SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
AMENDMENT NO. 1 ON FORM 10-Q/A
TO 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, 2000
-----------------------------------------
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 No. 0-26072
THCG, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0415597
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
512 Seventh Avenue, 17th Floor, New York, NY 10018
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (212) 223-0440
Indicate by check |X| 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.
Yes |X| No _____
As of November 10, 2000, there were 13,335,317 shares of the
registrant's Common Stock outstanding.
<PAGE>
THCG, Inc.
Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 2000
Explanatory Note
On November 14, 2000, THCG, Inc. (the "Company") filed Amendment No. 2
on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31,
1999. The Amendment included restated financial statements for the fiscal year
ended December 31, 1999 (the "1999 Restatement").
The 1999 Restatement related solely to the values assigned to Walnut
Financial Services, Inc. ("WFS") and Mercury Coast, Inc. ("Mercury Coast") in
connection with the Company's acquisition of these two companies in 1999. Both
acquisitions were accounted for, and continue in the 1999 Restatement to be
accounted for, using the purchase method.
In the financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, the calculation of the equity
consideration paid for each of these acquisitions was calculated based upon the
market price of the Company's common stock at the time the transactions closed.
However, the Company subsequently determined that the more appropriate valuation
date is the date of the announcement of the transaction rather than the closing
date. The 1999 Restatement reduced the equity consideration paid for WFS and
Mercury Coast and the related amount of goodwill and associated amortization
charge. The Company is revising its interim financial statements for the three
months ended March 31, 2000 and the six months ended June 30, 2000 to reflect
the changes to goodwill and the amortization charge for those periods required
by the change made in the 1999 Restatement. These revisions also reflect a
corresponding reduction in Stockholders' Equity and a corresponding decrease in
Net Loss and Loss Per Share.
The Financial Statements, Notes to Consolidated Financial Statements and
Management Discussion and Analysis of Financial Condition and Results of
Operations in this filing have been accordingly revised.
The following items are amended as follows:
Part I, Item 1 Financial Statements
Part I, Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II, Item 6 Exhibits and Reports on Form 8-K
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Statements of Financial Condition - as of June
30, 2000 (unaudited) and December 31, 1999..................... 5
Consolidated Statements of Operations - for the six months and
the three months ended June 30, 2000 (unaudited) and June 30,
1999 (unaudited)............................................... 6
Consolidated Statements of Changes in Stockholders' Equity - for
the six months ended June 30, 2000 (unaudited) ................ 7
Consolidated Statements of Cash Flows - for the six months
ended June 30, 2000 (unaudited) and June 30, 1999 (unaudited). 8
Notes to Consolidated Financial Statements (unaudited)......... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits....................................................... 18
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of THCG, Inc. and its
subsidiaries are presented on pages 5 through 9 hereof as set forth below:
Consolidated Statements of Financial Condition - as of June
30, 2000 (unaudited) and December 31, 1999................................ 5
Consolidated Statements of Operations - for the six months
and the three months ended June 30, 2000 (unaudited) and
June 30, 1999 (unaudited)................................................. 6
Consolidated Statements of Changes in Stockholders' Equity -
for the six months ended June 30, 2000 (unaudited) ....................... 7
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1999 (unaudited) and June 30, 2000
(unaudited)............................................................... 8
Notes to Consolidated Financial Statements (unaudited).................... 9
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<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
------------- -----------------
(Note 1) (Note 1)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,226 $ 1,592
Marketable securities 1,319 2,812
Nonmarketable securities, partnership, limited liability 20,557 7,104
company and other interests (See Note 2)
Ownership interest in company accounted for on the equity 4,533 --
method (See Note 4)
Fees and other receivables, net of allowance 2,257 352
Prepaid expenses and other assets 346 279
Loan receivable, related parties 375 312
Furniture, fixtures and equipment - net 200 104
Goodwill and other intangible assets, net of accumulated 14,829 16,610
amortization
Assets of discontinued operations (See Note 3) -- 6,537
-------- --------
Total Assets $ 48,642 $ 35,702
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other $ 3,096 $ 1,933
Loan payable -- 565
Notes payable -- 600
Deferred income taxes payable -- 495
-------- --------
Total Liabilities 3,096 3,593
-------- --------
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares authorized;
12,651,669 and 11,751,113 issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 127 118
Additional paid-in capital 80,866 68,777
