================================================================================ 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 June 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) (210) 302-0444 (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 August 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 - June 30, 2004 (Unaudited) and December 31, 2003............................................ 3 Unaudited Condensed Consolidated Statements of Operations - For the Three and Six Months ended June 30, 2004 and 2003...... 4 Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) - For the Three and Six Months ended June 30, 2004 and 2003.................................................... 5 Unaudited Condensed Consolidated Statements of Cash Flows - For the Six Months ended June 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....................................... 16 Item 3. Quantitative and Qualitative Disclosure about Market Risk......... 18 Item 4. Controls and Procedures........................................... 18 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................. 19 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............................................ 19 Item 6. Exhibits and Reports on Form 8-K.................................. 20 SIGNATURE .................................................................. 21 2 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) JUNE 30, DECEMBER 31, 2004 2003 -------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................................. $ 15,424 $ 5,330 Accounts receivable ................................................... 19 28 Prepaid and other assets .............................................. 69 309 ------------ ------------ Total current assets ................................................. 15,512 5,667 Property and equipment, net ............................................. 25 83 Other non-current assets ................................................ 6 53 Investments in affiliates ............................................... 293 7,233 ------------ ------------ Total assets .......................................................... $ 15,836 $ 13,036 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................................... $ 84 $ 58 Accrued liabilities ................................................... 442 1,252 ------------ ------------ Total current liabilities ............................................ 526 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 and 0 shares 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 ................................ 15 -- Accumulated deficit ................................................... (60,528) (59,097) ------------ ------------ Total stockholders' equity ........................................... 15,310 11,726 ------------ ------------ Total liabilities and stockholders' equity ........................... $ 15,836 $ 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------- 2004 2003 2004 2003 ---------- --------- ------------ ---------- Operating revenues ...................................... $ -- $ -- $ -- $ -- Operating expenses: General and administrative expenses .................. 3,613 541 4,258 1,221 Depreciation and amortization expenses ............... 5 40 21 80 -------- -------- -------- -------- Operating loss from continuing operations ............... (3,618) (581) (4,279) (1,301) Other income (expense): Interest income, net ................................. 16 22 26 49 Equity in net loss of affiliate ...................... (1,785) (766) (2,985) (1,413) Gain on sale of equity affiliate ..................... 5,817 -- 5,817 -- Other (expense) income, net .......................... (2) (1) (3) 11 -------- -------- -------- -------- Total other income (expense), net ....................... 4,046 (745) 2,855 (1,353) -------- -------- -------- -------- Net income (loss) from continuing operations ............ 428 (1,326) (1,424) (2,654) Discontinued operations: Net income from disposal of discontinued operations ........................................ -- -- -- 147 -------- -------- -------- -------- Net income (loss) ....................................... 428 (1,326) (1,424) (2,507) Preferred stock dividend ................................ (7) -- (7) -- -------- -------- -------- -------- Net income (loss) applicable to common stockholders .................................. $ 421 $ (1,326) $ (1,431) $ (2,507) ======== ======== ======== ======== Basic net income (loss) per common share: Net income (loss) from continuing operations ......... $ 0.01 $ (0.04) $ (0.04) $ (0.08) Net income from disposal of discontinued operations ........................................ -- -- -- 0.01 -------- -------- -------- -------- Net income (loss) .................................... $ 0.01 $ (0.04) $ (0.04) $ (0.07) ======== ======== ======== ======== Weighted average common shares outstanding .............. 34,653 34,218 34,653 34,218 ======== ======== ======== ======== Diluted net income (loss) per common share: Net income (loss) from continuing operations ......... $ 0.01 $ (0.04) $ (0.04) $ (0.08) Net income from disposal of discontinued operations ........................................ -- -- -- 0.01 -------- -------- -------- -------- Net income (loss) .................................... $ 0.01 $ (0.04) $ (0.04) $ (0.07) ======== ======== ======== ======== Weighted average common shares outstanding .............. 35,340 34,218 34,653 34,218 ======== ======== ======== ======== 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 SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ---------------------- 2004 2003 2004 2003 -------- -------- --------- -------- Net income (loss) ....................... $ 428 $(1,326) $(1,424) $(2,507) Other comprehensive income: Unrealized holding gains, net of $0 tax 4 -- 15 -- ------- ------- ------- ------- Comprehensive income (loss) ............. $ 432 $(1,326) $(1,409) $(2,507) ======= ======= ======= ======= 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) SIX MONTHS ENDED JUNE 30, 2004 2003 --------- --------- Cash flows from operating activities: Net loss from continuing operations .......................................... $ (1,424) $ (2,654) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation and amortization expenses ..................................... 