Series
C
|
|
Preferred
Stock,
Series
D
|
|
Common
Stock
|
|
Additional
Paid
In
|
|
Notes
Receivable
From
|
|
Deferred
|
|
Subscriptions
|
|
(Accumulated
|
|
Total
Stockholders'
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stockholders
|
|
Compensation
|
|
Receivable
|
|
Deficit)
|
|
(Deficit)
|
|
Balance,Janaury
1, 2005
|
|
|
-
|
|
$
|
-
|
|
|
60,780
|
|
$
|
60,780
|
|
|
23,640
|
|
$
|
591,000
|
|
|
7,292,265
|
|
$
|
729,227
|
|
$
|
4,060,974
|
|
$
|
(485,924
|
)
|
$
|
(8,333
|
)
|
$
|
(462,500
|
)
|
$
|
(7,471,506
|
)
|
$
|
(2,986,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with debt extention
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
250,000
|
|
|
25,000
|
|
|
22,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47,500
|
|
Isssuance
of common stock for consulting services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,050,000
|
|
|
105,000
|
|
|
414,000
|
|
|
-
|
|
|
(519,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Isssuance
of common stock as a penalty for not registering preferred
shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
300,000
|
|
|
30,000
|
|
|
60,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
90,000
|
|
Issuance
of common stock in connection with legal settlment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
10,000
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
Accrued
dividends payable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(156,300
|
)
|
|
(156,300
|
)
|
Issuance
of common stock in connection with the conversion of preferred
stock
|
|
|
-
|
|
|
-
|
|
|
(31,800
|
)
|
|
(31,800
|
)
|
|
-
|
|
|
-
|
|
|
530,001
|
|
|
53,000
|
|
|
(21,200
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of common stock in connection with the conversion of preferred
stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,000
|
)
|
|
(300,000
|
)
|
|
600,000
|
|
|
60,000
|
|
|
240,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of common stock in connection with settlement of debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
50,000
|
|
|
260,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
310,000
|
|
Issuance
of common stock in connection with settlement of accounts
payable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
7,500
|
|
|
39,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
46,500
|
|
Amortization
of deferred consulting fees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
272,616
|
|
|
-
|
|
|
-
|
|
|
272,616
|
|
Interest
on notes receivable from stockholders
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,715
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,715
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
668,359
|
|
|
668,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
28,980
|
|
|
28,980
|
|
|
11,640
|
|
|
291,000
|
|
|
10,697,266
|
|
|
1,069,727
|
|
|
5,085,274
|
|
|
(505,639
|
)
|
|
(254,717
|
)
|
|
(462,500
|
)
|
|
(6,959,447
|
)
|
|
(1,707,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isssuance
of common stock for consulting services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325,000
|
|
|
32,500
|
|
|
(167,750
|
)
|
|
|
|
|
146,936
|
|
|
|
|
|
-
|
|
|
11,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock in connection with convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
3,000
|
|
|
6,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Features and Other Debt Discounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants for financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock for interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,318
|
|
|
26,932
|
|
|
143,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,500
|
|
|
|
|
|
(127,500
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for extension of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
|
10,500
|
|
|
37,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
25,000
|
|
|
132,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Preferred Stock
|
|
|
|
|
|
|
|
|
(1,200
|
)
|
$
|
(1,200
|
)
|
|
|
|
|
|
|
|
20,000
|
|
|
2,000
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,012
|
|
|
|
|
|
|
|
|
219,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants for waiver of liquidated damages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Based Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
|
|
(316,800
|
)
|
|
|
|
|
|
|
|
43,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Preferred Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,075
|
|
|
203,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on Notes Receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,763
|
)
|
|
|
|
|
|
|
|
|
|
|
(19,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants for financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Misc.
Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,070
|
|
|
1,807
|
|
|
(1,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,051,744
|
)
|
|
(1,051,744
|
)
|
Balance,
December 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
27,780
|
|
$
|
27,780
|
|
|
11,640
|
|
$
|
291,000
|
|
|
11,714,654
|
|
$
|
1,171,466
|
|
$
|
8,802,564
|
|
$
|
(525,402
|
)
|
$
|
(333,069
|
)
|
$
|
(462,500
|
)
|
$
|
(7,808,116
|
)
|
$
|
1,163,723
|
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Years Ended December 31, 2006 and
2005
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,051,744
|
)
|
$
|
668,359
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
146,563
|
|
|
194,300
|
|
Gain
on settlement of legal dispute
|
|
|
-
|
|
|
(275,000
|
)
|
Gain
on forgiveness of accounts payable
|
|
|
-
|
|
|
(102,597
|
)
|
Gain
on forgiveness of notes payable
|
|
|
-
|
|
|
(216,375
|
)
|
Gain
on forgiveness of debt from waiver of liquidated damages
|
|
|
259,185
|
|
|
-
|
|
Stock
issued for interest expense
|
|
|
170,250
|
|
|
-
|
|
Stock
options grants
|
|
|
43,200
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
1,320,522
|
|
|
47,500
|
|
Amortization
of deferred consulting fees
|
|
|
236,435
|
|
|
272,616
|
|
Amortization
of deferred financing cost
|
|
|
347,988
|
|
|
-
|
|
Bad
debt expense (credit)
|
|
|
115,158
|
|
|
(5,334
|
)
|
Derivative
liability expense (income)
|
|
|
(1,494,761
|
)
|
|
-
|
|
Estimated
fair market value of common stock issued for
|
|
|
|
|
|
|
|
consulting
services and related change in fair value
|
|
|
(19,987
|
)
|
|
-
|
|
Estimated
fair market value of common stock issued for
|
|
|
|
|
|
|
|
partial
legal settlement
|
|
|
-
|
|
|
20,000
|
|
Interest
income on notes receivable from stockholders
|
|
|
(19,763
|
)
|
|
(19,715
|
)
|
Estimated
fair market value of common stock issued for
|
|
|
|
|
|
|
|
penalty
on failure to register convertible preferred stock
|
|
|
-
|
|
|
90,000
|
|
Other
|
|
|
45,985
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Contracts
receivable
|
|
|
(151,150
|
)
|
|
(554,368
|
)
|
Inventories
|
|
|
(191,235
|
)
|
|
51,295
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(742,913
|
)
|
|
(165,923
|
)
|
Prepaid
expenses and other current assets
|
|
|
(50,380
|
)
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
(557,620
|
)
|
|
169,887
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(48,473
|
)
|
|
(259,002
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,642,740
|
)
|
|
(84,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
(8,877
|
)
|
|
27,649
|
|
Proceeds
of issuance of notes payable
|
|
|
3,800,000
|
|
|
-
|
|
Restricted
cash
|
|
|
(123,898
|
)
|
|
-
|
|
Payment
of financing costs
|
|
|
(422,500
|
)
|
|
-
|
|
Principal
payments on notes payable
|
|
|
(1,548,667
|
)
|
|
-
|
|
Principal
repayments on obligations under capital lease
|
|
|
-
|
|
|
(72,379
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
1,696,058
|
|
|
(44,730
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
53,318
|
|
|
(129,087
|
)
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
-
|
|
|
129,087
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
53,318
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
discount on note payable extension
|
|
$
|
10,500
|
|
$
|
47,500
|
|
|
|
|
|
|
|
|
|
BCF
and Debt discount on convertible notes payable
|
|
$
|
3,843,300
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Accrued
cumulative dividends on preferred stock
|
|
$
|
84,800
|
|
$
|
156,300
|
|
|
|
|
|
|
|
|
|
Cumulative
preferred dividends waived
|
|
$
|
287,875
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Accrued
deffered financing cost
|
|
$
|
60,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock
|
|
$
|
2,000
|
|
$
|
331,800
|
|
|
|
|
|
|
|
|
|
Common
stock issued for settlement of notes payable
|
|
$
|
-
|
|
$
|
310,000
|
|
|
|
|
|
|
|
|
|
Common
stock issued for settlement of accounts payable
|
|
$
|
-
|
|
$
|
46,500
|
|
|
|
|
|
|
|
|
|
Reclassification
of warrant liability to equity
|
|
$
|
695,239
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Common
stock and warrants issued for deferred financing cost
|
|
$
|
641,790
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Equipment
acquired in legal settlement
|
|
$
|
-
|
|
$
|
275,000
|
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
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 is engaged in acquiring, re-manufacturing and selling
pre-owned Computer Numerically Controlled (CNC) machine tools to manufacturing
customers. The Company provides rebuilt, retrofit and remanufacturing services
for numerous brands of machine tools. It also manufactures original equipment
CNC large turning lathes and attachments under the trade name Century Turn.
CNC
machines use commands from onboard computers to control the movements of
cutting
tools and rotation speeds of the parts being produced.
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 trades on the Over-the-Counter Bulletin Board under the symbol
“NCNC.OB.”
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. The Company has an accumulated deficit of approximately
$7,808,000 and a history of operating losses. These factors, among others,
raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to fund operations through anticipated increased sales
along
with 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, 2007. 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
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Going
Concern (continued)
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.
During
2006, the Company entered into an agreement with one of its creditors,
whereby the creditor agreed to waive liquidated damages totaling $582,500
in
exchange for 1.5 million warrants valued at $300,000 (using the Black Scholes
option pricing model). In addition, during 2006 the Company settled with
several
vendors and was able to obtain reductions (generally 50%) in the amounts
due to
those specific vendors. This transaction resulted in a credit to earnings
of
approximately $42,000. As a result, the consolidated statement of operations
includes a net gain on forgiveness of debt of approximately $42,000 and $319,000
for 2006 and 2005, respectively.
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 had approximately $93,000 uninsured bank balances at
December 31, 2006, and none at December 31, 2005.
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 contract 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, 2006, sales to four customers approximated 53%
of
net sales. No other single customer net sales were more than 10% for the
year
ended December 31, 2006. Management reviews the collectibility of contracts
receivables periodically and believes that the allowance for doubtful
accounts at December 31, 2006 of approximately $115,000 is
adequate.
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.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
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, 2006.
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, 2006, the Company had inventory reserves approximating
$286,000.
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. For the years ended December 31, 2006
and
2005, the Company incurred depreciation expense of approximately $147,000
and $194,000, respectively.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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”). 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, 2006.
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.
Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" 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 on 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) are classified as a current asset.
Amounts billed in excess of costs and revenue earned (over billings) are
classified as a current liability.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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." Shipping and handling fees and costs incurred by
the
Company are immaterial to the operations of the Company and are included
in cost
of sales.
In
accordance with Statements of Financial Accounting Standards ("SFAS") No.
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.
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, 2006 and 2005, the warranty obligation was immaterial to the accompanying
consolidated balance sheets.
Advertising
The
Company expenses the cost of advertising when incurred as selling expense
in the
accompanying consolidated statements of operations. Advertising expenses
were
approximately $38,000 and $0 for the years ended December 31, 2006 and 2005,
respectively.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Income
Taxes
Income
taxes are accounted for in accordance with Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes
(“SFAS
109”). This statement requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases
of
the Company’s assets and liabilities result in a deferred tax asset,
SFAS 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such assets. A valuation allowance related
to a
deferred tax asset is recorded when it is more likely than not that some
portion
or all of the deferred tax asset will not be realized. A full valuation
allowance for deferred tax assets has been provided at December 31, 2006.
The valuation allowance approximate $4,527,000 at December 31, 2006 (See
Note
7).
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Basic
and Diluted Income (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
2,455,224 and 650,000 additional potential common shares at December 31,
2006
and 2005, respectively. Under the if-converted method, there were 6,072,358
additional potential common shares at December 31, 2006 and none at December
31,
2005.
Basic
net
earning (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
net
income (loss) per share is computed by dividing net loss by the weighted
average
number of common shares and dilutive common stock equivalents outstanding
for
each respective year. Common stock equivalents, representing convertible
Preferred Stock, convertible debt, options and warrants totaling approximately
6,026,490 and 6,403,728 shares at December 31, 2006 are not included in the
diluted loss per share as they would be anti-dilutive. Accordingly, diluted
and
basic loss per share are the same for 2006.
At
December 31, 2005 common stock equivalents which are not included in the
diluted
loss per share, representing convertible Preferred Stock, convertible debt,
options and warrants totaled 1,065,000 and 168,500.
