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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-28536
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NEW CENTURY EQUITY HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware 74-2781950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Crescent Court, Suite 1110, Dallas, Texas 75201
(Address of principal executive offices) (Zip code)
(210) 302-0444
(Registrant's telephone number, including area code)
10101 Reunion Place, Suite 970, San Antonio, Texas 78216
(Former address, if changed since last report)
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 such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
Indicated below is the number of shares outstanding of the
registrant's only class of common stock at August 12, 2004:
Number of Shares
Title of Class Outstanding
-------------- -----------
Common Stock, $0.01 par value 34,653,104
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NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2004 (Unaudited)
and December 31, 2003............................................ 3
Unaudited Condensed Consolidated Statements of Operations
- For the Three and Six Months ended June 30, 2004 and 2003...... 4
Unaudited Condensed Consolidated Statements of Comprehensive
Income (Loss) - For the Three and Six Months ended June 30,
2004 and 2003.................................................... 5
Unaudited Condensed Consolidated Statements of Cash
Flows - For the Six Months ended June 30, 2004 and 2003.......... 6
Notes to Unaudited Interim Condensed Consolidated
Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 16
Item 3. Quantitative and Qualitative Disclosure about Market Risk......... 18
Item 4. Controls and Procedures........................................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities............................................ 19
Item 6. Exhibits and Reports on Form 8-K.................................. 20
SIGNATURE .................................................................. 21
2
PART I FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
-------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 15,424 $ 5,330
Accounts receivable ................................................... 19 28
Prepaid and other assets .............................................. 69 309
------------ ------------
Total current assets ................................................. 15,512 5,667
Property and equipment, net ............................................. 25 83
Other non-current assets ................................................ 6 53
Investments in affiliates ............................................... 293 7,233
------------ ------------
Total assets .......................................................... $ 15,836 $ 13,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 84 $ 58
Accrued liabilities ................................................... 442 1,252
------------ ------------
Total current liabilities ............................................ 526 1,310
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
4,807,692 shares designated as Series A convertible preferred
stock and 0 shares issued and outstanding ................... 48 --
Common stock, $0.01 par value, 75,000,000 shares authorized;
34,653,104 shares issued and outstanding .................... 347 347
Additional paid-in capital ............................................ 75,428 70,476
Accumulated other comprehensive income ................................ 15 --
Accumulated deficit ................................................... (60,528) (59,097)
------------ ------------
Total stockholders' equity ........................................... 15,310 11,726
------------ ------------
Total liabilities and stockholders' equity ........................... $ 15,836 $ 13,036
============ ============
The accompanying notes are an integral part of these interim condensed consolidated
financial statements.
3
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
2004 2003 2004 2003
---------- --------- ------------ ----------
Operating revenues ...................................... $ -- $ -- $ -- $ --
Operating expenses:
General and administrative expenses .................. 3,613 541 4,258 1,221
Depreciation and amortization expenses ............... 5 40 21 80
-------- -------- -------- --------
Operating loss from continuing operations ............... (3,618) (581) (4,279) (1,301)
Other income (expense):
Interest income, net ................................. 16 22 26 49
Equity in net loss of affiliate ...................... (1,785) (766) (2,985) (1,413)
Gain on sale of equity affiliate ..................... 5,817 -- 5,817 --
Other (expense) income, net .......................... (2) (1) (3) 11
-------- -------- -------- --------
Total other income (expense), net ....................... 4,046 (745) 2,855 (1,353)
-------- -------- -------- --------
Net income (loss) from continuing operations ............ 428 (1,326) (1,424) (2,654)
Discontinued operations:
Net income from disposal of discontinued
operations ........................................ -- -- -- 147
-------- -------- -------- --------
Net income (loss) ....................................... 428 (1,326) (1,424) (2,507)
Preferred stock dividend ................................ (7) -- (7) --
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders .................................. $ 421 $ (1,326) $ (1,431) $ (2,507)
======== ======== ======== ========
Basic net income (loss) per common share:
Net income (loss) from continuing operations ......... $ 0.01 $ (0.04) $ (0.04) $ (0.08)
Net income from disposal of discontinued
operations ........................................ -- -- -- 0.01
-------- -------- -------- --------
Net income (loss) .................................... $ 0.01 $ (0.04) $ (0.04) $ (0.07)
======== ======== ======== ========
Weighted average common shares outstanding .............. 34,653 34,218 34,653 34,218
======== ======== ======== ========
Diluted net income (loss) per common share:
Net income (loss) from continuing operations ......... $ 0.01 $ (0.04) $ (0.04) $ (0.08)
Net income from disposal of discontinued
operations ........................................ -- -- -- 0.01
-------- -------- -------- --------
Net income (loss) .................................... $ 0.01 $ (0.04) $ (0.04) $ (0.07)
======== ======== ======== ========
Weighted average common shares outstanding .............. 35,340 34,218 34,653 34,218
======== ======== ======== ========
The accompanying notes are an integral part of these interim condensed consolidated
financial statements.
