SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
March 31, 2006 0-7722
NEW CENTURY COMPANIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 061034587
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(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
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(Address of Principal Executive Offices) (Zip Code)
(562) 906-8455
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes _X_ No___
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of Common Stock, par value $ .10 per share, outstanding as
of March 31, 2006 was 11,275,336.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
ITEM 1. FINANCIAL STATEMENTS (UNAUDIITED) F-1
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ----
Condensed Consolidated Balance Sheet F-1
Condensed Consolidated Statements of Operations F-2
Condensed Consolidated Statements of Cash Flows F-3
Notes to Condensed Consolidated Financial Statements F-4 - F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 3
ITEM 3. CONTROLS AND PROCEDURES 8
PART II OTHER INFORMATION 10
ITEM 1. LEGAL PROCEEDING 10
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS 10
ITEM 1. FINANCIAL STATEMENTS
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
ASSETS
Current Assets
Cash $ 267,805
Restricted cash 1,500,000
Contract receivables 912,574
Inventories, net 1,041,932
Costs and estimated earnings in excess of billings on uncompleted contracts 285,133
Deferred financing costs, net 336,691
Prepaid expenses and other current assets 3,643
-----------
Total current assets 4,347,778
Property and Equipment, net 392,623
Deferred Financing Costs, net 670,133
-----------
$ 5,410,534
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 1,214,124
Dividends payable 278,000
Billings in excess of costs and estimated earnings on uncompleted contracts 563,207
Warrant liability 2,954,762
Notes payable, net of discount 219,816
Convertible notes payable, net of discount 150,000
-----------
Total current liabilities 5,379,909
Convertible Notes Payable, net of discount 97,223
Commitments and Contingencies
Stockholders' Deficit
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, 28,980 shares issued and outstanding
(liquidation preference of $1,187,000) 28,980
Cumulative, convertible, Series D preferred stock, $25 par value,
75,000 shares authorized, 11,640 shares issued and outstanding
(liquidation preference of $394,000) 291,000
Common stock, $0.10 par value, 50,000,000 shares authorized;
11,275,336 shares issued and outstanding 1,127,534
Subscriptions receivable (462,500)
Notes receivable from stockholders (505,639)
Deferred consulting fees (360,178)
Additional paid-in capital 7,698,157
Accumulated deficit (7,883,952)
-----------
Total stockholders' deficit (66,598)
-----------
$ 5,410,534
===========
See accompanying notes to the condensed consolidated financial statements.
F-1
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the
Three Months Ended March 31, 2006 and 2005
(Unaudited)
2006 2005
------------ ------------
CONTRACT REVENUES $ 1,699,847 $ 1,431,889
COST OF SALES 1,296,608 1,045,870
------------ ------------
GROSS PROFIT 403,239 386,019
------------ ------------
OPERATING EXPENSES
Consulting and other compensation 203,058 44,972
Salaries and related 64,331 57,190
Selling, general and administrative 187,640 123,657
------------ ------------
TOTAL OPERATING EXPENSES 455,029 225,819
------------ ------------
OPERATING INCOME (LOSS) (51,790) 160,200
------------ ------------
OTHER EXPENSES
Derivative liability expense 764,762 --
Interest expense, including debt discount amortization 395,828 49,067
------------ ------------
TOTAL OTHER EXPENSES 1,160,590 49,067
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,212,380) 111,133
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET INCOME (LOSS) $ (1,212,380) $ 111,133
============ ============
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (924,505) $ 111,133
============ ============
Basic and diluted net income (loss) available to
common stockholders per common share $ (0.09) $ 0.02
============ ============
Basic and diluted weighted average common
shares outstanding 10,803,611 7,292,265
============ ============
See accompanying notes to the condensed consolidated financial statements.