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.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123-R,
"Share-Based Payment," ("SFAS No. 123-R"). SFAS No. 123-R requires employee
stock options and rights to purchase shares under stock participation plans
to
be accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the award. The
Company
previously accounted for awards granted under its equity incentive plan under
the intrinsic value method prescribed by Accounting Principles Board Opinion
No.
25, "Accounting for Stock Issued to Employees," and related interpretations,
and
provided the required pro forma disclosures prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended. The exercise price
of
options is generally equal to the market price of the Company's common stock
(defined as the closing price as quoted on the Over-the-Counter Bulletin
Board
administered by Nasdaq) on the date of grant. Accordingly, $43,200 share-based
compensation was recognized in the financial statements for the year ended
December 31, 2006.
Under
the
modified prospective method of adoption for SFAS No. 123-R, the compensation
cost recognized by the Company beginning January 1, 2006 includes compensation
cost for all equity incentive awards granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123-R. The Company had no equity incentive awards granted prior
to
January 1, 2006 that were not yet vested.
From
time
to time, the Company's Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone
basis
outside of any of the Company's formal stock plans. The terms of these grants
are individually negotiated and generally expire within five years from the
grant date.
Under
the
terms of the Company's 2000 Stock Option Plan, options to purchase an aggregate
of 5,000,000 shares of common stock may be issued to officers, key employees
and
consultants of the Company. The exercise price of any option generally may
not
be less than the fair market value of the shares on the date of grant. The
term
of each option generally may not be more than five years.
On
November 13, 2006, the Company granted 2,000,000 options to keys employees.
At
December 31, 2006, the Company had 1,750,000 options available for future
issuance under their equity compensation plans.
The
effects of share-based compensation resulting from the application of SFAS
No.
123-R to options granted outside of the Company's Stock Option Plan resulted
in
approximately $43,000 expense for the year ended December 31, 2006.
Share-based compensation recognized as a result of the adoption of SFAS No.
123-R as well as pro forma disclosures according to the original provisions
of
SFAS No. 123
for
periods prior to the adoption of SFAS No. 123-R use the Black Scholes option
pricing model for estimating fair value of options granted.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Stock
Based Compensation (continued)
In
accordance with SFAS No. 123-R, the Company’s policy is to adjust share-based
compensation on a quarterly basis for changes to the estimate of expected
award
forfeitures based on actual forfeiture experience. The effect of adjusting
the
forfeiture rate for all expense amortization after December 31, 2006 is
recognized in the period the forfeiture estimate is changed.
At
December 31, 2006, the Company estimated (using the Black Scholes pricing
model)
the fair value of options granted and no variance has been found. Therefore,
the
effect of forfeiture adjustments at the period ended December 31, 2006 was
not
applicable.
Options
outstanding that have vested and are expected to vest as of December 31,
2006
are as follows:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
in Years
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Vested
|
|
|
1,250,000
|
|
$
|
0.32
|
|
|
1.70
|
|
$
|
137,500
|
|
Expected
to vest
|
|
|
2,000,000
|
|
$
|
0.20
|
|
|
4.87
|
|
$
|
--
|
|
Total
|
|
|
3,250,000
|
|
|
|
|
|
|
|
$
|
137,500
|
|
|
(1)
|
These
amounts represent the difference between the exercise price and
$0.21, the
closing market price of the Company's common stock on December
31, 2006 as
quoted on the Over-the-Counter Bulletin Board under the symbol
"NCNC.OB"
for all in-the-money options
outstanding.
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Stock
Based Compensation(continued)
The
Company’s policy for options outstanding that are expected to vest are net of
estimated future forfeitures in accordance with the provisions of SFAS No.
123-R, which are estimated when compensation costs are recognized. Additional
information with respect to stock option activity is as follows:
|
|
Outstanding
Options
|
|
|
|
Shares
Available
for
Grant
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
|
|
Intrinsic
Value
(1)
|
|
December
31, 2005
|
|
|
3,586,500
|
|
|
1,413,500
|
|
$
|
0.40
|
|
$
|
269,000
|
|
Grants
|
|
|
2,000,000
|
|
|
2,000,000
|
|
$
|
0.20
|
|
|
|
|
Exercises
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Cancellations
|
|
|
163,500
|
|
|
163,500
|
|
$
|
0.90
|
|
|
|
|
December
31, 2006
|
|
|
1,750,000
|
|
|
3,250,000
|
|
$
|
0.25
|
|
$
|
—
|
|
Options
exerciseable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
1,413,500
|
|
$
|
0.40
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
1,250,000
|
|
$
|
0.32
|
|
|
|
|
(1)
Represents the added value as difference between the exercise price and the
closing market price of the Company's common stock on the end of the reporting
period (as of December 31, 2005 and December 31, 2006 the market price of
the
Company's common stock was $0.62 and $0.21 respectively).
The
Company follows SFAS No. 123 (R) (as interpreted by EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued To Other Than Employees
for
Acquiring, or in Conjunction with Selling, Goods or Services") to account
for
transactions involving services provided by third parties where the Company
issues equity instruments as part of the total consideration. Pursuant to
paragraph 7 of SFAS No. 123 (R), the Company accounts for such transactions
using the fair value of the consideration received (i.e. the value of the
goods
or services) or the fair value of the equity instruments issued, whichever
is
more reliably measurable. The Company applies EITF Issue No. 96-18, in
transactions, when the value of the goods and/or services are not readily
determinable and (1) the fair value of the equity instruments is more reliably
measurable and (2) the counterparty receives equity instruments in full or
partial settlement of the transactions, using the following
methodology:
a)
For
transactions where goods have already been delivered or services rendered,
the
equity instruments are issued on or about the date the performance is complete
(and valued on the date of issuance).
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
b)
For
transactions where the instruments are issued on a fully vested, non-forfeitable
basis, the equity instruments are valued on or about the date of the
contract.
c)
For
any transactions not meeting the criteria in (a) or (b) above, the Company
re-measures the consideration at each reporting date based on its then current
stock value.
Deferred
Financing Costs
Direct
costs of securing debt financing are capitalized and amortized over the term
of
the related debt using the straight-line method. When a loan is paid in full,
any unamortized financing costs are removed from the related accounts and
charged to operations. During the period ended December 31, 2006, the Company
amortized approximately $348,000 to interest expense.
Stock
Purchase Warrants Issued With Notes Payable
The
Company granted warrants in connection with the issuance of certain notes
payable. Under Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative
estimated fair value of such warrants represents a discount from the face
amount
of the notes payable. Such discounts are amortized to interest expense over
the
term of the notes.
Beneficial
Conversion Feature Of Convertible Notes Payable
The
convertible feature of certain notes payable provides for a rate of conversion
that is below market value. Such feature is normally characterized as a
"Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or
Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application
of
EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair
value of the BCF is recorded in the consolidated financial statements as
a
discount from the face amount of the notes. Such discounts are amortized
to
interest expense over the term of the notes.
Classification
Of Warrant Obligation
In
connection with the issuance of the 12% Senior Secured Convertible Notes
(See
Note 3), the Company has an obligation to file registration statements covering
the Registrable Securities, as defined in the Registration Rights Agreement
Amended. The obligation to file the registration statement meets the criteria
of
an embedded derivative to be bifurcated pursuant to SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended. Under this
transaction, the Company is obligated to register for resale the common shares
underlying the warrants, and as a result, the embedded derivative associated
with this warrant obligation does not meet the scope exception of paragraph
11(a) of SFAS No. 133.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Classification
Of Warrant Obligation(continued)
On
December 19, 2006, the Company entered into an amended agreement with the
warrant holder, CAMOFI Master LDC, where by the warrant holder agreed to
waive
all liquidated damages incurred as a result of the Company’s inability to file a
registration statement to register the shares underlying the warrants. In
addition, a limit was placed on the amount of liquidated damages to be incurred
in the event the Company fails to have an effective registration statement
within the time period required by the amended agreement. The liquidated
damages
would be limited to 10% of the outstanding balance of the note. As a result,
the
warrants meet all the criteria outlined in EITF 00-19 to be classified as
equity. Accordingly, the warrants were reclassified to equity at December
19,
2006.
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
(bank overdraft), contracts receivable, accounts payable
and
accrued expenses, and notes payable approximates their estimated fair values
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
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109,”Accounting for Income Taxes.” FIN No. 48 prescribes a more-likely-than-not
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken (or expected to be taken)
in
an income tax return. It also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The requirement to assess the need for a valuation
allowance on net deferred tax assets is not affected by FIN No. 48. This
pronouncement is effective for fiscal years beginning after December 31,
2006.
Management is in the process of evaluating this guidance, and therefore has
not
yet determined the impact (if any) that FIN No.48 will have on the Company’s
financial position or results of operation upon adoption.
In
September 2006, the FASB issued SFAS No.157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair value measurements. SFAS No. 157 simplifies and codifies related guidance
within GAAP, but does not require any new fair value measurements. The guidance
in SFAS No. 157 applies to derivatives and other financial instruments measured
at estimated fair value under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” and related pronouncements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within
those fiscal years. Management does not expect the adoption of SFAS No. 157
to
have a significant effect on the Company’s financial position or results of
operation.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Significant
Recent Accounting Pronouncements
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115.” This standard permits an entity to measure many financial
instruments and certain other items at estimated fair value. Most of the
provisions of SFAS No. 159 are elective; however, the amendment to SFAS No.
115
(“Accounting for Certain Investments in Debt and Equity Securities”) applies to
all entities that own trading and available-for-sale securities. The fair
value
option created by SFAS No. 159 permits an entity to measure eligible items
at
fair value as of specified election dates. Among others, eligible items exclude
(1) financial instruments classified (partially or in total) as permanent
or
temporary stockholders’ equity (such as a convertible debt security with a
non-contingent beneficial conversion feature) and (2) investments in
subsidiaries and interests in variable interest entities that must be
consolidated. A for-profit business entity will be required to report unrealized
gains and losses on items for which the fair value option has been elected
in
its statements of operations at each subsequent reporting date. The fair
value
option (a) may generally be applied instrument by instrument, (b) is irrevocable
unless a new election date occurs, and (c) must be applied to the entire
instrument and not to only a portion of the instrument. SFAS No. 159 is
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (i) makes that choice in the
first
120 days of that year, (ii) has not yet issued financial statements for any
interim period of such year, and (iii) elects to apply the provisions of
SFAS
No. 157 (“Fair Value Measurements”). The adoption of SFAS No. 159 is not
expected to have a significant impact on future financial
statements.
2.
CONTRACTS IN PROGRESS
Contracts
in progress at December 31, 2006, which include completed contracts not
completely billed, approximate:
Cumulative
costs to date
|
|
$
|
6,474,000
|
|
Cumulative
gross profit to date
|
|
|
5,568,000
|
|
|
|
|
|
|
Cumulative
revenue earned
|
|
|
12,042,000
|
|
|
|
|
|
|
Less
progress billings to date
|
|
|
(11,334,000
|
|
|
|
|
|
|
Net
under billings
|
|
$
|
708,000
|
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
2.
CONTRACTS IN PROGRESS (continued)
The
following approximate amounts are included in the accompanying consolidated
balance sheet under these captions as of December 31, 2006:
Costs
and estimated earnings in excess of billings on
uncompleted
contracts
|
|
$
|
1,161,000
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings on
uncompleted
contracts
|
|
|
(453,000
|
)
|
|
|
|
|
|
Net
under billings
|
|
$
|
708,000
|
|
3.
PROPERTY AND EQUIPMENT
Property
and equipment approximate the following at December 31, 2006:
Machinery
and equipment
|
|
$
|
905,000
|
|
Computer
equipment
|
|
|
20,000
|
|
Furniture
and fixture
|
|
|
4,000
|
|
Leasehold
improvements
|
|
|
123,000
|
|
|
|
|
1,052,000
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(767,000
|
)
|
|
|
|
|
|
|
|
$
|
285,000
|
|
4.
RELATED PARTY TRANSACTIONS
As
of
December 31, 2006, the Company had loans made prior to the enactment of the
Sarbanes-Oxley Act to two stockholders approximating $525,500, including
subsequent 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 during 2006
or 2005. For each of the years ended December 31, 2006 and 2005, total interest
income from notes receivable from stockholders approximated $20,000.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
5.
