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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2005
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)
(214) 661-7488
(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 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, 2005:
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, 2005 (Unaudited)
and December 31, 2004............................................... 3
Unaudited Condensed Consolidated Statements of Operations -
For the Three and Six Months ended June 30, 2005 and 2004........... 4
Unaudited Condensed Consolidated Statements of Comprehensive
Income (Loss) - For the Three and Six Months ended June 30,
2005 and 2004....................................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows -
For the Six Months ended June 30, 2005 and 2004..................... 6
Notes to Unaudited Interim Condensed Consolidated Financial
Statements.......................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 16
Item 4. Controls and Procedures.............................................. 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................. 18
Item 6. Exhibits............................................................. 18
SIGNATURE...................................................................... 19
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,
2005 2004
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 6 $ 1,716
Prepaid expenses and other current assets .......................... 829 145
Short-term investments ............................................. 13,830 12,895
-------- --------
Total current assets .............................................. 14,665 14,756
Property and equipment, net .......................................... 3 7
Other non-current assets ............................................. 6 6
Investments .......................................................... -- 326
-------- --------
Total assets ....................................................... $ 14,674 $ 15,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 50 $ 45
Accrued liabilities ................................................ 374 283
-------- --------
Total current liabilities ............................................ 424 328
Other non-current liabilities ........................................ 2 2
-------- --------
Total liabilities ................................................. 426 330
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
issued and outstanding ............................................ 48 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 75,428
Accumulated deficit ................................................ (61,570) (61,107)
Accumulated other comprehensive income (loss) ...................... (5) 49
-------- --------
Total stockholders' equity ........................................ 14,248 14,765
-------- --------
Total liabilities and stockholders' equity ...................... $ 14,674 $ 15,095
======== ========
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,
------------------------- -----------------------
2005 2004 2005 2004
----------- ---------- ---------- ---------
Operating revenues .................................. $ -- $ -- $ -- $ --
Operating expenses:
Selling, general and administrative expenses ..... 244 3,613 597 4,258
Depreciation and amortization expense ............ 2 5 4 21
-------- -------- -------- --------
Operating loss ...................................... (246) (3,618) (601) (4,279)
Other income (expense):
Interest income, net ............................. 100 16 181 26
Equity in net loss of affiliate .................. -- (1,785) -- (2,985)
Gain on sale of equity affiliate ................. -- 5,817 -- 5,817
Other (expense) income, net ...................... 57 (2) 57 (3)
-------- -------- -------- --------
Total other income, net ............................. 157 4,046 238 2,855
-------- -------- -------- --------
Net income (loss) ................................... (89) 428 (363) (1,424)
Preferred stock dividend ............................ (50) (7) (100) (7)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders .............................. $ (139) $ 421 $ (463) $ (1,431)
======== ======== ======== ========
Basic and diluted net income (loss) per common share:
Net income (loss) ............................... $ (0.01) $ 0.01 $ (0.02) $ (0.04)
======== ======== ======== ========
Weighted average common shares outstanding .......... 34,653 34,653 34,653 34,653
======== ======== ======== ========
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,
-------------------- --------------------
2005 2004 2005 2004
-------- ------- -------- -------
Net income (loss) ................................. $ (89) $ 428 $ (363) $(1,424)
Other comprehensive income:
Reclassification of unrealized gain on investment (94) -- (94) --
Unrealized holding gains (losses), net of $0 tax (5) 4 40 15
------- ------- ------- -------
Comprehensive income (loss) ....................... $ (188) $ 432 $ (417) $(1,409)
======= ======= ======= =======
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,
2005 2004
----------- ---------
Cash flows from operating activities:
Net loss ..................................................................... $ (363) $ (1,424)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expenses ..................................... 4 21
Equity in net loss of affiliate ............................................ - 2,985
Gain on sale of equity affiliate ........................................... - (5,817)