4
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2004 2003 2004 2003
-------- -------- --------- --------
Net income (loss) ....................... $ 428 $(1,326) $(1,424) $(2,507)
Other comprehensive income:
Unrealized holding gains, net of $0 tax 4 -- 15 --
------- ------- ------- -------
Comprehensive income (loss) ............. $ 432 $(1,326) $(1,409) $(2,507)
======= ======= ======= =======
The accompanying notes are an integral part of these interim condensed consolidated
financial statements.
5
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss from continuing operations .......................................... $ (1,424) $ (2,654)
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities:
Depreciation and amortization expenses ..................................... 21 80
Equity in net loss of affiliate ............................................ 2,985 1,413
Gain on sale of equity affiliate ........................................... (5,817) --
Loss on disposition of property and equipment .............................. 28 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ................................ 9 (31)
Decrease in prepaid and other assets ...................................... 247 44
Increase (decrease) in accounts payable ................................... 26 (17)
Decrease in accrued liabilities ........................................... (430) (30)
Increase in other liabilities and other non-cash items .................... -- 136
-------- --------
Net cash used in continuing operating activities ............................. (4,355) (1,059)
Net cash provided by discontinued operating activities ....................... -- 178
-------- --------
Net cash used in operating activities ........................................ (4,355) (881)
Cash flows from investing activities:
Purchases of property and equipment ........................................ (3) (3)
Proceeds from sale of property and equipment ............................... 12 --
Investment in affiliate .................................................... -- (200)
Proceeds from sale of equity affiliate (all holdings in Princeton) ......... 10,000 --
Proceeds from sale of equity affiliate (all holdings in Princeton) allocated
to former chief executive officer .......................................... (600) --
Other investing ............................................................ 40 --
-------- --------
Net cash provided by (used in) investing activities .......................... 9,449 (203)
Cash flows from financing activities:
Proceeds from sale of preferred stock ...................................... 5,000 --
-------- --------
Net increase (decrease) in cash and cash equivalents ......................... 10,094 (1,084)
Cash and cash equivalents, beginning of period ............................... 5,330 8,704
-------- --------
Cash and cash equivalents, end of period ..................................... $ 15,424 $ 7,620
======== ========
Supplemental disclosure of financial information:
Cash paid for interest ..................................................... $ -- $ --
Cash paid for income taxes ................................................. $ -- $ --
The accompanying notes are an integral part of these interim condensed consolidated
financial statements.
6
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included
herein have been prepared by New Century Equity Holdings Corp. and subsidiaries
(collectively, the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("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 have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the Company's management, the accompanying
interim condensed consolidated financial statements reflect all adjustments, of
a normal recurring nature, that are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for such
periods. It is recommended that these interim condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003. Results of operations for the interim periods are
not necessarily indicative of results that may be expected for any other interim
periods or the full fiscal year.
NOTE 2. RECENT DEVELOPMENTS
On June 18, 2004, the Company sold approximately 4.8 million newly
issued shares of its Series A 4% Convertible Preferred Stock (the "Series A
Preferred Stock") to Newcastle Partners, L.P. ("Newcastle") for $5.0 million
(the "Newcastle Transaction").
The Series A Preferred Stock is convertible into approximately
thirty-five percent of the Company's Common Stock, par value $.01 per share
("Common Stock") at any time after the expiration of twelve months from the date
of its issuance at a conversion price of $0.26 per share of Common Stock,
subject to adjustment for dilution. The holders of the Series A Preferred Stock
are entitled to a four percent annual cash dividend (the "Preferred Dividends").
The Preferred Dividends shall accrue and shall be cumulative from the date of
initial issuance of the shares of the Series A Preferred Stock, whether or not
declared by the Company's board of directors. In lieu of cash dividends, the
holders of Series A Preferred Stock may elect to receive such number of Series A
Preferred Stock that is equal to the aggregate dividend amount divided by $1.04.
So long as any shares of the Series A Preferred Stock remain
outstanding, (1) the Company's board of directors shall not exceed four members,
(2) the Company may not increase its authorized capitalization and (3) the
Company may not create rights, rankings or preferences that adversely affect the
rights, rankings and preferences of the Series A Preferred Stock, without the
written consent of the holders of at least a majority of the shares of Series A
Preferred Stock then outstanding, voting as a separate class. So long as any
shares of the Series A Preferred Stock remain outstanding, the holders of shares
of Series A Preferred Stock shall be entitled (1) to vote as a separate class to
elect two directors to the Company's board of directors and to pass upon any
matters that affect the rights, value or ranking of the Series A Preferred Stock
and (2) to vote on all other matters on which holders of Common Stock shall be
entitled to vote, casting such number of votes in respect of such shares of
Series A Preferred Stock as shall equal the largest whole number of shares of
Common Stock into which such shares of Series A Preferred Stock are then
convertible. The other powers, preferences, rights, qualifications and
restrictions of the Series A Preferred Stock are more fully set forth in the
Certificate of Designations of Series A Convertible Preferred Stock filed with
the Secretary of State of the State of Delaware simultaneously with the closing
of the Newcastle Transaction.