21 80 Equity in net loss of affiliate ............................................ 2,985 1,413 Gain on sale of equity affiliate ........................................... (5,817) -- Loss on disposition of property and equipment .............................. 28 -- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ................................ 9 (31) Decrease in prepaid and other assets ...................................... 247 44 Increase (decrease) in accounts payable ................................... 26 (17) Decrease in accrued liabilities ........................................... (430) (30) Increase in other liabilities and other non-cash items .................... -- 136 -------- -------- Net cash used in continuing operating activities ............................. (4,355) (1,059) Net cash provided by discontinued operating activities ....................... -- 178 -------- -------- Net cash used in operating activities ........................................ (4,355) (881) Cash flows from investing activities: Purchases of property and equipment ........................................ (3) (3) Proceeds from sale of property and equipment ............................... 12 -- Investment in affiliate .................................................... -- (200) 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 (203) Cash flows from financing activities: Proceeds from sale of preferred stock ...................................... 5,000 -- -------- -------- Net increase (decrease) in cash and cash equivalents ......................... 10,094 (1,084) Cash and cash equivalents, beginning of period ............................... 5,330 8,704 -------- -------- Cash and cash equivalents, end of period ..................................... $ 15,424 $ 7,620 ======== ======== 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 NEW CENTURY EQUITY HOLDINGS CORP. AND SUBSIDIARIES NOTES TO 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. 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 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. 7 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 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. The Company is currently not making payments under the consulting agreements (See Note 6). 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 term of offices expires at the 2006 annual meeting of stockholders of the Company. Pursuant to the agreement entered into in connection with the Newcastle Transaction, by August 1, 2004, 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 Mr. Murray, CFO of Newcastle Capital Management, assumed positions as Chairman of the Board, CEO and CFO, respectively, of the Company. 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. As a result of the Newcastle Transaction and the related management changes, the board of directors of the Company has determined that it is not in the best interests of the Company's stockholders to liquidate the Company as previously proposed in proxy materials recently 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 6). 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 Six Months Ended June 30, June 30, (in thousands, except per share data) 2004 2003 2004 2003 -------- --------- ----------- ----------- Net income (loss), as reported ...................... $ 428 $ (1,326) $ (1,424) $ (2,507) Less: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects ....... (67) (45) (68) (56) ------- --------- --------- --------- Net income (loss), pro forma ....................... $ 361 $ (1,371) $ (1,492) $ (2,563) ======= ========= ========= ========= Basic net income (loss) per common share: Net income (loss), as reported .................. $ 0.01 $ (0.04) $ (0.04) $ (0.07) Net income (loss), pro forma .................... $ 0.01 $ (0.04) $ (0.04) $ (0.07) Diluted net income (loss) per common share: Net income (loss), as reported .................. $ 0.01 $ (0.04) $ (0.04) $ (0.07) Net income (loss), pro forma .................... $ 0.01 $ (0.04) $ (0.04) $ (0.07) 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 six months ended June 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: June 30, December 31, (in thousands) 2004 2003 ---------- ------------ 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) -------- -------- 9 Net investment in Princeton .......................... -- 6,567 Investment in Sharps: Cash investments ........................................ 970 970 Settlement .............................................. (389) -- Impairment of investment ................................ (306) (306) Unrealized holding gain ................................. 15 -- Other ................................................... 3 2 -------- -------- Net investment in Sharps ............................. 293 666 -------- -------- Total investments in affiliates ......................... $ 293 $ 7,233 ======== ======== In June 2004, the Company sold all of its holdings in Princeton. See note 7 for further discussion. 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 New Century shares owned by them. Subsequent to this settlement, the Company owns approximately 3.6% of Sharps' outstanding shares. 10 NOTE 5. ACCRUED LIABILITIES Accrued liabilities is comprised of the following: June 30, December 31, (in thousands) 2004 2003 -------- ------------ Accrued split dollar life insurance (see Note 8) $ -- $ 561 Accrued settlement (see Note 4) ................ -- 389 Accrued severance .............................. 170 -- Accrued legal fees ............................. 57 10 Accrued vacation ............................... 18 136 Accrued audit fees ............................. 63 62 Accrued annual report fees ..................... 79 53 Other .......................................... 