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 March 31, 2006
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
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (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 May 12, 2006:
Number of Shares
Title of Class Outstanding
----------------------------- ----------------
Common Stock, $0.01 par value 34,653,104
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2006
(Unaudited) and December 31, 2005 ........................... 3
Unaudited Condensed Consolidated Statements of Operations -
For the Three Months ended March 31, 2006 and 2005 .......... 4
Unaudited Condensed Consolidated Statements of Comprehensive
Loss - For the Three Months ended March 31, 2006 and 2005 ... 5
Unaudited Condensed Consolidated Statements of Cash Flows -
For the Three Months ended March 31, 2006 and 2005 .......... 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 .............................................. 17
Item 1A. Risk Factors ................................................... 18
Item 6. Exhibits ....................................................... 20
SIGNATURE ................................................................ 21
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
2006 2005
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 12,011 $ 12,487
Accounts receivable........................................................... 13 33
Insurance receivable and other assets......................................... 1,006 1,637
Settlement fund receivable.................................................... 3,200 --
------------- -------------
Total current assets......................................................... 16,230 14,157
Other non-current assets........................................................ -- 6
Revenue interest................................................................ 803 415
------------- -------------
Total assets.................................................................. $ 17,033 $ 14,578
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 6 $ 53
Accrued liabilities........................................................... 458 550
Accrued settlement............................................................ 3,200 --
------------- -------------
Total current liabilities....................................................... 3,664 603
Other non-current liabilities................................................... -- 2
------------- -------------
Total liabilities............................................................ 3,664 605
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........................................................... (62,454) (61,850)
------------- -------------
Total stockholders' equity................................................... 13,369 13,973
------------- -------------
Total liabilities and stockholders' equity.................................. $ 17,033 $ 14,578
============= =============
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
March 31,
------------------------
2006 2005
-------- --------
Operating revenues ............................. $ 13 $ --
Operating expenses:
General and administrative expenses ......... 91 353
Depreciation and amortization expense ....... -- 2
-------- --------
Operating income (loss) ........................ (78) (355)
Other income (expense):
Derivative settlement costs ................. (600) --
Interest income ............................. 124 81
-------- --------
Total other income (expense), net .............. (476) 81
-------- --------
Net loss ....................................... (554) (274)
Preferred stock dividend ....................... (50) (50)
-------- --------
Net loss applicable to common stockholders ..... $ (604) $ (324)
======== ========
Basic and diluted net loss per common share:
Net loss .................................... $ (0.02) $ (0.01)
Weighted average common shares outstanding ..... 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 LOSS
(IN THOUSANDS)
Three Months Ended
March 31,
-----------------------
2006 2005
-------- --------
Net loss ......................................... $ (554) $ (274)
Other comprehensive income:
Unrealized holding gains, net of $0 tax ........ -- 45
-------- --------
Comprehensive loss ............................... $ (554) $ (229)
======== ========
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)
Three Months Ended
March 31,
-----------------------
2006 2005
-------- --------
Cash flows from operating activities:
Net loss ......................................... $ (554) $ (274)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expenses ......... -- 2
Accretion of discount on securities ............ -- (74)
Changes in operating assets and liabilities:
Decrease in accounts receivable ............... 20 --
Decrease in prepaid and other assets .......... 637 48
Increase in settlement fund receivable ........ (3,200) --
Decrease in accounts payable .................. (47) --
Increase (decrease) in accrued liabilities .... (144) 69
Increase in accrued settlement ................ 3,200 --
-------- --------
Net cash used in operating activities ............ (88) (229)
Cash flows from investing activities:
Purchase of revenue interest ................... (388) --
-------- --------
Net cash used in investing activities ............ (388) --
Cash flows from financing activities ............. -- --
-------- --------
Net decrease in cash and cash equivalents ........ (476) (229)
Cash and cash equivalents, beginning of period ... 12,487 1,716
-------- --------
Cash and cash equivalents, end of period ......... $ 12,011 $ 1,487
======== ========
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 ... $ -- $ 45
Preferred stock dividend ....................... $ 50 $ 50
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. ("NCEH" or "the
Company") and subsidiaries without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Although, 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 those rules and regulations,
all adjustments considered necessary in order to make the financial statements
not misleading, have been included. 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, 2005. 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.
