SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2001
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OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to
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Commission file Number 0-9459
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NEW CENTURY COMPANIES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 06-1034587
--------------------------------------------------------- ----------------------------------------------------
(State or other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
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(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
------------------- on Which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10
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(Title of Class)
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-SKB. [X]
State issuer's revenue for its most recent fiscal year $6,138,829.
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State the aggregate market value of the voting and non-voting common equity
held by no-affiliates computed by reference to the price at which the common
equity as sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days (See definition of affiliate in Rule
12b-2 of the Exchange Act.). $13,099,299.
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Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of share outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of April 10, 2001 there
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were 5,038,192 shares of common stock issued and outstanding
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Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
Registrant's consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-KSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Registrant's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Registrant's believes that the assumptions on which these forward-looking
statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate and actual results could differ materially
from those discussed in the forward looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-KSB
are qualified in their entity by this statement.
OVERVIEW
On May 25, 2001, the Company entered into a plan of Reorganization and
Merger with New Century Remanufacturing, Inc. Immediately prior to the merger,
the Company had 50,000,000 shares authorized and 2,695,942 shares issued and
outstanding. Pursuant to the merger, all of the 1,800 outstanding shares of NCR
were exchanged for shares of the Company on a 1 to 833.33 basis or into
1,500,000 shares of common stock of the Company for a total of 4,195,942 shares
of common stock issued and outstanding. Immediately after the merger, all then
existing officers and directors of the Company resigned and the management of
NCR was elected and appointed to such positions; thereby effecting a change of
control. Although NCR became a wholly-owned subsidiary of the Company following
the transaction, because the transaction resulted in a change of control, the
transaction was recorded as a "reverse merger" whereby NCR was considered to be
the accounting acquirer of the Company.
After the reverse merger the Company changed its name to New Century
Companies, Inc. The results of the Company previously filed in the past years
are not included herein. The related financial statements are the results of
operations for NCR.
Plan of Operations
The earnings of New Century Companies for the year ended 2002 were negative
as a result of management's strategy of continued investment in research and
development of new projects and of the corporate expenses related to compliance
with the regulatory requirements of being a public company. The goal of these
expenditures was to position New Century as a leading manufacturer and
remanufacturer of large horizontal and vertical turning machines. New Century
has completed the majority of this current development effort and expects
limited resources to be devoted to this area in the next fiscal year. The
Company's current strategy is to expand its customer sales base with its
present line of machine products. Plans for expansion are expected to be funded
through current working capital from ongoing sales. However, significant growth
will require additional funds in the form of debt or equity, or a combination
thereof. However, there can be no assurance these funds will be available. The
Company's growth strategy also includes strategic acquisitions in addition to
growing the current business. A significant acquisition will require additional
financing. There can be no assurance that the Company can obtain such financing
for the period ended December 31, 200 .
Restatement of 2001 Financial Statements
The Company previously recorded its convertible, Series B preferred stock as
issued and outstanding. However, in accordance with the conversion terms of the
preferred stock, the shares were to automatically convert into shares of common
stock with the effectiveness of the registration statement, registering the
underlying shares. As such, the Company has restated its December 31, 2001
financial statements to correctly reflect the Series B preferred stock as
committed common shares.
The resulting impact of this restatement on net loss attributable to common
shareholders is as follows:
Amount Per Share
--------- ---------
Net loss attributable to common shareholders, as previously reported......... $(549,791) $(0.16)
Adjustment to correct dividends on preferred shares previously recorded ..... 71,125 0.02
--------- ------
Net loss attributable to common shareholders, as restated.................... $(478,666) $(0.14)
========= ======
On December 21, 2001, the Company signed a promissory note agreement for
$215,000 for a deposit on the purchase of the building in which it operates.
This note payable was incorrectly excluded from its previously filed financial
statements. This transaction did not have any impact on the Company's reported
net loss for the year ended December 31, 2001.
The effect on the Company's total assets and liabilities as of December 31,
2001 is as follows:
As Reported Amount As Restated
----------- -------- -----------
Total assets........... $2,707,673 $215,000 $2,922,673
Total liabilities ..... $2,908,085 $215,000 $3,123,085
Results Of Operations For the Period Ended December 31, 2002 Compared to
December 31, 2001.
Revenues. New Century generated revenues of $9,054,146 for the fiscal year
ended December 31, 2002, which was a $2,915,317 increase from $6,138,829 for
the fiscal year ending December 31, 2001. This increase was primarily a result
of increased selling efforts and sales to new industries such as the defense
and medical industries.
Gross Profit. Gross profit for the fiscal year ending December 31, 2002,
was $1,780,807 or 19.7% of revenues, compared to $1,004,241, or 16.4% in 2001,
an increase of 20%, primarily due to continued product development and research
and increased productivity.
Net Loss. Net operating loss increased to $1,760,601 for the fiscal year
ended December 31, 2002 compared to $478,666 for the fiscal year ended December
31, 2001 due to the non-recurring corporate expenses related to being a public
company, moving costs related to a new expanded production facility, increased
interest expense and the write-off of subscription receivables.
Interest Expenses. Interest expense for the fiscal year ended December 31,
2002, increased to $610,675, compared to $66,507, for the fiscal year ended
December 31, 2001, primarily due to a increase in short term borrowings.
RESULTS OF OPERATIONS
New Century generated revenues of $6,138,829 for fiscal year ended December
31, 2001, which was $935,318 decrease from $7,074,147 for the year ending
December 31, 2000. This decrease was primarily a result of the economic slow
down in 2001.
