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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-28536
NEW CENTURY EQUITY HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2781950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 CRESCENT COURT, SUITE 1110, DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip code)
(214) 661-7488
(Registrant's telephone number, including area code)
10101 REUNION PLACE, SUITE 970, SAN ANTONIO, TEXAS 78216
(Former address, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). / / Yes /X/ No
Indicated below is the number of shares outstanding of the
registrant's only class of common stock at November 12, 2004:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
----------------------------- ----------------
Common Stock, $0.01 par value 34,653,104
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2004
(Unaudited) and December 31, 2003............................. 3
Unaudited Condensed Consolidated Statements of
Operations - For the Three and Nine Months
ended September 30, 2004 and 2003............................. 4
Unaudited Condensed Consolidated Statements
of Comprehensive Income (Loss) - For the Three
and Nine Months ended September 30, 2004 and 2003............. 5
Unaudited Condensed Consolidated Statements
of Cash Flows - For the Nine Months ended
September 30, 2004 and 2003................................... 6
Notes to Unaudited Interim Condensed Consolidated
Financial Statements.......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 17
Item 4. Controls and Procedures.......................................... 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities................................ 18
Item 6. Exhibits......................................................... 19
SIGNATURE ................................................................. 20
PART I FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2004 2003
-------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 15,117 $ 5,330
Accounts receivable .................................................... -- 28
Prepaid and other assets ............................................... 15 309
--------------- ---------------
Total current assets .................................................. 15,132 5,667
Property and equipment, net .............................................. 21 83
Other non-current assets ................................................. 6 53
Investments in affiliates ................................................ 285 7,233
--------------- ---------------
Total assets ........................................................... $ 15,444 $ 13,036
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 161 $ 58
Accrued liabilities .................................................... 294 1,252
--------------- ---------------
Total current liabilities ............................................. 455 1,310
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
4,807,692 shares designated as Series A convertible preferred
stock issued and outstanding ............................. 48 --
Common stock, $0.01 par value, 75,000,000 shares authorized;
34,653,104 shares issued and outstanding .............................. 347 347
Additional paid-in capital ............................................. 75,428 70,476
Accumulated other comprehensive income ................................. 7 --
Accumulated deficit .................................................... (60,841) (59,097)
--------------- ---------------
Total stockholders' equity ............................................ 14,989 11,726
--------------- ---------------
Total liabilities and stockholders' equity .......................... $ 15,444 $ 13,036
=============== ===============
The accompanying notes are an
integral part of these interim condensed consolidated financial statements.
3
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Operating revenues ................................................. $ -- $ -- $ -- $ --
Operating expenses:
General and administrative expenses ............................. 288 502 4,546 1,723
Depreciation and amortization expenses .......................... 4 41 26 121
-------- -------- -------- --------
Operating loss from continuing operations .......................... (292) (543) (4,572) (1,844)
Other income (expense):
Interest income, net ............................................ 31 16 57 65
Equity in net loss of affiliate ................................. -- (756) (2,985) (2,169)
Gain on sale of equity affiliate ................................ -- -- 5,817 --
Litigation settlement ........................................... -- (354) -- (354)
Other (expense) income, net ..................................... (1) (1) (4) 10
-------- -------- -------- --------
Total other income (expense), net .................................. 30 (1,095) 2,885 (2,448)
-------- -------- -------- --------
Net loss from continuing operations ................................ (262) (1,638) (1,687) (4,292)
Discontinued operations:
Net income from disposal of discontinued
operations ................................................... -- 212 -- 359
-------- -------- -------- --------
Net loss ........................................................... (262) (1,426) (1,687) (3,933)
Preferred stock dividend ........................................... (50) -- (57) --
-------- -------- -------- --------
Net loss applicable to common stockholders ......................... $ (312) $ (1,426) $ (1,744) $ (3,933)
======== ======== ======== ========
Basic and diluted net income (loss) per common share:
Net loss from continuing operations ............................. $ (0.01) $ (0.05) $ (0.05) $ (0.12)
Net income from disposal of discontinued
operations ................................................... -- 0.01 -- 0.01
-------- -------- -------- --------
Net loss ....................................................... $ (0.01) $ (0.04) $ (0.05) $ (0.11)
======== ======== ======== ========
Weighted average common shares outstanding ......................... 34,653 34,426 34,653 34,287
======== ======== ======== ========
The accompanying notes are an
integral part of these interim condensed consolidated financial statements.
4
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
------- ------- ------- -------
Net loss ................................................. $ (262) $(1,426) $(1,687) $(3,933)
Other comprehensive income:
Unrealized holding gains (losses), net of $0 tax ....... (8) -- 7 --
------- ------- ------- -------
Comprehensive loss ....................................... $ (270) $(1,426) $(1,680) $(3,933)
======= ======= ======= =======
The accompanying notes are an
integral part of these interim condensed consolidated financial statements.