7
In conjunction with the Newcastle Transaction, (1) Parris H. Holmes,
Jr., Gary D. Becker, and Stephen M. Wagner resigned from the Company's board of
directors and (2) Mr. Holmes resigned as the Company's Chief Executive Officer
("CEO") and David P. Tusa resigned as the Company's Chief Financial Officer
("CFO"), Executive Vice President and Corporate Secretary. Pursuant to
employment agreements executed prior to the Newcastle Transaction, upon their
resignation, the Company paid severance, accrued vacation and other amounts to
Mr. Holmes and Mr. Tusa totaling approximately $2.1 million and $0.5 million,
respectively. In addition, the Company entered into consulting agreements with
Mr. Holmes and Mr. Tusa through October 31, 2004 and September 30, 2004,
respectively. The Company is currently not making payments under the consulting
agreements (See Note 6).
Mark E. Schwarz, currently the CEO and Chairman of Newcastle Capital
Management, L.P. ("Newcastle Capital Management"), and Steven J. Pully,
currently the President of Newcastle Capital Management, have been appointed to
fill the director positions vacated by Messrs. Holmes, Becker and Wagner.
Messrs. Schwarz and Pully were appointed as directors of the class whose term of
offices expires at the 2006 annual meeting of stockholders of the Company.
Pursuant to the agreement entered into in connection with the
Newcastle Transaction, by August 1, 2004, the Company was to have caused the
number of directors serving on the board of directors to be increased and fixed
at five (5) directors and an additional representative of Newcastle was to have
been appointed as a director of the class whose term of office expires at the
2004 annual meeting of stockholders of the Company to fill the vacancy created
by such expansion. Newcastle has waived the requirement that an additional
representative of Newcastle was to have been appointed by August 1, 2004.
In June 2004, in connection with the Newcastle Transaction, Mr.
Schwarz, CEO and Chairman of Newcastle Capital Management, Mr. Pully, President
of Newcastle Capital Management, and Mr. Murray, CFO of Newcastle Capital
Management, assumed positions as Chairman of the Board, CEO and CFO,
respectively, of the Company.
Pursuant to the Newcastle Transaction, the Company amended its July
10, 1996 Shareholder Rights Agreement by reducing the Common Stock ownership
threshold for triggering the distribution of rights under such agreement from
fifteen percent to five percent and permitting Newcastle and its successors and
assigns to purchase Common Stock without triggering the distribution of rights.
The purpose of such amendment was to ensure the preservation of the Company's
net operating loss carryforwards.
As a result of the Newcastle Transaction and the related management
changes, the board of directors of the Company has determined that it is not in
the best interests of the Company's stockholders to liquidate the Company as
previously proposed in proxy materials recently filed by the Company with the
SEC. The Company withdrew all proxy materials filed with the SEC related to the
proposed liquidation.
On August 11, 2004, Craig Davis, allegedly a shareholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware
against various former directors and current directors of the Company and the
Company as a nominal defendant (See Note 6).
NOTE 3. STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," but elected to
apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its stock
option plans. Accordingly, the Company has not recognized compensation expense
for stock options granted where the exercise price is equal to or greater than
the market price of the underlying stock at the date of grant.
8
The following table illustrates the effect on net loss and net loss
per common share had compensation expense for the Company's stock option grants
been determined based on the fair value at the grant dates consistent with the
methodology of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". For purposes of the pro forma
disclosures, the estimated fair value of options is amortized to pro forma
compensation expense over the options' vesting periods.
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 2004 2003 2004 2003
-------- --------- ----------- -----------
Net income (loss), as reported ...................... $ 428 $ (1,326) $ (1,424) $ (2,507)
Less: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ....... (67) (45) (68) (56)
------- --------- --------- ---------
Net income (loss), pro forma ....................... $ 361 $ (1,371) $ (1,492) $ (2,563)
======= ========= ========= =========
Basic net income (loss) per common share:
Net income (loss), as reported .................. $ 0.01 $ (0.04) $ (0.04) $ (0.07)
Net income (loss), pro forma .................... $ 0.01 $ (0.04) $ (0.04) $ (0.07)
Diluted net income (loss) per common share:
Net income (loss), as reported .................. $ 0.01 $ (0.04) $ (0.04) $ (0.07)
Net income (loss), pro forma .................... $ 0.01 $ (0.04) $ (0.04) $ (0.07)
The fair value for these stock options was estimated at the
respective grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for the six months ended June 30, 2004
and 2003: expected volatility of 99.22% and 96.3%, respectively, no dividend
yield, expected life of 2.5 years and risk-free interest rates of 4.75% and
1.8%, respectively.