Gross profit for the year ending December 31, 2001, was $1,004,241 or 16%
of revenues, compared to $357,875, or 5% in 2000, an increase of 180%, primarily
due to product development and research reflected in productivity improvement.
Net operating loss increased to $478,666 for the year December 31, 2001
compared to $395,075 for year ended December 31, 2000 due to the non-recurring
corporate expenses related to the public company.
Interest expense for the year ended December 31, 2001, decreased to
$66,507, compared to $67,839, year ended December 31, 2000, primarily due to a
decrease of the prime lending rate.
Financial Condition, Liquidity, Capital Resources
-------------------------------------------------
Net cash used in the operations of New Century during fiscal year 2001 was
($483,855), which was a $1,044,154 decrease from fiscal year 2000. The decrease
is due to corporate expenses related to the public company. New century financed
its cash flow deficiency by securing financing through the placement of common
stock and Notes payable. Total cash provided by financing activities of $375,736
for the fiscal year 2001.
The Registrant plans to continue to rely upon external financing sources to
meet the cash requirement of its ongoing operations. Management is currently
seeking to raise additional funding on the form of equity or debt, or a
combination thereof. However, there is no guarantee that it will raise
sufficient capital to execute its business plan. To the extent that the
Registrant is unable to raise sufficient capital, the Registrant's business plan
will be required to be substantially modified and its operations curtailed.
The company's auditors have issued their report which contains an
explanatory paragraph as to the company's ability to continue as a going
concern. The company is currently addressing its liquidity problem by the
following actions:
.. The company continues its aggressive program for selling inventory that has
been produced or is currently in production.
.. The Company continues to implement plans to further reduce operating costs.
.. The Company is continually seeking investment capital through the public
markets.
However, there is no guarantee that any of these strategies will enable the
company to meet its obligations for the foreseeable future.
Inflation and Changing Prices
-----------------------------
The Registrant does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
Critical Account Policies
-------------------------
The Company uses the percentage-of-completion method of accounting to
account for long-term contracts and, therefore, take 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 extend over one or more years, 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 financial statements.
Contracts that are substantially complete are considered closed for
financial statement purposes. Revenue earned on contracts in progress in excess
of billings (underbillings) is classified as a current asset. Amounts billed in
excess of revenue earned (overbillings) are classified as a current liability.
ITEM 7. Financial Statements.
The Restated Financial Statements of the Company are set forth at the end
hereof.
PART III
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 28, 2003 NEW CENTURY COMPANIES, INC.
/s/ David Duquette
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Name: David Duquette
Title: Chairman, President and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and ill the capacities and on
the dates indicated.
Date: April 28, 2003 /s/ David Duquette
----------------------------------------
Name: David Duquette
Title: Chairman, President and Director
Date: April 28, 2003 /s/ Josef Czikmantori
----------------------------------------
Name: Josef Czikmantori
Title: Secretary and Director
CERTIFICATION
I, David Duquette, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of New
Century Companies, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and I have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
Company's auditors and the audit committee of Company's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Company's internal controls; and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
April 28, 2003 /s/ David Duquette
-------------------------------------
Name: David Duquette
Title: Chief Executive Officer and
Chief Financial Officer
NEW CENTURY COMPANIES, INC.
CONTENTS
December 31, 2001
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance Sheet 2 - 3
Statements of Operations 4
Statements of Shareholders' Deficit 5
Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 25
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
New Century Companies, Inc.
Santa Fe Springs, California
We have audited the accompanying balance sheet of New Century Companies, Inc. as
of December 31, 2001, as restated (see Note 3), and the related statements of
operations, shareholders' deficit, and cash flows, as restated (see Note 3) for
each of the two years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 restated financial statements referred to above present
fairly, in all material respects, the financial position of New Century
Companies, Inc. as of December 31, 2001, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's current liabilities exceed its current
assets. This raises substantial doubt about the Company's ability to continue as
a going concern. Management's plan in regard to these matters is also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 1, 2002
NEW CENTURY COMPANIES, INC.
BALANCE SHEET
December 31, 2001
ASSETS
(restated)
Current assets
Cash $ 43,764
Contracts receivable 306,176
Inventory 1,193,204
Costs and estimated earnings on contracts in
progress in excess of billings 106,554
Prepaid expenses and other current assets 97,933
------------
Total current assets 1,747,631
Property and equipment, net 700,865
Deposits 474,177
------------
Total assets $ 2,922,673
============
The accompanying notes are an integral part of these financial statements.
2
NEW CENTURY COMPANIES, INC.
BALANCE SHEET
December 31, 2001
LIABILITIES AND SHAREHOLDERS' DEFICIT
(restated)
Current liabilities
Book overdraft $ 88,079
Notes payable, net of discount of $106,000 606,013
Current portion of capital lease obligations 44,537
Accounts payable 1,097,473
Accrued expenses 315,385
Billings in excess of costs and estimated earnings on
contracts in progress 921,584
----------------
Total current liabilities 3,073,071
Capital lease obligations, net of current portion 50,014
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Total liabilities 3,123,085
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Commitments and contingencies
Shareholders' deficit
Cumulative, convertible, Series B preferred stock, $1 par value
15,000,000 shares authorized
no shares issued and outstanding -
Common stock issuable on conversion of Series B preferred stock
95,023 shares 56,900
Common stock, $0.10 par value
6,000,000 shares authorized
4,940,527 shares issued and outstanding 494,053
Additional paid-in capital 1,410,927
Treasury stock, at cost, 7,750 shares (7,750)
Subscription receivable (1,087,500)
Loans to shareholders (433,345)
Deferred consulting fees (155,031)
Accumulated deficit (478,666)
----------------
Total shareholders' deficit (200,412)
----------------
Total liabilities and shareholders' deficit $ 2,922,673
================
The accompanying notes are an integral part of these financial statements.