Deferred compensation (23,649) (27,294)
Accumulated deficit (11,798) (9,492)
-------- --------
Total Stockholders' Equity 45,546 32,109
-------- --------
Total Liabilities and Stockholders' Equity $ 48,642 $ 35,702
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
(Note 1) (Note 1)
Revenues
<S> <C> <C> <C> <C>
Venture service fees $3,319 $1,938 $1,836 $1,672
Realized and unrealized gain (loss) in investments 13,187 16 375 16
------------ ------------ ------------ ------------
Total Revenues 16,506 1,954 2,211 1,688
Expenses
Selling, general and administrative 6,685 1,531 3,678 1,028
Equity-based compensation 5,000 -- 2,913 --
Amortization of acquired intangibles 1,782 -- 891 --
------------ ------------ ------------ ------------
Total Expenses 13,467 1,531 7,482 1,028
Income (loss) from continuing operations 3,039 423 (5,271) 660
Provision for income taxes (tax benefit) 506 170 (495) 158
------------ ------------ ------------ ------------
Income (loss) before discontinued operations and equity
in losses of company accounted for on the equity method 2,533 253 (4,776) 502
Equity in losses of company accounted for on the equity
method (492) -- (492) --
------------ ------------ ------------ ------------
Net income (loss) before discontinued operations 2,041 253 (5,268) 502
Net (loss) from discontinued operations (4,347) -- -- --
------------ ------------ ------------ ------------
Net income (loss) ($2,306) $253 ($5,268) $502
============ ============ ============ ============
Basic Earnings Per Share
Basic income (loss) per share from continuing operations $0.16 $0.07 ($0.42) $0.13
Basic (loss) per share from discontinued operations (0.35) -- -- --
------------ ------------ ------------ ------------
Basic income (loss) per share ($0.19) $0.07 ($0.42) $0.13
============ ============ ============ ============
Shares used in calculation 12,368,839 3,723,000 12,635,592 3,723,000
============ ============ ============ ============
Diluted Earnings Per Share
Diluted income (loss) per share from continuing operations $0.13 $0.07 ($0.42) $0.13
Diluted (loss) per share from discontinued operations (0.28) -- -- --
------------ ------------ ------------ ------------
Diluted income (loss) per share ($0.15) $0.07 ($0.42) $0.13
============ ============ ============ ============
Shares used in calculation 15,387,539 3,723,000 12,635,592 3,723,000
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Number of Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 11,751,113 $118 $68,777 ($27,294) ($9,492) $32,109
Proceeds from exercise of warrants for 633,373 6 5,694 $5,700
common stock
Proceeds from exercise of options for 5,000 1 17 $18
common stock
Issuance of common stock in connection 262,183 2 5,023 $5,025
with investment
Deferred compensation for stock options 1,355 (1,355) --
issued to employees
Amortization of deferred compensation 5,000 $5,000
Net loss (2,306) ($2,306)
------------------------------------------------------------------------------------
Balance, June 30, 2000 12,651,669 $127 $80,866 ($23,649) ($11,798) $45,546
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------------
June 30, June 30,
2000 1999
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,306) $411
Adjustment to reconcile net income (loss) to net cash used in continuing
operating activities:
Loss from discontinued operations 4,347 --
Equity in losses of company accounted for on the equity method 492 --
Net change in unrealized appreciation of investments (13,435) --
Gain on sale of marketable securities (31) --
Amortization of deferred compensation 5,000 --
Depreciation and amortization 47 11
Amortization of intangible assets 1,782 --
Bad debt expense 100 90
Deferred income tax provision (495) --
Changes in operating assets and liabilities:
Fees and other receivables (1,905) 244
Prepaid expenses and other assets (67) 250
Loans receivable, related parties (63) (219)
Accounts payable, accrued expenses and other 2,076 (301)
-------- --------
Net cash provided (used) in operating activities (4,458) 486
-------- --------
Cash flows from investing activities:
Proceeds from sale of marketable securities 3,556 --
Investments in partnerships, limited liability companies and other interests (1,928) (140)
Purchase of furniture and equipment (143) (7)
-------- --------
Net cash provided (used) by investing activities 1,485 (147)
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of warrants for common stock 5,700 --
Proceeds from the exercise of options for common stock 18 --
-------- --------
Net cash provided by financing activities 5,718 --
-------- --------
Net cash used in discontinued operations (111) --
-------- --------
Net increase in cash and cash equivalents 2,634 339
Cash and cash equivalents - January 1, 1,592 610
-------- --------
Cash and cash equivalents - June 30, $4,226 $949
======== ========
Supplemental disclosure of cash flow information:
Cash paid:
Interest $27 --
Taxes -- $48
Supplemental disclosure of noncash investing and financing activities:
Issuance of stock in connection with Global Credit Services, Inc. $5,025 --
</TABLE>
See Notes to Consolidated Financial Statements
-8-
<PAGE>
THCG, Inc.
Notes to CONSOLIDATED financial statements
JUNE 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements as of June 30, 2000
are unaudited; however, in the opinion of the management of THCG, Inc., a
Delaware corporation ("THCG" or the "Company"), such statements include all
adjustments (consisting of normal recurring accruals) necessary to present a
fair statement of the information presented therein. The balance sheet at
December 31, 1999 was derived from the audited financial statements at such
date.