Loss on disposition of property and equipment .............................. - 28
Gain on sale of Sharps Compliance Corp. common stock ....................... (57) -
Accretion of discount on securities ........................................ (150) -
Changes in operating assets and liabilities:
Decrease in accounts receivable ........................................... - 9
Decrease (increase) in prepaid and other assets ........................... (684) 247
Increase in accounts payable .............................................. 5 26
Increase (decrease) in accrued liabilities ................................ 188 (430)
-------- --------
Net cash used in operating activities ........................................ (1,057) (4,355)
Cash flows from investing activities:
Proceeds from sale of short-term investments ............................... 13,334 -
Purchase of short-term investments ......................................... (13,787) -
Purchases of property and equipment ........................................ - (3)
Proceeds from sale of property and equipment ............................... - 12
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 .......................... (453) 9,449
Cash flows from financing activities:
Cash dividends paid on preferred stock ..................................... (200) -
Proceeds from sale of preferred stock ...................................... - 5,000
-------- --------
Net cash provided by (used in) financing activities .......................... (200) 5,000
Net increase (decrease) in cash and cash equivalents ......................... (1,710) 10,094
Cash and cash equivalents, beginning of period ............................... 1,716 5,330
-------- --------
Cash and cash equivalents, end of period ..................................... $ 6 $ 15,424
======== ========
Supplemental disclosure of financial information:
Cash paid for interest ..................................................... $ - $ -
Cash paid for income taxes ................................................. $ - $ -
Supplemental disclosure of non-cash transactions:
Increase in fair market value of investments ............................... $ 40 $ -
Preferred stock dividend ................................................... $ 100 $ 7
Reclassification of gain on investment ..................................... $ (94) $ -
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
6
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO THE 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, 2004. 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. HISTORICAL OVERVIEW AND RECENT DEVELOPMENTS
New Century Equity Holdings Corp. is a company in transition. The
Company is currently seeking to redeploy its assets to enhance stockholder value
and is seeking, analyzing and evaluating potential acquisition and merger
candidates. The Company was formerly known as Billing Concepts Corp. ("BCC") and
was incorporated in the state of Delaware in 1996. BCC was previously a
wholly-owned subsidiary of U.S. Long Distance Corp. ("USLD"). Upon its spin-off
from USLD, BCC became an independent, publicly-held company. Beginning in 1998,
the Company made multiple investments in Princeton eCom Corporation
("Princeton") totaling approximately $77,300,000 before selling all of its
interest for $10,000,000 in June 2004. During the period from April 1, 2005
through May 5, 2005, the Company sold its equity interest in Sharps Compliance
Corp. ("Sharps") for approximately $334,000.
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.
The following table illustrates the effect on net income (loss) and
net income (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.
7
Three Months Ended Six Months Ended
---------------------- --------------------------
June 30, June 30,
(in thousands, except per share data) 2005 2004 2005 2004
----------- ----------- ---------- -------------
Net income (loss), as reported ................. $ (89) $ 428 $ (363) $ (1,424)
Less: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ..... (20) (67) (27) (68)
---------- --------- --------- -----------
Net income (loss), pro forma ................... $ (109 $ 361 (390) $ (1,492)
========== ========= ========= ===========
Basic net income (loss) per common share:
Net income (loss), as reported ................. $ (0.01) $ 0.01 $ (0.01) $ (0.04)
Net income (loss), pro forma ................... $ (0.01) $ 0.01 $ (0.01) $ (0.04)
Diluted net income (loss) per common share:
Net income (loss), as reported ................. $ (0.01) $ 0.01 $ (0.01) $ (0.04)
Net income (loss), pro forma ................... $ (0.01) $ 0.01 $ (0.01) $ (0.04)
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, 2005
and 2004: expected volatility of 99.22%, no dividend yield, expected life of 2.5
years and risk-free interest rates of 4.75%.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
SHARE-BASED PAYMENT, which established accounting standards for transactions
where the entity exchanges equity instruments for goods and services. The
revision of this statement focuses on the accounting for transactions where the
entity obtains employee services in share-based payment transactions. This
statement revision eliminates the alternative use of APB 25 intrinsic value
method and requires that entities adopt the fair-value method for all
share-based transactions. This statement is effective the next fiscal year
following June 15, 2005. The Company will adopt the provisions of this standard
on a modified prospective basis in the first quarter of 2006, and the Company
believes that the overall impact to the financial statements will be immaterial.