5
NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
----------------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net loss from continuing operations ................................................ $ (1,687) $ (4,292)
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities:
Depreciation and amortization expenses ........................................... 25 121
Equity in net loss of affiliate .................................................. 2,985 2,169
Gain on sale of equity affiliate ................................................. (5,817) --
Litigation settlement ............................................................ -- 354
Loss on disposition of property and equipment .................................... 28 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ...................................... 28 (79)
Decrease in prepaid and other assets ............................................ 301 204
Increase (decrease) in accounts payable ......................................... 103 6
Decrease in accrued liabilities ................................................. (628) (55)
Increase in other liabilities and other non-cash items .......................... -- 136
-------- --------
Net cash used in continuing operating activities ................................... (4,662) (1,436)
Net cash provided by discontinued operating activities ............................. -- 178
-------- --------
Net cash used in operating activities .............................................. (4,662) (1,258)
Cash flows from investing activities:
Purchases of property and equipment .............................................. (3) (6)
Proceeds from sale of property and equipment ..................................... 12 --
Investment in affiliate .......................................................... -- (1,400)
Proceeds from sale of equity affiliate (all holdings in Princeton) ............... 10,000 --
Proceeds from sale of equity affiliate (all holdings in Princeton)
allocated to former chief executive officer ...................................... (600) --
Other investing .................................................................. 40 --
-------- --------
Net cash provided by (used in) investing activities ................................ 9,449 (1,406)
Cash flows from financing activities:
Proceeds from sale of preferred stock ............................................ 5,000 --
-------- --------
Net increase (decrease) in cash and cash equivalents ............................... 9,787 (2,664)
Cash and cash equivalents, beginning of period ..................................... 5,330 8,704
-------- --------
Cash and cash equivalents, end of period ........................................... $ 15,117 $ 6,040
======== ========
Supplemental disclosure of financial information:
Cash paid for interest ........................................................... $ -- $ --
Cash paid for income taxes ....................................................... $ -- $ --
The accompanying notes are an
integral part of these interim condensed consolidated financial statements.
6
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included
herein have been prepared by New Century Equity Holdings Corp. and subsidiaries
(collectively, the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the Company's management, the accompanying
interim condensed consolidated financial statements reflect all adjustments, of
a normal recurring nature, that are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for such
periods. It is recommended that these interim condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003. Results of operations for the interim periods are
not necessarily indicative of results that may be expected for any other interim
periods or the full fiscal year.
NOTE 2. RECENT DEVELOPMENTS
On June 18, 2004, the Company sold approximately 4.8 million newly
issued shares of its Series A 4% Convertible Preferred Stock (the "Series A
Preferred Stock") to Newcastle Partners, L.P. ("Newcastle") for $5.0 million
(the "Newcastle Transaction").
The Series A Preferred Stock is convertible into approximately
thirty-five percent of the Company's Common Stock, par value $.01 per share
("Common Stock") at any time after the expiration of twelve months from the date
of its issuance at a conversion price of $0.26 per share of Common Stock,
subject to adjustment for dilution. The holders of the Series A Preferred Stock
are entitled to a four percent annual cash dividend (the "Preferred Dividends").
The Preferred Dividends shall accrue and shall be cumulative from the date of
initial issuance of the shares of the Series A Preferred Stock, whether or not
declared by the Company's board of directors. In lieu of cash dividends, the
holders of Series A Preferred Stock may elect to receive such number of shares
of Series A Preferred Stock that is equal to the aggregate dividend amount
divided by $1.04.
So long as any shares of the Series A Preferred Stock remain
outstanding, (1) the Company's board of directors shall not exceed four members,
(2) the Company may not increase its authorized capitalization and (3) the
Company may not create rights, rankings or preferences that adversely affect the
rights, rankings and preferences of the Series A Preferred Stock, without the
written consent of the holders of at least a majority of the shares of Series A
Preferred Stock then outstanding, voting as a separate class. So long as any
shares of the Series A Preferred Stock remain outstanding, the holders of shares
of Series A Preferred Stock shall be entitled (1) to vote as a separate class to
elect two directors to the Company's board of directors and to pass upon any
matters that affect the rights, value or ranking of the Series A Preferred Stock
and (2) to vote on all other matters on which holders of Common Stock shall be
entitled to vote, casting such number of votes in respect of such shares of
Series A Preferred Stock as shall equal the largest whole number of shares of
Common Stock into which such shares of Series A Preferred Stock are then
convertible. The other powers, preferences, rights, qualifications and
restrictions of the Series A Preferred Stock are more fully set forth in the
Certificate of Designations of Series A Convertible Preferred Stock filed with
the Secretary of State of the State of Delaware simultaneously with the closing
of the Newcastle Transaction.
In conjunction with the Newcastle Transaction, (1) Parris H. Holmes,
Jr., Gary D. Becker, and Stephen M. Wagner resigned from the Company's board of
directors and (2) Mr. Holmes resigned as the Company's Chief Executive Officer
("CEO") and David P. Tusa resigned as the Company's Chief Financial Officer
("CFO"), Executive Vice President and Corporate Secretary. Pursuant to
employment
7
agreements executed prior to the Newcastle Transaction, upon their resignation,
the Company paid severance, accrued vacation and other amounts to Mr. Holmes and
Mr. Tusa totaling approximately $2.1 million and $0.5 million, respectively. In
addition, the Company entered into consulting agreements with Mr. Holmes and Mr.