On October 5, 2005, the Company made an investment in ACP Investments L.P.
(d/b/a Ascendant Capital Partners) ("Ascendant"), pursuant to which the Company
currently receives 50% of the revenues generated by Ascendant. Ascendant is a
Berwyn, Pennsylvania based alternative asset management company whose funds have
investments in long/short equity funds and which distributes its registered
funds primarily through various financial intermediaries and related channels.
The Company's revenue interest in Ascendant currently represents the Company's
sole operating business.
The Company, which was formerly known as Billing Concepts Corp. ("BCC"),
was incorporated in the state of Delaware in 1996. BCC was previously a
wholly-owned subsidiary of U.S. Long Distance Corp. ("USLD") and principally
provided third-party billing clearinghouse and information management services
to the telecommunications industry (the "Transaction Processing and Software
Business"). Upon its spin-off from USLD, BCC became an independent,
publicly-held company. In October 2000, the Company completed the sale of
several wholly-owned subsidiaries that comprised the Transaction Processing and
Software Business to Platinum Holdings ("Platinum") for consideration of
$49,700,000 (the "Platinum Transaction"). The Company also received payments
totaling $7,500,000 for consulting services provided to Platinum over the
twenty-four month period subsequent to the Platinum Transaction.
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. The Company's strategy, beginning
with its investment in Princeton, of making investments in high-growth companies
was also facilitated through several other investments.
7
In early 2004, the Company announced that it would seek stockholder
approval to liquidate the Company. In June of 2004, the board of directors of
the Company determined that it would be in the best interest of the Company to
accept an investment from Newcastle Partners, L.P. ("Newcastle"), an investment
fund with a long track record of investing in public and private companies. On
June 18, 2004, the Company sold 4,807,692 newly issued shares of its Series A 4%
Convertible Preferred Stock (the "Series A Preferred Stock") to Newcastle for
$5,000,000 (the "Newcastle Transaction"). 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. Following
the investment by Newcastle, the management team resigned and new executives and
board members were appointed.
During May 2005, the Company sold its equity interest in Sharps Compliance
Corp. ("Sharps") for approximately $334,000. Following the sale of its Sharps
interest, the Company no longer holds any investments made by former management
and which reflected former management's strategy of investing in high-growth
companies.
On August 11, 2004, Craig Davis, allegedly a stockholder of the Company,
filed a lawsuit in the Chancery Court of New Castle County, Delaware (the
"Lawsuit"). The Lawsuit asserted direct claims, and also derivative claims on
the Company's behalf, against five former and three current directors of the
Company. On April 13, 2006, the Company announced that it reached an agreement
with all of the parties to the Lawsuit to settle all claims relating thereto
(the "Settlement"). As part of the Settlement, the Company will set up a fund
(the "Settlement Fund"), which will be distributed to stockholders following
final approval of the Settlement by the Delaware Chancery Court, which is
expected to occur in July of 2006. The portion of the Settlement Fund which will
be distributable to all holders of common stock of the Company on the record
date for the Settlement is expected to be approximately $2,265,000, provided
that any common stock of the Company held by defendants in the Lawsuit who were
formerly directors of the Company will not be entitled to any distribution from
the Settlement Fund. A record date will be established following approval of the
Settlement by the Delaware Chancery Court. The distribution of the Settlement
Fund to stockholders of record is expected to approximate $.04 per common share
on a fully diluted basis. The total Settlement proceeds of $3,200,000 are being
funded by the Company's insurance carrier and by Parris H. Holmes, Jr., the
Company's former Chief Executive Officer, who is contributing $150,000. Included
in the total Settlement proceeds is $600,000 of reimbursement for legal and
professional fees submitted to the Company's insurance carrier. The Company is
contributing the $600,000 of reimbursed legal and professional fees to the
Settlement Fund and, therefore, has recognized a loss of $600,000 related to the
Lawsuit for the quarter ended March 31, 2006. The Company and the other
defendants in the Lawsuit have agreed not to oppose the request for fees and
expenses by counsel to the plaintiff of $935,000. Under the Settlement, the
plaintiff, the Company and the other defendants (including Mr. Holmes) have also
agreed to certain mutual releases of claims arising out of transactions
referenced in the Lawsuit.
