================================================================================
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, 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 May 15, 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 - March 31, 2007 (Unaudited)
and December 31, 2006.............................................. 3
Unaudited Condensed Consolidated Statements of Operations - For the
Three Months ended March 31, 2007 and 2006......................... 4
Unaudited Condensed Consolidated Statements of Cash Flows - For the
Three Months ended March 31, 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................................................... 15
Item 1A Risk Factors ....................................................... 17
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)
March 31, December 31,
2007 2006
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 12,355 $ 12,319
Insurance receivable and other assets .............................. 298 368
Settlement fund receivable ........................................... -- 3,200
-------- --------
Total current assets .............................................. 12,653 12,687
Property and equipment, net .......................................... 2 --
Revenue interest ..................................................... 803 803
-------- --------
Total assets .................................................... $ 13,458 $ 13,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 5 $ 13
Accrued liabilities ................................................ 150 161
-------- --------
Total current liabilities .......................................... 155 174
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;
53,883,782 shares issued and outstanding .......................... 539 539
Additional paid-in capital ......................................... 75,340 75,340
Accumulated deficit ................................................ (62,576) (62,563)
-------- --------
Total stockholders' equity ........................................ 13,303 13,316
-------- --------
Total liabilities and stockholders' equity ....................... $ 13,458 $ 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
March 31,
-------------------------------
2007 2006
-------------- --------------
Operating revenues ................................... $ -- $ 13
Operating expenses:
General and administrative expenses ................ 169 91
-------- --------
Operating loss ....................................... (169) (78)
Other income (expense):
Derivative settlement costs ....................... -- (600)
Interest income .................................... 156 124
-------- --------
Total other income (expense), net .................... 156 (476)
-------- --------
Net loss ............................................. (13) (554)
Preferred stock dividend ............................. -- (50)
-------- --------
Net loss applicable to common stockholders ........... $ (13) $ (604)
======== ========
Basic and diluted net loss per common share:
Net loss ........................................... $ (0.00) $ (0.02)
Weighted average common shares outstanding ........... 53,884 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 CASH FLOWS
(In thousands)
Three Months Ended
March 31,
-------------------------------
2007 2006
-------------- --------------
Cash flows from operating activities:
Net loss ............................................................ $ (13) $ (554)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Changes in operating assets and liabilities:
Decrease in accounts receivable ................................... -- 20
Decrease in prepaid and other assets .............................. 70 637
Increase in settlement fund receivable ............................ -- (3,200)
Decrease in accounts payable ...................................... (8) (47)
Decrease in accrued liabilities ................................... (11) (144)
Increase in accrued settlement .................................... -- 3,200
-------- --------
Net cash provided by (used in) operating activities ................. 38 (88)
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 ................................ -- --
-------- --------
Net increase (decrease) in cash and cash equivalents ................ 36 (476)
Cash and cash equivalents, beginning of period ...................... 12,319 12,487
-------- --------
Cash and cash equivalents, end of period ............................ $ 12,355 $ 12,011
======== ========
Supplemental disclosure of non-cash transactions:
Preferred stock dividend ........................................ $ -- $ 50
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 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.
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 quarter ended March 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 provides that, if the Company has not acquired a business
that generates revenues by March 1, 2007, the plaintiff maintains 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. As of December 31, 2006, the Company recorded a receivable
from the insurance carrier of approximately $300,000 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.
Based on discussions with the insurance carrier, the Company reduced the
receivable by $50,000 during the quarter ended March 31, 2007. The Company
believes its claims are valid and is currently negotiating a settlement with the
insurance carrier with respect to remaining unreimbursed amounts.
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 no
stock-based compensation expense under the fair-value provisions of SFAS 123R
during the quarters ended March 31, 2007 and March 31, 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.
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
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.
8
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.
Ascendant had assets under management of approximately $27,700,000 and
$27,100,000 as of March 31, 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 and December 31, 2006 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 March 31, 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 and March 31, 2007. According to the Agreement with Ascendant, 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 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.
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
9
2010. Under the original terms of the second lease, the remaining minimum
undiscounted rent payments total approximately $3,901,000 at March 31, 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.
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 19,380,768 shares of Common
Stock of the Company.
10
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 for $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 at market rates 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. Approximately $2,270,017 was distributed to certain stockholders pursuant
to the Settlement 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
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,
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
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 increased by $78,000, or 86%, to $169,000, during the three months
ended March 31, 2007, as compared to the three months ended March 31, 2006.
Based on recent discussions with the insurance carrier, the Company reduced the
insurance receivable by $50,000 during the quarter ended March 31, 2007. 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 $32,000, or 26%, to $156,000, during the
three months ended March 31, 2007, as compared to the three months ended March
31, 2006. This increase was attributable to higher yields on cash balances
available for short-term investment.
12
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 quarter ended March 31, 2006.
See Part II, Item 1. "Legal Proceedings."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $12,355,000 at March 31, 2007,
from $12,319,000 at December 31, 2006. The increase resulted from interest
income of approximately $156,000 offset by cash funding of G&A expenses incurred
during the quarter ended March 31, 2007.
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. As of December 31, 2006, the Company recorded a receivable
from the insurance carrier of approximately $300,000 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.
Based on discussions with the insurance carrier the Company reduced the
receivable by $50,000 during the quarter ended March 31, 2007. The Company
believes its claims are valid and is currently negotiating a settlement with the
insurance carrier with respect to remaining unreimbursed amounts.
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 was $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
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. 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, including as a result of Ascendant's failure to make required revenue
sharing payments for the quarters ended June 30, 2006, September 30, 2006,
December 31, 2006 and March 31, 2007, and at this time the Company believes it
is not obligated to make the third and fourth installment payments to Ascendant.
13
As part of the parties' discussions regarding non-payment of amounts
under the Ascendant Agreement by each party, the Company has proposed an
amendment that would permit Ascendant to temporarily defer certain payments to
the Company, including the payments owed in respect of the quarters ended June
30, 2006, September 30, 2006, December 31, 2006 and March 31, 2007. There is no
assurance that an amendment will be effected on such terms or that any
resolution of the foregoing matter will be reached. 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 $3,901,000 at March 31, 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.
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, 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 chief executive officer and chief financial officer as appropriate
to allow timely decisions regarding required disclosures.
14
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's chief executive officer and chief
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e). Based upon that evaluation, the chief executive officer
and chief financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. No change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) occurred during the period covered by this report that materially
affected or is reasonably likely to materially affect the Company's internal
control over financial reporting.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 11, 2004, Craig Davis, allegedly a stockholder of the Company,
filed a 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 quarter ended March 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 provides that, if the Company has not acquired a business
that generates revenues by March 1, 2007, the plaintiff maintains 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.
15
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. As of December 31, 2006, the Company recorded a receivable
from the insurance carrier of approximately $300,000 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.
Based on discussions with the insurance carrier, the Company reduced the
receivable by $50,000 during the quarter ended March 31, 2007. The Company
believes its claims are valid and is currently negotiating a settlement with the
insurance carrier with respect to remaining unreimbursed amounts.
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.
16
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.
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)
17
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, 2007 By: /s/ John p. Murray
-------------------------------------
John P. Murray
CHIEF FINANCIAL OFFICER
(Duly authorized and principal financial officer)