3
NEW CENTURY COMPANIES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2001 2000
--------------- --------------
(restated)
Net sales $ 6,138,829 $ 7,074,147
Cost of sales 5,134,588 6,716,272
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Gross profit 1,004,241 357,875
Operating expenses 1,437,918 819,350
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Loss from operations (433,677) (461,475)
--------------- --------------
Other income (expense)
Interest expense (66,507) (67,839)
Interest income 17,916 11,621
Other income 4,402 123,418
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Total other income (expense) (44,189) 67,200
--------------- --------------
Loss before provision for income taxes (477,866) (394,275)
Provision for income taxes 800 800
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Net loss and net loss attributable to common
shareholders $ (478,666) $ (395,075)
=============== ==============
Basic and diluted loss per share $ (0.14) $ (0.26)
=============== ==============
Basic and diluted weighted-average shares outstanding 3,451,109 1,500,000
=============== ==============
The accompanying notes are an integral part of these financial statements.
4
NEW CENTURY COMPANIES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Years Ended December 31,
Shares Issuable on
Conversion of Additional
Series B Preferred Stock Common Stock Paid-in Treasury Subscription Loans to
------------------------- ------------------------
Shares Amount Shares Amount Capital Stock Receivable Shareholders
--------- ----------- ----------- ----------- ----------- -------- ------------ -------------
Balance, December 31,
1999 - $ - 1,500,000 $ 150,000 $ (60,000) $ - $ - $ (106,500)
Loan to shareholder (251,824)
Net loss
--------- ----------- ----------- ----------- ----------- -------- ------------ -------------
Balance, December 31,
2000 - - 1,500,000 150,000 (60,000) - - (358,324)
Merger with Internet-
Mercado.com, Inc. 168,358 100,900 2,695,942 269,594 (275,244) (7,750) (87,500)
Reclassification of "S"
corporation retained
earnings on
termination of "S"
corporation status 128,505
Issuance of common
stock for
subscription
receivable 400,000 40,000 960,000 (1,000,000)
Issuance of common
stock for cash 200,000 20,000 230,000
Issuance of common
stock for consulting
services 71,250 7,125 285,000
Amortization of
deferred
consulting fees
Loan to shareholder (75,021)
Discount on debt
attributable to stock
purchase warrants 106,000
Issuance of committed
common stock (73,335) (44,000) 73,335 7,334 36,666
Net loss
--------- ----------- ----------- ----------- ----------- -------- ------------ -------------
Balance, December 31,
2001 (restated) 95,023 $ 56,900 4,940,527 $ 494,053 $ 1,410,927 $ (7,750) $ (1,087,500) $ (433,345)
========= =========== =========== =========== =========== ======== ============ =============
Retained
Deferred Earnings
Consulting (Accumulated
Fees Deficit) Total
---------- ----------- ---------
Balance, December 31,
1999 $ - $ 523,580 $ 507,080
Loan to shareholder (251,824)
Net loss (395,075) (395,075)
---------- ----------- ---------
Balance, December 31,
2000 - 128,505 (139,819)
Merger with Internet-
Mercado.com, Inc. -
Reclassification of "S"
corporation retained
earnings on
termination of "S"
corporation status (128,505) -
Issuance of common
stock for
subscription
receivable -
Issuance of common
stock for cash 250,000
Issuance of common
stock for consulting
services (292,125) -
Amortization of
deferred
consulting fees 137,094 137,094
Loan to shareholder (75,021)
Discount on debt
attributable to stock
purchase warrants 106,000
Issuance of committed
common stock -
Net loss (478,666) (478,666)
---------- ----------- ---------
Balance, December 31,
2001 (restated) $ (155,031) $ (478,666) $(200,412)
========== =========== =========
The accompanying notes are an integral part of these financial statements.
5
NEW CENTURY COMPANIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2001 2000
--------------- --------------
(restated)
Cash flows from operating activities
Net loss $ (478,666) $ (395,075)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization of property and equipment 216,490 129,500
Amortization of consulting fees 137,094 -
Interest income (17,916) (11,621)
Inventory reserves for obsolescence - (50,000)
(Increase) decrease in
Contracts receivable (47,176) (156,500)
Inventory (503,365) 590,348
Costs and estimated earnings on contracts in
progress in excess of billings (14,414) 43,806
Prepaid expenses and other current assets (52,085) (16,001)
Deposits (250,000) -
Increase (decrease) in
Accounts payable 223,531 (182,482)
Accrued expenses 230,873 (68,224)
Billings in excess of costs and estimated earnings on
contracts in progress 71,779 676,548
--------------- --------------
Net cash provided by (used in) operating activities (483,855) 560,299
--------------- --------------
Cash flows from investing activities
Purchase of property and equipment (4,041) (34,042)
Loans to shareholders (75,021) (251,824)
--------------- --------------
Net cash used in investing activities (79,062) (285,866)
--------------- --------------
Cash flows from financing activities
Book overdraft 88,079 -
Proceeds from notes payable 250,000 -
Principal payments on notes payable (176,834) (116,208)
Principal payments on capital lease obligations (35,509) (26,358)
Issuance of common stock 250,000 -
--------------- --------------
Net cash provided by (used in) financing activities 375,736 (142,566)
--------------- --------------
The accompanying notes are an integral part of these financial statements.