NOTE 4. INVESTMENTS
Investments consist of the following:
June 30,
(in thousands) 2005
---------------
Investment in Sharps Compliance Corp:
Cash investments................................. $ 970
Settlement....................................... (389)
Impairment of investment......................... (306)
Gain on sale..................................... 57
Other............................................ 2
Proceeds from sale............................... (334)
---------------
Total investments ............................... $ -
===============
In January 2004, the Company entered into an agreement with the
former majority stockholders 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
8
stockholders 525,000 shares of the common stock of Sharps owned by the Company,
valued at approximately $389,000. During the period from April 1, 2005 through
May 5, 2005, the Company sold its equity interest in Sharps for approximately
$334,000, resulting in a $57,000 gain for financial reporting purposes, net of
$94,000 reclassified from other comprehensive income.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In October 2000, the Company completed the sale of several
wholly-owned subsidiaries that principally provided third-party billing
clearinghouse and information management services to the telecommunications
industry (the "Transaction Processing and Software Business") to Platinum
Holdings ("Platinum"), for consideration of approximately $49,700,000 (the
"Platinum Transaction"). Under the terms of the Platinum Transaction, all leases
and corresponding obligations associated with the Transaction Processing and
Software Business were assumed by Platinum. Prior to the Platinum 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 approximately $2,431,000 at
June 30, 2005. 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 approximately $6,383,000 at
June 30, 2005. In conjunction with the Platinum Transaction, Platinum agreed to
indemnify the Company should the underlying operating companies not perform
under the terms of the office leases. The Company can provide no assurance as to
Platinum's ability, or willingness, to perform its obligations under the
indemnification. 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.
On August 11, 2004, Craig Davis, allegedly a stockholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware
(the "Complaint"). The 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 named in the Complaint are Parris H.
Holmes, Jr., C. Lee Cooke, Jr., Justin L. 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
receiver 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 the Company operated as an unregistered investment company.
The Company and certain of the defendants responded to the Complaint
by filing a motion to dismiss or stay the action on October 18, 2004 and on
November 3, 2004 filed a memorandum of law in support of such positions. The
motion to dismiss filed by the Company and various defendants was heard by the
Chancery Court of New Castle County, Delaware on January 18, 2005. The court
denied the motion to dismiss. On May 6, 2005, the Company and certain of the
defendants filed a response in opposition to plaintiff's motion for receiver.
Mediation among parties named in the Complaint took place in Wilmington,
Delaware on May 13, 2005. On May 31, 2005, Mr. Davis filed an amendment to the
Complaint to include James Risher, a current director, and Newcastle Partners,
L.P. ("Newcastle") as additional defendants. On July 8, 2005, the Company and
certain of the defendants filed a supplemental response in opposition to
plaintiff's motion for appointment of receiver. A trial date is currently set
for December 5, 2005.
The Company is currently funding legal expenses of the defendants
pursuant to indemnification arrangements that were in place during the
respective terms of each of the defendants. As of June 30, 2005, the Company had
met the $500,000 deductible as stipulated in the Company's directors and
9
officers liability insurance policy. The directors and officers liability
insurance policy carries a maximum coverage limit of $5,000,000. Because this
case is in the early stages, it is not possible to evaluate the likelihood of
exceeding the policy limit. As of June 30, 2005, the Company has recorded a
receivable from the insurance carrier of approximately $781,000 for
reimbursement of legal and professional fees incurred in excess of the policy
deductible, in accordance with the provisions of the insurance policy. As of
August 12, 2005, the Company had not received any reimbursement from the
insurance carrier and continues to have ongoing discussions with the insurance
carrier regarding reimbursement under the provisions of the policy. If for any
reason the insurance carrier does not fulfill its obligation to reimburse the
Company under the insurance policy, nonpayment of the claim for reimbursement of
legal and professional fees could have a material adverse effect on the
financial condition and results of operations of the Company.
On October 27, 2004 the board of directors appointed Messrs. Pully,
Risher and Schwarz to a special litigation committee to investigate the claims
of the plaintiff. Prior to the filing of the Complaint, the Company had
commenced an investigation 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 7) and the
reimbursement of various expenses involving meals and entertainment, travel and
other reimbursed expenses. As part of the investigative work commenced by the
Company prior to the filing of the Complaint, the Company sought reimbursement
from Mr. Holmes for various amounts paid to him. The Company and Mr. Holmes were
unable to agree on the amount that Mr. Holmes should reimburse the Company.
