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 September 30, 2007
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)
200 Crescent Court, Suite 1400, 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 November 14, 2007:
Number of Shares
Title of Class Outstanding
----------------------------- ----------------
Common Stock, $0.01 par value 53,883,872
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2007 (Unaudited)
and December 31, 2006.................................................. 3
Unaudited Condensed Consolidated Statements of Operations - For the
Three and Nine Months ended September 30, 2007 and 2006................ 4
Unaudited Condensed Consolidated Statements of Cash Flows - For the
Nine Months ended September 30, 2007 and 2006.......................... 5
Notes to Unaudited Interim Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 14
Item 4. Controls and Procedures................................................. 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 14
Item 1A. Risk Factors .......................................................... 16
Item 6. Exhibits................................................................ 17
SIGNATURE....................................................................... 18
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)
September 30, December 31,
2007 2006
------------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 12,402 $ 12,319
Insurance receivable and other assets ................................. 246 368
-------- --------
Total current assets ................................................. 12,648 12,687
Property and equipment, net ............................................ 2 --
Revenue interest ....................................................... 803 803
-------- --------
Total assets ...................................................... $ 13,453 $ 13,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ -- $ 13
Accrued liabilities ................................................... 102 161
-------- --------
Total current liabilities .......................................... 102 174
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued and outstanding ..................................... -- --
Common stock, $0.01 par value, 75,000,000 shares authorized;
53,883,872 shares issued and outstanding ............................. 539 539
Additional paid-in capital ............................................ 75,357 75,340
Accumulated deficit ................................................... (62,545) (62,563)
-------- --------
Total stockholders' equity ........................................... 13,351 13,316
-------- --------
Total liabilities and stockholders' equity .......................... $ 13,453 $ 13,490
======== ========
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 Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
-------- -------- -------- --------
Operating revenues ....................... $ -- $ -- $ -- $ 69
Operating expenses:
General and administrative expenses .... 121 235 448 367
-------- -------- -------- --------
Operating loss ........................... (121) (235) (448) (298)
Other income (expense):
Derivative settlement costs ............ -- -- -- (600)
Interest income ........................ 155 153 466 430
-------- -------- -------- --------
Total other income (expense) ............. 155 153 466 (170)
-------- -------- -------- --------
Net income (loss) ........................ 34 (82) 18 (468)
Preferred stock dividend ................. -- -- -- (100)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders .................... $ 34 $ (82) $ 18 $ (568)
======== ======== ======== ========
Basic and diluted net income (loss) per
common share:
Net income (loss) ...................... $ 0.00 $ (0.00) $ 0.00 $ (0.01)
======== ======== ======== ========
Weighted average common shares outstanding 53,884 53,883 53,884 41,063
======== ======== ======== ========
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 CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
-------------------
2007 2006
-------- --------
Cash flows from operating activities:
Net income (loss) ............................................ $ 18 $ (468)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Share based payment expense ................................. 17 17
Bad debt expense ............................................ -- 34
Fair market value of services ............................... -- 17
Changes in operating assets and liabilities:
Increase in accounts receivable ............................ -- (1)
Decrease in prepaid and other assets ....................... 122 1,154
Decrease in accounts payable ............................... (13) (48)
Decrease in accrued liabilities ............................ (59) (313)
-------- --------
Net cash provided by operating activities .................... 85 392
Cash flows from investing activities:
Purchase of property and equipment ......................... (2) --
Purchase of revenue interest ............................... -- (388)
-------- --------
Net cash used in investing activities ........................ (2) (388)
Cash flows from financing activities: ........................ -- --
Cash dividends paid on preferred stock ..................... -- (207)
-------- --------
Net cash used in financing activities ........................ -- (207)
Net increase (decrease) in cash and cash equivalents ......... 83 (203)
Cash and cash equivalents, beginning of period ............... 12,319 12,487
-------- --------
Cash and cash equivalents, end of period ..................... $ 12,402 $ 12,284
======== ========
Supplemental disclosure of non-cash transactions:
Preferred stock dividend ................................. $ -- $ 100
The accompanying notes are an integral part of these interim condensed consolidated
financial statements.
5
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, 2006. 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
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"). 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 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.
6
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 was
convertible into approximately thirty-five percent of the Company's common stock
(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
were entitled to a four percent annual cash dividend (the "Preferred
Dividends"). Following the investment by Newcastle, the management team resigned
and new executives and board members were appointed. On July 3, 2006, Newcastle
converted its Series A Preferred Stock into 19,230,768 shares of Common Stock.