6
NEW CENTURY COMPANIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2001 2000
--------------- ----------------
(restated)
Net increase (decrease) in cash $ (187,181) $ 131,867
Cash, beginning of year 230,945 99,078
--------------- ----------------
Cash, end of year $ 43,764 $ 230,945
=============== ================
Supplemental disclosures of cash flow information
Interest paid $ 66,507 $ 67,839
=============== ================
Income taxes paid $ 800 $ 800
=============== ================
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 2001, the Company entered into the following
non-cash transactions:
.. issued 2,695,942 shares of common stock in connection with the merger of
InternetMercado.com.
.. issued 400,000 shares of common stock in exchange for a $1,000,000
subscription receivable.
.. issued 71,250 shares of common stock in exchange for $292,125 of consulting
services.
.. converted 44,000 shares of preferred stock in exchange for 73,335 shares of
common stock.
.. acquired $31,452 of property and equipment under capital lease obligations.
.. made a deposit on property in exchange for a $215,000 note payable.
During the year ended December 31, 2000, the Company entered into the following
non-cash transactions:
.. acquired $88,000 of property and equipment under capital lease obligations.
.. transferred $730,710 of inventory to property and equipment.
The accompanying notes are an integral part of these financial statements.
7
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 1 - BUSINESS AND ORGANIZATION
General
New Century Companies, Inc. (the "Company"), a California corporation, was
incorporated March 1996 and is located in Southern California. The Company
provides after-market services, including rebuilding, retrofitting, and
remanufacturing of metal cutting machinery. Once completed, a
remanufactured machine is "like new" with state-of-the-art computers, and
the cost to the Company's customers is approximately 40% to 50% of that of
a new machine.
The Company currently sells its services by direct sales and through a
network of machinery dealers across the United States. Its customers are
generally medium- to large-sized manufacturing companies in various
industries where metal cutting is an integral part of their businesses. The
Company grants credit to its customers who are predominately located in the
western United States.
Stock Split
On November 26, 2001, the Company authorized a one-for-10 reverse stock
split. All share and per share data have been retroactively restated to
reflect the split.
Merger with InternetMercado.com, Inc.
On May 25, 2001, the Company entered into a merger agreement (the
"Agreement") in which the Company was merged with InternetMercado.com, Inc.
("InternetMercado"). In accordance with the terms of the Agreement, the
following conversions occurred:
. Each issued and outstanding share of common stock of the new entity's
newly formed, wholly owned subsidiary was converted into one share of
the Company's common stock.
. Each share of the Company's common stock was converted into shares of
InternetMercado's common stock, par value $0.10 per share (the
"InternetMercado Shares") at the rate of 83.33 InternetMercado Share
for each of the Company's shares amounting to an aggregate 1,500,000
InternetMercado Shares.
The transaction has been accounted for as a reverse acquisition, whereby
the Company is the accounting acquirer. The acquisition has been recorded
at the value of the net assets of InternetMercado. The equity section has
been restated to reflect the Company's current capital structure.
Accordingly, the financial statements are the historical financial
statements of New Century Companies, Inc. In addition, since the Company
was an "S" Corporation prior to the merger, all retained earnings for the
period prior to the merger have been reclassified to additional paid-in
capital in accordance with rules promulgated by the Securities and Exchange
Commission. Accumulated earnings between December 31, 2000 and May 25, 2001
were not material.
8
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 1 - BUSINESS AND ORGANIZATION (Continued)
Name Change
In June 2001, the Company's name was changed from InternetMercado.com, Inc.
to New Century Companies, Inc.
NOTE 2 - GOING CONCERN AND RISKS AND UNCERTAINTIES
Going Concern
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As of
December 31, 2001, the Company had high levels of inventory, its current
liabilities exceeded its current assets, and it is not in compliance with
loan terms, which caused the Company liquidity issues. These factors raise
substantial doubt about the Company's ability to continue as a going
concern.
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 merged with a public company in May 2001 (see Note 1) and
is in the process of issuing a private placement.
. The Company is seeking investment capital through the public markets.
. The Company has secured approximately $1,815,500 worth of new orders
from January 2002 through March 2002.
The financial statements do not include any adjustments that might be
necessary should the Company be unable to implement any or all of these
plans.
Listing and Maintenance Criteria for NASDAQ Securities
The Company intends to apply for listing of its common stock on NASDAQ for
the Small-Cap Market. The initial listing standards for the NASDAQ
Small-Cap Market require that the Company have total assets of at least
$4,000,000, total shareholders' equity of at least $2,000,000, a public
float of at least 100,000 shares with a market value of at least
$1,000,000, at least 300 shareholders, a minimum bid price for its common
stock of $3 per share, and at least two market makers.
9
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 2 - GOING CONCERN AND RISKS AND UNCERTAINTIES (Continued)
Listing and Maintenance Criteria for NASDAQ Securities (Continued)
To maintain its listing on the NASDAQ Small-Cap Market, the Company must
continue to be registered under Section 12(g) of the Securities and
Exchange Act of 1934 and have total assets of at least $2,000,000, total
shareholders' equity of at least $1,000,000, a public float of at least
100,000 shares with a market value of at least $200,000, at least 300
shareholders, a minimum bid price for its common stock of $1 per share, and
at least two market makers. There is not any assurance that the Company
will be able to obtain or maintain the standards for NASDAQ Small-Cap
Market listing.