The Company has been notified by counsel to both Mr. Holmes and
David P. Tusa (former chief financial officer) that each of Messrs. Holmes and
Tusa believe that approximately $60,000 and $34,000, respectively, are owed to
each of them under their respective consulting agreements. In addition to
notifying both Messrs. Holmes and Tusa that their consulting services were not
required and that no obligation therefore existed under their respective
agreements, both have also been notified that the Company is investigating
various transactions, including, among other things, the payment of
approximately $600,000 to Mr. Holmes in connection with a restricted stock
agreement (see Note 7) and the reimbursement of various expenses involving meals
and entertainment, travel and other reimbursed expenses. The Company disputes
that any additional amounts are owed under the consulting agreements and,
therefore, has not provided for such amounts in the accompanying financial
statements for the period ended June 30, 2005.
Pursuant to the sale of approximately 4.8 million newly issued
shares of the Company's Series A 4% Convertible Preferred Stock (the "Series A
Preferred Stock") to Newcastle on June 18, 2004 (the "Newcastle Transaction")
the Company agreed to indemnify Newcastle from any liability, loss or damage,
together with all costs and expenses related thereto that the Company may suffer
which arises out of affairs of the Company, its board of directors or employees
prior to the closing of the Newcastle Transaction. The Company's obligation to
indemnify may be satisfied at the option of the purchaser by issuing additional
Series A Preferred Stock to the purchaser, modifying the conversion price of the
Series A Preferred Stock, a payment of cash or a redemption of Series A
Preferred Stock or a combination of the foregoing. The Company and the purchaser
have not yet determined whether events that have arisen since the closing will
trigger the indemnity provisions.
NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In June 2004, the Company sold all of its interest in Princeton for
$10,000,000. The sale of Princeton generated a capital loss for federal income
tax purposes of approximately $67,000,000. Prior to the selling of its interest
in Princeton in June 2004, the Company accounted for its investment in Princeton
10
under the equity method of accounting and 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 six months ended June 30, 2004, the Company
accelerated the recording of its equity in net loss of Princeton to the date of
sale. Princeton's statement of operations for the eight months ended May 31,
2004, has been used to calculate the equity in net loss recorded in the
Company's statement of operations for the six months ended June 30, 2004.
Princeton's summarized statement of operations was as follows:
Eight
Months
Ended
May 31,
(in thousands) 2004
-----------
Total revenues........................... $ 16,965
Gross profit............................. 7,258
Loss from operations..................... (9,188)
Net loss................................. (9,214)
NOTE 7. RELATED PARTY TRANSACTIONS
Parris H. Holmes, Jr. (former Chairman of the Board and Chief
Executive Officer of the Company) 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. David P. Tusa (former Chief
Financial Officer of the Company) served as a member of the Board of Princeton
from August 2001 until June 2002.
According to public filings, Mr. Holmes has been a member of the
board of directors of Sharps since July 1998. Mr. Tusa was appointed Chief
Financial Officer of Sharps in February 2003. A former member of the Company's
board of directors, Lee Cooke, served on the board of directors of Sharps from
March 1992 until November 2004.
In August 2003, the Company issued 435,484 shares of the Company's
Common Stock, par value $.01 per share ("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 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 approximately
$172,000. The underlying life insurance policy had a face value of $4,500,000
and required remaining annual premium payments through March 2012, totaling
$1,500,000. 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 approximately $700,000 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 $700,000 was included in general and administrative
11
expenses during the year ended December 31, 2003. In December 2003, $200,000 of
the total $700,000 was paid. The remaining $500,000 was accrued at December 31,
2003 and paid in January 2004. In conjunction with the Insurance Agreement, the
Company relinquished its rights under two other split-dollar life insurance
policies previously entered into with Mr. Holmes. All premiums had been paid
under the two policies prior to 2004. The Company paid approximately $3,800 on
behalf of Mr. Holmes in connection with the transfer of rights to Mr. Holmes.
Prior to the Newcastle Transaction, during the six months ended June
30, 2004, the Company sold certain office furniture to Mr. Holmes for
approximately $7,000 and provided Mr. Holmes with title to the automobile that
had been furnished to him by the Company at no cost. 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. Pursuant to the
terms of his employment agreement, Mr. Holmes was provided with an automobile.
The automobile was acquired by the Company for $75,000 in 2000. At the time of
transfer, the net book value of the automobile was zero and the fair market
value was $20,000. In accordance with the terms of Mr. Holmes' employment
agreement, the income taxes incurred by Mr. Holmes as a result of the transfer
of title to him were borne by the Company.