F-2
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,212,380) $ 111,133
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment 39,028 66,744
Amortization of deferred financing costs 57,466 --
Amortization of deferred consulting fees 137,039 5,000
Amortization of BCFs and other debt discounts 249,123 --
Derivative liability expense 764,762 --
Changes in operating assets and liabilities:
Contracts receivable (625,005) --
Inventories (112,985) 65,363
Costs and estimated earnings in excess of billings on
uncompleted contracts 132,622 (193,530)
Prepaid expenses and other current assets (2,083) --
Accounts payable and accrued expenses (277,456) (97,313)
Billings in excess of costs and estimated earnings on
uncompleted contracts 61,823 3,567
----------- -----------
Net cash used in operating activities (788,046) (39,036)
----------- -----------
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 (1,500,000) --
Bank overdraft (27,649) --
Proceeds of issuance of convertible notes payable 3,800,000 --
Principal payments on notes payable (774,000) --
Deferred financing costs (422,500) --
Principal repayments on obligations under capital lease -- (20,405)
----------- -----------
Net cash provided by (used in) financing activities 1,075,851 (20,405)
----------- -----------
Net increase (decrease) in cash 267,805 (59,441)
Cash at beginning of period -- 129,087
----------- -----------
Cash at end of period $ 267,805 $ 69,646
=========== ===========
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 $ --
=========== ===========
Fair value of common stock and warrants issued for
deferred consulting services $ 242,500 $ --
=========== ===========
Waived cumulative dividends on preferred stock $ (287,875) $ --
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
F-3
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
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 subtantially 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 completed a reverse merger in May 2001 and trades on the OTC
Bulletin Board under the symbol "NCNC.OB".
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The accompanying unaudited interim condensed 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, 2005, 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, 2006, 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, 2006
are not necessarily indicative of the results for the full year.
F-4
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of March 31, 2006, the Company has negative
working capital $1,032,131 and an accumulated deficit of $7,883,952, and
recurring losses. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The Company fund operations
through increased sales and debt and equity financing arrangements which
management believes may be insufficient to fund its capital expenditures,
working capital and other cash requirements for the fiscal year ending December
31, 2006. 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:
o The Company continues its aggressive program for selling inventory.
o The Company continues to implement plans to further reduce operating
costs.
o The Company is seeking investment capital through the public
markets.
The condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of assets carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
INVENTORY
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Inventories represent cost of
work in process on units not yet under contract. Cost includes all direct
material and labor, machinery, subcontractors and allocations of indirect
overhead.
REVENUE RECOGNITION
The Company's revenues consist of contracts with vendors. The Company uses the
percentage-of-completion method of accounting to account for long-term contracts
and, therefore, takes into account the cost, estimated earnings and revenue to
date on fixed-fee contracts not yet completed. The percentage-of-completion
method is used because management considers total cost to be the best available
measure of progress on the contracts. Because of inherent uncertainties in
estimating costs, it is at least reasonably possible that the estimates used
will change within the near term.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as amended and
superseded by SAB No. 104, which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial
F-5
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.
The Company accounts for shipping and handling fees and costs in accordance with
Emerging Issues Task Force ("EITF") Issue No. 00-10 "Accounting for Shipping and
Handling Fees and Costs." Such fees and costs incurred by the Company are
immaterial to the operations of the Company.
In accordance with 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.
BASIC AND DILUTED LOSS PER COMMON SHARE
Under SFAS No. 128, "Earnings Per Share," basic earnings per common share is
computed by dividing income available to common stockholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. There were 2,025,451 potentially dilutive and 13,392,330 potential
common shares as of March 31, 2006, which include common stock purchase warrants
and shares underlying convertible preferred stock and convertible notes payable.
At March 31, 2005, there were no potentially dilutive common shares.