Concentrations of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and contracts receivable. The
Company places its cash with high credit, quality financial institutions.
At times, such cash may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000. At December 31, 2001, the
uninsured portions held at the financial institutions aggregated to
$118,573. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash. With
respect to contracts receivable, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that
the receivable credit risk exposure is limited.
Major Customers
During the year ended December 31, 2001, the Company conducted business
with three customers whose sales comprised 28%, 22%, and 10% of net sales.
As of December 31, 2001, three customers accounted for 44%, 36%, and 15% of
total contracts receivable.
Major Suppliers
During the years ended December 31, 2001 and 2000, the Company conducted
business with one supplier who accounted for 32% and 27% of total
purchases, respectively. As of December 31, 2001, two suppliers accounted
for 21% and 12% of total accounts payable.
NOTE 3 - RESTATEMENTS
The Company previously recorded its convertible, Series B preferred stock
as issued and outstanding. However, in accordance with the conversion terms
of the preferred stock, the shares were to automatically convert into
shares of common stock with the effectiveness of the registration
statement, registering the underlying shares which registration statement
on Form SB-2 File 333-89335 was declared effective in November 1999. As
such, the Company has restated its December 31, 2001 financial statements
to correctly reflect the Series B preferred stock as committed common
shares.
10
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 3 - RESTATEMENTS (Continued)
The resulting impact of this restatement on net loss attributable to common
shareholders is as follows:
Amount Per Share
--------------- ----------------
Net loss attributable to common shareholders, as
previously reported $ (549,791) $ (0.16)
Adjustment to correct dividends on preferred shares
previously recorded 71,125 0.02
--------------- ----------------
Net loss attributable to common
shareholders, as restated $ (478,666) $ (0.14)
=============== ================
On December 21, 2001, the Company signed a promissory note agreement for
$215,000 for a deposit on the purchase of the building in which it operates
(see Note 8). This note payable was incorrectly excluded from its
previously filed financial statements. This transaction did not have any
impact on the Company's reported net loss for the year ended December 31,
2001.
The effect on the Company's total assets and liabilities as of December 31,
2001 is as follows:
As Reported Amount As Restated
----------------------- ------------
Total assets $ 2,707,673 $ 215,000 $ 2,922,673
Total liabilities $ 2,908,085 $ 215,000 $ 3,123,085
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Service Revenue
Service revenues are billed and recognized in the period the services are
rendered and earned and the collection of the related receivable is
reasonably assured. Service revenues for the years ended December 31, 2001
and 2000 were not material.
Method of Accounting for Long-Term Contracts
In accordance with the American Institute of Certified Public Accountant's
Statement of Position 81-1, "Accounting for Performance of Certain
Construction-Type and Certain Product Type Contracts," the Company records
its revenue on long-term, fixed priced contracts on the basis of the
percentage-of-completion method applied to individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate
final results with reasonable accuracy.
11
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Method of Accounting for Long-Term Contracts (Continued)
That portion of the total contract price is accrued which is allocable, on
the basis of the Company's estimates of the percentage of completion, to
contract expenditures and work performed. Operating expenses, including
indirect costs and administrative expenses, are charged to income as
incurred and are not allocated to contract costs.
As these long-term contracts extend over one or more years, revisions in
cost and profit estimates during the course of the work are recognized in
the accounting period in which the facts which require the revision become
known.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss on both short- and long-term contracts is accrued.
Substantially all of the Company's revenues were derived from long-term
contracts for the years ended December 31, 2001 and 2000.
Comprehensive Income
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes
in equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is
not presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period presented.
Inventory
Inventory is comprised primarily of work in process and is valued at the
lower of cost (first-in, first-out method) or market. Cost components
include material, direct labor, machinery, subcontracts, and allocations of
indirect overhead.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the
estimated useful lives of the various classes of property and equipment as
follows:
Machinery and equipment 5 years
Computer equipment 5 years
Capital lease equipment 5 years
Leasehold improvements 5 years
12
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment (Continued)
Maintenance and repair costs are expensed as they are incurred while
renewals and improvements of a significant nature are capitalized. At the
time of retirement or disposal of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is reflected in the results of
operations.
Fair Value of Financial Instruments
For the Company's financial instruments, including cash, contracts
receivable, accounts payable, and accrued expenses, the carrying amounts
approximate fair value due to their short maturities. The amounts shown for
notes payable and capital lease obligations also approximate fair value
because current interest rates offered to the Company for debt of similar
maturities are substantially the same.
Warranty Policy
The Company's warranty policy provides for varying years of coverage for
its machines and labor. The Company's policy is to accrue the estimated
cost of warranty coverage and returns as part of the production costs on
fixed-priced contracts and at the time the product is shipped for any other
product sales.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation issued to employees.
The Company has elected to use the intrinsic value based method and has
disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation. For stock-based compensation
issued to non-employees, the Company uses the fair value method of
accounting under the provisions of SFAS No. 123.
Advertising
Advertising expenses are charged to expense as incurred. For the years
ended December 31, 2001 and 2000, total advertising expense was $83,812 and
$204,832, respectively.