NOTE 4. INVESTMENTS IN AFFILIATES
Investments in affiliates is comprised of the following:
June 30, December 31,
(in thousands) 2004 2003
---------- ------------
Investment in Princeton eCom Corporation ("Princeton"):
Cash investments ........................................ $ 77,276 $ 77,276
Proceeds from sale of all holdings in Princeton ......... (10,000) --
Proceeds from sale of all holdings in Princeton allocated
to former chief executive officer ..................... 600 --
Gain on sale of Princeton ............................... 5,817 --
Amortization and equity loss pick-up .................... (65,971) (62,986)
In-process research and development costs ............... (4,465) (4,465)
Impairment of investment ................................ (1,777) (1,777)
Other ................................................... (1,480) (1,481)
-------- --------
9
Net investment in Princeton .......................... -- 6,567
Investment in Sharps:
Cash investments ........................................ 970 970
Settlement .............................................. (389) --
Impairment of investment ................................ (306) (306)
Unrealized holding gain ................................. 15 --
Other ................................................... 3 2
-------- --------
Net investment in Sharps ............................. 293 666
-------- --------
Total investments in affiliates ......................... $ 293 $ 7,233
======== ========
In June 2004, the Company sold all of its holdings in Princeton. See
note 7 for further discussion.
In January 2004, the Company entered into an agreement with the
former majority shareholders of Operator Service Company ("OSC") to settle all
claims related to the April 2000 acquisition of OSC by the Company. Under the
terms of the agreement, the Company transferred to the former OSC majority
shareholders 525,000 shares of the common stock of Sharps owned by the Company,
valued at approximately $389,000. Additionally, the former OSC majority
shareholders agreed to a voting rights agreement which allows the Company to
direct the vote of New Century shares owned by them. Subsequent to this
settlement, the Company owns approximately 3.6% of Sharps' outstanding shares.
10
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities is comprised of the following:
June 30, December 31,
(in thousands) 2004 2003
-------- ------------
Accrued split dollar life insurance (see Note 8) $ -- $ 561
Accrued settlement (see Note 4) ................ -- 389
Accrued severance .............................. 170 --
Accrued legal fees ............................. 57 10
Accrued vacation ............................... 18 136
Accrued audit fees ............................. 63 62
Accrued annual report fees ..................... 79 53
Other .......................................... 55 41
------ ------
Total accrued liabilities ................... $ 442 $1,252
====== ======
Prior to the Newcastle Transaction, the Company entered into
severance agreements with three non-executive employees of the Company. These
employees are entitled to the severance amounts upon their termination of
employment.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In October 2000, the Company sold its primary operating companies to
Platinum Holdings ("Platinum"). Under the terms of this sale (the
"Transaction"), all leases and corresponding obligations associated with the
Transaction Processing and Software divisions were assumed by Platinum. Prior to
the Transaction, the Company guaranteed two operating leases for office space of
the divested companies. The first lease is related to office space located in
San Antonio, Texas, and expires in 2006. Under the original terms of the first
11
lease, the remaining minimum undiscounted rent payments total $4.3 million at
June 30, 2004. The second lease is related to office space located in Austin,
Texas, and expires in 2010. Under the original terms of the second lease, the
remaining minimum undiscounted rent payments total $7.8 million at June 30,
2004. The Company does not believe it is probable that it will be required to
perform under these lease guarantees and therefore, no liability has been
accrued on the Company's financial statements. In conjunction with the
Transaction, Platinum agreed to indemnify the Company should the underlying
operating companies not perform under the terms of the office leases.
On August 11, 2004, Craig Davis, allegedly a shareholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware.
That complaint asserts direct claims, and also derivative claims on the
Company's behalf, against five former and three current directors of the
Company. The individual defendants are Parris H. Holmes, Jr., C. Lee Cooke, Jr.,
Justin Ferrero, Gary D. Becker, J. Stephen Barley, Stephen M. Wagner, Mark E.
Schwarz, and Steven J. Pully; the Company is a nominal defendant. In his
complaint, Mr. Davis seeks the appointment of a guardian for the Company under
Section 226(a) of the Delaware General Corporation Law and other remedies. Mr.
Davis alleges that different director defendants breached their fiduciary duties
to the Company. The allegations involve, among other things, transactions with,
and payments to, Mr. Holmes, and whether New Century operated as an unregistered
investment company. The Company is currently evaluating Mr. Davis' complaint.
Prior to the filing of the complaint, New Century had commenced a review of
various transactions involving former management, including, among other things,
the payment of approximately $600,000 to Mr. Holmes in connection with a
restricted stock agreement (See Note 8) and the reimbursement of various
expenses involving meals and entertainment, travel and other reimbursed
expenses.
The Company has not requested that Messrs. Holmes or Tusa provide
consulting services at the current time and accordingly, the Company is not
making payments under the consulting agreements entered into with each of them.