During May 2005, the Company sold its equity interest in Sharps Compliance
Corp. ("Sharps") for approximately $334,000. Following the sale of its interest
in Sharps, the Company no longer holds any investments made by former management
and which reflected former management's strategy of investing in high-growth
companies.
DERIVATIVE LAWSUIT
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"). On June 23, 2006, the Chancery Court approved the
Settlement, and on July 25, 2006, the Settlement became final and
non-appealable. As part of the Settlement, the Company set up a fund (the
"Settlement Fund"), which was distributed to stockholders of record as of July
28, 2006, with a payment date of August 11, 2006. The portion of the Settlement
Fund distributed to stockholders pursuant to the Settlement was $2,270,017 or
approximately $.04 per common share on a fully diluted basis, provided that any
Common Stock held by defendants in the Lawsuit who were formerly directors of
the Company would not be entitled to any distribution from the Settlement Fund.
The total Settlement proceeds of $3,200,000 were funded by the Company's
insurance carrier and by Parris H. Holmes, Jr., the Company's former Chief
Executive Officer, who contributed $150,000. Also included in the total
Settlement proceeds is $600,000 of reimbursement for legal and professional fees
paid to the Company by its insurance carrier and subsequently contributed by the
Company to the Settlement Fund. Therefore, the Company recognized a loss of
$600,000 related to the Lawsuit for the year ended December 31, 2006. As part of
the Settlement, the Company and the other defendants in the Lawsuit agreed not
to oppose the request for fees and expenses by counsel to the plaintiff of
$929,813. Under the Settlement, the plaintiff, the Company and the other
defendants (including Mr. Holmes) also agreed to certain mutual releases.
The Settlement provided that, if the Company had not acquired a business
that generated revenues by March 1, 2007, the plaintiff maintained the right to
pursue a claim to liquidate the Company. This custodian claim was one of several
claims asserted in the Lawsuit. Even if such a claim is elected to be pursued,
there is no assurance that it will be successful. In addition, the Company
believes that it has preserved its right to assert that the Ascendant investment
meets the foregoing requirement to acquire a business.
7
In connection with the resolution of the Lawsuit, the Company has ceased
funding of legal and professional fees of the current and former director
defendants. The funding of legal and professional fees was made 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. The Company and the insurance carrier have agreed to settle
all claims for reimbursement of legal and professional fees associated with the
Lawsuit and, based on this, the Company has recorded a receivable from the
insurance carrier of $240,000 as of September 30, 2007. During October 2007, the
Company collected $240,000 from the insurance carrier.
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). The Company recorded
stock-based compensation expense of $17,000 under the fair-value provisions of
SFAS 123R during the nine months ended September 30, 2007 and September 30,
2006. The Company utilizes stock-based awards as a form of compensation for
employees, officers and directors.
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 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. On
November 5, 2007, John Murray, Chief Financial Officer of the Company, was
appointed to the Investment Advisory Committee of Ascendant to serve in the
place of the Company's former CEO. 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
was payable on July 5, 2006. On April 5, 2006, the Company elected not to make
the April installment payment and subsequently determined not to make the
installment payment due July 5, 2006. The Company believed that it was not
required to make the payments because Ascendant did not satisfy all of the
conditions in the Ascendant Agreement.
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 Ascendant is exercising this right as a
result of the Company's election not to make its third and fourth installment
payments. The Company believes that Ascendant has not satisfied the requisite
conditions to repurchase the Company's revenue interest.
8
Ascendant had assets under management of approximately $35,000,000 and
$27,100,000 as of September 30, 2007 and December 31, 2006, respectively. 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.
Under the terms of the Ascendant Agreement, Ascendant has 45 days following
notice by the Company to cure any material breach by Ascendant of the Ascendant
Agreement, including with respect to payment obligations. Ascendant failed to
make the required revenue sharing payments for the quarters ended June 30, 2006,
September 30, 2006, December 31, 2006, March 31, 2007 and June 30, 2007, in a
timely manner and did not cure such failures within the required 45 day period.
In addition, Ascendant has not made the payment for the quarter ended September
30, 2007. Under the terms of the Ascendant Agreement, upon notice of an uncured
material breach, Ascendant is required to fully refund all amounts paid by the
Company, and the Company's revenue interest remains outstanding.