13
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes are provided on a
liability method, whereby deferred tax assets are recognized for deductible
temporary differences, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion of all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
As of April 30, 2001, the Company's federal filing status was changed from
"S" corporation to "C" corporation status. Under its "S" corporation
status, any profits or losses in the Company were passed on to its
shareholders and were not taxed at the corporate level. Taxes recorded on
the accompanying financial statements are only those for the period from
May 1, 2001 through December 31, 2001 and may not be indicative of future
tax provisions.
The pro forma effects of taxes as if the Company had been taxed as a "C"
corporation during the years ended December 31, 2001 and 2000 would not
have an effect on pro forma basic and diluted loss per share as a full
valuation allowance was made on the deferred tax benefit.
Loss per Share
Loss per share is presented according to SFAS No. 128, "Earnings Per
Share." Basic loss per share excludes dilution and is computed by dividing
net loss available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted loss per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For the
years ended December 31, 2001 and 2000, because the Company incurred net
losses, basic and diluted loss per share are the same. In addition, the
Company had certain convertible preferred stock and common stock, including
options and warrants, which were not included in diluted loss per share as
their effects would have been anti-dilutive.
Reclassifications
Certain amounts included in the prior year financial statements have been
reclassified to conform with the current year presentation. Such
reclassification did not have any effect on reported net loss.
14
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development, and/or
the normal operation of long-lived assets, except for certain obligations
of lessees. The Company does not expect adoption of SFAS No. 143 to have a
material impact, if any, on its financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual, and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a
business, and amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Company does
not expect adoption of SFAS No. 144 to have a material impact, if any, on
its financial position or results of operations.
NOTE 5 - CONTRACTS IN PROGRESS
Contracts in progress as of December 31, 2001 were as follows:
Cumulative costs to date $ 1,023,205
Cumulative gross profit to date 481,684
------------
Cumulative revenue earned 1,504,889
Less progress billings to date 2,319,919
------------
Net overbillings $ (815,030)
============
15
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 5 - CONTRACTS IN PROGRESS (Continued)
The following is included in the accompanying balance sheet under these
captions as of December 31, 2001:
Costs and estimated earnings on contracts in
progress in excess of billings $ 106,554
Billings in excess of costs and estimated earnings
on contracts in progress 921,584
-------------
Net overbillings $ (815,030)
=============
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 consisted of the following:
Machinery and equipment $ 876,781
Computer equipment 26,506
Capital lease equipment 159,652
Leasehold improvements 106,107
-------------
1,169,046
Less accumulated depreciation and amortization 468,181
-------------
Total $ 700,865
=============
For the years ended December 31, 2001 and 2000, depreciation and
amortization expense amounted to $216,490 and $129,500, respectively.
Included in accumulated depreciation is $31,930 for capital lease equipment
at December 31, 2001.
NOTE 7 - LOANS TO SHAREHOLDERS
As of December 31, 2001, the Company had loans to certain of its
shareholders for $433,345, which bear interest at 5% per annum. There is
not a specified maturity date, and it is the Company's and shareholders'
intention not to reduce the balance before December 31, 2002. For the years
ended December 31, 2001 and 2000, total interest income from loans to
shareholders was $17,916 and $11,621, respectively.
16
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 8 - NOTES PAYABLE
Notes payable at December 31, 2001 consisted of the following:
Notepayable - converted from line of credit, secured by all
of the Company's assets and personal guarantees of the
shareholders. Payable monthly at $8,500, plus interest at
the Citibank, N.A.'s base rate (4.75% at December 31,
2001), plus 1%. Debt matured in February 2001, but was
subsequently extended to June 2002. $ 170,624
Notepayable - secured by all of the Company's assets and
personal guarantees of the shareholders. Payable monthly
at $6,944, plus interest at the Citibank, N.A.'s base rate
(4.75% at December 31, 2001), plus 1.25%. Debt matures in
December 2002. The Company must maintain certain financial
covenants of which the Company was not in compliance at
December 31, 2001. 76,389
Notepayable - original principal of $250,000, unsecured,
including warrants to purchase the Company's common stock
at an exercise price of $0.20 per share. The note payable
is personally guaranteed by a shareholder of the Company.
Payable on or before June 21, 2002, accruing interest at
18% per annum. This amount is net of a discount applicable
to detachable warrants of $106,000. 144,000
Notepayable - promissory note dated December 21, 2001,
original principal balance of $215,000 due in 90 days. The
note bears interest, in default, at the greater of 15% per
annum or the highest allowable rate under California state
law, subject to certain limitations. The note is jointly
executed by the Company's President and another shareholder. 215,000
----------------
606,013
Less current portion 606,013
----------------
Long-term portion $ -
================
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases equipment under an operating lease requiring minimum
monthly payments of $273 per month through August 2005. For the year ended
December 31, 2001 and 2000, total equipment rent expense was $3,277 and
$3,277, respectively.
17
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
The Company leases a truck under an operating lease requiring minimum
monthly payments of $538 per month through July 2005. For the years ended
December 31, 2001 and 2000, truck lease expense was $6,460 and $2,690,
respectively.
The Company leases office and factory space under an operating lease
requiring minimum monthly payments of $6,800 through August 2003. The
agreement calls for annual increases. For the years ended December 31, 2001
and 2000, rent expense was $83,150 and $79,200, respectively.