NOTES PAYABLE
On
March
7, 2006, the Company paid one of its creditors $900,000 in cash and 250,000
shares of restricted common stock to settle $750,000 of principal on two
outstanding defaulted notes payable and $291,050 of related accrued interest.
The Company recorded the stock at fair value (estimated based on the trading
price of the Company's stock on the date of issuance) totaling $157,500.
The
value of the stock issued and the cash paid exceeded the value of the amount
of
the outstanding debt and accrued interest by approximately $17,000. Such
amount
was recorded as a loss on debt extinguishment in the accompanying consolidated
statement of operations.
During,
2006, the Company settled an outstanding note payable with one of its creditors
totaling approximately $80,000 for $40,000 in cash and recognized approximately
$40,000 in gain on forgiveness of debt.
During
the year ended December 31, 2001, the Company entered into a note payable
with a
third party for $215,000. The note accrued interest at a fixed rate of 15%
per
annum and matured in March 2002. The note was secured by certain assets of
the
Company, as defined, and was in default at December 31, 2004. During 2005,
the
Company and the note holder executed a mutual agreement to fully settle the
debt
whereby by the Company agreed to make fifteen monthly installments of $12,000
(totaling $180,000) beginning January 2006 and to issue 100,000 shares of
restricted common stock valued at $62,000 (estimated based on the market
price
of the stock on the date of the agreement) to the holder. Accrued interest
on
the note totaled approximately $116,000 on the date of the transaction. As
a
result of the effective reduction in principal balance of $35,000, the
forgiveness of approximately $116,000 of accrued interest and the issuance
of
restricted common stock valued at $62,000, the Company recorded a gain on
forgiveness of notes payable totaling approximately $89,000 for the year
ended
December 31, 2005. During the year ended December 31, 2006, the Company made
cash payments of $132,000 to reduce the principal balance on the secured
note
payable. As of December 31 2006, the balance of the note is
$48,000.
6.
CONVERTIBLE DEBT
On
February 15, 2006 the Company entered into a convertible note payable agreement
("Note A") with Motivated Minds, LLC (the "Holder") in the total amount of
$300,000. The principal balance, together with all accrued interest at the
rate
of 24% per annum for the first 30 days, and 27% for the following 60 days,
was
to become due on the earlier of a) May 16, 2006, or b) the date which the
Company obtains additional financing. Note A is convertible into shares of
the
Company's common stock at a fixed price of $0.66 at any time at the Holder's
option. In connection with Note A, the Company issued 30,000 shares of its
common stock and 454,545 warrants with a fixed exercise price of $0.63 to
the
Holder.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
6.
CONVERTIBLE DEBT (continued)
The
warrants vested and became fully exercisable on the issuance date. In accordance
with EITF Issue No. 98-5 and Accounting Principles Board Opinion ("APB")
No. 14,
the Company allocated the $300,000 debt proceeds between the relative fair
values of the warrants, the common shares issued and the fair value of the
beneficial conversion feature ("BCF"). Pursuant to EITF Issue Nos. 98-5 and
00-27, the conversion feature of Note A provides for a rate of conversion
that
is below market value. The resulting BCF and other debt discount on Note
A
totaled $300,000 and is being amortized on a straight-line basis to interest
expense over the life of the loan. During 2006, amortization of the discount
resulted in expense of $300,000, which is included in interest expense in
the
accompanying condensed consolidated statement of operations for the year
ended
December 31, 2006.
Additionally,
due to the financing with CAMOFI (see below), Note A became due on February
28,
2006 and the Company issued 30,000 shares of common stock to the Holder to
extend the maturity date of Note A to May 16, 2006. Such shares were valued
at
approximately $18,900 (estimated to be the fair value based on the trading
price
on the issuance date). Accordingly, the Company recorded $18,900 in debt
issue
discount and additional paid-in capital and is amortizing the debt discount
over
the remaining life of Note A. The entire amount was amortized during
2006.
In
connection with Note A, the Company issued 45,454 warrants and paid $30,000
in
cash to third parties as financing costs. The warrants were valued, using
a
Black Scholes option pricing model, at $29,090. Accordingly, the Company
recorded deferred financing costs of $59,090 and additional paid-in capital
of
$29,090. The entire amount was amortized to interest expense in 2006, which
is
included in in the accompanying condensed consolidated statement of
operations.
On
August
8, 2006, the Holder agreed to extend the maturity date of $150,000 of the
note
balance to August 16, 2006 and the remaining $150,000 until October 16, 2006.
As
consideration for the extension, the Company issued 45,000 shares of restricted
common stock to the Holder. The shares were valued at $23,400 (based on the
price of the Company’s stock on the date of issuance) which was recorded as
additional debt discount and amortized over the remaining life of the note.
The
amount was fully amortized during 2006. On August 16, 2006 the Company repaid
$150,000 of principal and all accrued interest to the Holder. The due date
on
the remaining $150,000 principal was extended to December 16, 2006 and an
additional 30,000 restricted common stock valued at $6,000 (based on the
stock
price on the date of grant) were granted to the Holder, which was also recorded
as additional debt discount and was fully amortized to interest expense during
the year ended December 31, 2006. On December 7, 2006, $50,000 of principal
was
repaid and the due date on the remaining $100,000 balance on Note was extended
until January 31, 2007. As of December 31, 2006, the balance of the note
was
approximately $105,000 and the note was paid in full in January
2007.
In
connection with the Note A, the Company entered into a Registration Rights
Agreement dated February 16, 2006, pursuant to which the Company granted
"piggy
back" registration rights to the Holder in connection with the shares issuable
upon conversion of the Note and issuable upon exercise of the
warrants.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
6.
CONVERTIBLE DEBT (continued)
On
February 28, 2006, the Company entered into a Securities Purchase Agreement
(“Note B”) with CAMOFI Master, LDC (“CAMOFI”), whereby CAMOFI agreed to
purchase, up to $5,000,000 aggregate principal amount of 12% Senior Secured
Convertible Notes, due February 28, 2009 (up to $3,500,000 to be purchased
at
the closing and up to an additional $1,500,000 to be purchased pursuant to
an
Additional Investment Right), secured by a first priority lien on all assets
of
the Company and its current and future subsidiaries (including a pledge of
the
shares of the Company's current and future Subsidiaries). Note B is convertible
into 5,555,556 shares of the Company's common stock at a fixed price of $0.63
at
any time at CAMOFI’s option. As of December 31, 2006, the Company had not
received the additional $1,500,000.Additionally, $750,000 of the $3,500,000
proceeds from the closing were placed into an escrow account, to be used
exclusively for making the scheduled principal and interest payments on the
note. Accordingly, such amount has been recorded as restricted cash in the
accompanying consolidated balance sheet. In connection with Note B, the Company
issued 3,476,190 warrants at an exercise price of $0.63 to CAMOFI that expire
on
February 28, 2013. The warrants vested and became fully exercisable on the
issuance date. In accordance with EITF Issue No. 98-5 and Accounting Principles
Board Opinion (“APB”) No. 14, the Company allocated the $3,500,000 debt proceeds
between the relative fair values of the warrants and the fair value of the
beneficial conversion feature (BCF”). Pursuant to EITF Issue Nos. 98-5 and
00-27, the conversion feature of Note B provides for a rate of conversion
that
is below market value. The resulting BCF and other debt discount on Note
B
totaled $3,500,000 and are being amortized to interest expense over the life
of
the loan. As of December 31, 2006, approximately $972,000 was amortized to
interest expense.
At
December 31, 2006, future minimum principal payments on the note payable
approximate the following for the years ending December 31:
2007
|
|
|
1,400,000
|
|
2008
|
|
|
1,400,000
|
|
2009
|
|
|
233,333
|
|
|
|
|
|
|
|
|
$
|
3,033,333
|
|
On
December 19, 2006, the Company entered into an Amended and Restated Registration
Rights Agreement (the “Agreement”) with CAMOFI. Pursuant to the Amendment the
Company agreed to file registration statements to cover the resale of the
shares
issuable upon conversion of the CAMOFI Note and warrants as follows:
i)
on or
before January 31, prepare and file with the United States Securities and
Exchange Commission (“SEC”) a Registration Statement covering the resale of all
common Stock issuable upon conversion of the 12% Senior Secured Convertible
Note
dated February 28, 2009, up to 33% of our issued and outstanding stock;
ii)
within 90 days from effectiveness of the Registration Statement referred
to in
i) above, prepare and file a Registration Statement covering the resale of
all
common Stock issuable upon conversion of the 12% Senior Secured Convertible
Note
dated February 28, 2009 to the extent not registered above plus all shares
of
common stock underlying the Purchaser Warrants, up to 33% of our issued and
outstanding stock;
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
6.
CONVERTIBLE DEBT (continued)
ii)
within 90 days from effectiveness of the Registration Statement referred
to in
ii) above, prepare and file a Registration Statement covering the resale
of all
common Stock issuable upon conversion of the 12% Senior Secured Convertible
Note
dated February 28, 2009 plus all shares of common stock underlying the Purchaser
Warrants to extent not registered above, up to 33% of our issued and outstanding
stock;
iv)
within 90 days from effectiveness of the Registration Statement referred
to in
iii) above, prepare and file a Registration Statement covering the resale
of all
additional Purchaser Warrants to extent not registered above, up to 33% of
our
issued and outstanding stock.
Pursuant
to the Agreement, CAMOFI agreed to waive all liquidated damages accrued prior
to
the date of the Amendment. However, failure to meet the timetable set forth
above will subject the Company to liquidated damages equal to 1.5% of the
outstanding principal of the Notes for any registrable securities then held
by
CAMOFI for the first 30 days (or part thereof) after the default date and
an
additional 1.5% for any subsequent 30-day period (or part thereof), thereafter
or a maximum of 10% of the remaining balance of the note.
As
a
result of the amended registration rights agreement and the limit of 10%
placed
on the amount of liquidated damages to be paid if the Company does not have
an
effective registration statement in accordance with the amended registration
rights agreement, and since the warrant agreement provides the option of
settling the warrant obligation by issuing unregistered shares using a cashless
exercise feature in the event that there is no effective registration statement
within the required time period, the warrants have met all the criteria outlined
in EITF 00-19 to be classified as equity. Accordingly, on December 19, 2006,
the
date of the amended agreement, the Company re-evaluated the estimated fair
value
of the warrant liability at approximately $626,000 using a Black Scholes
option
pricing model. The decrease in fair value totaling approximately $1,495,000
was
recorded as a credit to derivative liability expense in the accompanying
condensed consolidated statements of operations and the warrants were
reclassified to additional paid-in capital.
Other
Transactions
In
connection with the Agreement, the Company issued to CAMOFI warrants to purchase
1,500,000 shares of common stock of our common stock, at an exercise price
of
$0.35 for a term of seven years. Per EITF 96-18, Since the warrants are
exercisable immediately, and the services (waiver of liquidated damages accrued
as a result of the Company’s failure to register the warrants issued with the
debt) were complete at the same time, the value of the services is deemed
to be
fair value of the warrants on the measurement date, which is the date of
the
transaction. The warrants were valued at $300,000, using a Black-Scholes
option
pricing model on the dates of grant and were recorded as interest expense
in the
Company’s consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
6.
CONVERTIBLE DEBT (continued)
Other
Transactions (continued)
In
connection with the CAMOFI Note, the Company paid $393,000 in cash for financing
costs. Such amount was recorded as deferred financing costs and are being
amortized on a straight line basis over the life of the note. In addition,
the
Company issued 722,539 warrants to Ascendiant Securities, LLC, (the “Placement
Agent) with an exercise price of $0.63 and expire on February 28, 2013. The
warrants were valued using a Black Scholes option pricing model at $455,200
and
were recorded as deferred financing costs and amortized to interest expense
over
the remaining life of the note. In connection with Note B, the Placement
Agent
also received 250,000 restricted shares of common stock valued at $157,500
(based on the value of the Company’s stock at the date of issuance) which were
also recorded as deferred financing costs and amortized to interest expense
over
the life of the note.
The
total
financing costs incurred in connection with Note B totaled approximately
$1,065,000, of which approximately $289,000 was amortized to interest expense
during the year 2006.