F-6
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three month periods
ended March 31, 2006 and 2005:
For the Three Months Ended
March 31,
2006 2005
------------ ------------
Net income (loss) $ (1,212,380) $ 111,133
Waiver of accrued cumulative preferred
dividends 287,875 --
------------ ------------
Numerator for basic and diluted net income (loss) per common share:
Net income (loss) available to common stockholders (924,505) 111,133
Denominator for basic and diluted net income (loss) per common share:
Weighted average common shares outstanding 10,803,611 7,292,265
------------ ------------
Basic and diluted net income (loss)
per common share $ (0.09) $ 0.02
============ ============
STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), "Share-Based Payment." 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
grant date, based on the fair value of the award. The Company previously
accounted for awards granted under its equity incentive plans under the
intrinsic value method prescribed by Accounting Principles Board (APB) 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. There was no employee
stock-based compensation cost recognized in net income (loss) for the three
months ended March 31, 2006 and 2005. Additionally, there was no unvested
portion of previous grants for which the requisite service had not been rendered
as of January 1, 2006.
The Company follows SFAS No. 123 (R) (as intepreted 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.
F-7
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).
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 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 (see
Note 3).
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.
BENEFICAL 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 a registration statement covering
the resale of 125% of the Registrable Securities, as defined in the Registration
Rights Agreement. 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.
F-8
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. Specifically, at March 31, 2006, the Company
did not have any uncommitted registered shares to settle the warrant obligation
and accordingly, such obligation has been 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 will be
evaluated at each reporting date and as such, it will continue to be reported as
a liability until a registration statement which includes the shares underlying
the warrants becomes effective.
NEW ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31, 2005
financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB that are required to be adopted during the year ending
December 31, 2006 did not or will not have a significant impact on the Company's
financial statements.
2. CONTRACTS IN PROGRESS
Contracts in progress as of March 31, 2006 which include completed contracts not
completely billed, approximate:
Cumulative costs to date $ 2,037,000
Cumulative gross profit to date 3,416,000
-----------
Cumulative revenue earned 5,453,000
Less progress billings to date (5,731,000)
-----------
Net over billings $ (278,000)
===========
The following is included in the accompanying condensed consolidated balance
sheet under these captions as of March 31, 2006:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 285,000
Billings in excess of costs and estimated earnings
on uncompleted contracts (563,000)
---------
Net over billings $(278,000)
=========
F-9
3. DEBT FINANCING TRANSACTIONS
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. The warrants vested and became fully exercisable on the issuance date.
In accordance with EITF Issue No. 88-9 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 the quarter ended March 31,
2006, amortization of the discount resulted in expense of $150,000, which is
included in interest expense in the accompanying condensed consolidated
statement of operations for the three months ended March 31, 2006. The remaining
$150,000 discount balance is presented net of the $300,000 principal balance of
Note A included in convertible notes payable balance in the accompanying
condensed consolidated balance sheet.
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.
In connection with Note A, the Company issued 45,454 warrants and paid $30,000
in cash to third parties for financing charges. 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 deferred financing cost is being amortized over the life of the
note resulting in expense of $29,545 for the quarter ended March 31, 2006, which
is included in interest expense in the accompanying condensed consolidated
statements of operations. The remaining balance of the deferred financing costs
associated with Note A totaled $29,545 at March 31, 2006.
On February 28, 2006, the Company entered into a Securities Purchase Agreement (
"Note B") with CAMOFI Master LDC ("CAMOFI") whereby the 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 shares of the Company's common stock at a fixed price of $0.63 at any time
at the CAMOFI's option. As of March 31, 2006, the Company had not received the
additional $1,500,000 under the Additional
F-10
Investment Right. Additionally, $1,500,000 of the $3,500,000 proceeds from the
closing were placed into an escrow account to be used for a potential private
company business acquisition. Accordingly, such amount has been recorded as
restricted cash in the accompanying condensed consolidated balance sheet. In
connection with Note B, the Company issued 3,476,190 warrants at an exercise
price of $0.63 to CAMOFI. The warrants vested and became fully exercisable on
their issuance date.