The Company has been notified by counsel to both Messrs. Holmes and Tusa that
each of Messrs. Holmes and Tusa believe that amounts are owed to each of them
under their respective consulting agreements. In addition to notifying both
Messrs. Holmes and Tusa that their consulting services are not required, both
have also been notified that the Company is reviewing various transactions,
including, among other things, the payment of approximately $600,000 to Mr.
Holmes in connection with a restricted stock agreement (See Note 8) and the
reimbursement of various expenses involving meals and entertainment, travel and
other reimbursed expenses.
NOTE 7. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In March 2004, the Company entered into a definitive agreement to
sell all of its holdings in Princeton to existing and new investors of Princeton
for $10.0 million in cash. (see Note 8). The Company completed the sale of its
holdings in Princeton in early June 2004 which generated a capital loss for
federal income tax purposes of approximately $67 million.
12
The Company accounted for its investment in Princeton under the
equity method of accounting (as the Company did not exhibit control over
Princeton) and historically recorded the equity in net loss of Princeton on a
three-month lag. As a result of the sale of the Company's holdings in Princeton,
during the three months ended June 30, 2004, the Company accelerated the
recording of its equity in net loss of Princeton to the date of sale. As a
result, the Company's equity in net loss of Princeton for the three months ended
June 30, 2004 includes five months of operations of Princeton. As of December
31, 2003, the Company's ownership percentage of the preferred stock, the
outstanding stock and the fully diluted stock of Princeton was 34.0%, 36.2% and
31.7%, respectively.
Princeton's summarized balance sheet as of September 30, 2003, was
as follows:
September 30,
(in thousands) 2003
-------------
Current assets ........................................ $34,750
Non-current assets .................................... 12,681
Current liabilities ................................... 30,386
Non-current liabilities ............................... 486
Mandatorily redeemable convertible preferred stock..... 39,587
Princeton's statements of operations for the five months ended May
31, 2004 and three months ended March 31, 2003, have been used to calculate the
equity in net loss recorded in the Company's statements of operations for the
three months ended June 30, 2004 and 2003, respectively. Princeton's statements
of operations for the eight months ended May 31, 2004 and six months ended March
31, 2003, have been used to calculate the equity in net loss recorded in the
Company's statements of operations for the six months ended June 30, 2004 and
2003, respectively. Princeton's summarized statements of operations are as
follows:
Five Three Eight Six
Months Months Months Months
Ended Ended Ended Ended
May 31, March 31, May 31, March 31,
(in thousands) 2004 2003 2004 2003
---------- ----------- --------- ----------
Total revenues ........ $ 10,806 $ 9,170 $ 16,695 $ 17,810
Gross profit .......... 5,318 4,278 7,258 8,366
Loss from operations... (5,420) (2,164) (9,188) (4,283)
Net loss .............. (5,687) (2,147) (9,214) (3,964)
13
NOTE 8. RELATED PARTY TRANSACTIONS
In June 2004, in connection with the Newcastle Transaction, Mr.
Schwarz, CEO and Chairman of Newcastle Capital Management, Mr. Pully, President
of Newcastle Capital Management, and Mr. Murray, CFO of Newcastle Capital
Management, assumed positions as Chairman of the Board, CEO and CFO,
respectively, of the Company. Newcastle Capital Management is a general partner
of Newcastle, which owns 4,807,692 shares of Series A Preferred Stock and
150,000 shares of Common Stock.
In November 2001, the Company entered into an Amended and Restated
Employment Agreement ("Employment Agreement") with Mr. Holmes. As part of the
Employment Agreement, the Company entered into a Split-Dollar Life Insurance
Agreement ("Insurance Agreement") with a trust beneficially owned by Mr. Holmes
pursuant to which the Company paid the annual insurance premium of $0.2 million.
The underlying life insurance policy (New York Life policy number 46731037) had
a face value of $4.5 million and required remaining annual premium payments
through March 2012, totaling $1.5 million. In December 2003, Mr. Holmes and the
Company agreed to amend the Employment Agreement and terminate the provisions of
the Employment Agreement related to the Insurance Agreement in exchange for
payments by the Company to, and on behalf of, Mr. Holmes totaling $0.7 million
in cash. Accordingly, the Company assigned to Mr. Holmes, and Mr. Holmes
assumed, all future obligations and benefits related to the Insurance Agreement.
Mr. Holmes released and discharged the Company from any further obligation to
provide or fund any life insurance for the benefit of Mr. Holmes, including the
Insurance Agreement. The entire $0.7 million was included in general and
administrative expenses during the year ended December 31, 2003. In December
2003, $0.2 million of the total $0.7 million was paid. The remaining $0.5
million was accrued at December 31, 2003 and paid in January 2004.
In August 2003, the Company issued 435,484 shares of its common
stock to Mr. Holmes in exchange for a salary reduction of $135,000 for the
employment period of October 1, 2003 to September 30, 2004. These shares were
issued under the New Century Equity Holdings Corp. 1996 Employee Comprehensive
Stock Plan, which allows for this type of issuance without any material
amendments.