Tusa through October 31, 2004 and September 30, 2004, respectively. Mr. Holmes
and Mr. Tusa were paid pro-rated consulting payments for the month of June in
conjuction with their severance. Thereafter, the Company engaged the consulting
services of Mr. Tusa for the month of July 2004 only (See Note 5).
Mark E. Schwarz, currently the CEO and Chairman of Newcastle Capital
Management, L.P. ("Newcastle Capital Management"), and Steven J. Pully,
currently the President of Newcastle Capital Management, have been appointed to
fill the director positions vacated by Messrs. Holmes, Becker and Wagner.
Messrs. Schwarz and Pully were appointed as directors of the class whose terms
of office expires at the 2006 annual meeting of stockholders of the Company.
Pursuant to the agreement entered into in connection with the
Newcastle Transaction, the Company was to have caused the number of directors
serving on the board of directors to be increased and fixed at five (5)
directors and an additional representative of Newcastle was to have been
appointed as a director of the class whose term of office expires at the 2004
annual meeting of stockholders of the Company to fill the vacancy created by
such expansion. Newcastle has waived the requirement that an additional
representative of Newcastle was to have been appointed by August 1, 2004.
In June 2004, in connection with the Newcastle Transaction, Mr.
Schwarz, CEO and Chairman of Newcastle Capital Management, Mr. Pully, President
of Newcastle Capital Management, and John Murray, CFO of Newcastle Capital
Management, assumed positions as Chairman of the Board, CEO and CFO,
respectively, of the Company. On October 27, 2004, the Company announced that
James Risher had been appointed to the Company's Board of Directors. Mr. Risher
was also named as a member of the Company's audit committee.
Pursuant to the Newcastle Transaction, the Company amended its July
10, 1996 Shareholder Rights Agreement by reducing the Common Stock ownership
threshold for triggering the distribution of rights under such agreement from
fifteen percent to five percent and permitting Newcastle and its successors and
assigns to purchase Common Stock without triggering the distribution of rights.
The purpose of such amendment was to ensure the preservation of the Company's
net operating loss carryforwards.
In conjuction with it's decision to enter into the Newcastle
Transaction, the Board of Directors at that time determined that it was not in
the best interests of the Company's stockholders to liquidate the Company as
previously proposed in proxy materials filed by the Company with the SEC. The
Company withdrew all proxy materials filed with the SEC related to the proposed
liquidation.
On August 11, 2004, Craig Davis, allegedly a shareholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware
against various former directors and current directors of the Company and the
Company as a nominal defendant (See Note 5).
NOTE 3. STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," but elected to
apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its stock
option plans. Accordingly, the Company has not recognized compensation expense
for stock options granted where the exercise price is equal to or greater than
the market price of the underlying stock at the date of grant.
8
The following table illustrates the effect on net loss and net loss
per common share had compensation expense for the Company's stock option grants
been determined based on the fair value at the grant dates consistent with the
methodology of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". For purposes of the pro forma
disclosures, the estimated fair value of options is amortized to pro forma
compensation expense over the options' vesting periods.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(in thousands, except per share data) 2004 2003 2004 2003
------- ------- ------- -------
Net loss, as reported .............................................. $ (262) $(1,426) $(1,687) $(3,933)
Less: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ...................... (5) (71) (72) (127)
------- ------- ------- -------
Net loss, pro forma ................................................ $ (267) $(1,497) $(1,759) $(4,060)
======= ======= ======= =======
Basic and diluted net loss per common share:
Net loss, as reported ........................................... $ (0.01) $ (0.04) $ (0.05) $ (0.11)
Net loss, pro forma ............................................. $ (0.01) $ (0.04) $ (0.05) $ (0.12)
The fair value for these stock options was estimated at the
respective grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for the nine months ended September 30,
2004 and 2003: expected volatility of 99.22% and 96.3%, respectively, no
dividend yield, expected life of 2.5 years and risk-free interest rates of 4.75%
and 1.8%, respectively.
NOTE 4. INVESTMENTS IN AFFILIATES
Investments in affiliates is comprised of the following:
September 30, December 31,
2004 2003
-------- --------
(in thousands)
Investment in Princeton eCom Corporation ("Princeton"):
Cash investments .............................................. $ 77,276 $ 77,276
Proceeds from sale of all holdings in Princeton ............... (10,000) --
Proceeds from sale of all holdings in Princeton allocated
to former chief executive officer ........................... 600 --
Gain on sale of Princeton ..................................... 5,817 --
Amortization and equity loss pick-up .......................... (65,971) (62,986)
In-process research and development costs ..................... (4,465) (4,465)
Impairment of investment ...................................... (1,777) (1,777)
Other ......................................................... (1,480) (1,481)
-------- --------
Net investment in Princeton ................................ -- 6,567
Investment in Sharps:
Cash investments .............................................. 970 970
Settlement .................................................... (389) --
Impairment of investment ...................................... (306) (306)
Unrealized holding gain ....................................... 7 --
Other ......................................................... 3 2
-------- --------
Net investment in Sharps ................................... 285 666
-------- --------
Total investments in affiliates ............................... $ 285 $ 7,233
======== ========
In June 2004, the Company sold all of its holdings in Princeton. See
note 6 for further discussion.