55 41 ------ ------ Total accrued liabilities ................... $ 442 $1,252 ====== ====== Prior to the Newcastle Transaction, the Company entered into severance agreements with three non-executive employees of the Company. These employees are entitled to the severance amounts upon their termination of employment. NOTE 6. 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 11 lease, the remaining minimum undiscounted rent payments total $4.3 million at June 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 $7.8 million at June 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 New Century operated as an unregistered investment company. The Company is currently evaluating Mr. Davis' complaint. Prior to the filing of the complaint, New Century 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 8) and the reimbursement of various expenses involving meals and entertainment, travel and other reimbursed expenses. The Company has not requested that Messrs. Holmes or Tusa provide consulting services at the current time and accordingly, the Company is not making payments under the consulting agreements entered into with each of them. The Company has been notified by counsel to both Messrs. Holmes and Tusa that each of Messrs. Holmes and Tusa believe that amounts are owed to each of them under their respective consulting agreements. In addition to notifying both Messrs. Holmes and Tusa that their consulting services are 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 8) and the reimbursement of various expenses involving meals and entertainment, travel and other reimbursed expenses. NOTE 7. INVESTMENT IN UNCONSOLIDATED AFFILIATE In March 2004, the Company entered into a definitive agreement to sell all of its holdings in Princeton to existing and new investors of Princeton for $10.0 million in cash. (see Note 8). The Company completed the sale of its holdings in Princeton in early June 2004 which generated a capital loss for federal income tax purposes of approximately $67 million. 12 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 three months ended June 30, 2004 includes five 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 Princeton's statements of operations for the five months ended May 31, 2004 and three months ended March 31, 2003, have been used to calculate the equity in net loss recorded in the Company's statements of operations for the three months ended June 30, 2004 and 2003, respectively. Princeton's statements of operations for the eight months ended May 31, 2004 and six months ended March 31, 2003, have been used to calculate the equity in net loss recorded in the Company's statements of operations for the six months ended June 30, 2004 and 2003, respectively. Princeton's summarized statements of operations are as follows: Five Three Eight Six Months Months Months Months Ended Ended Ended Ended May 31, March 31, May 31, March 31, (in thousands) 2004 2003 2004 2003 ---------- ----------- --------- ---------- Total revenues ........ $ 10,806 $ 9,170 $ 16,695 $ 17,810 Gross profit .......... 5,318 4,278 7,258 8,366 Loss from operations... (5,420) (2,164) (9,188) (4,283) Net loss .............. (5,687) (2,147) (9,214) (3,964) 13 NOTE 8. RELATED PARTY TRANSACTIONS 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. 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 $0.2 million. The underlying life insurance policy (New York Life policy number 46731037) had a face value of $4.5 million and required remaining annual premium payments through March 2012, totaling $1.5 million. 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 $0.7 million in cash. 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 $0.7 million was included in general and administrative expenses during the year ended December 31, 2003. In December 2003, $0.2 million of the total $0.7 million was paid. The remaining $0.5 million was accrued at December 31, 2003 and paid in January 2004. 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 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 six months ended June 30, 2003, as compensation expense related to the stock grant. Related to the restricted stock grant, in June 2004, the Company paid Mr. Holmes approximately $600,000. New Century 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. 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 approximately $75,000 in 2000. 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 member of the Company's Board, Lee 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, Justin 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. 14 Mr. Holmes 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 served as a member of the Board of Princeton from August 2001 until June 2002. Mr. Holmes and one of the Company's Board members 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 June 30, 2004, approximately $9,000 was due to the Company by Sharps for the unpaid portion of these expenses, all of which was collected in July 2004. NOTE 9. EARNINGS PER SHARE Basic income (loss) per common share is computed based on the weighted average number of common shares outstanding during each period. For the three months ended June 30, 2004, diluted income per common share is computed based on the weighted average number of common shares outstanding, after giving effect to the potential issuance of Common Stock on the assumed conversion of 4,807,692 shares of Series A Preferred Stock. For the six months ended June 30, 2004 and the three and six months ended June 30, 2003, potentially dilutive securities have not been included in the diluted loss per common share calculation as they would have been antidilutive. 15 The following table provides a reconciliation between net income and net income applicable to common stockholders and between basic and diluted shares outstanding: Three Months Ended June 30, 2004 ----------------------------------- Numerator Denominator Per Share (in thousands, except per share data) Income Shares Amount ---------- --------- ----------- Basic: Net income ......................... $ 428 Less: Preferred stock dividends .... (7) ------- Total basic net income ............. 