On November 30, 2001, the Company entered into an agreement with a real
estate company to lease its office and warehouse facility, commencing
December 31, 2001. The lease requires initial monthly payments of $28,515
and includes annual increases of 3% through December 2006. The lease is
personally guaranteed by one of the shareholders. The agreement includes an
option to purchase the land and building for $3,550,000. As of December 31,
2001, the Company had placed $250,000 in escrow to be used toward such
purchase, which is included in deposits in the accompanying balance sheet.
These monies are non-refundable, except for reasons specified in the
agreement. In addition, on December 21, 2001, the Company executed a
promissory note in the amount of $215,000 (see Note 8) toward the purchase
of the property.
The Company also leases equipment under capital lease obligations that
expire through December 2005. Monthly payments of $5,201 are due, including
interest at rates ranging from 16% to 31%.
Future minimum lease payments under operating and capital lease agreements
at December 31, 2001 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ -------------- -------------
2002 $ 435,911 $ 62,405
2003 418,176 34,805
2004 372,750 14,155
2005 378,499 10,033
2006 385,120 -
-------------- -------------
$ 1,990,456 121,398
==============
Less amount representing interest 26,847
-------------
94,551
Less current portion 44,537
-------------
Long-term portion $ 50,014
=============
18
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
Interest expense related to capital lease obligations for the years ended
December 31, 2001 and 2000 was $26,896 and $19,062, respectively.
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. As of December 31,
2001, the Company was a party to two such agreements. During the years
ended December 31, 2001 and 2000, the Company incurred $137,094 and $0,
respectively, in connection with such arrangements. Such expense is
included in operating expenses in the accompanying statements of
operations. 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 the service (see Note 11).
NOTE 10 - SERIES B PREFERRED STOCK
The Company has 15,000,000 authorized shares of cumulative, convertible
Series B preferred stock. The preferred shares have a cumulative dividend
of $1.25 per share, which is payable on a semi-annual basis, are
convertible into 1.67 shares of the Company's common stock, and do not have
any voting rights. As of December 31, 2001, no shares were issued and
outstanding. As of December 31, 2001, in accordance with the conversion
terms of the convertible Series B preferred stock, 95,023 shares of common
stock remained unissued and committed. During the year ended December 31,
2001, 73,335 shares of common stock were issued in relation to these
committed shares.
NOTE 11 - COMMON STOCK
Common Stock Issued for Subscription Receivable
The Company received an $87,500 subscription receivable from a member of
the Board of Directors in exchange for shares of the Company's common
stock. The receivable bears interest at an annual rate of 6%. Principal and
any unpaid interest is due on October 6, 2001. As of December 31, 2001, the
receivable remained unpaid, and management expects full collection.
19
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 11 - COMMON STOCK (Continued)
Common Stock Issued for Subscription Receivable (Continued)
On May 25, 2001, the Company received a $1,000,000 subscription receivable
from five employees in exchange for 400,000 shares of the Company's common
stock. The receivable bears interest at 6% per annum. The principal and
accrued interest are payable in May 2002, with an option to extend the due
date for one year in return for an increase in the interest rate to 10% per
annum.
Common Stock Issued for Cash
During the year ended December 31, 2001, the Company issued 200,000 shares
of common stock to a shareholder, valued at $1.25 per share, for $250,000
in cash.
Common Stock Issued for Services
On November 15, 2001, the Company issued 31,250 restricted shares of common
stock to a consultant for services in connection with a private placement.
The shares were valued at the fair market value as of November 15, 2001, or
$4.10 per share, totaling $128,125. The term of the agreement was two
months, and the related expense is being amortized accordingly.
On November 15, 2001, the Company entered into a second agreement with a
consulting firm. The agreement had a term of 18 months from the effective
date and called for the issuance of 40,000 shares of common stock. The
stock was valued at $4.10 per share, which was the trading value of the
Company's common stock, or $164,000. This amount is being amortized over
the term of the agreement.
Total amounts recognized and deferred in connection with these agreements
are as follows:
Total Amount Amount
Shares Amount Recognized Deferred
--------------- ---------------- --------------- ----------------
First agreement 31,250 $ 128,125 $ 96,094 $ 32,031
Second agreement 40,000 164,000 41,000 123,000
--------------- ---------------- --------------- ----------------
Total 71,250 $ 292,125 $ 137,094 $ 155,031
=============== ================ =============== ================
New Issuances of Common Stock
Generally, all new issuances of common stock made by the Company carry
registration rights.
20
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 12 - WARRANTS AND STOCK OPTIONS
Warrants
On December 21, 2001, the Company issued warrants to purchase 100,000
shares of common stock for $2 per share, which is exercisable for two years
from the date of issuance. The warrants were issued in connection with a
six-month, short-term note payable. In accordance with accounting
principles generally accepted in the United States of America, the proceeds
of the financing have been allocated to the debt and the warrants, based on
their relative fair values. Accordingly, a discount of $106,000 has been
recorded as a reduction in the debt balance, and the off-setting credit has
been recorded as additional paid-in capital. The discount is being
amortized and charged to expense over the life of the debt. During the year
ended December 31, 2001, amortization of the discount was not material.
Employee Stock Options
In connection with the merger agreement with InternetMercado, the Company
assumed the Incentive Stock Option Plan ("ISOP") granted by InternetMercado
to its employees.
Under the terms of the Company's ISOP, options to purchase 1,000,000 shares
of common stock may be issued to all key employees who are eligible to
receive non-assignable and non-transferable options to purchase shares. 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. During the
year ended December 31, 2000, the Company assumed 233,250 stock options in
connection with the merger agreement under the Company's ISOP.