The Company is currently funding legal and professional fees of the
current and former director defendants pursuant to indemnification arrangements
that were in place during the respective terms of each of the defendants. The
Company has met the $500,000 retention 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. As of March 31,
2006, the Company has recorded a receivable from the insurance carrier of
8
approximately $912,000 for reimbursement of legal and professional fees incurred
in excess of the policy retention, net of the $600,000 reimbursement from the
insurance carrier as part of the Settlement. The Company continues to have
ongoing discussions with the insurance carrier regarding reimbursement of legal
and professional fees under the provisions of the 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. The Company intends to vigorously seek enforcement of its rights under
the policy. The Settlement does not preclude the Company from seeking
reimbursement of legal and professional fees up to an amount remaining within
the policy limit, which is approximately $1,950,000 after considering the terms
of the Settlement.
NOTE 3. STOCK BASED COMPENSATION
During the quarter ended March 31, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" (SFAS 123R) using the modified prospective application
transition method. Under this method, previously reported amounts should not be
restated to reflect the provisions of SFAS 123R. SFAS 123R requires measurement
of all employee stock-based compensation awards using a fair-value method and
recording of such expense in the consolidated financial statements over the
requisite service period. Previously, the Company had applied the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations and elected to utilize the
disclosure option of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). In the first quarter of
fiscal 2006, the Company recorded stock-based compensation expense of $0 under
the fair-value provisions of SFAS 123R. The Company utilizes stock-based awards
as a form of compensation for employees, officers and directors.
For the quarter ended March 31, 2005, 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.
No stock options were issued during the three months ended March 31, 2005.
9
Three Months Ended
March 31,
------------------
(in thousands, except per share data) 2005
------
Net loss, as reported ..................................................... $ (274)
Less: Total stock based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (8)
------
Net loss, pro forma ....................................................... $ (282)
======
Basic and diluted net loss per common share:
Net loss, as reported .................................................. $(0.01)
Net loss, pro forma .................................................... $(0.01)
NOTE 4. REVENUE INTEREST
On October 5, 2005, the Company entered into an agreement (the "Ascendant
Agreement") with Ascendant to acquire an interest in the revenues generated by
Ascendant. Pursuant to the Ascendant Agreement, the Company is currently
entitled to a 50% interest, subject to certain adjustments, in the revenues of
Ascendant, which interest declines if the assets under management of Ascendant
reach certain levels. Revenues generated by Ascendant include revenues from
assets under management or any other sources or investments, net of any agreed
commissions. The Company also agreed to provide various marketing services to
Ascendant. Steven J. Pully, CEO of the Company, was appointed to the Investment
Advisory Committee of Ascendant. The total potential purchase price under the
terms of the Ascendant Agreement is $1,550,000, payable in four equal
installments of $387,500. The first installment was paid at the closing and the
second installment was paid on January 5, 2006. Subject to the provisions of the
Ascendant Agreement, including Ascendant's compliance with the terms thereof,
the third installment was payable on April 5, 2006 and the fourth installment is
payable on July 5, 2006. As of May 12, 2006, the Company has elected not to make
the third installment payment.
Subject to the terms of the Ascendant Agreement, if the Company does not
make an installment payment and Ascendant is not in breach of the Ascendant
Agreement, Ascendant has the right to acquire the Company's revenue interest at
a price which would yield a 10% annualized return to the Company. The Company
has been notified by Ascendant that it intends to exercise this right as a
result of the Company's election not to make its third installment payment. The
Company believes that Ascendant has not satisfied the requisite conditions to
repurchase the Company's revenue interest.