The
CAMOFI Note and corresponding warrants were offered and sold to CAMOFI in
a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated thereunder. CAMOFI is an accredited investor as defined in Rule
501
of Regulation D promulgated under the Securities Act of 1933.
The
Conversion Option
SFAS
No.
133 states that a contract issued by an entity that is both (a) indexed to
its
own stock and (b) would be classified in stockholders' equity if it were
a
freestanding financial instrument is not a derivative for purposes of that
pronouncement. Management has concluded that the CAMOFI debt financing
transaction's conversion option is "indexed to the Company's own stock" as
that
term is defined by EITF Issue No. 01-6, "The Meaning of Indexed to a Company's
Own Stock". In addition, since the debt financing transaction has been
determined to be a "conventional convertible debt instrument" as defined
in EITF
Issue No. 05-2, "The Meaning of "Conventional Convertible Debt Instrument"
in
Issue 00-19", the requirements of EITF Issue No. 00-19 do not apply. Lastly,
the
debt host contract is not a derivative in its entirety and (based on SFAS
No.
133) the conversion option need not be bifurcated from such contract. Therefore,
the conversion option is not a derivative instrument as contemplated by EITF
Issue No. 00-19 or SFAS No. 133. As explained below, the Company has therefore
applied intrinsic value accounting to the BCF embedded in the conversion
option.
Intrinsic
Value Accounting for the BCF
As
explained in the following paragraph, the Company has accounted for the BCF
in
the CAMOFI debt financing transaction in accordance EITF Issue No. 98-5,
EITF
Issue No. 00-27, and APB No. 14. The excess of the proceeds over the estimated
fair value of the warrants (see "Accounting for the Warrants" below) of
approximately $1,310,000 was used to calculate the effective conversion price
of
$0.50 per share.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
6.
CONVERTIBLE DEBT (continued)
Intrinsic
Value Accounting for the BCF (continued)
The
difference between the effective conversion price and the fair value of the
debt
at the commitment date of $0.236 per share resulted in a "theoretical"
beneficial conversion feature of approximately $2,190,000. Since the BCF
cannot
exceed the proceeds allocated to the debt, the Company recorded a debt issuance
discount on Note B of $1,310,000 which is being amortized to interest expense
(using the effective interest method) over the three-year term of the note.
The
Company recorded interest expense on such BCF of approximately $364,000 during
the year ended December 31, 2006 in the accompanying consolidated statement
of
operations.
Total
Debt Discounts
The
remaining BCF and debt discount balances on Note B associated with the
conversion option of the debt and the warrants, respectively, totaled
approximately $2,528,000 at December 31, 2006 and is presented net of the
$3,033,000 principal balance of Note B in the accompanying consolidated balance
sheet.
7.
INCOME TAXES
During
2006 and 2005, the provision for taxes 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:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Computed
“expected” tax (benefit) expense
|
|
$
|
(367,000
|
)
|
$
|
227,000
|
|
|
|
|
|
|
|
|
|
Addition
to (reduction) in income taxes
|
|
|
|
|
|
|
|
resulting
from:
|
|
|
|
|
|
|
|
State
income taxes, net of federal benefit
|
|
|
(65,000
|
)
|
|
40,800
|
|
Change
in deferred tax asset valuation allowance
|
|
|
416,000
|
|
|
(267,000
|
)
|
Non-deductible
expenses
|
|
|
16,800
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
800
|
|
$
|
800
|
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
7.
INCOME TAXES (continued)
The
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31, 2006 and 2005 are presented
below:
Deferred
tax assets:
|
|
|
|
|
|
Tax
net operating loss carryforwards
|
|
$
|
4,600,000
|
|
|
3,955,000
|
|
Warrant
liability
|
|
|
(584,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Accrued
inventory reserve
|
|
|
114,000
|
|
|
167,000
|
|
Accrued
expenses
|
|
|
397,000
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax asset
|
|
|
4,527,000
|
|
|
4,140,000
|
|
Less
valuation allowance
|
|
|
(4,527,000
|
)
|
|
(4,140,000
|
)
|
|
|
|
|
|
|
|
|
Total
net deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
The
valuation allowance increased by $387,000 and decreased by $267,000 and during
the years ended December 31, 2006 and 2005, respectively. The current provision
for income taxes for the years ended December 31, 2006 and 2005 is not
significant and due primarily to certain state taxes.
At
December 31, 2006, the Company had net tax operating loss carryforwards of
approximately $12.6 million and $9.9 million 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
2026 and 2015, 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.
8.
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 preference equal
to
$25 per share before any payment or distribution shall be made on common
stock.
As of December 31, 2001, in accordance with the conversion terms of the
Preferred Series B shares, 95,023 shares of the common stock remained un-issued
and committed, which the Company has reclassified to common stock during
the
year ended December 31, 2002 because the stock had constructively been issued.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
8.
EQUITY TRANSACTIONS (continued)
Preferred
Stock (continued)
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 years ended December 31, 2006 and 2005, the Company issued 20,000 and
530,001 shares of restricted common stock, respectively, upon conversion
of
1,200 and 31,800 shares of Series C, respectively, at a conversion rate of
16.667-to-1.
In
March
2006, some of the Company’s preferred shareholders elected to waive their rights
to receive dividends. Accordingly, the Company recorded a reduction in dividends
payable of $282,875.
At
December 31, 2006, the Company had a total of 27,780 shares of Series C issued
and outstanding with accumulated dividends totaling approximately $238,000,
which is included in dividends payable in the accompanying consolidated balance
sheet.
During
the year ended December 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. 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
for
2004 (see Note 9). 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
expired on March 4, 2007.
In
July
2005, the Company issued 600,000 shares of restricted common stock upon
conversion of 12,000 shares of Series D at a conversion rate of
50-to-1.
In
March
2006, one of the Company’s preferred series D shareholders elected to waive
their rights to receive dividends. Accordingly, the Company recorded a reduction
in dividends payable of $5,000.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
8.
EQUITY TRANSACTIONS (continued)
Preferred
Stock (continued)
At
December 31, 2006, the Company had a total of 11,640 shares of Series D issued
and outstanding, with accumulated dividends totaling approximately $125,000,
which is included in dividends payable in the accompanying consolidated balance
sheet.
Common
Stock
During
the year ended December 31, 2001, the Company received a subscription receivable
of $87,500 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, 2006, 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, 2006.
As
of
December 31, 2006, the subscription receivable remains unpaid. The related
accrued interest receivable and interest income are insignificant to the
consolidated financial statements.
On
October 27, 2005, the Company issued 300,000 shares of restricted common
stock
to a consultant for corporate finance and investor relations services under
a
one year consulting agreement. The Company recorded the fair value of the
common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $132,000 as deferred consulting fees and is amortizing
such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company’s stock price from issuance to the end of the reporting
period, in accordance with the EITF 96-18, the Company performed a recalculation
of the deferred consulting fees based on the December 31, 2005 fair value
stock
price, and adjusted the fees to $186,000. The additional $54,000 difference
was
recorded as deferred consulting fees and was amortized over the remaining
term
of the contract. At December 31, 2005, the remaining deferred consulting
fees
under this contract totaled $155,000. At December 31, 2006, In accordance
with
the EITF 96-18, the Company performed a recalculation of the deferred consulting
fees based on the fair value stock price at the completion of contract, and
adjusted the fees to $60,000.
On
April
25, 2006, the Company issued 9,091 shares of common stock for conversion
of
$6,000 of interest due on Note A. The common stock conversion price was $0.66
in
accordance with the terms of Note A.
On
May
15, 2006, the Company issued 10,227 shares of common stock for conversion
of
$6,750 of interest due on Note A. The common stock conversion price was $0.66
in
accordance with the terms of Note A.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
8.
EQUITY TRANSACTIONS (continued)
Common
Stock (continued)
On
March
7, 2006 the Company issued 250,000 shares of common stock to a third party
as
financing fees in connection with Note B. The shares were valued at $157,500
(based on the estimated fair value of the common stock on the date of the
transaction ) and recorded as deferred financing costs and amortized to interest
expense over the life of the note. At December 31, 2006, approximately $44,000
was amortized to interest expense.
In
July
2006, the Company issued 100,000 shares of common stock valued at $41,000
(based
on the market price of the shares on the date the services were completed)
to a
third party for corporate finance and investor relations services under one
month contract. The amount was recorded as consulting expense during the
year
ended December 31, 2006.
In
December 2006, the Company issued 150,000 shares of common stock valued at
$28,500 (based on the market price of the shares on the date of grant) to
a
third party for public relations consulting services. In accordance with
EITF
96-18, the Company revalued the transaction at December 31, 2006 and adjusted
the fees to $31,500. The additional $3,000 difference was recorded as deferred
consulting fees and is being amortized over the remaining term of the contract.
At December 31, 2006, the remaining deferred consulting fees under this contract
totaled $9,000.
In
April
2005, the Company issued 75,000 shares to a consultant for consulting services.
However, the transaction was inadvertently overlooked by management and was
not
recorded in 2005. Since the value of the transaction was deemed to be immaterial
to the financial statements as a whole for the quarter ended June 30, 2005
and
the year ended December 31, 2005, management recorded the transaction in
the
current year. The transaction was valued at approximately $14,000 (based
on the
stock price on the date of grant).
On
October 26, 2005, the Company issued 100,000 shares of restricted common
stock
to a consultant for corporate finance and investor relations services under
a
one year consulting agreement. The Company recorded the fair value of the
common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $42,000 as deferred consulting fees and was amortizing
such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company’s stock price from issuance to the date when the
services were deemed completed, at December 31, 2005, in accordance with
EITF
96-18, the Company performed a recalculation of the deferred consulting fees
based on December 31, 2005 and adjusted the fees to $62,000. The additional
$20,000 difference was recorded as deferred consulting fees and was amortized
over the remaining term of the contract. At December 31, 2005, the remaining
deferred consulting fees under this contract totaled $50,633. At December
31,
2006, the deferred consulting fees under this contract were amortized
entirely.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
EQUITY TRANSACTIONS (continued)
Common
Stock (continued)
On
October 11, 2005, the Company issued 100,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under
a
one year consulting agreement. The Company recorded the fair value of the common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $41,000 as deferred consulting fees and is amortizing such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company’s stock price from issuance to the date when the
services were deemed completed, at December 31, 2005, in accordance with the
EITF 96-18, the Company performed a recalculation of the deferred consulting
fees based on the December 31, 2005 fair value stock price, and adjusted the
fees to $62,000. The additional $21,000 difference was recorded as deferred
consulting fees and was amortized over the remaining term of the contract.
At
December 31, 2005, the remaining deferred consulting fees under this contract
totaled $49,083. At December 31, 2006, the deferred consulting fees under this
contract were amortized entirely.
Stock
Options and Warrants
Under
the
terms of the Company's Incentive Stock Option Plan ("ISOP"), options to purchase
an aggregate of 5,000,000 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.
During
the year ended December 31, 2006, the Company granted 2,000,000 incentive stock
options to its two officers under the Company’s ISOP. The options have
an exercise price of $0.20 and vest on December 1, 2007. None of the options
granted to employees during the year were vested as of December 31, 2006. During
the year ended December 31, 2006, the Company granted 6,403,728 warrants to
certain note holders, its assignee and placement agents, in connection with
issuance of two convertible notes.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
8.
EQUITY TRANSACTIONS (continued)
Stock
Options and Warrants (continued)
The
following is a status of the stock options outstanding at December 31, 2006
and
2005 the changes during the two years then ended:
|
|
2006
|
|
2005
|
|
|
|
Options
|
|
Weighted
|
|
Options
|
|
Weighted
|
|
|
|
|
|
Average
Price
|
|
|
|
Average
Price
|
|
Outstanding,
|
|
|
|
|
|
|
|
|
|
beginning
of year
|
|
|
1,413,500
|
|
$
|
0.25
|
|
|
1,483,250
|
|
$
|
0.82
|
|
Granted
|
|
|
2,000,000
|
|
$
|
0.20
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Terminated
|
|
|
(163,500
|
)
|
|
(0.90
|
)
|
|
(69,750
|
)
|
|
(9.57
|
)
|
Total
Outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end
of year
|
|
$
|
3,250,000
|
|
$
|
0.25
|
|
|
1,413,500
|
|
$
|
0.25
|
|
Exercisable
|
|
|
1,250,000
|
|
|
0.32
|
|
|
1,413,500
|
|
|
0.25
|
|
The
weighted average grant-date fair value of the options granted was $0.18. The
fair value of each share-based award is estimated on the grant date using the
Black Scholes option-pricing formula. Expected volatilities are based on the
historical volatility of the Company’s stock price (328%). The risk-free rate
for periods within the contractual life of the option is based on the U.S.