In April 2000, the Board of Directors of the Company approved a
restricted stock grant to Mr. Holmes. The restricted stock grant consisted of
400,000 shares of Princeton common stock and was modified in June 2001 to
provide for certain anti-dilution and ratchet protections. The restricted stock
grant vested on April 30, 2003. The Company expensed the fair market value of
the restricted stock grant over the three-year period ended April 30, 2003. The
Company recognized $150,000 during the six months ended June 30, 2003, as
compensation expense related to the stock grant. Related to the restricted stock
grant, in June 2004, the Company paid Mr. Holmes approximately $600,000. New
Century has commenced a review of various transactions involving former
management, including, among other things, the payment of approximately $600,000
to Mr. Holmes in connection with a restricted stock agreement and the
reimbursement of various expenses involving certain meals and entertainment,
travel and other reimbursed expenses.
During the quarter ended June 30, 2004, the Company sold certain
office furniture to Mr. Holmes for approximately $7,000. The Company had
purchased the office furniture for approximately $28,000 during the period
October 1994 through April 2003 and the furniture had a book value of $4,000.
Mr. Holmes also was provided with an automobile at the net book value of the
automobile pursuant to the terms of his employment agreement. The net book
value of the automobile at the time of transfer was zero. The automobile was
acquired for approximately $75,000 in 2000.
Mr. Holmes served as Chairman of the Board of Tanisys Technology,
Inc. ("Tanisys") at the time of the Company's investment in Tanisys and until
his resignation in February 2002. A member of the Company's Board, Lee Cooke,
served as Tanisys' Chairman of the Board and CEO from February 2002 until
February 2003 and as a member of Tanisys' Board from February 2002 to March
2003. Mr. Cooke was entitled to receive approximately $15,000 per month from
Tanisys as compensation for services as Chairman of the Board and CEO. The
Company also appointed Mr. Tusa and another one of its Board members, Justin
Ferrero, to the Board of Tanisys. Mr. Ferrero resigned from the Board of Tanisys
in February 2003 and Mr. Tusa resigned from the Board of Tanisys in March 2003.
14
Mr. Holmes served on the Board of Princeton from September 1998
until March 2004. Mr. Holmes served as Chairman of the Board of Princeton from
January 2002 until December 2002. Mr. Tusa served as a member of the Board of
Princeton from August 2001 until June 2002.
Mr. Holmes and one of the Company's Board members serve on the Board
of Sharps and did so at the time the Company invested in Sharps. Mr. Tusa was
appointed CFO of Sharps in February 2003. In March 2003, Sharps began
reimbursing the Company for certain expenses incurred by Mr. Tusa. As of June
30, 2004, approximately $9,000 was due to the Company by Sharps for the unpaid
portion of these expenses, all of which was collected in July 2004.
NOTE 9. EARNINGS PER SHARE
Basic income (loss) per common share is computed based on the
weighted average number of common shares outstanding during each period. For the
three months ended June 30, 2004, diluted income per common share is computed
based on the weighted average number of common shares outstanding, after giving
effect to the potential issuance of Common Stock on the assumed conversion of
4,807,692 shares of Series A Preferred Stock. For the six months ended June 30,
2004 and the three and six months ended June 30, 2003, potentially dilutive
securities have not been included in the diluted loss per common share
calculation as they would have been antidilutive.
15
The following table provides a reconciliation between net income and
net income applicable to common stockholders and between basic and diluted
shares outstanding:
Three Months Ended June 30, 2004
-----------------------------------
Numerator Denominator Per Share
(in thousands, except per share data) Income Shares Amount
---------- --------- -----------
Basic:
Net income ......................... $ 428
Less: Preferred stock dividends .... (7)
-------
Total basic net income ............. 421 34,653 $ 0.01
========
Effect of dilutive securities:
Convertible preferred stock ........ 7 687
------ ------
Total diluted net income ........... $ 428 35,340 $ 0.01
====== ====== ========
NOTE 10. DISCONTINUED OPERATIONS
In August 2001, the Company invested $1,060,000 in Tanisys. In
February 2003, the Company sold its preferred stock in Tanisys to ATE Worldwide
LLC, whose majority shareholder is a leader in the semiconductor testing
equipment market. The Company received approximately $0.2 million in exchange
for its preferred stock, which is reported as net income from disposal of
discontinued operations during the six months ended June 30, 2003.