CAMOFI has certain registration rights for the common stock underlying both the
warrants and the convertible debt. The related registration rights agreement
includes financial penalties because the Company failed to meet the registration
statement filing deadline, which was April 24, 2006, and expects to miss the
effectiveness deadline, which is May 29, 2006 if the registration statement is
not reviewed by the SEC, and June 28, 2006 if it is reviewed by the SEC. Such
penalties, which are 1.5% of the outstanding principal balance of Note B for the
first 30 days and an additional 1.5% for each 30 day period thereafter, can be
paid in common stock at the option of the Company. As of March 31, 2006, the
Company has accrued $43,500 for such liquidated damages, which are included in
accounts payable and accrued expenses in the accompanying condensed consolidated
balance sheet. As a result of not meeting these deadlines, this condition may
deemed to be an "Event of Default" if not cured to the satisfaction of CAMOFI
prior to the expiration of thirty days from the Event Date, as defined in the
registration rights agreement, and could possibly allow CAMOFI to call the debt
or seek other remedy at such time.
The Company's accounting for certain other elements of the debt financing
transaction is discussed below.
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.
F-11
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. 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 $36,000 during the
quarter ended March 31, 2006 in the accompanying condensed consolidated
statements of operations.
Accounting for the Warrants
Under GAAP, accounting for certain warrants can be significantly affected by the
terms of a registration rights penalty. In the CAMOFI debt financing
transaction, once the registration statement required by the registration rights
agreement (the "Agreement") has been declared effective by the SEC, the
Company's liability for the registration rights penalty will cease if, among
other conditions described in the agreement, the registration statement's
effectiveness is maintained for the time period defined in the Agreement and the
Company otherwise complies with SEC Rule 415 (which governs continuous
offerings) during the time period set forth in the Agreement. However, the
Agreement limits the registration rights penalty to a specific time period only
when the continuing requirements of the agreement have been met, and it does not
explicitly limit the maximum dollar amount of any such penalty.
Based on the preceding paragraph, the registration rights penalty could exceed
the difference between the fair value of a registered share of the Company's
common stock and the estimated fair value of an unregistered share. According to
EITF Issue No. 00-19, the ability to register a company's securities is not
within the issuer's control. Furthermore, since payment of a penalty in an
indeterminate amount is considered an uneconomic settlement alternative, EITF
Issue No. 00-19 requires the Company to assume that the warrant will be net-cash
settled even though the warrant agreement does not include any such provision.
Therefore, the warrants (which are an embedded derivative) have been separated
from the convertible debt instrument, reported as a liability, and measured at
estimated fair value.
The fair value of the warrants in the debt financing transaction, based on the
Black-Scholes option-pricing model, was estimated at $2,190,000 on the
measurement date of February 28, 2006. Such amount was recorded as the
derivative warrant liability with a corresponding entry to debt discount against
the face of Note B. Such discount 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 discount of approximately $61,000 during the
quarter ended March 31, 2006 in the accompanying condensed consolidated
statements of operations. On March 31, 2006, the Company re-evaluated the
estimated fair value of the warrant liability at approximately $2,955,000. Such
increase in fair value totaling approximately $765,000 was recorded as
derivative liability expense in the accompanying condensed consolidated
statements of operations.
F-12
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 $3,403,000 at March 31, 2006 and is presented net of the
$3,500,000 principal balance of Note B in the accompanying condensed
consolidated balance sheet.
Accounting for Deferred Financing Costs
In connection with Note B, the Company paid $392,000 in cash and issued 250,000
shares of common stock and 722,539 warrants to third parties for financing
charges. The common stock was value at approximately $157,000 (estimated based
on the trading price of the Company's stock on the date of grant). The warrants
were valued at approximately $455,000 (estimated based on the Black-Scholes
option-pricing model). Accordingly, the Company recorded deferred financing
costs and additional paid-in capital of approximately $1,005,000 and $588,000,
respectively. The deferred financing cost is being amortized over the life of
the note resulting in expense of approximately $28,000 for the quarter ended
March 31, 2006, which is included in interest expense in the accompanying
condensed consolidated statements of operations. The remaining balance of the
deferred financing costs associated with Note B totaled $977,000 at March 31,
2006.
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 deficit.
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.
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.
F-13
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.