Ascendant had assets under management of approximately $19,600,000 and
$17,800,000 as of March 31, 2006 and December 31, 2005, respectively. Ascendant
notified the Company that its calculation of net revenues (after deducting
certain third party expenses) for the quarter ended March 31, 2006 was
approximately $26,000, and accordingly made a payment to the Company of
approximately $13,000. Under the Ascendant Agreement, revenues earned by the
Company from the Ascendant revenue interest (as determined in accordance with
the terms of the Ascendant Agreement) are payable in cash within 30 days after
the end of each quarter.
10
After the second anniversary of the Ascendant Agreement and upon the
occurrence of certain events, Ascendant has the option to repurchase a portion
of the Company's revenue interest at a price which would yield a 25% annualized
return to the Company. In connection with the Ascendant Agreement, the Company
also entered into the Principals Agreement with Ascendant and certain limited
partners and key employees of Ascendant (the "Principals Agreement") pursuant to
which the Company has the option to purchase limited partnership interests of
Ascendant under certain circumstances. Effective March 14, 2006, in accordance
with the terms of the Principals Agreement, the Company acquired a 7% limited
partnership interest from a limited partner of Ascendant for a nominal amount.
NOTE 5. COMMITMENTS AND CONTINGENCIES
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 approximately $1,063,000 at March 31, 2006. 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 $5,319,000 at March 31, 2006. 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.
Pursuant to the sale of 4,807,692 newly issued shares of the Series A
Preferred Stock to Newcastle on June 18, 2004, 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.
On December 12, 2005, the Company received a letter from the SEC, based on
a review of the Company's Form 10-K filed for the year ended December 31, 2004,
requesting that the Company provide a written explanation as to whether the
Company is an "investment company" (as such term is defined in the Investment
Company Act of 1940). The Company provided a written response to the SEC, dated
January 12, 2006, stating the reasons why it believes it is not an "investment
company". The Company continues to provide certain confirmatory information
requested by the SEC. In the event the SEC or a court took the position that the
Company is an investment company, the Company's failure to register as an
investment company would not only raise the possibility of an enforcement or
other legal action by the SEC and potential fines and penalties, but also could
threaten the validity of corporate actions and contracts entered into by the
Company during the period it was deemed to be an unregistered investment
company, among other remedies.
11
During February 2006, the Company entered into an agreement with a former
employee to settle a dispute over a severance agreement the employee had entered
into with the Company. The severance agreement which was executed by former
management provided for a payment of approximately $98,000 upon the occurrence
of certain events. The Company paid approximately $85,000 to settle all claims
associated with the severance agreement. During May 2006, the Company entered
into an agreement to settle a dispute with a law firm that had previously been
hired by the Company. In accordance with the terms of the agreement, the Company
received and recorded a refund of legal and professional fees of $125,000 during
May 2006. In addition, the Company reversed accrued legal and professional fees
of approximately $38,000 during the quarter ended March 31, 2006.
NOTE 6. RELATED PARTY TRANSACTIONS
In June 2004, in connection with the Newcastle Transaction, Mark Schwarz,
Chief Executive Officer and Chairman of Newcastle Capital Management, L.P.
("NCM"), Steven J. Pully, President of NCM, and John 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 occupies 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 7. 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
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.
12
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 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.
On April 10, 2006, Newcastle delivered a letter to the Company of
Newcastle's irrevocable intent to convert all of its Series A Preferred Stock
into 19,230,768 shares of Common Stock of the Company following and subject to
final confirmation by the Delaware Chancery Court of a Stipulation and Agreement
dated as of February 21, 2006 in connection with a pending lawsuit in which
derivative and other claims have been made by a stockholder of the Company
against various parties. See Part II, Item 1. "Legal Proceedings."
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, THE INTEREST RATE
ENVIRONMENT, GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, 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 unaudited condensed
consolidated financial condition and results of operations for New Century
Equity Holdings Corp. and subsidiaries for the three months ended March 31,
2006. 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, 2005.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
General and administrative ("G&A") expenses are comprised of all marketing
and administrative costs incurred in direct support of the business operations
of the Company. G&A expenses decreased by $262,000, or 74%, to $91,000, during
the three months ended March 31, 2006, as compared to the three months ended
March 31, 2005. The decrease is attributable to a decrease in legal and
professional fees. As of March 31, 2005, the Company had not yet met the
$500,000 retention as stipulated in the Company's directors' and officers'
liability insurance policy related to the Lawsuit. The Company expensed
approximately $229,000 in legal and professional fees related to the Lawsuit
during the quarter ended March 31, 2005. Also, the Company reversed accrued
legal and professional fees of approximately $38,000 during the quarter ended
March 31, 2006 in accordance with the terms of an agreement to settle a dispute
with a law firm that had previously been hired by the Company.