The Company paid Mr. Holmes approximately $600,000 on June 2, 2004,
purportedly as a result of a restricted stock grant as described below. 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 has commenced an
investigation of various transactions involving former management, including,
among other things, the $600,000 payment.
In June 2004, in connection with the Newcastle Transaction, Mr.
Schwarz, Chief Executive Officer and Chairman of Newcastle Capital Management,
L.P. ("NCM"), Mr. Pully, President of NCM, and Mr. Murray, Chief Financial
Officer of NCM, assumed positions as Chairman of the Board, Chief Executive
Officer and Chief Financial Officer, respectively, of the Company. Mr. Pully
receives an annual salary of $150,000 as Chief Executive Officer of the Company.
NCM is the general partner of Newcastle, which owns 4,807,692 shares of Series A
Preferred Stock and 150,000 shares of Common Stock of the Company.
The Company's corporate headquarters are currently located at 300
Crescent Court, Suite 1110, Dallas, Texas 75201, which are also the offices of
NCM. Pursuant to an oral agreement, the Company subleases a portion of NCM's
space on a month-to-month basis at no charge.
The Company also receives accounting and administrative services
from employees of NCM at no charge.
NOTE 8. SHARE CAPITAL
On July 10, 1996, the Company, upon authorization of the board of
directors, adopted a Shareholder Rights Plan ("Rights Plan") and declared a
dividend of one preferred share purchase right on each share of its outstanding
Common Stock. The rights will become exercisable if a person or group acquires
15% or more of the Company's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's Common Stock. These rights, which expire on July 10, 2006,
entitle stockholders to buy one ten-thousandth of a share of a new series of
12
participating preferred shares at a purchase price of $130 per one
ten-thousandth of a preferred share. The Rights Plan was designed to ensure that
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company.
On June 10, 2004, 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. Newcastle and its successors and assigns are exempted from the five
percent ownership limitation. The purpose of such amendment was to help ensure
the preservation of the Company's net operating loss and capital loss
carryforwards.
The Company has never declared or paid any cash dividends on its
Common Stock. The Company may not pay dividends on its Common Stock unless all
declared and unpaid dividends on the Series A Preferred Stock have been paid. In
addition, whenever the Company shall declare or pay any dividends on its Common
Stock, the holders of the Series A Preferred Stock are entitled to receive such
Common Stock dividends on a ratably as-converted basis.
The Series A Preferred Stock is convertible into approximately
thirty-five percent of the 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 shares of Series A Preferred Stock that is equal to the
aggregate dividend amount divided by $1.04. On June 18, 2005 the holders of the
Series A Preferred Stock elected to receive the Preferred Dividends in cash for
the annual period ended June 18, 2005.
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.
NOTE 9. INVESTMENT IN SECURITIES AVAILABLE-FOR-SALE
In May 2005, the Company purchased a 26-week U.S. Treasury bill for
approximately $13,786,000. The fair value was $13,830,000 at June 30, 2005.
13
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.
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, 2005. 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, 2004.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Selling, general and administrative ("SG&A") expense includes
management salaries and benefits, legal fees, public company costs and other
administrative costs incurred in direct support of the business operations of
the Company. SG&A expenses decreased by $3,369,000, or 93%, and $3,661,000, or
86% for the three and six months ended June 30, 2005, respectively, as compared
to the corresponding periods of the prior fiscal year. SG&A expenses for the
three and six months ended June 30, 2004, included approximately $2,600,000 of
severance paid to Messrs. Holmes and Tusa, the Company's former Chief Executive
Officer and Chief Financial Officer, respectively. For the three and six months
ended June 30, 2004, SG&A expenses also included approximately $700,000 of legal
and professional expenses related to the proposed proxy statement seeking
shareholder approval to liquidate the Company (which was subsequently withdrawn)
and completing the Newcastle Transaction. The remainder of the decrease in SG&A
is due to reduced salary and benefits as the number of employees have decreased
from five to one and a decrease in rent expense as a result of the sublease
entered into on October 8, 2004, to sublet the Company's office space located at
10101 Reunion Place, Suite 970, San Antonio, Texas. The decrease in SG&A is
partially offset by approximately $21,000 for legal and professional fees
incurred during the three months ended June 30, 2005, related to the lawsuit
filed by Craig Davis.