The Company has not recorded any revenue or corresponding receivable for
revenue sharing payments for the quarters ended September 30, 2006, December 31,
2006, March 31, 2007, June 30, 2007 and September 30, 2007. According to the
Ascendant Agreement, if Ascendant acquires the revenue interest from the
Company, Ascendant must pay the Company a return on the capital that it
invested. Pursuant to the Ascendant Agreement, the required return will not be
impacted by any payments not made by Ascendant.
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, among
other things, 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 nominal
consideration. The Principals Agreement contains certain noncompete and
nonsolicitation obligations of the partners of Ascendant that apply during their
employment and the twelve month period following the termination thereof.
Since the Ascendant revenue interest meets the indefinite life criteria
outlined in SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
the Company does not amortize this intangible asset, but instead reviews this
asset quarterly for impairment. Each reporting period, the Company assesses
whether events or circumstances have occurred which indicate that the indefinite
life criteria are no longer met. If the indefinite life criteria are no longer
met, the Company assesses whether the carrying value of the asset exceeds its
fair value, and an impairment loss is recorded in an amount equal to any such
excess.
The Company assesses whether the entity in which the acquired revenue
interest exists meets the indefinite life criteria based on a number of factors
including: the historical and potential future operating performance; the
historical and potential future rates of attrition among existing clients; the
stability and longevity of existing client relationships; the recent, as well as
long-term, investment performance; the characteristics of the entities' products
and investment styles; the stability and depth of the management team and the
history and perceived franchise or brand value.
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 expired in 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
9
undiscounted rent payments total approximately $3,191,000 at September 30, 2007.
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 the remaining lease guarantee 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.
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 has provided 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. In connection with this matter,
the Company reversed accrued legal and professional fees of approximately
$38,000 during the quarter ended March 31, 2006.
In a letter to the Company dated October 16, 2007, a lawyer representing
Steven J. Pully (the former CEO) alleged that the Company filed false and
misleading disclosure with the Securities and Exchange Commission with respect
to the elimination of Mr. Pully's compensation (see the Company's Forms 8-K
filed on September 5, 2007 and October 17, 2007). No specifics were provided as
to such allegations. The Company believes such allegations are unfounded and, if
a claim is made, the Company intends to vigorously defend itself.
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, former 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 received an annual salary of $150,000 as Chief
10
Executive Officer of the Company. Mr. Pully resigned as Chief Executive
Officer of the Company effective October 15, 2007. Mr. Schwarz is performing
the functions of Chief Executive Officer. NCM is the general partner of
Newcastle, which owns 19,380,768 shares of Common Stock of the Company.
The Company's corporate headquarters are currently located at 200 Crescent
Court, Suite 1400, Dallas, Texas 75201, which are also the offices of NCM. The
Company occupies a portion of NCM space on a month-to-month basis at $2,500 per
month, pursuant to a services agreement entered into between the parties. NCM is
the general partner of Newcastle. The Company also receives accounting and
administrative services from employees of NCM pursuant to such agreement.
NOTE 7. SHARE CAPITAL
On July 10, 2006, the Company entered into a stockholders rights plan (the
"Rights Plan") that replaced the Company's stockholders rights plan dated July
10, 1996 (the "Old Rights Plan") that expired according to its terms on July 10,
2006. The Rights Plan provides for a dividend distribution of one preferred
share purchase right (a "Right") for each outstanding share of Common Stock. The
dividend was payable on July 10, 2006, to the Company's stockholders of record
at the close of business on that date (the "Record Date"). The terms of the
Rights and the Rights Plan are set forth in a Rights Agreement, dated as of July
10, 2006, by and between New Century Equity Holdings Corp. and The Bank of New
York Trust Company, N.A., as Rights Agent.