421 34,653 $ 0.01 ======== Effect of dilutive securities: Convertible preferred stock ........ 7 687 ------ ------ Total diluted net income ........... $ 428 35,340 $ 0.01 ====== ====== ======== NOTE 10. 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, which is reported as net income from disposal of discontinued operations during the six months ended June 30, 2003. 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. 16 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 six months ended June 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 June 30, 2004 and 2003, G&A expenses totaled $3.6 million and $0.5 million, respectively. For the six months ended June 30, 2004 and 2003, G&A expenses totaled $4.3 million and $1.2 million, respectively. G&A expenses for the three and six months ended June 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 three and six months ended June 30, 2004, G&A expenses also included $0.3 million and $0.4 million, respectively, 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. In June 2004 the Company sold all of its holdings in Princeton, which offers electronic bill presentment and payment services via the internet and telephone. Equity in net loss of affiliate totaled $1.8 million and $0.8 million during the three months ended June 30, 2004 and 2003, respectively. Equity in net loss of affiliate totaled $3.0 million and $1.4 million during the six months ended June 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 eCom Corporation ("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. PRINCETON For the five months ended May 31, 2004 and three months ended March 31, 2003, Princeton's revenues totaled $10.8 million and $9.2 million, respectively, gross profit totaled $5.3 million and $4.3 million, respectively, loss from operations totaled $5.4 million and $2.2 million, respectively, and net loss totaled $5.7 million and $2.1 million, respectively. For the eight months ended May 31, 2004 and six months ended March 31, 2003, Princeton's revenues totaled $16.7 million and $17.8 million, respectively, gross profit totaled $7.3 million and $8.4 million, respectively, loss from operations totaled $9.2 million and $4.3 million, respectively, and net loss totaled $9.2 million and $4.0 million, respectively. DISCONTINUED OPERATIONS 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 six months ended June 30, 2003. 17 LIQUIDITY AND CAPITAL RESOURCES The Company's cash balance increased to $15.4 million at June 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, $0.4 million for legal and professional expenses related to completing the proposed liquidation proxy (which was subsequently withdrawn) and completing the sale of preferred stock to Newcastle and the cash portion of corporate expenses. Capital expenditures totaled $3,000 during the six months ended June 30, 2004. New Century 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 $4.3 million at June 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 $7.8 million at June 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. 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 June 30, 2004, because the Company's intention is to maintain 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. 18 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 New Century operated as an unregistered investment company. The Company is currently evaluating Mr. Davis' complaint. Prior to the filing of the complaint, New Century 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 and the reimbursement of various expenses involving certain meals and entertainment, travel and other reimbursed expenses. The Company has not requested that Messrs. Holmes or Tusa provide consulting services at the current time and accordingly, the Company is not making payments under the consulting agreements entered into with each of them. The Company has been notified by counsel to both Messrs. Holmes and Tusa that each of Messrs. Holmes and Tusa believe that amounts are owed to each of them under their respective consulting agreements. In addition to notifying both Messrs. Holmes and Tusa that their consulting services are 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 and the reimbursement of various expenses involving meals and entertainment, travel and other reimbursed expenses. 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. 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. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (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) (b) Current Reports on Form 8-K: Pursuant to General Instructions B.2. and B.6. of Form 8-K, to the extent that the Forms 8-K listed below contain Item 9 and/or Item 12 disclosures, those Items of such Forms 8-K are not incorporated into this Form 10-Q or into any other form or report filed with the SEC into which this Form 10-Q would be incorporated by reference. Form 8-K, dated and filed May 12, 2004, announcing the Company's results of operations for the three months ended March 31, 2004. Form 8-K, dated and filed June 2, 2004, announcing the exploration of strategic alternatives for the Company, the delay of distribution of the proxy statement seeking shareholder approval for the liquidation of the Company and the sale of the Company's holdings in Princeton eCom Corporation. Form 8-K, dated and filed June 10, 2004, announcing the completion of the sale of the Company's holdings in Princeton eCom Corporation for an aggregate purchase price of $10 million. Form 8-K, dated June 29, 2004, filed June 30, 2004, announcing the sale of 4.8 million shares of Series A 4% Cumulative Preferred Stock to Newcastle Partners, L.P. for $5 million and the withdrawal of the Company's proxy materials filed with the Commission seeking shareholder approval of the proposed plan of liquidation of the Company. 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW CENTURY EQUITY HOLDINGS CORP. (Registrant) Date: August 16, 2004 By: /s/ John P. Murray -------------------------------- John P. Murray Chief Financial Officer (Duly authorized and principal financial officer) 21