ITEM 2.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN
"FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND INFORMATION RELATING TO THE COMPANY AND ITS
SUBSIDIARIES THAT ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL
AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S
MANAGEMENT. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE", "BELIEVE",
"ESTIMATE", "EXPECT" AND "INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS
THEY RELATE TO THE COMPANY OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE
CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS
INCLUDING, WITHOUT LIMITATION, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS,
CUSTOMER RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT,
GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS,
PRODUCTS INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONETIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED
UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion of the interim condensed consolidated
financial condition and results of operations for New Century Equity Holdings
Corp. and subsidiaries (collectively, the "Company"), for the three and six
months ended June 30, 2004. It should be read in conjunction with the Unaudited
Interim Condensed Consolidated Financial Statements of the Company, the notes
thereto and other financial information included elsewhere in this report, and
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
General and administrative ("G&A") expenses are comprised of all
general and administrative costs incurred in direct support of the business
operations of the Company. For the three months ended June 30, 2004 and 2003,
G&A expenses totaled $3.6 million and $0.5 million, respectively. For the six
months ended June 30, 2004 and 2003, G&A expenses totaled $4.3 million and $1.2
million, respectively. G&A expenses for the three and six months ended June 30,
2004 included a total of $2.6 million of severance paid to Parris Holmes and
David Tusa, the Company's former Chief Executive Officer and Chief Financial
Officer, respectively. For the three and six months ended June 30, 2004, G&A
expenses also included $0.3 million and $0.4 million, respectively, for legal
and professional expenses related to completing the proposed proxy statement
seeking shareholder approval to liquidate the Company (which was subsequently
withdrawn) and completing the sale (the "Newcastle Transaction") of preferred
stock to Newcastle Partners, L.P. ("Newcastle"). See Note 2 of the Condensed
Consolidated Financial Statements for a detailed description of the Newcastle
Transaction.
In June 2004 the Company sold all of its holdings in Princeton,
which offers electronic bill presentment and payment services via the internet
and telephone. Equity in net loss of affiliate totaled $1.8 million and $0.8
million during the three months ended June 30, 2004 and 2003, respectively.
Equity in net loss of affiliate totaled $3.0 million and $1.4 million during the
six months ended June 30, 2004 and 2003, respectively. The increase in the
equity in net loss of affiliate is the result of the acceleration of the
Company's equity pickup in Princeton eCom Corporation ("Princeton") to the date
of the sale (previously done on a three month lag) as well as an increase in the
net loss generated by Princeton. The sale of Princeton generated a capital loss
for federal income tax purposes of approximately $67 million.
PRINCETON
For the five months ended May 31, 2004 and three months ended March
31, 2003, Princeton's revenues totaled $10.8 million and $9.2 million,
respectively, gross profit totaled $5.3 million and $4.3 million, respectively,
loss from operations totaled $5.4 million and $2.2 million, respectively, and
net loss totaled $5.7 million and $2.1 million, respectively. For the eight
months ended May 31, 2004 and six months ended March 31, 2003, Princeton's
revenues totaled $16.7 million and $17.8 million, respectively, gross profit
totaled $7.3 million and $8.4 million, respectively, loss from operations
totaled $9.2 million and $4.3 million, respectively, and net loss totaled $9.2
million and $4.0 million, respectively.
DISCONTINUED OPERATIONS
In February 2003, the Company sold its preferred stock in Tanisys
Technology, Inc. to ATE Worldwide LLC, whose majority shareholder is a leader in
the semiconductor testing equipment market. The Company received approximately
$0.2 million in exchange for its preferred stock, which is reported as net
income from disposal of discontinued operations during the six months ended June
30, 2003.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $15.4 million at June 30,
2004, from $5.3 million at December 31, 2003. The increase relates to the
receipt of $10.0 million in proceeds from the sale of the Company's holdings in
Princeton and $5.0 million from the sale of preferred stock to Newcastle, offset
by severance payments totaling $2.6 million made to Mr. Holmes and Mr. Tusa, a
$0.6 million payment made to Mr. Holmes in connection with a restricted stock
grant, a $0.5 million payment related to the termination of the split dollar
life insurance agreement with Mr. Holmes, $0.4 million for legal and
professional expenses related to completing the proposed liquidation proxy
(which was subsequently withdrawn) and completing the sale of preferred stock to
Newcastle and the cash portion of corporate expenses. Capital expenditures
totaled $3,000 during the six months ended June 30, 2004. New Century has
commenced a review of various transactions involving former management,
including, among other things, the payment of approximately $600,000 to Mr.
Holmes in connection with a restricted stock agreement and the reimbursement of
various expenses involving certain meals and entertainment, travel and other
reimbursed expenses.
LEASE GUARANTEES
In October 2000, the Company sold its primary operating companies to
Platinum Holdings ("Platinum"). Under the terms of this sale (the
"Transaction"), all leases and corresponding obligations associated with the
Transaction Processing and Software divisions were assumed by Platinum. Prior to
the Transaction, the Company guaranteed two operating leases for office space of
the divested companies. The first lease is related to office space located in
San Antonio, Texas, and expires in 2006. Under the original terms of the first
lease, the remaining minimum undiscounted rent payments total $4.3 million at
June 30, 2004. The second lease is related to office space located in Austin,
Texas, and expires in 2010. Under the original terms of the second lease, the
remaining minimum undiscounted rent payments total $7.8 million at June 30,
2004. The Company does not believe it is probable that it will be required to
perform under these lease guarantees and therefore, no liability has been
accrued in the Company's financial statements. In conjunction with the
Transaction, Platinum agreed to indemnify the Company should the underlying
operating companies not perform under the terms of the office leases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents and short-term marketable securities. The Company
does not believe that it has significant exposure to market risks associated
with changing interest rates as of June 30, 2004, because the Company's
intention is to maintain a liquid portfolio. The Company does not use derivative
financial instruments in its operations.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Securities Exchange
Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
A 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. Because of inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 11, 2004, Craig Davis, allegedly a shareholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware.