9
In January 2004, the Company entered into an agreement with the
former majority shareholders of Operator Service Company ("OSC") to settle all
claims related to the April 2000 acquisition of OSC by the Company. Under the
terms of the agreement, the Company transferred to the former OSC majority
shareholders 525,000 shares of the common stock of Sharps owned by the Company,
valued at approximately $389,000. Additionally, the former OSC majority
shareholders agreed to a voting rights agreement which allows the Company to
direct the vote of the Company's shares owned by them. Subsequent to this
settlement, the Company owns approximately 3.6% of Sharps' outstanding shares.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In October 2000, the Company sold its primary operating companies to
Platinum Holdings ("Platinum"). Under the terms of this sale (the
"Transaction"), all leases and corresponding obligations associated with the
Transaction Processing and Software divisions were assumed by Platinum. Prior to
the Transaction, the Company guaranteed two operating leases for office space of
the divested companies. The first lease is related to office space located in
San Antonio, Texas, and expires in 2006. Under the original terms of the first
lease, the remaining minimum undiscounted rent payments total $3.8 million at
September 30, 2004. The second lease is related to office space located in
Austin, Texas, and expires in 2010. Under the original terms of the second
lease, the remaining minimum undiscounted rent payments total $7.4 million at
September 30, 2004. The Company does not believe it is probable that it will be
required to perform under these lease guarantees and therefore, no liability has
been accrued on the Company's financial statements. In conjunction with the
Transaction, Platinum agreed to indemnify the Company should the underlying
operating companies not perform under the terms of the office leases.
On August 11, 2004, Craig Davis, allegedly a shareholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware.
That complaint asserts direct claims, and also derivative claims on the
Company's behalf, against five former and three current directors of the
Company. The individual defendants are Parris H. Holmes, Jr., C. Lee Cooke, Jr.,
Justin Ferrero, Gary D. Becker, J. Stephen Barley, Stephen M. Wagner, Mark E.
Schwarz, and Steven J. Pully; the Company is a nominal defendant. In his
complaint, Mr. Davis seeks the appointment of a guardian for the Company under
Section 226(a) of the Delaware General Corporation Law and other remedies. Mr.
Davis alleges that different director defendants breached their fiduciary duties
to the Company. The allegations involve, among other things, transactions with,
and payments to, Mr. Holmes, and whether the Companhy operated as an
unregistered investment company. The Company and the other directors responded
to the Complaint by filing a motion to dismiss or stay the action on October 18,
2004 and on November 3, 2004 filed a memorandum of law in support of such
positions. On October 27, 2004 the board of directors appointed Messrs. Pully,
Risher and Schwarz to a special litigation committee to investigate the claims
of the plaintiff. Prior to the filing of the complaint, the Company had
commenced a review of various transactions involving former management,
including, among other things, the payment of approximately $600,000 to Mr.
Holmes in connection with a restricted stock agreement (see Note 7) and the
reimbursement of various expenses involving meals and entertainment, travel and
other reimbursed expenses.
The Company has been notified by counsel to both Messrs. Holmes and
Tusa that each of Messrs. Holmes and Tusa believe that approximately $60,000 and
$34,000, respectively, are owed to each of them under their respective
consulting agreements. In addition to notifying both Messrs. Holmes and Tusa
that their consulting services were not required, both have also been notified
that the Company is reviewing various transactions, including, among other
things, the payment of approximately $600,000 to Mr. Holmes in connection with a
restricted stock agreement (See Note 7) and the reimbursement of various
expenses involving meals and entertainment, travel and other reimbursed
expenses. The Company disputes that any additional amounts are owed under the
consulting agreements, and therefore, has not provided for such amounts in the
accompanying financial statements for the period ended September 30, 2004.
10
Pursuant to the purchase agreement entered into in connection with
the Newcastle Transaction, the Company agreed to indemnify the purchaser of the
Series A Preferred Stock from any liability, loss or damage, together with all
costs and expenses related thereto that the Company may suffer which arises out
of affairs of the Company, its Board of Directors or employees prior to the
closing of the Newcastle Transaction. The Company's obligation to indemnify may
be satisfied at the option of the purchaser by issuing additional Series A
Preferred Stock to the purchaser, modifying the conversion price of the Series A
Preferred Stock, a payment of cash or a redemption of Series A Preferred Stock
or a combination of the foregoing. The Company and the purchaser have not yet
determined whether events that have arisen since the closing will trigger the
indemnity provisions.
NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In March 2004, the Company entered into a definitive agreement to
sell all of its holdings in Princeton to $10,000,000 (see Note 7). The Company
completed the sale of its holdings in Princeton in early June 2004. The sale
generated a capital loss for federal income tax purposes of approximately
$67,000,000 and book gain of approximately $5,800,000.
The Company accounted for its investment in Princeton under the
equity method of accounting (as the Company did not exhibit control over
Princeton) and historically recorded the equity in net loss of Princeton on a
three-month lag. As a result of the sale of the Company's holdings in Princeton,
during the three months ended June 30, 2004, the Company accelerated the
recording of its equity in net loss of Princeton to the date of sale. As a
result, the Company's equity in net loss of Princeton for the nine months ended
September 30, 2004 includes eight months of operations of Princeton. As of
December 31, 2003, the Company's ownership percentage of the preferred stock,
the outstanding stock and the fully diluted stock of Princeton was 34.0%, 36.2%
and 31.7%, respectively.
Princeton's summarized balance sheet as of September 30, 2003, was
as follows:
September 30,
(in thousands) 2003
-----------
Current assets............................................ $ 34,750
Non-current assets........................................ 12,681
Current liabilities....................................... 30,386
Non-current liabilities................................... 486
Mandatorily redeemable convertible preferred stock........ 39,587
11
Princeton's statement of operations for the three months ended June
30, 2003, was used to calculate the equity in net loss recorded in the Company's
statement of operations for the three months ended September 30, 2003.
Princeton's statements of operations for the eight months ended May 31, 2004 and
nine months ended June 30, 2003, were used to calculate the equity in net loss
recorded in the Company's statements of operations for the nine months ended
September 30, 2004 and 2003, respectively. Princeton's summarized statements of
operations are as follows:
Three Eight Nine
Months Months Months
Ended Ended Ended
June 30, May 31, June 30,
(in thousands) 2003 2004 2003
--------------- --------------- ----------
Total revenues......................... $ 9,192 $ 16,695 $ 27,002
Gross profit........................... 4,519 7,258 12,885
Loss from operations................... (2,121) (9,188) (6,404)
Net loss............................... (2,122) (9,214) (6,086)
NOTE 7. RELATED PARTY TRANSACTIONS
Mr. Holmes (former Chairman of the Board and Chief Executive Officer
of the Company) served on the Board of Princeton from September 1998 until March
2004. Mr. Holmes served as Chairman of the Board of Princeton from January 2002
until December 2002. Mr. Tusa (former Chief Financial Officer of the Company)
served as a member of the Board of Princeton from August 2001 until June 2002.
Mr. Holmes and one of the Company's current Board members, Mr.
Cooke, serve on the Board of Sharps and did so at the time the Company invested
in Sharps. Mr. Tusa was appointed CFO of Sharps in February 2003. In March 2003,
Sharps began reimbursing the Company for certain expenses incurred by Mr. Tusa.
As of September 30, 2004, no amount was due to the Company by Sharps for these
expenses.
Mr. Holmes served as Chairman of the Board of Tanisys Technology,
Inc. ("Tanisys") at the time of the Company's investment in Tanisys and until
his resignation in February 2002. A current member of the Company's Board, Mr.
Cooke, served as Tanisys' Chairman of the Board and CEO from February 2002 until
February 2003 and as a member of Tanisys' Board from February 2002 to March
2003. Mr. Cooke was entitled to receive approximately $15,000 per month from
Tanisys as compensation for services as Chairman of the Board and CEO. The
Company also appointed Mr. Tusa and another one of its Board members, Mr.
Ferrero, to the Board of Tanisys. Mr. Ferrero resigned from the Board of Tanisys
in February 2003 and Mr. Tusa resigned from the Board of Tanisys in March 2003.
In August 2003, the Company issued 435,484 shares of its common
stock to Mr. Holmes in exchange for a salary reduction of $135,000 for the
employment period of October 1, 2003 to September 30, 2004. These shares were
issued under the New Century Equity Holdings Corp. 1996 Employee Comprehensive
Stock Plan, which allows for this type of issuance without any material
amendments.
In November 2001, the Company entered into an Amended and Restated
Employment Agreement ("Employment Agreement") with Mr. Holmes. As part of the
Employment Agreement, the Company entered into a Split-Dollar Life Insurance
Agreement ("Insurance Agreement") with a trust beneficially owned by Mr. Holmes
pursuant to which the Company paid the annual insurance premium of $200,000. The
underlying life insurance policy (New York Life policy number 46731037) had a
face value of $4,500,000 and required remaining annual premium payments through
March 2012, totaling $1,500,000. In December 2003, Mr. Holmes and the Company
agreed to amend the Employment Agreement and terminate the provisions of the
Employment Agreement related to the Insurance Agreement in exchange for payments
by the Company to, and on behalf of, Mr. Holmes totaling $700,000 in cash.
