================================================================================ 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)
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10-Q Filing
Wilhelmina International (WHLM) 10-Q2007 Q1 Quarterly report
Filed: 15 May 07, 12:00am