That complaint asserts direct claims, and also derivative claims on the
Company's behalf, against five former and three current directors of the
Company. The individual defendants are Parris H. Holmes, Jr., C. Lee Cooke, Jr.,
Justin Ferrero, Gary D. Becker, J. Stephen Barley, Stephen M. Wagner, Mark E.
Schwarz, and Steven J. Pully; the Company is a nominal defendant. In his
complaint, Mr. Davis seeks the appointment of a guardian for the Company under
Section 226(a) of the Delaware General Corporation Law and other remedies. Mr.
Davis alleges that different director defendants breached their fiduciary duties
to the Company. The allegations involve, among other things, transactions with,
and payments to, Mr. Holmes, and whether New Century operated as an unregistered
investment company. The Company is currently evaluating Mr. Davis' complaint.
Prior to the filing of the complaint, New Century had commenced a review of
various transactions involving former management, including, among other things,
the payment of approximately $600,000 to Mr. Holmes in connection with a
restricted stock agreement and the reimbursement of various expenses involving
certain meals and entertainment, travel and other reimbursed expenses.
The Company has not requested that Messrs. Holmes or Tusa provide
consulting services at the current time and accordingly, the Company is not
making payments under the consulting agreements entered into with each of them.
The Company has been notified by counsel to both Messrs. Holmes and Tusa that
each of Messrs. Holmes and Tusa believe that amounts are owed to each of them
under their respective consulting agreements. In addition to notifying both
Messrs. Holmes and Tusa that their consulting services are not required, both
have also been notified that the Company is reviewing various transactions,
including, among other things, the payment of approximately $600,000 to Mr.
Holmes in connection with a restricted stock agreement and the reimbursement of
various expenses involving meals and entertainment, travel and other reimbursed
expenses.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On June 18, 2004 the Company sold 4,807,692 newly issued shares of
Series A 4% convertible preferred stock, to Newcastle Partners, L.P. for $5
million. For a detailed description of the transaction and the powers,
preferences, rights, qualifications and restrictions of the preferred stock, See
Note 2 to the Condensed Consolidated Financial Statements. The issuance of the
preferred stock was deemed to be exempt from registration under the Securities
Act of 1933, as amended (the "Act") in reliance on Section 4(2) of the Act as a
transaction by an issuer not involving a public offering.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer in Accordance with Section
302 of the Sarbanes-Oxley Act (filed herewith)
31.2 Certification of Chief Financial Officer in Accordance with Section
302 of the Sarbanes-Oxley Act (filed herewith)
32.1 Certification of Chief Executive Officer in Accordance with Section
906 of the Sarbanes-Oxley Act (filed herewith)
32.2 Certification of Chief Financial Officer in Accordance with Section
906 of the Sarbanes-Oxley Act (filed herewith)
(b) Current Reports on Form 8-K:
Pursuant to General Instructions B.2. and B.6. of Form 8-K, to the
extent that the Forms 8-K listed below contain Item 9 and/or Item 12
disclosures, those Items of such Forms 8-K are not incorporated into
this Form 10-Q or into any other form or report filed with the SEC
into which this Form 10-Q would be incorporated by reference.
Form 8-K, dated and filed May 12, 2004, announcing the Company's
results of operations for the three months ended March 31, 2004.
Form 8-K, dated and filed June 2, 2004, announcing the exploration
of strategic alternatives for the Company, the delay of distribution
of the proxy statement seeking shareholder approval for the
liquidation of the Company and the sale of the Company's holdings in
Princeton eCom Corporation.
Form 8-K, dated and filed June 10, 2004, announcing the completion
of the sale of the Company's holdings in Princeton eCom Corporation
for an aggregate purchase price of $10 million.
Form 8-K, dated June 29, 2004, filed June 30, 2004, announcing the
sale of 4.8 million shares of Series A 4% Cumulative Preferred Stock
to Newcastle Partners, L.P. for $5 million and the withdrawal of the
Company's proxy materials filed with the Commission seeking
shareholder approval of the proposed plan of liquidation of the
Company.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NEW CENTURY EQUITY HOLDINGS CORP.
(Registrant)
Date: August 16, 2004 By: /s/ John P. Murray
--------------------------------
John P. Murray
Chief Financial Officer
(Duly authorized and principal financial officer)
21