12
Accordingly, the Company assigned to Mr. Holmes, and Mr. Holmes assumed, all
future obligations and benefits related to the Insurance Agreement. Mr. Holmes
released and discharged the Company from any further obligation to provide or
fund any life insurance for the benefit of Mr. Holmes, including the Insurance
Agreement. The entire $700,000 was included in general and administrative
expenses during the year ended December 31, 2003. In December 2003, $200,000 of
the total $700,000 was paid. The remaining $500,000 was accrued at December 31,
2003 and paid in January 2004.
During the quarter ended June 30, 2004, the Company sold certain
office furniture to Mr. Holmes for approximately $7,000. The Company had
purchased the office furniture for approximately $28,000 during the period
October 1994 through April 2003 and the furniture had a book value of $4,000.
Mr. Holmes also was provided with an automobile at the net book value of the
automobile pursuant to the terms of his employment agreement. The net book value
of the automobile at the time of transfer was zero. The automobile was acquired
for $75,000 in 2000.
The Company paid Mr. Holmes approximately $600,000 on June 2, 2004
purportedly as a result of a restricted stock grant as described below. In April
2000, the Board of Directors of the Company approved a restricted stock grant to
Mr. Holmes. The restricted stock grant consisted of 400,000 shares of Princeton
common stock and was modified in June 2001 to provide for certain anti-dilution
and ratchet protections. The restricted stock grant vested on April 30, 2003.
The Company expensed the fair market value of the restricted stock grant over
the three-year period ended April 30, 2003. The Company recognized $150,000
during the nine months ended September 30, 2003, as compensation expense related
to the stock grant. The Company has commenced a review of various transactions
involving former management, including, among other things, the $600,000
payment.
In June 2004, in connection with the Newcastle Transaction, Mr.
Schwarz, CEO and Chairman of Newcastle Capital Management, Mr. Pully, President
of Newcastle Capital Management, and Mr. Murray, CFO of Newcastle Capital
Management, assumed positions as Chairman of the Board, CEO and CFO,
respectively, of the Company. Newcastle Capital Management is a general partner
of Newcastle, which owns 4,807,692 shares of Series A Preferred Stock and
150,000 shares of Common Stock.
NOTE 8. DISCONTINUED OPERATIONS
In August 2001, the Company invested $1,060,000 in Tanisys. In
February 2003, the Company sold its preferred stock in Tanisys to ATE Worldwide
LLC, whose majority shareholder is a leader in the semiconductor testing
equipment market. The Company received approximately $0.2 million in exchange
for its preferred stock in Tanisys, which is reported as net income from
disposal of discontinued operations during the nine months ended September 30,
2003.
NOTE 9. SUBSEQUENT EVENTS
On October 8, 2004, the Company entered into a sublease agreement to
sublet office space previously used as the Company's corporate headquarters
located at 10101 Reunion Place Suite 970, San Antonio, Texas. Under the terms of
the original lease the Company is obligated to make monthly rental installments
of approximately $3,000 through January 31, 2007, the expiration of the lease.
The sublease agreement provides for the subtenant to make monthly rental
installments of approximately $2,500 per month through January 31, 2007.
13
ITEM 2.
This Quarterly Report on Form 10-Q contains certain
"forward-looking" statements as such term is defined in the Private Securities
Litigation Reform Act of 1995 and information relating to the Company and its
subsidiaries that are based on the beliefs of the Company's management as well
as assumptions made by and information currently available to the Company's
management. When used in this report, the words "anticipate", "believe",
"estimate", "expect" and "intend" and words or phrases of similar import, as
they relate to the Company or its subsidiaries or Company management, are
intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitation, competitive factors, general economic conditions,
customer relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
products introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other
filings made by the Company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion of the interim condensed consolidated
financial condition and results of operations for New Century Equity Holdings
Corp. and subsidiaries (collectively, the "Company"), for the three and nine
months ended September 30, 2004. It should be read in conjunction with the
Unaudited Interim Condensed Consolidated Financial Statements of the Company,
the notes thereto and other financial information included elsewhere in this
report, and the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
RESULTS OF OPERATIONS
Continuing Operations
General and administrative ("G&A") expenses are comprised of all
general and administrative costs incurred in direct support of the business
operations of the Company. For the three months ended September 30, 2004 and
2003, G&A expenses totaled $0.3 million and $0.5 million, respectively. For the
nine months ended September 30, 2004 and 2003, G&A expenses totaled $4.6 million
and $1.7 million, respectively. G&A expenses for the nine months ended September
30, 2004 included a total of $2.6 million of severance paid to Parris Holmes and
David Tusa, the Company's former Chief Executive Officer and Chief Financial
Officer, respectively. For the nine months ended September 30, 2004, G&A
expenses also included $0.5 million for legal and professional expenses related
to completing the proposed proxy statement seeking shareholder approval to
liquidate the Company (which was subsequently withdrawn) and completing the sale
(the "Newcastle Transaction") of preferred stock to Newcastle Partners, L.P.