5. SUBSEQUENT EVENTS
On April 25, 2006, the Company issued 9,091 shares of common stock for
conversion of $6,000 of interest due on 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.
F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-QSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, and market and general policies, competition from other similar
businesses, and market and general economic factors. All forward-looking
statements contained in this Form 10-QSB are qualified in their entirety by this
statement.
OVERVIEW
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. The remanufacturing of a machine tool,
typically consisting of replacing all components, realigning the machine, adding
updated CNC capability and electrical and mechanical enhancements, generally
takes two to four months to complete. Once completed, a remanufactured machine
is a "like new," state-of-the-art machine with a price ranging from $275,000 to
$1,000,000, which is subtantially less than the price of a new machine. The
Company 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. 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.
3
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 the Company's 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 and
medical fields. The Company sells its products to customers located in United
States, Canada and Mexico.
Over the last four years, the Company has designed and developed a large
horizontal CNC turning lathe with productivity features new to the metalworking
industry. The Company believes that a potential market for the Century Turn
Lathe, in addition to the markets mentioned above, is aircraft landing gear.
We provide our manufactured and remanufactured machines as part of the machine
tool industry. The machine tool industry worldwide is approximately a 30 billion
dollar business annually. The industry is sensitive to market conditions and
generally trends downward prior to poor economic conditions, and improves prior
to an improvement in economic conditions.
Our machines are utilized in a wide variety of industry segments as follows:
aerospace, energy, valves, fittings, oil and gas, machinery and equipment, and
transportation. With the recent downturn in the aerospace industry, we have seen
an increase in orders from new industries such as defense and medical
industries.
PLAN OF OPERATIONS
The earnings of the Company for the three months ended March 31, 2006 were
negative as a result of an increase in operating expenses.
The Company's current strategy is to expand its customer sales base with its
present line of machine products. The Company's growth strategy also includes
strategic acquisitions in addition to growing the current business. Plans for
expansion are funded through current working capital from ongoing sales and
additional funds in the form of debt or equity. Currently, the Company's
management attracted additional funding in the form of subordinated debt.
However, there is no guarantee that the capital raised is sufficient to execute
its business plan. To the extent that the capital raised is not sufficient, the
Company's business plan will be required to be substantially modified and its
operations curtailed.
4
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO
MARCH 31, 2005.
Revenues. The Company generated revenues of $1,699,847 for the three
months ended March 31, 2006, which was a $267,958 or 19% increase from
$1,431,889 for the three months ended March 31, 2005. The increase is the result
of a growth in customer orders, based on the overall enlarged market for machine
tools and on capability to sell the Company's product at higher contact amounts.
Gross Profit. Gross profit for the three months ended March 31, 2006, was
$403,239 or 24% of revenues, compared to $386,019, or 27% of revenues for the
three months ended March 31, 2005, a 3% increase. The increase of gross profit
is the result of increased sales.
Operating Loss. Operating loss for the three months ended March 31, 2006,
was $(51,790) compared to an operating income of $160,200 for the three months
ended March 31, 2005. The decrease of $211,990 or 132% in operating loss is due
to approximately $158,000 increased cost of consulting expenses such us investor
relations, business and financial consultants, and approximately $64,000
increase in selling, general and administrative expenses due primarily to
approximately $40,000 increase in accounting and auditing fees.
Interest Expense. Interest expense for the three months ended March 31,
2006, was $395,828 compared with $49,067 for the three months ended March 31,
2005. The $346,761 increase in interest expense is due primarily to $249,123
amortization of beneficial conversion future and discount on warrants and
conversion option associated to two convertible notes payable and amortization
of deferred financing costs totaling $57,466 related to warrants and common
stock granted to third parties as financing cost on convertible notes.
Secondarily, the increase in interest expense is due to $43,500 liquidated
damages on $3.5 million convertible debt.