14
INTEREST INCOME
Interest income increased by $89,000 or 556%, and $160,000 or 615%
for the three and six months ended June 30, 2005, respectively, as compared to
the corresponding periods of the prior fiscal year. This increase was
attributable to increased yields available for short-term investments and higher
cash balances from the proceeds of the Newcastle Transaction and the sale of our
Princeton interest in June 2004.
EQUITY IN NET LOSS OF AFFILIATE
Equity in net loss of affiliate totaled approximately $2,985,000
during the six months ended June 30, 2004. In June 2004, the Company sold all
its interest in Princeton for $10,000,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments decreased to
approximately $13,836,000 at June 30, 2005, from $14,611,000 at December 31,
2004. The significant items affecting the Company's cash and short-term
investments during the six months ended June 30, 2005, are as follows: proceeds
of approximately $334,000 from the sale of the Sharps common stock, the payment
of $200,000 for the annual Preferred Dividends and approximately $1,031,000 of
legal and professional fees related to the lawsuit filed by Craig Davis. As of
June 30, 2005, the Company had met the $500,000 deductible as stipulated in the
Company's directors and officers liability insurance policy. The directors and
officers liability insurance policy carries a maximum coverage limit of
$5,000,000. Because this case is in the early stages, it is not possible to
evaluate the likelihood of exceeding the policy limit. As of June 30, 2005, the
Company has recorded a receivable from the insurance carrier of approximately
$781,000 for reimbursement of legal and professional fees incurred in excess of
the policy deductible, in accordance with the provisions of the insurance
policy. As of August 12, 2005, the Company has not received any reimbursement
from the insurance carrier and continues to have ongoing discussions with the
insurance carrier regarding reimbursement under the provisions of the policy. If
for any reason the insurance carrier does not fulfill its obligation to
reimburse the Company under the insurance policy, nonpayment of the claim for
reimbursement of legal and professional fees could have a material adverse
effect on the financial condition and results of operations of the Company.
There were no capital expenditures during the six months ended June
30, 2005.
During the remainder of 2005, the Company's operating cash
requirements are expected to consist principally of funding corporate expenses,
the costs associated with maintaining a public company and expenses incurred in
pursuing and operating new business activities. The Company expects to incur
additional operating losses through fiscal 2005, which will continue to have a
negative impact on liquidity and capital resources.
LEASE GUARANTEES
In October 2000, the Company completed the Platinum Transaction.
Under the terms of the Platinum Transaction, all leases and corresponding
obligations associated with the Transaction Processing and Software Business
were assumed by Platinum. Prior to the Platinum 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 $2,431,000 at June 30, 2005. The second
15
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 $6,383,000 at June 30, 2005. In conjunction with the
Platinum Transaction, Platinum agreed to indemnify the Company should the
underlying operating companies not perform under the terms of the office leases.
The Company can provide no assurance as to Platinum's ability, or willingness,
to perform its obligations under the indemnification. 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.
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, 2005, 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
Disclosure controls and procedures are designed with the objective
of ensuring that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such
as this Form 10-Q, is reported in accordance with the rules of the SEC.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated appropriately and communicated to management,
including the chief executive officer and chief financial officer as appropriate
to allow timely decisions regarding required disclosures.
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 Exchange Act Rules
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. No change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) occurred during the period covered by this report that materially
affected or is reasonably likely to materially affect the Company's internal
control over financial reporting.
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 11, 2004, Craig Davis, allegedly a stockholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware
(the "Complaint"). The 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 named in the Complaint are Parris H.
Holmes, Jr., C. Lee Cooke, Jr., Justin L. Ferrero, Gary D. Becker, J. Stephen
16
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
receiver 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 the Company operated as an unregistered investment company.
The Company and certain of the defendants responded to the Complaint
by filing a motion to dismiss or stay the action on October 18, 2004 and on
November 3, 2004 filed a memorandum of law in support of such positions. The
motion to dismiss filed by the Company and various defendants was heard by the
Chancery Court of New Castle County, Delaware on January 18, 2005. The court
denied the motion to dismiss. On May 6, 2005, the Company and certain of the
defendants filed a response in opposition to plaintiff's motion for receiver.
Mediation among parties named in the Complaint took place in Wilmington,
Delaware on May 13, 2005. On May 31, 2005, Mr. Davis filed an amendment to the
Complaint to include James Risher, a current director, and Newcastle as
additional defendants. On July 8, 2005, the Company and certain defendants filed
a supplemental response in opposition to plaintiff's motion for appointment of
receiver. A trial date is currently set for December 5, 2005.