Non-Employee Stock Options
The Company has also assumed a non-statutory stock option plan ("NSSO") to
purchase an aggregate of 1,350,000 shares of common stock granted to three
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 vested on the date of grant. During the year ended December 31,
2000, the Company assumed 308,333 stock options in connection with the
merger agreement under the Company's NSSO plan.
21
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 12 - WARRANTS AND STOCK OPTIONS (Continued)
Warrant and Stock Option Transactions
The following table summarizes all of the Company's warrant and stock
option transactions:
Weighted-
Number of Shares Average
------------------------------
Non- Exercise
Employee Employee Total Price
-------------- -------------- ------------- -------------
Assumed in connection
with merger agreement 233,250 308,333 541,583 $ 10.48
Granted - 100,000 100,000 $ 2.00
-------------- -------------- -------------
Outstanding and
exercisable,
December 31, 2001 233,250 408,333 641,583 $ 9.15
============== ============== =============
The weighted-average remaining contractual life of the warrants and options
outstanding at December 31, 2001 was 3.37 years. The exercise prices of the
warrants and options outstanding at December 31, 2001 ranged from $2 to
$12.50, and information relating to these options is as follows:
Weighted-
Average
Weighted- Exercise Price of
Stock Options Average Stock Options
Range of and Warrants Remaining and Warrants
Exercise Outstanding and Contractual Outstanding and
Prices Exercisable Life Exercisable
-------------- ---------------- ----------------- -----------------
$ 2.00 - 7.50 135,000 3.59 years $ 3.30
$ 9.80 64,750 3.36 years $ 9.80
$ 10.00 291,833 3.28 years $ 10.00
$ 12.50 150,000 3.36 years $ 12.50
----------------
641,583
================
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of the
grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is not any related compensation expense
recorded in the Company's financial statements. Had compensation cost for
stock-based compensation been determined based on the fair value of the
grant dates consistent with the methods of SFAS No. 123, the Company's net
loss and loss per share for the years ended December 31, 2001 and 2000
would be the same since employee options were not issued during those
years. As such, no pro forma disclosure has been made.
22
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 12 - WARRANTS AND STOCK OPTIONS (Continued)
Warrant and Stock Option Transactions (Continued)
The fair value of the warrants granted during the year ended December 31,
2001 for purposes of determining the discount to be applied to the note
payable issued with detachable warrants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended December 31, 2001: dividend
yield of 0%, expected volatility of 175%, risk-free interest rate of 3.17%,
and expected life of two years.
NOTE 13 - BACKLOG
The following schedule summarizes changes in backlog on contracts during
the year ended December 31, 2001. Backlog represents the amount of revenue
the Company expects to realize from work to be performed on uncompleted
contracts in progress at December 31, 2001 and from contractual agreements
on which work has not yet begun:
Backlog balance at December 31, 2000 $ 2,438,165
New contracts and contract adjustments during the year 6,466,628
-------------
Sub-total 8,904,793
Less contract revenue earned during the year 6,138,829
-------------
Backlog balance at December 31, 2001 $ 2,765,964
=============
NOTE 14 - INCOME TAXES
Significant components of the Company's deferred tax assets at December 31,
2001 were as follows:
Net operating loss carryforward $ 133,000
Reserve for warranty 12,900
Accrued compensated absences 12,000
-------------
157,900
Less valuation allowance 157,900
-------------
Total $ -
=============
23
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 14 - INCOME TAXES (Continued)
A reconciliation of the expected income tax computed using the federal
statutory income rate to the Company's effective rate for the year ended
December 31, 2001 is as follows:
Income tax computed at federal statutory tax rate 34.0%
State taxes, net of federal benefit 5.8
Benefit from termination of "S" corporation status (6.0)
Change in valuation allowance (33.8)
-------------
Total -%
=============
A reconciliation of the expected income tax has not been provided for the
year ended December 31, 2000 as the Company operated as an "S" corporation
during that period.
Realization of the future tax benefits related to the deferred assets is
dependent on many factors, including the Company's ability to generate
taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to
the valuation allowance for financial reporting purposes.
As of December 31, 2001, the valuation allowance for deferred tax assets
totaled $157,900. For the years ended December 31, 2001 and 2000, the net
change in the valuation allowance was an increase of $157,900 and a change
of $0, respectively.
As of December 31, 2001, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $426,900 and
$212,900, respectively. The net operating loss carryforwards begin expiring
in 2021 and 2011, respectively. The utilization of net operating loss
carryforwards may be limited due to the ownership change under the
provisions of Internal Revenue Code Section 382 and similar state
provisions.
NOTE 15 - SUBSEQUENT EVENTS
Private Placement Memorandum
Subsequent to December 31, 2001, the Company authorized 60,000 shares of
Series C 5% convertible preferred stock (the "Series C"). Effective March
20, 2002, the Company began the process of preparing for the public
offering of the Series C at a price of $25 a share, with a minimum offering
of 30,000 shares and a maximum of 60,000 shares. The Series C has a par
value of $1 per share and is convertible into 16.667 shares of the
Company's common stock with a par value of $0.10 per share, representing a
purchase price of $1.50 per share.
24
NEW CENTURY COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 15 - SUBSEQUENT EVENTS (Continued)
Sublease Agreement
In January 2002, the Company entered into an agreement with an unrelated
party to sublease its office and factory space, expiring in August 2003.
The sublease agreement requires monthly rent of $8,200 and a security
deposit equal to the monthly rent.
25