The Company's Board of Directors adopted the Rights Plan to protect
stockholder value by protecting the Company's ability to realize the benefits of
its net operating loss carryforwards ("NOLs") and capital loss carryforwards. In
general terms, the Rights Plan imposes a significant penalty upon any person or
group that acquires 5% or more of the outstanding Common Stock without the prior
approval of the Company's Board of Directors. Stockholders that own 5% or more
of the outstanding Common Stock as of the close of business on the Record Date
may acquire up to an additional 1% of the outstanding Common Stock without
penalty so long as they maintain their ownership above the 5% level (such
increase subject to downward adjustment by the Company's Board of Directors if
it determines that such increase will endanger the availability of the Company's
NOLs and/or its capital loss carryforwards). In addition, the Company's Board of
Directors has exempted Newcastle, the Company's largest stockholder, and may
exempt any person or group that owns 5% or more if the Board of Directors
determines that the person's or group's ownership will not endanger the
availability of the Company's NOLs and/or its capital loss carryforwards. A
person or group that acquires a percentage of Common Stock in excess of the
applicable threshold is called an "Acquiring Person." Any Rights held by an
Acquiring Person are void and may not be exercised. The Company's Board of
Directors authorized the issuance of one Right per each share of Common Stock
outstanding on the Record Date. If the Rights become exercisable, each Right
would allow its holder to purchase from the Company one one-hundredth of a share
of the Company's Series A Junior Participating Preferred Stock, par value $0.01
(the "Preferred Stock"), for a purchase price of $10.00. Each fractional share
of Preferred Stock would give the stockholder approximately the same dividend,
voting and liquidation rights as does one share of Common Stock. Prior to
exercise, however, a Right does not give its holder any dividend, voting or
liquidation rights.
The Company has never declared or paid any cash dividends on its Common
Stock. Pursuant to the Settlement, $2,270,017 was distributed to certain
stockholders in August 2006 (See Note 2). On June 30, 2006, Newcastle elected to
receive Preferred Dividends in cash for the period from June 19, 2005 through
June 30, 2006.
11
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.
ITEM 2. 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 and nine months ended
September 30, 2007. 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, 2006.
RESULTS OF OPERATIONS
OPERATING REVENUES
During the three and nine months ended September 30, 2006, operating
revenues consisted of revenue sharing payments under the Ascendant Agreement.
Since June 30, 2006, the Company has not recorded any revenue under the
Ascendant Agreement and has not received revenue sharing payments from
Ascendant.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses are comprised of all costs
incurred in direct support of the business operations of the Company. G&A
expenses decreased by $114,000, or 49%, to $121,000 during the three months
ended September 30, 2007, as compared to the corresponding period of the prior
fiscal year. This decrease is primarily attributable to a decrease in legal and
professional fees, officers' compensation and bad debt expense. G&A expenses
increased by $81,000, or 22%, to $448,000 during the nine months ended September
30, 2007, as compared to the corresponding period of the prior fiscal year. This
increase is primarily attributable to the absence of a credit which was included
in the prior fiscal period offset by a decrease in legal and professional fees,
officers' compensation and bad debt expense. The credit resulted from a refund
of legal and professional fees of $125,000 received by the Company during the
quarter ended June 30, 2006, to settle a dispute with a law firm that had
previously been hired by the Company.
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INTEREST INCOME
Interest income increased by $2,000, or 1%, and $36,000, or 8%, to
$155,000 and $466,000, respectively, during the three and nine months ended
September 30, 2007, respectively, as compared to the corresponding periods of
the prior fiscal year. This increase is attributable to slightly higher cash
balances available for short-term investment.
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 were funded by the Company's insurance
carrier and by Parris H. Holmes, Jr., the Company's former Chief Executive
Officer, who contributed $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 contributed the $600,000 of reimbursed
legal and professional fees to the Settlement Fund and, therefore, recognized a
loss of $600,000 related to the Lawsuit for the nine months ended September 30,
2006. See Part II, Item 1. "Legal Proceedings."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $12,402,000 at September 30, 2007,
from $12,319,000 at December 31, 2006. The increase resulted from interest
income of approximately $466,000 offset by cash funding of general and
administrative expenses during the nine months ended September 30, 2007.
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. The Company expects to incur additional operating
losses through fiscal 2007 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 expired in 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 $3,191,000 at September 30, 2007.
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 the remaining lease guarantee and, therefore, no liability has been
accrued in the Company's financial statements.
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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 September 30, 2007, 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 principal executive officer and principal financial officer as
appropriate to allow timely decisions regarding required disclosures. John
Murray, the Company's CFO, is the Company's principal financial officer. Up
until his resignation as CEO in October 2007, Steven J. Pully was the Company's
principal executive officer. Since Mr. Pully's resignation, Mark E. Schwarz, the
Chairman of the Board of the Company, has served the function of the CEO and is
currently the principal executive officer of the Company.