("Newcastle"). See Note 2 of the Condensed Consolidated Financial Statements for
a detailed description of the Newcastle Transaction.
For the three months ended September 30, 2004 and 2003, depreciation
and amortization expenses totaled $4,000 and $41,000, respectively. For the nine
months ended September 30, 2004 and 2003, depreciation and amortization expenses
totaled $26,000 and $121,000 respectively. The decrease in depreciation and
amortization from prior periods is the result of fixed asset sales to
accommodate the Company downsizing corporate office and overhead.
There was no litigation settlement expense for the three and nine
months ended September 30, 2004. A litigation settlement of $354,000 is included
in other income (expense) for the three and nine months ended September 30,
2003. This amount represents the return of the Company's investment in
14
Microbilt Corporation ("Microbilt") to Bristol Investments, Ltd. ("Bristol"). In
April 2003, the Company received notice that Bristol and Microbilt filed suit
against the Company and one of its former officers alleging breach of contract
and misrepresentation in conjunction with the October 2001 merger of a former
subsidiary, FIData, Inc., into Microbilt. In October 2003, the Company settled
the suit by surrendering its ownership of the common stock of Microbilt to
Bristol. This settlement resolves all claims brought by and against the Company
and one of its former officers.
In June 2004, the Company sold all of its holdings in Princeton eCom
Corporation ("Princeton"), which offered electronic bill presentment and payment
services via the internet and telephone. Equity in net loss of affiliate totaled
$0.0 million and $0.8 million during the three months ended September 30, 2004
and 2003 respectively. Equity in net loss of affiliate totaled $3.0 million and
$2.2 million during the nine months ended September 30, 2004 and 2003,
respectively. The increase in the equity in net loss of affiliate is the result
of the acceleration of the Company's equity pickup in Princeton to the date of
the sale (previously done on a three month lag) as well as an increase in the
net loss generated by Princeton. The sale of Princeton generated a capital loss
for federal income tax purposes of approximately $67 million and a book gain of
approximately $5.8 million.
Princeton
For the three months ended June 30, 2003, Princeton's revenues
totaled $9.2 million, gross profit totaled $4.5 million, loss from operations
totaled $2.1 million and net loss totaled $2.1 million. For the eight months
ended May 31, 2004 and nine months ended June 30, 2003, Princeton's revenues
totaled $16.7 million and $27.0 million, respectively, gross profit totaled $7.3
million and $12.9 million, respectively, loss from operations totaled $9.2
million and $6.4 million, respectively, and net loss totaled $9.2 million and
$6.1 million, respectively.
Discontinued Operations
In September 2003, the Company recognized income from the disposal
of discontinued operations of $0.2 million, thereby reducing the accruals
related to discontinued operations to zero as no known future liabilities exist.
In February 2003, the Company sold its preferred stock in Tanisys
Technology, Inc. to ATE Worldwide LLC, whose majority shareholder is a leader in
the semiconductor testing equipment market. The Company received approximately
$0.2 million in exchange for its preferred stock, which is reported as net
income from disposal of discontinued operations during the nine months ended
September 30, 2003.
Sublease
On October 8, 2004, the Company entered into a sublease agreement to
sublet office space previously used as the Company's corporate headquarters
located at 10101 Reunion Place Suite 970, San Antonio, Texas. Under the terms of
the original lease the Company is obligated to make monthly rental installments
of approximately $3,000 through January 31, 2007, the expiration of the lease.
The sublease agreement provides for the subtenant to make monthly rental
installments of approximately $2,500 per month through January 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $15.1 million at September
30, 2004, from $5.3 million at December 31, 2003. The increase relates to the
receipt of $10.0 million in proceeds from the sale of the Company's holdings in
Princeton and $5.0 million from the sale of preferred stock to Newcastle, offset
by severance payments totaling $2.6 million made to Mr. Holmes and Mr. Tusa, a
$0.6 million payment made to Mr. Holmes in connection with a restricted stock
grant, a $0.5 million payment related to the termination of the split dollar
life insurance agreement with Mr. Holmes, $0.5 million for legal and
professional expenses related to completing the proposed liquidation proxy
(which was subsequently
15
withdrawn) and completing the sale of preferred stock to Newcastle and the cash
portion of corporate expenses of $1.0 million. Capital expenditures totaled
$3,000 during the nine months ended September 30, 2004. The Company has
commenced a review of various transactions involving former management,
including, among other things, the payment of approximately $600,000 to Mr.
Holmes in connection with a restricted stock agreement and the reimbursement of
various expenses involving certain meals and entertainment, travel and other
reimbursed expenses.