INTEREST INCOME
Interest income increased by $43,000, or 53%, to $124,000, during the
three months ended March 31, 2006, as compared to the three months ended March
31, 2005. This increase was attributable to higher yields on cash balances
available for short-term investment.
14
DERIVATIVE SETTLEMENT COSTS
On April 13, 2006, the Company announced that it reached an agreement with
all of the parties to the Lawsuit to settle all claims relating thereto. The
total Settlement proceeds of $3,200,000 are being funded by the Company's
insurance carrier and by Parris H. Holmes, Jr., the Company's former Chief
Executive Officer, who is contributing $150,000. Included in the total
Settlement proceeds is $600,000 of reimbursement for legal and professional fees
submitted to the Company's insurance carrier. The Company is contributing the
$600,000 of reimbursed legal and professional fees to the Settlement Fund and,
therefore, has recognized a loss of $600,000 related to the Lawsuit for the
quarter ended March 31, 2006. See Part II, Item 2. "Legal Proceedings."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $12,011,000 at March 31, 2006,
from $12,487,000 at December 31, 2005. The decrease relates to the following:
G&A expenses incurred during the three months ended March 31, 2006; continued
funding of legal and professional fees related to the Lawsuit; the settlement of
a dispute with a former employee over a severance agreement and the second
installment paid under the Ascendant Agreement; partially offset by interest
income and revenues from Ascendant. There were no capital expenditures during
the three months ended March 31, 2006.
During the quarter ended March 31, 2006, the Company continued funding
legal and professional fees of the current and former director defendants in the
Lawsuit pursuant to indemnification arrangements that were in place during the
respective terms of each of the defendants. The Company has met the $500,000
retention 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. As of March 31, 2006, the
Company has recorded a receivable from the insurance carrier of approximately
$912,000 for reimbursement of legal and professional fees incurred in excess of
the policy retention, net of the $600,000 reimbursement of legal and
professional fees from the insurance carrier as part of the Settlement. The
Company continues to have ongoing discussions with the insurance carrier
regarding reimbursement of legal and professional fees under the provisions of
the 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. The Company intends to vigorously seek enforcement
of its rights under the policy. The Settlement does not preclude the Company
from seeking reimbursement of legal and professional fees up to an amount
remaining within the policy limit, which is approximately $1,950,000 after
considering the terms of the Settlement.
During the next 12 months, 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
the Company's business plan. Additionally, the total potential purchase price
under the terms of the Ascendant Agreement is $1,550,000, payable in four equal
installments of $387,500. Subject to the provisions of the Ascendant Agreement,
the third installment was payable on April 5, 2006 and the fourth installment is
payable on July 5, 2006. As of May 12, 2006, the Company has not made the third
installment. Subject to the terms of the Ascendant Agreement, if the Company
does not make an installment payment and Ascendant is not in breach of the
Ascendant Agreement, Ascendant has the right to acquire the Company's revenue
interest at a price which would yield a 10% annualized return to the Company.
The Company has been notified by Ascendant that it intends to exercise this
right as a result of the Company's election not to make its third installment
payment. The Company believes that Ascendant has not satisfied the requisite
conditions to repurchase the Company's revenue interest.
The Company expects to incur additional operating losses through fiscal
2006 which will continue to have a negative impact on liquidity and capital
resources.
15
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 approximately $1,063,000 at March 31, 2006. 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 $5,319,000 at March 31, 2006. 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 DISCLOSURES 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 March 31, 2006 because the Company's
intention is to maintain a liquid portfolio. The Company has not used derivative
financial instruments in its operations.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls are procedures that 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.