The Company is currently funding legal expenses of the defendants
pursuant to indemnification arrangements that were in place during the
respective terms of each of the defendants. As of June 30, 2005, the Company had
met the $500,000 deductible as stipulated in the Company's directors and
officers liability insurance policy. The directors and officers liability
insurance policy carries a maximum coverage limit of $5,000,000. Because this
case is in the early stages, it is not possible to evaluate the likelihood of
exceeding the policy limit. As of June 30, 2005, the Company has recorded a
receivable from the insurance carrier of approximately $781,000 for
reimbursement of legal and professional fees incurred in excess of the policy
deductible, in accordance with the provisions of the insurance policy. As of
August 12, 2005, the Company has not received any reimbursement from the
insurance carrier and continues to have ongoing discussions with the insurance
carrier regarding reimbursement under the provisions of the policy. If for any
reason the insurance carrier does not fulfill its obligation to reimburse the
Company under the insurance policy, nonpayment of the claim for reimbursement of
legal and professional fees could have a material adverse effect on the
financial condition and results of operations of the Company.
On October 27, 2004, the board of directors appointed Messrs. Pully,
Risher and Schwarz to a special litigation committee to investigate the claims
of the plaintiff. Prior to the filing of the Complaint, the Company had
commenced an investigation 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 7) and the
reimbursement of various expenses involving meals and entertainment, travel and
other reimbursed expenses. As part of the investigative work commenced by the
Company prior to the filing of the Complaint, the Company sought reimbursement
from Mr. Holmes for various amounts paid to him. The Company and Mr. Holmes were
unable to agree on the amount that Mr. Holmes should reimburse the Company.
The Company has been notified by counsel to both Mr. Holmes and
David P. Tusa (former chief financial officer) that each of Messrs. Holmes and
Tusa believe that approximately $60,000 and $34,000, respectively, are owed to
each of them under their respective consulting agreements. In addition to
notifying both Messrs. Holmes and Tusa that their consulting services were not
required and that no obligation therefore existed under their respective
agreements, both have also been notified that the Company is investigating
various transactions, including, among other things, the payment of
17
approximately $600,000 to Mr. Holmes in connection with a restricted stock
agreement (see Note 7 to the condensed consolidated financial statements) and
the reimbursement of various expenses involving meals and entertainment, travel
and other reimbursed expenses. The Company disputes that any additional amounts
are owed under the consulting agreements and, therefore, has not provided for
such amounts in the accompanying financial statements for the period ended June
30, 2005.
Pursuant to the Newcastle Transaction, the Company agreed to
indemnify Newcastle from any liability, loss or damage, together with all costs
and expenses related thereto that the Company may suffer which arises out of
affairs of the Company, its board of directors or employees prior to the closing
of the Newcastle Transaction. The Company's obligation to indemnify may be
satisfied at the option of the purchaser by issuing additional Series A
Preferred Stock to the purchaser, modifying the conversion price of the Series A
Preferred Stock, a payment of cash or a redemption of Series A Preferred Stock
or a combination of the foregoing. The Company and the purchaser have not yet
determined whether events that have arisen since the closing will trigger the
indemnity provisions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 27, 2005, the Company held its Annual Meeting of Stockholders
for the year ended December 31, 2004 for the following purpose: (a) for holders
of Common Stock and holders of Series A Preferred Stock to elect Jonathan Bren
as a director to hold office until the 2007 Annual Meeting of Stockholders and
to elect James A. Risher as a director to hold office until the 2008 Annual
Meeting of Stockholders, and (b) for holders of Series A Preferred Stock to
elect Mark E. Schwarz and Steven J. Pully as directors to hold office until the
2006 Annual Meeting of Stockholders. The vote on this proposal was as follows:
ELECTION OF DIRECTORS FOR WITHHELD
--------------------- --- --------
Jonathan Bren 50,209,372 21,018
James A. Risher 50,192,744 4,390
Mark E. Schwarz 4,807,692 -
Steven J. Pully 4,807,692 -
ITEM 6. EXHIBITS
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).
18
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 15, 2005 By: /s/ John P. Murray
------------------------------------
John P. Murray
CHIEF FINANCIAL OFFICER
(Duly authorized and principal financial
officer)
19