Lease Guarantees
In October 2000, the Company sold its primary operating companies to
Platinum Holdings ("Platinum"). Under the terms of this sale (the
"Transaction"), all leases and corresponding obligations associated with the
Transaction Processing and Software divisions were assumed by Platinum. Prior to
the Transaction, the Company guaranteed two operating leases for office space of
the divested companies. The first lease is related to office space located in
San Antonio, Texas, and expires in 2006. Under the original terms of the first
lease, the remaining minimum undiscounted rent payments total $3.8 million at
September 30, 2004. The second lease is related to office space located in
Austin, Texas, and expires in 2010. Under the original terms of the second
lease, the remaining minimum undiscounted rent payments total $7.4 million at
September 30, 2004. The Company does not believe it is probable that it will be
required to perform under these lease guarantees, and therefore, no liability
has been accrued in the Company's financial statements. In conjunction with the
Transaction, Platinum agreed to indemnify the Company should the underlying
operating companies not perform under the terms of the office leases.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents and short-term marketable securities. The Company
does not believe that it has significant exposure to market risks associated
with changing interest rates as of September 30, 2004, because the Company
maintains a liquid portfolio. The Company does not use derivative financial
instruments in its operations.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Securities Exchange
Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 11, 2004, Craig Davis, allegedly a shareholder of the
Company, filed a complaint in the Chancery Court of New Castle County, Delaware.
That complaint asserts direct claims, and also derivative claims on the
Company's behalf, against five former and three current directors of the
Company. The individual defendants are Parris H. Holmes, Jr., C. Lee Cooke, Jr.,
Justin Ferrero, Gary D. Becker, J. Stephen Barley, Stephen M. Wagner, Mark E.
Schwarz, and Steven J. Pully; the Company is a nominal defendant. In his
complaint, Mr. Davis seeks the appointment of a guardian for the Company under
Section 226(a) of the Delaware General Corporation Law and other remedies. Mr.
Davis alleges that different director defendants breached their fiduciary duties
to the Company. The allegations involve, among other things, transactions with,
and payments to, Mr. Holmes, and whether the Company operated as an unregistered
investment company. The Company and the other directors responded to the
Complaint by filing a motion to dismiss or stay the action on October 18, 2004
and on November 3, 2004 filed a memorandum of law in support of such positions.
On October 27, 2004 the board of directors appointed Messrs. Pully, Risher and
Schwarz to a special litigation committee to investigate the claims of the
plaintiff. Prior to the filing of the complaint, the Company had commenced a
review of various transactions involving former management, including, among
other things, the payment of approximately $600,000 to Mr. Holmes in connection
with a restricted stock agreement (see Note 7) and the reimbursement of various
expenses involving meals and entertainment, travel and other reimbursed
expenses.
The Company has been notified by counsel to both Messrs. Holmes and
Tusa that each of Messrs. Holmes and Tusa believe that approximately $60,000 and
$34,000, respectively, are owed to each of them under their respective
consulting agreements. In addition to notifying both Messrs. Holmes and Tusa
that their consulting services were not required, both have also been notified
that the Company is reviewing various transactions, including, among other
things, the payment of approximately $600,000 to Mr. Holmes in connection with a
restricted stock agreement (See Note 7) and the reimbursement of various
expenses involving meals and entertainment, travel and other reimbursed
expenses. The Company disputes that any additional amounts are owed under the
consulting agreements, and therefore, has not provided for such amounts in the
accompanying financial statements for the period ended September 30, 2004.
Pursuant to the purchase agreement entered into in connection with
the Newcastle Transaction, the Company agreed to indemnify the purchaser of the
Series A Preferred Stock from any liability, loss or damage, together with all
costs and expenses related thereto that the Company may suffer which arises out
of affairs of the Company, its Board of Directors or employees prior to the
closing of the Newcastle Transaction. The Company's obligation to indemnify may
be satisfied at the option of the purchaser by issuing additional Series A
Preferred Stock to the purchaser, modifying the conversion price of the Series A
Preferred Stock, a payment of cash or a redemption of Series A Preferred Stock
or a combination of the foregoing. The Company and the purchaser have not yet
determined whether events that have arisen since the closing will trigger the
indemnity provisions.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
On June 18, 2004 the Company sold 4,807,692 newly issued shares of
Series A 4% convertible preferred stock, to Newcastle Partners, L.P. for $5
million. The proceeds are being used for general corporate purposes. For a
detailed description of the transaction and the powers, preferences, rights,
qualifications and restrictions of the preferred stock, See Note 2 to the
Condensed Consolidated Financial Statements. The issuance of the preferred stock
was deemed to be exempt from registration under the Securities Act of 1933, as
amended (the "Act") in reliance on Section 4(2) of the Act as a transaction by
an issuer not involving a public offering. No underwriters were involved in the
Series A 4% convertible preferred stock issuance.
18
ITEM 6. EXHIBITS
(a) Exhibits:
31.1 Certification of Chief Executive Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2 Certification of Chief Financial Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
32.1 Certification of Chief Executive Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)
32.2 Certification of Chief Financial Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)
99.1 Sublease agreement entered into by and between New Century Equity
Holdings Corp., and the Law Offices of Alfred G. Holcomb P.C.
The accompanying notes are an
integral part of these interim condensed consolidated financial statements.
19
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 15, 2004 By: /S/ JOHN P. MURRAY
----------------------------
John P. Murray
Chief Financial Officer
(Duly authorized and principal
financial officer)