16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 11, 2004, Craig Davis, allegedly a stockholder of the Company,
filed a lawsuit in the Chancery Court of New Castle County, Delaware (the
"Lawsuit"). The Lawsuit asserted direct claims, and also derivative claims on
the Company's behalf, against five former and three current directors of the
Company. On April 13, 2006, the Company announced that it reached an agreement
with all of the parties to the Lawsuit to settle all claims relating thereto
(the "Settlement"). As part of the Settlement, the Company will set up a fund
(the "Settlement Fund"), which will be distributed to stockholders following
final approval of the Settlement by the Delaware Chancery Court, which is
expected to occur in July of 2006. The portion of the Settlement Fund which will
be distributable to all holders of common stock of the Company on the record
date for the Settlement is expected to be approximately $2,265,000, provided
that any common stock of the Company held by defendants in the Lawsuit who were
formerly directors of the Company will not be entitled to any distribution from
the Settlement Fund. A record date will be established following approval of the
Settlement by the Delaware Chancery Court. The distribution of the Settlement
Fund to stockholders of record is expected to approximate $.04 per common share
on a fully diluted basis. The total Settlement proceeds of $3,200,000 are being
funded by the Company's insurance carrier and by Parris H. Holmes, Jr., the
Company's former Chief Executive Officer, who is contributing $150,000. Included
in the total Settlement proceeds is $600,000 of reimbursement for legal and
professional fees submitted to the Company's insurance carrier. The Company is
contributing the $600,000 of reimbursed legal and professional fees to the
Settlement Fund and, therefore, has recognized a loss of $600,000 related to the
Lawsuit for the quarter ended March 31, 2006. The Company and the other
defendants in the Lawsuit have agreed not to oppose the request for fees and
expenses by counsel to the plaintiff of $935,000. Under the Settlement, the
plaintiff, the Company and the other defendants (including Mr. Holmes) have also
agreed to certain mutual releases of claims arising out of transactions
referenced in the Lawsuit.
The Company is currently funding legal and professional fees of the
current and former director defendants pursuant to indemnification arrangements
that were in place during the respective terms of each of the defendants. The
Company has met the $500,000 retention 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. As of March 31,
2006, the Company has recorded a receivable from the insurance carrier of
approximately $912,000 for reimbursement of legal and professional fees incurred
in excess of the policy retention, net of the $600,000 reimbursement from the
insurance carrier as part of the Settlement. The Company continues to have
ongoing discussions with the insurance carrier regarding reimbursement of legal
and professional fees under the provisions of the 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. The Company intends to vigorously seek enforcement of its rights under
the policy. The Settlement does not preclude the Company from seeking
reimbursement of legal and professional fees up to an amount remaining within
the policy limit, which is approximately $1,950,000 after considering the terms
of the Settlement.
17
Pursuant to the sale of 4,807,692 newly issued shares of the Series A
Preferred Stock to Newcastle on June 18, 2004, 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.
On December 12, 2005, the Company received a letter from the SEC, based on
a review of the Company's Form 10-K filed for the year ended December 31, 2004,
requesting that the Company provide a written explanation as to whether the
Company is an "investment company" (as such term is defined in the Investment
Company Act of 1940). The Company provided a written response to the SEC, dated
January 12, 2006, stating the reasons why it believes it is not an "investment
company". The Company continues to provide certain confirmatory information
requested by the SEC. In the event the SEC or a court took the position that the
Company is an investment company, the Company's failure to register as an
investment company would not only raise the possibility of an enforcement or
other legal action by the SEC and potential fines and penalties, but also could
threaten the validity of corporate actions and contracts entered into by the
Company during the period it was deemed to be an unregistered investment
company, among other remedies.
During February 2006, the Company entered into an agreement with a former
employee to settle a dispute over a severance agreement the employee had entered
into with the Company. The severance agreement which was executed by former
management provided for a payment of approximately $98,000 upon the occurrence
of certain events. The Company paid approximately $85,000 to settle all claims
associated with the severance agreement. During May 2006, the Company entered
into an agreement to settle a dispute with a law firm that had previously been
hired by the Company. In accordance with the terms of the agreement the Company
received a refund of legal and professional fees of $125,000 during May 2006 and
reversed accrued legal and professional fees of approximately $38,000 during the
quarter ended March 31, 2006.