Treasury interest rates in effect at the time of grant (4.60%). All of the
options granted during the year have an expected term of 5 years.
The
following table summarizes information related to stock options outstanding
at
December 31, 2005:
|
|
Options
Outstanding
|
|
Exercise
Price
|
|
Number
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
$
0.25
|
|
|
1,300,000
|
|
|
2.7
|
|
$
|
0.25
|
|
$
1.00
|
|
|
100,000
|
|
|
1.7
|
|
|
1.10
|
|
$
5.00
|
|
|
5,000
|
|
|
2.0
|
|
|
5.00
|
|
$10.00
|
|
|
8,500
|
|
|
0.5
|
|
|
10.00
|
|
|
|
|
1,413,500
|
|
|
|
|
|
0.39
|
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
8.
EQUITY TRANSACTIONS (continued)
Stock
Options and Warrants (continued)
The
following table summarizes information related to stock options outstanding
at
December 31, 2006:
|
|
Options
Outstanding
|
|
Exercise
Price
|
|
Number
of Options
Outstanding
|
|
Weighted
Average
Remaining Contractual Life (Years)
|
|
Average
Exercise
Price
|
|
$0.20-
$0.25
|
|
|
3,150,000
|
|
|
3.19
|
|
$
|
0.22
|
|
$1.10
|
|
|
100,000
|
|
|
0.69
|
|
|
1.10
|
|
|
|
|
3,250,000
|
|
|
|
|
$
|
0.25
|
|
From
time
to time, the Company issues warrants to employees and to third parties pursuant
to various agreements, which are not approved by the shareholders.
The
following is a status of the warrants outstanding at December 31, 2006 and
2005
the changes during the two years then ended:
|
|
2006
|
|
2005
|
|
|
|
Warrants
|
|
Weighted
Average
Price
|
|
Warrants
|
|
Weighted
Average
Price
|
|
Outstanding,
|
|
|
|
|
|
|
|
|
|
beginning
of year
|
|
|
55,000
|
|
$
|
0.86
|
|
|
228,333
|
|
$
|
7.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,371,455
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Terminated
|
|
|
(22,727
|
)
|
|
(0.66
|
)
|
|
(173,333
|
)
|
|
(10.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, end of year
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
8.
EQUITY TRANSACTIONS (continued)
Stock
Options and Warrants (continued)
The
following table summarizes information related to warrants outstanding at
December 31, 2005:
|
|
Warrants
Outstanding
|
|
Exercise
Price
|
|
Number
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
$
0.50 - $0.75
|
|
|
20,000
|
|
|
1.2
|
|
$
|
0.56
|
|
$
1.00 - $1.25
|
|
|
35,000
|
|
|
1.8
|
|
|
1.04
|
|
|
|
|
55,000
|
|
|
|
|
|
0.86
|
|
The
following table summarizes information related to warrants outstanding at
December 31, 2006:
|
|
Warrants
Outstanding
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Number
of
|
|
Remaining
|
|
Average
|
|
|
|
Warrants
|
|
Contractual
|
|
Exercise
|
|
Exercise
Price
|
|
Outstanding
|
|
Life
(Years)
|
|
Price
|
|
$0.35
|
|
|
1,500,000
|
|
|
1.63
|
|
$
|
0.35
|
|
$0.50-0.75
|
|
|
4,868,728
|
|
|
2.87
|
|
|
0.63
|
|
$1.00-1.25
|
|
|
35,000
|
|
|
1.09
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,403,728
|
|
|
|
|
$
|
0.57
|
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
9.
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,
2006 and 2005:
|
|
2006
|
|
2005
|
|
Net
income (loss)
|
|
$
|
(1,051,744
|
)
|
$
|
668,359
|
|
|
|
|
|
|
|
|
|
Cumulative
preferred dividends (See Note 8)
|
|
|
(84,800
|
)
|
|
(156,300
|
)
|
|
|
|
|
|
|
|
|
Waived
Cumulative preferred dividends (See Note 8)
|
|
|
287,875
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earning (loss) per share:
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
|
(848,669
|
)
|
|
512,059
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
11,332,289
|
|
|
9,186,987
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings ( loss) per share:
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
11,332,289
|
|
|
9,836,987
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
(0.07
|
)
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
(0.07
|
)
|
$
|
0.05
|
|
10.
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 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 2007. The
lease is personally guaranteed by one of the stockholders.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
10.
COMMITMENTS AND CONTINGENCIES (continued)
Future
minimum lease payments on the operating lease obligations approximate $400,000
for the year ended December 31, 2007. The Company currently has no future lease
commitments beyond such date.
Rental
expense for operating leases approximated $410,000 for each of the years ended
December 31, 2006 and 2005.
Legal
From
time
to time, the Company may be involved in various claims, lawsuits, and 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.
Backlog
(Unaudited)
The
following schedule approximates a reconciliation of backlog representing signed
contracts:
|
|
|
|
Balance,
January 1, 2006
|
|
$
|
3,374,000
|
|
New
contracts, January 1, 2006 through December 31, 2006
|
|
|
8,540,000
|
|
|
|
|
11,914,000
|
|
Less,
contract revenue earned - January 1, 2006 through December 31,
2006
|
|
|
(8,319,000
|
)
|
Balance
December 31, 2006
|
|
$
|
3,595,000
|
|
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
11.
SUBSEQUENT EVENTS
On
January 23, 2007, the Company paid off the principal balance and all accrued
interest outstanding on Note A.
On
January 31, 2007, the Company filed a Registration Statement to register
4,235,000 common stock issued or issuable in connection with CAMOFI convertible
note. Such Registration statement has not been declared effective by
the Securities and Exchange Commission as of March 28,
2007.
On
March
15, 2007, the Company issued 550,000 shares of restricted common stock under
three consulting agreements, for investor relations and financial
services.
On
March
27, 2007, the Company entered into an Amended and Restated Registration Rights
Agreement (the “2nd
Amendment”) with CAMOFI. Pursuant to the Amendment, CAMOFI agreed to waive any
liquidated damages accrued prior to the date of the 2nd
Amendment. Also, in 30 days after the date of the 2nd
Amendment, the Company agreed to file a registration statements to cover the
resale of the shares issuable upon conversion of the CAMOFI Note up to 33%
of
the Company’s issued and outstanding stock, and, in 90 days after the date of
filing, to have the registration statement declared effective by the Security
Exchange Commission.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
March
31, 2007
(Unaudited)
ASSETS
|
|
Current
Assets
|
|
|
|
Cash
|
|
$
|
317,806
|
|
Contract
receivables
|
|
|
473,693
|
|
Inventories,
net
|
|
|
1,333,056
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
872,335
|
|
Deferred
financing costs, net
|
|
|
358,292
|
|
Prepaid
expenses and other current assets
|
|
|
7,404
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,362,586
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
256,529
|
|
Deferred
Financing Costs, net
|
|
|
328,436
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
3,947,551
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Bank
Overdraft
|
|
$
|
34,090
|
|
Accounts
payable and accrued expenses
|
|
|
1,199,491
|
|
Dividends
payable
|
|
|
362,800
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
399,710
|
|
Notes
payable
|
|
|
12,000
|
|
Convertible
notes payable, net of discount
|
|
|
237,223
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,245,314
|
|
|
|
|
|
|
Convertible
Notes Payable, net of discount
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
Cumulative,
convertible, Series B preferred stock, $1 par value,
|
|
|
|
|
15,000,000
shares authorized, no shares issued and outstanding
|
|
|
|
|
(liquidation
preference of $25 per share)
|
|
|
-
|
|
Cumulative,
convertible, Series C preferred stock, $1 par value,
|
|
|
|
|
75,000
shares authorized, 27,780 shares issued and outstanding
|
|
|
|
|
(liquidation
preference of $933,000)
|
|
|
27,780
|
|
Cumulative,
convertible, Series D preferred stock, $25 par value,
|
|
|
|
|
75,000
shares authorized, 11,640 shares issued and outstanding
|
|
|
|
|
(liquidation
preference of $416,000)
|
|
|
291,000
|
|
Common
stock, $0.10 par value, 50,000,000 shares authorized;
|
|
|
|
|
12,264,656
shares issued and outstanding
|
|
|
1,226,466
|
|
Subscriptions
receivable
|
|
|
(462,500
|
)
|
Notes
receivable from stockholders
|
|
|
(532,402
|
)
|
Deferred
consulting fees
|
|
|
(234,092
|
)
|
Additional
paid-in capital
|
|
|
8,995,064
|
|
Accumulated
deficit
|
|
|
(7,819,079
|
)
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
1,492,237
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' equity
|
|
$
|
3,947,551
|
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Three Months Ended March 31, 2007 and 2006
(Unaudited)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
CONTRACT
REVENUES
|
|
$
|
3,185,469
|
|
$
|
1,699,847
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
2,000,230
|
|
|
1,296,608
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,185,239
|
|
|
403,239
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Consulting
and other compensation
|
|
|
429,363
|
|
|
203,058
|
|
Salaries
and related
|
|
|
116,634
|
|
|
64,331
|
|
Selling,
general and administrative
|
|
|
173,276
|
|
|
187,640
|
|
TOTAL
OPERATING EXPENSES
|
|
|
719,273
|
|
|
455,029
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
465,966
|
|
|
(51,790
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
Loss
on forgiveness of debt
|
|
|
(11,688
|
)
|
|
-
|
|
Derivative
liability expense
|
|
|
-
|
|
|
(764,762
|
)
|
Interest
expense, including debt discount amortization
|
|
|
(465,241
|
)
|
|
(395,828
|
)
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES
|
|
|
(476,929
|
)
|
|
(1,160,590
|
)
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
(10,963
|
)
|
|
(1,212,380
|
)
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(10,963
|
)
|
$
|
(1,212,380
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS APPLICABLE
|
|
|
|
|
|
|
|
TO
COMMON STOCKHOLDERS
|
|
$
|
(10,963
|
)
|
$
|
(924,505
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss available to
|
|
|
|
|
|
|
|
common
stockholders per common share
|
|
|
.0.00
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
11,983,543
|
|
|
10,803,611
|
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Three Months Ended March 31, 2007 and 2006
(Unaudited)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,963
|
)
|
$
|
(1,212,380
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
28,578
|
|
|
39,028
|
|
Amortization
of deferred financing costs
|
|
|
89,574
|
|
|
57,466
|
|
Amortization
of Beneficial Conversion Features and other debt
discounts
|
|
|
291,667
|
|
|
249,123
|
|
Amortization
of deferred consulting fees
|
|
|
98,977
|
|
|
137,039
|
|
Estmated
fair market value of common stock issued for consulting services
|
|
|
|
|
|
|
|
and
related change in fair value
|
|
|
247,500
|
|
|
-
|
|
Derivative
liability expense
|
|
|
-
|
|
|
764,762
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Contracts
receivable
|
|
|
(170,151
|
)
|
|
(625,005
|
)
|
Inventories
|
|
|
(212,874
|
)
|
|
(112,985
|
)
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
288,333
|
|
|
132,622
|
|
Prepaid
expenses and other current assets
|
|
|
12,801
|
|
|
(2,083
|
)
|
Notes
receivable from stockholders
|
|
|
(7,000
|
)
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
8,031
|
|
|
(277,456
|
)
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(53,201
|
)
|
|
61,823
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used in) operating activities
|
|
|
611,272
|
|
|
(788,046
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
-
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
-
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
123,898
|
|
|
(1,500,000
|
)
|
Bank
overdraft
|
|
|
15,318
|
|
|
(27,649
|
)
|
Proceeds
of issuance of convertible notes payable
|
|
|
-
|
|
|
3,800,000
|
|
Principal
payments on notes payable
|
|
|
(486,000
|
)
|
|
(774,000
|
)
|
Deferred
financing costs
|
|
|
-
|
|
|
(422,500
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(346,784
|
)
|
|
1,075,851
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
264,488
|
|
|
267,805
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
53,318
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
317,806
|
|
$
|
267,805
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and warrants issued for deferred financing costs
|
|
$
|
-
|
|
$
|
641,790
|
|
|
|
|
|
|
|
|
|
Conversion
of notes payable and interest to common stock
|
|
$
|
-
|
|
$
|
157,500
|
|
|
|
|
|
|
|
|
|
BCF
and other debt discount on convertible notes payable
|
|
$
|
-
|
|
$
|
3,800,000
|
|
|
|
|
|
|
|
|
|
Debt
discount on notes payable for note extension
|
|
$
|
-
|
|
$
|
18,900
|
|
|
|
|
|
|
|
|
|
Waived
cumulative dividends on preferred stock
|
|
$
|
-
|
|
$
|
(287,875
|
)
|
See
accompanying notes to the consolidated financial statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
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 substantially less than the price 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 trades on the OTC Bulletin Board under the symbol
"NCNC.OB".