Derivative liability expense. As of March 31, 2006, an increase in fair value of
the derivative liability associated with the warrants to purchase common stock,
granted in connection with $3.5 million convertible debenture, was calculated
and a resulting amount of $764,762 was recorded as derivate liability expense.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
The net cash increase of the Company during the three months ended March
31, 2005 was $267,805. The increase is due to net cash provided by financing
activities of $1,075,851. Currently, the Company's management attracted
additional funding in the form of subordinated debt. However, there is no
guarantee that the capital raised is sufficient to execute its business plan. To
the extent that the capital raised is not sufficient, the Company's business
plan will be required to be substantially modified and its operations curtailed.
5
The Company is currently addressing its liquidity issue by the following
actions:
o The Company continues to implement plans to increase revenues.
o The Company continues its program for selling inventory that has
been produced or is currently in production.
o The Company continues to implement plans to further reduce operating
costs by improved process control and greater productivity.
o 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 financial obligations for the foreseeable future.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
GOING CONCERN
The Company has incurred operating losses, has a working capital deficit
and a significant stockholders' deficit. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the 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,
inventories and derivative liabilities. 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.
6
In accordance with SFAS 48, "Revenue Recognition when Right of Return Exists,"
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management's evaluation of historical
experience, current industry trends and estimated costs.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. Management believes that the Company's revenue recognition policy
for services and product sales conforms to SAB 101. The Company recognizes
revenue of long-term contracts pursuant to 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, the estimating of costs for long-term construction contracts and the
valuation of derivative liabilities. Actual results could materially differ from
those estimates.
7
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 a registration statement covering
the resale of 125% of the Registrable Securities, as defined in the Registration
Rights Agreement. 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. Specifically, at March 31, 2006, the Company
did not have any uncommitted registered shares to settle the warrant obligation
and accordingly, such obligation has been 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 will be
evaluated at each reporting date and as such, it will continue to be reported as
a liability until a registration statement which includes the shares underlying
the warrants becomes effective.
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 Condesed Consolidated Financial Statements, Summary of
Significant Accounting Policies, which discusses accounting policies that must
be selected by management when there are acceptable alternatives.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Exchange Act as of a date (the "Evaluation Date") within 90 days prior to filing
the Company's March 31, 2006 Form 10-Q. Based upon that evaluation, the CEO and
CFO concluded that, as of March 31, 2006, our disclosure controls and procedures
were not effective in timely alerting management to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic filings with the SEC.
8
CHANGES IN CONTROLS AND PROCEDURES
There were no changes made in our internal controls over financial reporting
during the quarter ended March 31, 2006 that have materially affected or are
reasonably likely to materially affect these controls.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2005, the Company issued 30,000 shares
of common stock to Motivated Minds LLC, as a fee for $300,000 convertible note,
250,000 shares of common stock to G Golenberg and S Silbert, for accrued
interest on $750,000 Note Payable, 30,000 shares of common stock to Motivated
Minds LLC, for extension on Motivated Minds' convertible note, and 250,000
shares of common stock to Ascendiant Capital Group LLC, placement agent for $3.5
mil financing. The shares were issued pursuant to Section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
During November 2004, the Company borrowed $80,816 on two notes payable to one
individual. The Note is unsecured, matured in January 2005, has an interest rate
of 6% and is currently in default. At March 31, 2006 the total outstanding
principal balance on this Note was $80,816.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
WAIVER OF PREFERRED DIVIDEND
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.
Item 6. Exhibits
Exhibits:
Exhibit 31.1 Section 302 Sarbanes Oxley Certification
Exhibit 31.2 Section 906 Sarbanes Oxley Certification
10
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 22, 2006 NEW CENTURY COMPANIES, INC.
/s/ DAVID DUQUETTE
---------------------------------------
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 Company and in the capacities and on the
dates indicated.
Date: May 22, 2006 /s/ DAVID DUQUETTE
----------------------------------------
Name: David Duquette
Title: Chairman, President and Director
Date: May 22, 2006 /s/ JOSEF CZIKMANTORI
----------------------------------------
Name: Josef Czikmantori
Title: Secretary and Director
11