ITEM 1A. RISK FACTORS
The Risk Factors included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005 have not materially changed other than
as set forth below.
OUR BUSINESS COULD BE HARMED IF THERE IS A NON-FAVORABLE RESOLUTION TO THE
DERIVATIVE ACTION COMMENCED AGAINST US BY CRAIG DAVIS OR IN OTHER LITIGATION OR
REGULATORY PROCEEDINGS AGAINST THE COMPANY.
As discussed in Part II, Item 1. "Legal Proceedings," on August 11, 2004,
Craig Davis, allegedly a stockholder of the Company, filed a lawsuit in the
Chancery Court of New Castle County, Delaware. The lawsuit asserted direct
claims, and also derivative claims on the Company's behalf, against five former
and three current directors of the Company. On April 13, 2006, the Company
announced that it reached an agreement with all of the parties to the lawsuit to
settle all claims relating thereto. As part of the settlement, the Company will
set up a fund which will be distributed to stockholders following final approval
of the settlement by the Delaware Chancery Court, which is expected to occur in
July of 2006.
18
In the event the settlement is not approved by the Delaware Chancery Court and
there is an adverse outcome to the lawsuit, the Company may sustain significant
monetary damages, a liquidation of the Company's assets or injunctive relief,
among other remedies. While management currently believes that resolving the
lawsuit filed by Mr. Davis will not have a material adverse impact on the
Company's financial position or results of operations, litigation is subject to
inherent uncertainties and management's view of these matters may change in the
future. There exists the possibility of a material adverse impact on the
Company's financial position and the results of operations for the period in
which the effect of an unfavorable final outcome becomes probable and reasonably
estimable.
The Company is currently funding legal and professional fees of the
current and former director defendants pursuant to indemnification arrangements
that were in place during the respective terms of each of the defendants. The
Company has met the $500,000 retention 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. As of March 31,
2006, the Company has recorded a receivable from the insurance carrier of
approximately $912,000 for reimbursement of legal and professional fees incurred
in excess of the policy retention, net of the $600,000 reimbursement from the
insurance carrier as part of the settlement. The Company continues to have
ongoing discussions with the insurance carrier regarding reimbursement of legal
and professional fees under the provisions of the 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. The Company intends to vigorously seek enforcement of its rights under
the policy. The settlement does not preclude the Company from seeking
reimbursement of legal and professional fees up to an amount remaining within
the policy limit, which is approximately $1,950,000 after considering the terms
of the settlement.
Among the claims filed by Mr. Davis is a claim that the Company operated
as an illegal investment company in violation of the Investment Company Act of
1940 (the "Investment Company Act"). Although the Company does not believe that
it has violated the Investment Company Act in the past, or at present, there can
be no assurance that the Company has not, or is not, in violation of, the
Investment Company Act. In the event the SEC or a court took the position that
the Company is an investment company, the Company's failure to register as an
investment company would not only raise the possibility of an enforcement or
other legal action by the SEC and potential fines and penalties, but also could
threaten the validity of corporate actions and contracts entered into by the
Company during the period it was deemed to be an unregistered investment
company, among other remedies.
THE ASSETS ON OUR BALANCE SHEET INCLUDE A REVENUE INTEREST IN ASCENDANT, AND ANY
IMPAIRMENT OF THE REVENUE INTEREST COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL POSITION.
As of March 31, 2006, the Company's total assets were approximately
$17,033,000, of which approximately $803,000 were intangible assets relating to
the revenue interest in Ascendant. The Company cannot be certain that it will
ever realize the value of such intangible assets. If the Company were to record
an intangible impairment charge, its results of operations and financial
position could be adversely affected.
19
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)
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: May 15, 2006 By: /s/ John P. Murray
----------------------------------
John P. Murray
CHIEF FINANCIAL OFFICER
(Duly authorized and
principal financial officer)
21