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.
Basis
Of Presentation
The
accompanying unaudited interim consolidated financial statements have been
prepared by the Company, pursuant to the rules and regulations of the United
States Securities and Exchange Commission (the "SEC"). Certain information
and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”) have been omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make
the
information presented not misleading. These financial statements and the notes
hereto should be read in conjunction with the financial statements, accounting
policies and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2006, filed with the SEC. In
the
opinion of management, all adjustments necessary to present fairly, in
accordance with GAAP, the Company's financial position as of March 31, 2007,
and
the results of operations and cash flows for the interim periods presented,
have
been made. Such adjustments consist only of normal recurring adjustments. The
results of operations for the three moths ended March 31, 2007 are not
necessarily indicative of the results for the full year ending December 31,
2007.
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. The Company has an accumulated deficit of approximately
$7,800,000.
This factor, among others, raises substantial doubt about the Company's ability
to continue as a going concern. The Company intends to fund operations through
anticipated increased sales along with 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,
2007. 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 CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
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 asset 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.
As of
March 31, 2007, the company’s inventory was determined to be approximately
$1,333,000 net, based on approximately $197,000 cost of labor, $825,000 cost
of
materials, $121,000 cost of subcontracted services, $476,000 overhead cost,
offset by $286,000 reserve for estimated markdowns cost of
inventory.
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.
Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" 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 on 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
statements purposes. Costs incurred and revenue earned on contracts in progress
in excess of billings (under billings) are classified as a current asset.
Amounts billed in excess of costs and revenue earned (over billings) 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." Shipping and handling fees and costs incurred by
the
Company are immaterial to the operations of the Company and are included in
cost
of sales.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
In
accordance with Statements of Financial Accounting Standards ("SFAS") No. 48,
"Revenue Recognition when Right of Return Exists," revenue is recorded net
of an
estimate for markdowns, price concessions and warranty costs. Such reserve
is
based on management's evaluation of historical experience, current industry
trends and estimated costs. As of March 31, 2007, the Company estimated the
markdowns, price concessions and warranty costs and concluded that are
immaterial and did not record any adjustment to revenues.
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..
Common
stock equivalents, representing convertible Preferred Stock, convertible debt,
options and warrants totaling approximately 8,240,816 shares at March 31,
2007 are not included in the diluted loss per share as they would be
anti-dilutive. Accordingly, diluted and basic loss per share are the same for
March 31, 2007. There were 2,025,451 potentially dilutive and 13,392,330
potential common shares that were excluded from the diluted earnings per share
calculation.
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123-R,
"Share-Based Payment," ("SFAS No. 123-R"). SFAS No. 123-R requires employee
stock options and rights to purchase shares under stock participation plans
to
be accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the award. The
exercise price of options is generally equal to the market price of the
Company's common stock (defined as the closing price as quoted on the
Over-the-Counter Bulletin Board administered by Nasdaq) on the date of grant.
$86,400 and $0 of share-based compensation expense was recognized in the
accompanying consolidated financial statements for the three month periods
ended
March 31, 2007 and 2006, respectively.
From
time
to time, the Company's Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone basis
outside of any of the Company's formal stock plans. The terms of these grants
are individually negotiated and generally expire within five years from the
grant date.
Under
the
terms of the Company's 2000 Stock Option Plan, options to purchase an aggregate
of 5,000,000 shares of common stock may be issued to officers, key employees
and
consultants of the Company. The exercise price of any option generally may
not
be less than the fair market value of the shares on the date of grant. The
term
of each option generally may not be more than five years.
Under
the
terms of the Company's non-statutory stock option plan, 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.
On
November 13, 2006, the Company granted 2,000,000 options to key employees.
At
March 31, 2007, the Company had 1,750,000 options available for future issuance
under their equity compensation plans.
In
accordance with SFAS No. 123-R, the Company’s policy is to adjust share-based
compensation on a quarterly basis for changes to the estimate of expected award
forfeitures based on actual forfeiture experience. The effect of adjusting
the
forfeiture rate for all expense amortization after March 31, 2007 is recognized
in the period the forfeiture estimate is changed.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
At
March
31, 2007, the Company estimated (using the Black Scholes pricing model) the
fair
value of options granted and no variance has been found. Therefore, the effect
of forfeiture adjustments at the period ended March 31, 2007 was not
applicable.
Options
outstanding that have vested and are expected to vest as of March 31, 2007
are
as follows:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
in Years
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Vested
|
|
|
1,250,000
|
|
$
|
0.32
|
|
|
1.35
|
|
$
|
—
|
|
Expected
to vest
|
|
|
2,000,000
|
|
$
|
0.20
|
|
|
4.62
|
|
$
|
|
|
Total
|
|
|
3,250,000
|
|
|
|
|
|
|
|
$
|
|
|
(1)
These amounts represent the difference between the exercise price and
$0.32, the
closing market price of the Company's common stock on March 31, 2007
as quoted
on the Over-the-Counter Bulletin Board under the symbol "NCNC.OB" for
all
in-the-money options outstanding.
The
Company’s policy for options outstanding that are expected to vest are net of
estimated future forfeitures in accordance with the provisions of SFAS
No.
123-R, which are estimated when compensation costs are recognized. Additional
information with respect to stock option activity is as
follows:
|
|
|
|
Outstanding
Options
|
|
|
|
Shares
Available
for
Grant
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
|
|
Intrinsic
Value
(1)
|
|
December
31, 2006
|
|
|
1,750,000
|
|
|
3,250,000
|
|
$
|
0.25
|
|
$
|
130,000
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
1,750,000
|
|
|
3,250,000
|
|
$
|
0.25
|
|
$
|
|
|
Options
exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
|
|
|
1,250,000
|
|
$
|
0.32
|
|
|
|
|
(1)
Represents the added value as difference between the exercise price and the
closing market price of the Company's common stock at the end of the reporting
period (as of December 31, 2006 and March 31, 2007 the market price of the
Company's common stock was $0.21 and $0.32, respectively).
The
Company follows SFAS No. 123 (R) (as interpreted by EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued To Other Than Employees
for
Acquiring, or in Conjunction with Selling, Goods or Services") to account for
transactions involving services provided by third parties where the Company
issues equity instruments as part of the total consideration. Pursuant to
paragraph 7 of SFAS No. 123 (R), the Company accounts for such transactions
using the fair value of the consideration received (i.e. the value of the goods
or services) or the fair value of the equity instruments issued, whichever
is
more reliably measurable. The Company applies EITF Issue No. 96-18 to
transactions when the value of the goods and/or services are not readily
determinable and (1) the fair value of the equity instruments is more reliably
measurable and (2) the counterparty receives equity instruments in full or
partial settlement of the transactions, using the following
methodology:
a)
For
transactions where goods have already been delivered or services rendered,
the
equity instruments are issued on or about the date the performance is complete
(and valued on the date of issuance).
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
b)
For
transactions where the instruments are issued on a fully vested, non-forfeitable
basis, the equity instruments are valued on or about the date of the
contract.
c)
For
any transactions not meeting the criteria in (a) or (b) above, the Company
re-measures the consideration at each reporting date based on its then current
stock value.
From
time
to time, the Company issues warrants to employees and to third parties pursuant
to various agreements, which are not approved by the shareholders. During the
three month periods ended March 31, 2007, the Company did not grant any options
or warrants.
The
following is a status of the warrants outstanding at March 31, 2007 and the
changes during the three months ended March 31, 2007:
|
|
|
|
Weighted
|
|
|
|
Warrants
|
|
Average
Price
|
|
Outstanding,
December 31, 2006
|
|
|
6,403,728
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Terminated
|
|
|
(25,000
|
)
|
|
(0.65
|
))
|
|
|
|
|
|
|
|
|
Total
Outstanding, March 31, 2007
|
|
|
6,378,728
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2007
|
|
|
6,378,728
|
|
|
0.57
|
|
Deferred
Financing Costs
Direct
costs of securing debt financing are capitalized and amortized over the term
of
the related debt. When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations. During the
three months ended March 31, 2007 and 2006, the Company amortized approximately
$292,000 and $97,000, respectively, to interest expense.
Beneficial
Conversion Feature Of Convertible Notes Payable
The
convertible feature of certain notes payable provides for a rate of conversion
that is below market value. Such feature is normally characterized as a
"Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or
Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application
of
EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
Classification
Of Warrant Obligation
In
connection with the issuance of the 12% Senior Secured Convertible Notes, the
Company has an obligation to file registration statements covering the
Registrable Securities underlying the warrants issued in connection with the
convertible note, as defined in the Amended Registration Rights Agreement.
The
obligation to file the registration statement met the criteria of an embedded
derivative to be bifurcated pursuant to SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. Under this transaction, the
Company was obligated to register for resale the common shares underlying the
warrants, and as a result, the embedded derivative associated with this warrant
obligation did not meet the scope exception of paragraph 11(a) of SFAS No.
133.
Specifically, at March 31, 2006, the Company did not have any uncommitted
registered shares to settle the warrant obligation and accordingly, such
obligation was classified as a liability (outside of stockholders' deficit)
in
accordance with EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
The
classification of the warrant obligation has been evaluated at each reporting
date and reported as a liability until such time all of the criteria necessary
for equity classification were met. The warrant liability was recorded
originally, on February 28, 2006, the issuance date, at $2,190,000, and adjusted
market-to-market every quarter to aproximatelly $2,955,000, $2,155,000,
$1,321,000 and $695,000 at the quarter ended March 31, 2006, June 30, 2006,
September 30, 2006, and December 19, 2006, correspondingly. The market-to-market
adjustment was reversed to derivative liability expense.
On
December 19, 2006, the Company entered into an amended agreement with the
warrant holder, CAMOFI Master LDC, where by the warrant holder agreed to waive
all liquidated damages incurred as a result of the Company’s inability to file a
registration statement to register the shares underlying the warrants. In
addition, a limit was placed on the amount of liquidated damages to be incurred
in the event the Company fails to have an effective registration statement
within the time period required by the amended agreement. The liquidated damages
would be limited to 10% of the outstanding balance of the note. As a result,
the
warrants met all the criteria outlined in EITF 00-19 to be classified as equity.
Accordingly, the warrants were reclassified to equity at December 19, 2006,
and
the $695,000 fair value of warrant liability was credited to additional paid
in
capital.
Management
evaluated the warrants in accordance with SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”, and concluded that the warrants meet all the criteria required to be
classified as equity.
Income
Taxes
We
adopted the provisions of Financial Standards Accounting Board Interpretation
No. 48 Accounting for Uncertainty in Income Taxes ("FIN 48") an interpretation
of FASB Statement No. 109 ("SFAS 109") on January 1, 2007. The implementation
of
FIN 48 did not result in any adjustment to the Company's beginning tax
positions. The Company continues to fully recognize its tax benefits which
are
offset by a valuation allowance to the extent that it is more likely than not
that the deferred tax assets will not be realized. As of March 31, 2007, the
Company did not have any unrecognized tax benefits. The Company files a
Consolidated Federal income tax return in the U.S. The Company files a separate
income tax return in the State of California. The Company is no longer subject
to U.S. Federal tax examinations for the years before 2004.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
Significant
Recent Accounting Pronouncements
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115.” This standard permits an entity to measure many financial
instruments and certain other items at estimated fair value. Most of the
provisions of SFAS No. 159 are elective; however, the amendment to SFAS No.