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 principal executive officer and
principal 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 principal executive
officer and principal 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 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
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with all of the parties to the Lawsuit to settle all claims relating thereto
(the "Settlement"). On June 23, 2006, the Chancery Court approved the
Settlement, and on July 25, 2006, the Settlement became final and
non-appealable. As part of the Settlement, the Company set up a fund (the
"Settlement Fund"), which was distributed to stockholders of record as of July
28, 2006, with a payment date of August 11, 2006. The portion of the Settlement
Fund distributed to stockholders pursuant to the Settlement was $2,270,017 or
approximately $.04 per common share on a fully diluted basis, provided that any
Common Stock held by defendants in the Lawsuit who were formerly directors of
the Company would not be entitled to any distribution from the Settlement Fund.
The total Settlement proceeds of $3,200,000 were funded by the Company's
insurance carrier and by Parris H. Holmes, Jr., the Company's former Chief
Executive Officer, who contributed $150,000. Also included in the total
Settlement proceeds is $600,000 of reimbursement for legal and professional fees
paid to the Company by its insurance carrier and subsequently contributed by the
Company to the Settlement Fund. Therefore, the Company has recognized a loss of
$600,000 related to the Lawsuit for the year ended December 31, 2006. As part of
the Settlement, the Company and the other defendants in the Lawsuit agreed not
to oppose the request for fees and expenses by counsel to the plaintiff of
$929,813. Under the Settlement, the plaintiff, the Company and the other
defendants (including Mr. Holmes) also agreed to certain mutual releases.
The Settlement provided that, if the Company had not acquired a business
that generated revenues by March 1, 2007, the plaintiff maintained the right to
pursue a claim to liquidate the Company. This custodian claim was one of several
claims asserted in the Lawsuit. Even if such a claim is elected to be pursued,
there is no assurance that it will be successful. In addition, the Company
believes that it has preserved its right to assert that the Ascendant investment
meets the foregoing requirement to acquire a business.
In connection with the resolution of the Lawsuit, the Company has ceased
funding of legal and professional fees of the current and former director
defendants. The funding of legal and professional fees was made 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. The Company and the insurance carrier have agreed to settle
all claims for reimbursement of legal and professional fees associated with the
Lawsuit, and based on this, the Company has recorded a receivable from the
insurance carrier of $240,000 as of September 30, 2007. During October 2007, the
Company collected $240,000 from the insurance carrier.
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.
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 has provided 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.
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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. In connection with this matter,
the Company reversed accrued legal and professional fees of approximately
$38,000 during the quarter ended March 31, 2006.
In a letter to the Company dated October 16, 2007, a lawyer representing
Steven J. Pully (the former CEO) alleged that the Company filed false and
misleading disclosure with the Securities and Exchange Commission with respect
to the elimination of Mr. Pully's compensation (see the Company's Forms 8-K
filed on September 5, 2007 and October 17, 2007). No specifics were provided as
to such allegations. The Company believes such allegations are unfounded and, if
a claim is made, the Company intends to vigorously defend itself.
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, 2006, have not materially changed other than
as set forth below.
OUR RESULTS OF OPERATIONS COULD BE HARMED AS A RESULT OF CERTAIN ISSUES RELATING
TO THE SETTLEMENT OF THE DAVIS LITIGATION.
As discussed in 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"). On June 23,
2006, the Chancery Court approved the Settlement, and on July 25, 2006, the
Settlement became final and non-appealable.
In connection with the resolution of the Lawsuit, the Company has ceased
funding of legal and professional fees of the current and former director
defendants. The funding of legal and professional fees was made 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. The Company and the insurance carrier have agreed to settle
all claims for reimbursement of legal and professional fees associated with the
Lawsuit and, based on this, the Company has recorded a receivable from the
insurance carrier of $240,000 as of September 30, 2007. During October 2007, the
Company collected $240,000 from the insurance carrier.
The Settlement provided that, if the Company had not acquired a business
that generated revenues by March 1, 2007, the plaintiff maintained the right to
pursue a claim to liquidate the Company. This custodian claim was one of several
claims asserted in the Lawsuit. Even if such a claim is elected to be pursued,
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there is no assurance that it will be successful. In addition, the Company
believes that it has preserved its right to assert that the Ascendant investment
meets the foregoing requirement to acquire a business.
ITEM 6. EXHIBITS
Exhibits:
31.1 Certification of Principal Executive Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2 Certification of Principal Financial Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
32.1 Certification of Principal Executive Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)
32.2 Certification of Principal Financial Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)
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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: November 14, 2007 By: /s/ John P. Murray
---------------------------
John P. Murray
CHIEF FINANCIAL OFFICER
(Duly authorized and principal financial officer)
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