115
(“Accounting for Certain Investments in Debt and Equity Securities”) applies to
all entities that own trading and available-for-sale securities. The fair value
option created by SFAS No. 159 permits an entity to measure eligible items
at
fair value as of specified election dates. Among others, eligible items exclude
(1) financial instruments classified (partially or in total) as permanent or
temporary stockholders’ equity (such as a convertible debt security with a
non-contingent beneficial conversion feature) and (2) investments in
subsidiaries and interests in variable interest entities that must be
consolidated. A for-profit business entity will be required to report unrealized
gains and losses on items for which the fair value option has been elected
in
its consolidated statements of operations at each subsequent reporting date.
The
fair
value option (a) may generally be applied instrument by instrument, (b) is
irrevocable unless a new election date occurs, and (c) must be applied to the
entire instrument and not to only a portion of the instrument. SFAS No. 159
is
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (i) makes that choice in the
first
120 days of that year, (ii) has not yet issued financial statements for any
interim period of such year, and (iii) elects to apply the provisions of SFAS
No. 157 (“Fair Value Measurements”). The adoption of SFAS No. 159 is not
expected to have a significant impact on future financial
statements.
2.
CONTRACTS IN PROGRESS
Contracts
in progress as of March 31, 2007 which include completed contracts not
completely billed represent the following:
Cumulative
costs to date
|
|
$
|
3,910,000
|
|
Cumulative
gross profit to date
|
|
|
4,123,000
|
|
Cumulative
revenue earned
|
|
|
8,033,000
|
|
Less
progress billings to date
|
|
|
(7,560,000
|
)
|
Net
under billings
|
|
$
|
473,000
|
|
The
following is included in the accompanying consolidated balance sheet under
these
captions as of March 31, 2007:
Costs
and estimated earnings in excess of billings
|
|
|
|
on
uncompleted contracts
|
|
$
|
873,000
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings
|
|
|
|
|
on
uncompleted contracts
|
|
|
(400,000
|
)
|
Net
under billings
|
|
$
|
473,000
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
3.
DEBT FINANCING TRANSACTIONS
During
the three months ended March 31, 2006, the Company recorded approximately
$1,007,000 of finance charges in relation to the unamortized portion of deferred
financing costs for the debt financings.
During
the three months ended March 31, 2006, the Company amortized approximately
$97,000 of debt discounts, including beneficial conversion features, to interest
expense.
During
the three months ended March 31, 2007, the Company amortized approximately
$292,000 of debt discounts, including beneficial conversion features, to
interest expense.
During
the three months ended March 31, 2006, the Company made cash payments of $24,000
to reduce the principal balance on one of its outstanding secured notes payable.
As of March 31, 2006, the balance of the note was $156,000.
During
the three months ended March 31, 2006, the Company did not made any principal
payments on one of its secured convertible note payable. As of March 31, 2006,
the balance of the note was $3,500,000.
Also,
during the three months ended March 31, 2006, the Company made cash payments
of
$300,000 to reduce the principal balance on one of its outstanding convertible
notes payable. As of March 31, 2006, the principal balance on that note was
$300,000.
During
the three months ended March 31, 2007, the Company made cash payments of $36,000
to reduce the principal balance on one of its outstanding secured notes payable.
As of March 31, 2007, the balance of the note is $12,000 which is included
in
the notes payable section of the accompanying consolidated balance
sheet.
During
the three months ended March 31, 2007, the Company made cash payments of
$350,000 to reduce the principal balance on one of its outstanding secured
convertible notes payable. As of March 31, 2007, the principal balance is
approximately $2,683,000 which is presented net of debt discounts totaling
approximately $2,236,000.
Also,
during the three months ended March 31, 2007, the Company made cash payments
of
$100,000 to pay in full the principal balance on one of its outstanding
convertible notes payable.
4.
EQUITY TRANSACTIONS
During
the quarter ended March 31, 2006, the Company issued 150,000 warrants valued
at
$127,500 (estimated using a Black-Scholes option pricing model on the dates
of
grant) to a third party for consulting services. Approximately $10,000 was
recorded as consulting expense during the quarter ended March 31, 2006 and
approximately $117,500 remained unamortized as deferred consulting fees at
March
31, 2006, which was recorded as an offset to stockholders’ equity.
During
March 2006, the Company paid $900,000 in cash and issued 250,000 shares of
restricted common stock to one of its creditors to settle the outstanding
principal balance and accrued interest on two defaulted notes payable, totaling
approximately $1,041,000. The Company recorded the stock at fair value
(estimated based on the trading price of the Company's stock on the date of
grant) totaling $157,500. The value of the stock issued and the cash paid
exceeded the value of the amount of the outstanding debt and accrued interest
by
approximately $17,000. Such amount which was recorded as a loss on debt
extinguishment and included in selling, general and administrative expenses
in
the accompanying condensed consolidated statement of operations for the quarter
ended March 31, 2006.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
As
described in Note 1, the Company enters into equity based compensation
arrangements with non-employees where the value of the services are not readily
determinable and the fair value of the equity instruments is more reliably
measurable. Under most of these arrangements, the performance criteria required
for a measurement date is not reached until the service period has been
completed. As a result, the Company is required to re-measure the consideration
at each reporting date based on its then current stock value. During the quarter
ended March 31, 2006, the Company recorded net increases to the fair values
of
such equity based compensation arrangements of approximately
$115,000.
During
the quarter ended March 31, 2006, the Company recorded approximately $137,000
of
consulting expense related to the amortization of deferred consulting fees
on
equity based compensation arrangements with third parties.
At
March
31, 2006, the Company had a total of 28,980 preferred shares Series C and 11,640
preferred shares Series D issued and outstanding. As of December 31, 2005,
the
Company accumulated dividends totaling $565,875.
In
March
2006, ten of the Company's preferred shareholders elected to waive their rights
to receive dividends. Therefore, the Company recorded a decrease in dividends
payable of $287,875.
In
February 2007, the Company issued 150,000 shares of common stock valued at
$60,000 (based on the market price of the shares on the date the services were
completed in accordance with EITF 96-18) to a third party for investor marketing
services under a one month contract.
In
February 2007, the Company issued 100,000 shares of common stock valued at
$36,000 (based on the market price of the shares on the date the services were
completed in accordance with EITF 96-18) to a third party for financial
consulting services under a 13 day contract.
In
February 2007, the Company issued 300,000 shares of common stock valued at
$126,000 (based on the market price of the shares on the date the services
were
completed in accordance with EITF 96-18) to a third party for investor relation
services under a one month contract.
All
the
above three contracts were recorded as public company expense in the quarter
ended March 31, 2007 in the accompanying consolidated statements of
operations.
As
described in Note 1, the Company enters into equity based compensation
arrangements with non-employees where the value of the services are not readily
determinable and the fair value of the equity instruments is more reliably
measurable. Under most of these arrangements, the performance criteria required
for a measurement date is not reached until the service period has been
completed. As a result, the Company is required to re-measure the consideration
at each reporting date based on its then current stock value. During the quarter
ended March 31, 2007, the Company recorded net increases to the fair values
of
such equity based compensation arrangements of approximately
$25,000.
During
the quarter ended March 31, 2007, the Company recorded approximately $98,800
of
consulting expense related to the amortization of deferred consulting fees
on
equity based compensation arrangements with third parties.
The
preferred shares Series C and preferred shares Series D shares 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.
At
March
31, 2007, the Company had a total of 27,780 preferred shares Series C and 11,640
preferred shares Series D issued and outstanding. As of December 31, 2006,
the
Company has accumulated dividends totaling $362,800. During the quarters ended
March 31, 2006 and March 31, 2007, the Company did not accrue any
dividends.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 2007 And 2006
5.
SUBSEQUENT EVENTS
On
May 1,
2007, the Company entered into an Amended and Restated Registration Rights
Agreement (the “2nd
Amendment”) with CAMOFI. Pursuant to the Amendment, CAMOFI agreed to waive any
liquidated damages prior to the date of the 2nd
Amendment. Also, within 30 days after the date of the 2nd
Amendment, the Company agreed to file a registration statement to cover the
resale of the shares issuable upon conversion of the CAMOFI Note up to 33%
of
the Company’s issued and outstanding stock, and, in 90 days after the date of
filing, to have the registration statement declared effective by the Security
Exchange Commission.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our
Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by the corporate law of the State of Nevada, that our directors
or officers shall not be personally liable to us or our shareholders for damages
for breach of such director's or officer's fiduciary duty. The effect of this
provision on our Articles of Incorporation, as amended and restated, is to
eliminate our rights and our shareholders (through shareholders' derivative
suits on behalf of our company) to recover damages against a director or officer
for breach of the fiduciary duty of care as a director or officer (including
breaches resulting from negligent or grossly negligent behavior), except under
certain situations defined by statute. We believe that the indemnification
provisions in our Articles of Incorporation, as amended, are necessary to
attract and retain qualified persons as directors and officers.
Our
By
Laws also provide that the Board of Directors may also authorize the Company
to
indemnify our employees or agents, and to advance the reasonable expenses of
such persons, to the same extent, following the same determinations and upon
the
same conditions as are required for the indemnification of and advancement
of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
ITEM
25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE
OF EXPENSE AMOUNT
SEC
REGISTRATION FEE
|
|
$
|
91.01
|
|
ACCOUNTING
FEES AND EXPENSES
|
|
$
|
5,000
|
* |
LEGAL
FEES AND EXPENSES
|
|
$
|
40,000
|
* |
MISCELLANEOUS
|
|
$
|
4,908.99
|
* |
|
|
$
|
50,000
|
|
*
Estimated.
PREFERRED
STOCK
In
June
2006, holders of the Company's Preferred C converted 1,200 shares into 20,000
shares of common stock. There were no other transactions related to preferred
stock .
COMMON
STOCK
Related
to Motivated Minds Convertible Note
In
connection with the initial issuance of the Motivated Minds convertible
note
on
February 15, 2006, the Company issued 30,000 shares of common stock to the
note
holder. The proceeds of the note were allocated to the common shares using
Relative Fair Value allocation method in accordance with APB No.14, resulting
in
debt discount of approximately $9,600, which was amortized over the life of
the
Note.
On
March
7, 2006, in connection with the Motivated Minds convertible
note
dated
February 15, 2006, the Company issued 30,000 restricted shares of common stock
to Motivated Minds for extension of the maturity date of $300,000 of principal
balance of the note until May 15, 2006. The common stock was recorded at the
estimated fair value of the common stock on the date of the transaction totaling
approximately $18,900, which was amortized as interest expense over three
months.
On
April
25, 2006, the Company issued 9,091 shares of common stock for conversion of
$6,000 of interest due on Motivated Minds Note. The common stock conversion
price was recorded at $0.66 in accordance with the terms of the convertible
note
agreement.
On
May
15, 2006, the Company issued 10,227 shares of common stock for conversion of
$6,750 of interest due on Motivated Minds Note. The common stock conversion
price was recorded at $0.66 in accordance with the terms of the convertible
note
agreement.
On
July
25, 2006, in connection with the Motivated Minds convertible note dated February
15, 2006, the Company issued 45,000 restricted shares of common stock to
Motivated Minds for extension of the maturity date of $150,000 of principal
balance of the note until August 16, 2006, and the remaining principal balance
of $150,000 of the note until October 16, 2006. The common stock was recorded
at
the estimated fair value of the common stock on the date of the transaction
totaling approximately $23,400, which was amortized as interest expense over
three months.
On
November 14, 2006, in connection with the Motivated Minds convertible note
dated
February 15, 2006, the Company issued 30,000 restricted shares of common stock
to Motivated Minds for extension of the maturity date of $150,000 of principal
balance of the note until December 16, 2006. The common stock was recorded
at
the estimated fair value of the common stock on the date of the transaction
totaling approximately $6,000, which was expensed immediately as interest
expense.
Related
to CAMOFI Secured Convertible Note
In
connection with the initial issuance of the CAMOFI
secured convertible note
on
February 28, 2006, the Company issued 250,000 shares of common stock to
Ascendiant Securities LLC. The common stock was recorded at the estimated fair
value of the common stock on the date of the transaction totaling approximately
$157,500, which was recorded as deferred financing cost and is amortized over
3
years, the life of the note. As of December 31, 2006, a total of $43,750 was
amortized to interest expense.
Other
During
March 2006, the Company paid $900,000 in cash and issued 250,000 shares of
restricted common stock to one of its creditors to settle $750,000 outstanding
principal balance and $291,050 accrued interest on two defaulted notes payable.
The Company recorded the stock at fair value (estimated based on the trading
price of the Company's stock on the date of grant) totaling $157,500. The value
of the stock issued and the cash paid exceeded the value of the amount of the
outstanding debt and accrued interest by approximately $17,000. Such amount
which was recorded as a loss on debt extinguishment.
In
July
2006, the Company issued 100,000 shares of common stock valued at $41,000 (based
on the market price of the shares) to a third party for corporate finance and
investor relations services under a one month contract. The common stock was
recorded at the estimated fair value of the common stock on the date of the
transaction and expensed immediately.
In
December 2006, the Company issued 150,000 shares of common stock valued at
$28,500 (based on the market price of the shares) to a third party for public
relations consulting services under a 14 day contract. The common stock was
recorded at the estimated fair value of the common stock on the date of the
transaction and approximately $28,500. At December 31, 2006, In accordance
with
the EITF 96-18, the Company performed a recalculation of the deferred consulting
fees based on the fair value stock price at the ending of reporting period,
and
adjusted the fees to $31,500. The additional $3,000 difference was recorded
as
deferred consulting fees and is being amortized over the remaining term of
the
contract. At December 31, 2006, the remaining deferred consulting fees under
this contract totaled $9,000.
On
October 11, 2005, the Company issued 100,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under
a
one year consulting agreement. The Company recorded the fair value of the common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $41,000 as deferred consulting fees and is amortizing such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company’s stock price from issuance to the date when the
services were deemed completed, at December 31, 2005, in accordance with the
EITF 96-18, the Company performed a recalculation of the deferred consulting
fees based on the December 31, 2005 fair value stock price, and adjusted the
fees to $62,000. The additional $21,000 difference was recorded as deferred
consulting fees and was amortized over the remaining term of the contract.
At
December 31, 2005, the remaining deferred consulting fees under this contract
totaled $49,083. At December 31, 2006, the remaining deferred consulting fees
under this contract were amortized entirely during the year.
On
October 26, 2005, the Company issued 100,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under
a
one year consulting agreement. The Company recorded the fair value of the
transaction (based on the trading price of the Company's stock on the date
of
issuance $42,000 as deferred consulting fees and was amortizing such amount
over
the twelve month term of the agreement. Due to a significant increase of the
Company’s stock price from issuance to the date when the services were deemed
completed, at December 31, 2005, in accordance with the EITF 96-18, the Company
performed a recalculation of the deferred consulting fees based on the December
31, 2005 fair value stock price, and adjusted the fees to $62,000. The
additional $20,000 difference was recorded as deferred consulting fees and
was
amortized over the remaining term of the contract. At December 31, 2005, the
remaining deferred consulting fees under this contract totaled $50,633. At
December 31, 2006, the remaining deferred consulting fees under this contract
were amortized entirely during the year.
On
October 27, 2005, the Company issued 300,000 shares of restricted common stock
to a consultant for corporate finance and investor relations services under
a
one year consulting agreement. The Company recorded the fair value of the common
stock (based on the trading price of the Company's stock on the date of
issuance) totaling $132,000 as deferred consulting fees and is amortizing such
amount over the twelve month term of the agreement. Due to a significant
increase of the Company’s stock price from issuance to the end of the reporting
period, in accordance with the EITF 96-18, the Company performed a recalculation
of the deferred consulting fees based on the December 31, 2005 fair value stock
price, and adjusted the fees to $186,000. The additional $54,000 difference
was
recorded as deferred consulting fees and was amortized over the remaining term
of the contract. At December 31, 2005, the remaining deferred consulting fees
under this contract totaled $155,000. On November 1, 2006, the date the services
were completed, in accordance with the EITF 96-18, the Company performed a
recalculation of the deferred consulting fees based on the fair value stock
price at the completion of contract, and adjusted the deferred consulting fees
to $60,000. The remaining deffered consulting fees were fully amortized in
2006.
In
December 2005, the Company issued 75,000 shares of common stock to a consultant
for consulting services. However, the management inadvertently did not record
the transaction. In December 2006, the Company recorded issuance of the 75,000
shares of common stock. The common stock was recorded at the estimated fair
value of the common stock on the date of the transaction and approximately
$14,250 was expensed immediately.
WARRANTS
In
February 2006, the Company issued 454,545 warrants shares of common stock to
the
holder of the note in connection with the issuance of the Motivated Minds
convertible note dated February 15, 2006.
The
Warrants are exercisable at a price of $0.66 per share and expire on February
14, 2011. Also,
the
Company issued an aggregate of 45,454 warrants shares of common stock to the
Placement Agents and their assignees. The warrants are exercisable at a price
of
$.66 per share and expire on February 14, 2011. (See
Note
6).
In
February 2006, the Company issued 3,476,190 warrants shares of common stock
to
the holder of the note in connection with the issuance of the CAMOFI
convertible note dated February 28, 2006.
The
Warrants are exercisable at a price of $0.63 per share and will expire on
February 28, 2011. Also, the Company issued an aggregate of 722,539 warrants
to
the Placement Agent and its assignee. The warrants are exercisable at a price
of
$.63 per share and expire on February 28, 2011. (See Note 6).
In
March
2006, the Company issued 150,000 warrants valued at $127,500 (estimated using
a
Black-Scholes option pricing model on the dates of grant) to a third party
for
consulting services under an agreement to write an Executive Informational
Overview and 4 quaterly updates. The Company recorded the fair value of the
common stock totaling $127,500 as deferred consulting fees and amortized such
amount over the twelve month term of the agreement. In accordance with the
EITF
96-18, the Company performed a recalculation of the deferred consulting fees
based on the December 31, 2006 fair value stock price, and adjusted the fees
to
$31,500. The $96,000 difference was recorded as a decrease in deferred
consulting fees.
On
December 19, 2006, the Company entered into an Amended and Restated Registration
Rights Agreement (the “Amendment”) with CAMOFI. Pursuant to the Amendment,
CAMOFI agreed to waive any liquidated damages accrued prior to the date of
the
Amendment. An aggregate of 1,500,000 warrants valued at $300,000 (based on
the
stock trading price on the date of grant in accordance with EITF 96-18) were
issued to the Noteholder as a consideration of the Amendment. The warrants
are
exercisable at a price of $.35 per share and expire on December 19, 2013. (See
Note 6).
The
foregoing were issued in reliance upon an exemption from the registration
requirements of the Securities Act of 1933, as amended, (the “Act”) for the
private placement of the securities discussed above, pursuant to Section 4(2)
of
the Act and/or Regulation D promulgated thereunder.
The
following exhibits are included as part of this Form SB-2. References to "the
Company" in this Exhibit List mean New Century Companies, Inc.
EXHIBIT
NUMBER
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DESCRIPTION
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2.1
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Share
Exchange Agreement dated as of December 18, 2000. (1)
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3.1
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Certificate
of Incorporation as filed with the Delaware Secretary of State, as
amended.(2)
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3.2
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Certificate
of Amendment to the Certificate of Incorporation as filed with the
Delaware Secretary of State.(3)
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3.2
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Bylaws.
(2)
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5.1
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Sichenzia
Ross Friedman Ference LLP Opinion and Consent (filed
herewith)
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10.1
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Agreement
and Plan of Merger, dated as of May 25, 2003, by and among
Internetmercado.com, Inc., New Century Remanufacturing, Inc., New
Century
Acquisition Corporation, David Duquette and Josef Czikmantori;
(4)
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10..2
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Series
A Convertible Note issued to Motivated Minds, LLC dated February
28, 2006
(6)
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10.3
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Common
Stock Purchase Warrants issued to Motivated Minds, LLC dated February
28,
2006 (6)
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10.4
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Registration
Rights Agreement dated February 15, 2006 (6)
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10.5
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Securities
Purchase Agreement between New Century Companies, Inc. and CAMOFI
Master
LDC (5)
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10.6
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12%
Senior Secured Convertible Note issued by New Century Companies,
Inc. in
favor of CAMOFI Master LDC (5)
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10.7
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Common
Stock Purchase Warrant issued to CAMOFI Master LDC (5)
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10.8
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Registration
Rights Agreement between New Century Companies, Inc. and CAMOFI Master
LDC
(5)
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10.9
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Escrow
Agreement between New Century Companies, Inc., CAMOFI Master LDC
and
Katten Muchin Rosenman LLP, as Escrow Agent (5)
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10.10
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Security
Agreement between New Century Companies, Inc. and its current and
future
subsidiaries on the one hand, and CAMOFI Master LDC on the other
hand
(5)
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10.11
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Subsidiary
Guarantee provided by all current and future subsidiaries of New
Century
Companies, Inc. to CAMOFI Master LDC (5)
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10.12
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Lock-up
Agreement with certain shareholders of New Century Companies, Inc.
(5)
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10.13
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Allonge
to Series A Convertible Note dated August 8, 2006 (filed
herewith)
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10.14
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Amendment
to Registration Rights Agreement dated August 8, 2006 (filed
herewith)
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10.15
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Amended
and Restated Registration Rights Agreement dated December 19, 2006
(7)
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10.16
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Common
Stock Purchase Warrants issued to Motivated Minds, LLC dated December
19,
2006 (7)
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10.17
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Amended
and Restated Registration Rights Agreement dated May 1,
2007.
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10.18
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Placement
Agent agreement with Ascendiant Securities, LLC dated January 26,
2006.
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21.1
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Subsidiaries
of the Company (6).
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23.1
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Consent
of Squar, Milner, Peterson, Miranda, & Williamson, LLP (filed
herewith)
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23.2
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Consent
of Sichenzia Ross Friedman Ference LLP (See Exhibit
5.1)
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(1)
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Incorporated
herein by reference from the Company's filing on Form 8-K filed on
August
23, 2000.
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(2)
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Incorporated
by reference to Exhibit 2.1 the Company's Registration Statement
on Form
C-18, filed on August 14, 1980.
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(3)
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Incorporated
by reference to 8-K filed June 4, 2003
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(4)
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Incorporated
by reference to the Exhibit 2.1 of the 8-K filed June 4,
2003.
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(5)
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Incorporated
by reference to the Company’s Form 8-K filed on March 13,
2006
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(6)
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Incorporated
by reference to the Company’s Form SB-2 Registration Statement filed on
June 8, 2006
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(7)
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Incorporated
by reference to the Company’s Form 8-K filed on December 26,
2006
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ITEM
28. UNDERTAKINGS.
The
undersigned registrant hereby undertakes to:
(1)
File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act
if,
in the aggregate, the changes in volume and price represent no more than a
20%
change in the maximum aggregate offering price set forth in the "Calculation
of
Registration Fee" table in the effective registration statement,
and
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3)
File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
For
purposes of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5)
For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for
the securities offered in the registration statement, and that offering of
the
securities at that time as the initial bona fide offering of those
securities.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and
is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the registrant of expenses incurred or paid by a director, officer
or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this amendment no. 1 to
the
registration statement to be signed on its behalf by the undersigned, in the
City of Santa Fe Springs, State of California, on May 30, 2007.
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New
Century Companies, Inc.
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By: |
/s/ David
Duquette
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David
Duquette
Chief
Executive Officer and Chief Financial
Officer
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KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David Duquette as true and lawful attorney-in-fact
and
agent with full power of substitution and resubstitution and for him/her and
in
his/her name, place and stead, in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement, as well as any new registration statement filed to
register additional securities pursuant to Rule 462(b) under the Securities
Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorney-in-fact and agent full power and authority to do and perform
each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done
by
virtue hereof. In accordance with the requirements of the Securities Act of
1933, registration statement was signed by the following persons in the
capacities and on May 29, 2007.
Signature
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Title
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Date
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/s/
David Duquette
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Chief
Executive Officer
Chief
Financial Officer and Director
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May
30, 2007
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/s/
Josef Czikmantori
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Secretary
and Director
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May
30, 2007
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