Pursuant to accounting requirements of the Securities and Exchange
Commission (the "SEC") applicable to Quarterly Reports on Form 10-Q, the
accompanying financial statements and these Notes do not include all disclosures
required by generally accepted accounting principles for audited financial
statements. Accordingly, these statements should be read in conjunction with
THCG's audited financial statements included in Amendment No. 2 on Form 10-K/A
to its Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for fiscal years.
The financial statements of THCG include the accounts of its wholly
owned subsidiaries, Mercury Coast Inc. ("Mercury Coast") and Tower Hill
Securities, Inc. ("Tower Hill Securities") and its wholly owned subsidiaries,
THCG LLC and THCG Ventures LLC. THCG Ventures LLC is a management company for
two related venture capital companies, THCG Venture Partners I LLC ("Venture I")
and THCG Partners LLC. THCG Ventures LLC has a 0.45% member's interest in THCG
Partners LLC. THCG Partners LLC and THCG LLC have a 15.1% and a 9.9% membership
interest, respectively, in Venture I. All significant intercompany accounts and
transactions are eliminated in consolidation. Pacific Financial Services Corp.
("Pacific Financial") and Inland Financial Corporation ("Inland Financial") are
wholly owned subsidiaries of THCG whose operations have been discontinued. See
Note 3 of the Notes to Consolidated Financial Statements.
Revised Financial Statement
Initially, the calculation of the equity consideration paid for the
acquisitions of WFS and Mercury Coast were calculated based upon the market
price of THCG's common stock at the time the transactions closed. In the case of
WFS, the average of the high and low sales prices of WFS common stock on
November 1, 1999 ($3.625) was used to calculate equity consideration of
$13,367,000. In the case of Mercury Coast, the calculation was based on the
average price of the Company's common stock over the four days commencing two
days prior to the close of the transaction on December 29, 1999 ($29.69 per
share), resulting in equity consideration of $20,782,000.
The Company has determined that the more appropriate valuation date is
the date of the announcement of the transaction rather than the closing date. As
a result, the equity consideration in the WFS transaction has been recalculated
based on the closing price of WFS common stock on August 4, 1999 ($2.19),
resulting in equity consideration of $8,593,000. The equity consideration in the
Mercury Coast transaction has been recalculated based on the closing price of
THCG common stock on December 8, 1999 ($18.25), resulting in equity
consideration of $12,732,000.
The effect of changing the values of these transactions is that Goodwill
and Other Intangible Assets on the Consolidated Balance Sheet as at December 31,
1999 has been reduced to $16,610,000 (net of amortization of $86,000), from
$29,266,000 (net of amortization of $254,000) and Stockholders' Equity has been
reduced to $32,109,000 from $44,765,000. Consequently, Amortization of Acquired
Intangibles on the Consolidated Statement of Operations for the six months ended
June 30, 2000 has also been reduced to $1,782,000 from $3,064,000. The result of
these changes has been that net loss for the six months ended June 30, 2000 has
been decreased to $2,306,000 from $3,588,000; Basic Loss Per Share has been
decreased to ($0.19) from ($0.29); and Diluted Loss Per Share has been decreased
to ($0.15) from ($0.23).
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<PAGE>
Additionally, amortization of Acquired Intangibles on the Consolidated
Statements of Operations for the three months ended June 30, 2000 is also
reduced to $891,000 from $1,532,000. The result of these changes is that net
loss for the three months ended June 30, 2000 is decreased to $5,268,000 from
$5,910,000; Basic and Diluted Loss Per Share is decreased to ($0.42) from
($0.47).
On April 11, 2000, THCG announced the acquisition of approximately $300
thousand of assets of certain businesses operated under the Giza Group ("Giza")
name in Israel. Zinook Ltd. ("Zinook") is the entity's new name. The transaction
closed on September 1, 2000 and is being accounted for using the purchase method
of accounting. The businesses acquired are the investment banking and equity
research operations of Giza. THCG issued 750,000 shares of common stock in
connection with the acquisition. Cash advanced by THCG to Giza to fund Giza's
current operations, which totaled $766 thousand for the three and the six months
ended June 30, 2000, are being expensed as advanced.
NOTE 2 - PARTNERSHIP, LIMITED LIABILITY COMPANY AND OTHER INTERESTS
THCG owns 100% of the general partner of Walnut Growth Partners, L.P.
("WGP"). The general partner owns 1% of WGP and manages WGP's assets, for which
services it is entitled to management fees and additional compensation in the
form of a carried interest equal to 20% of the profits of WGP after the limited
partner's capital is returned.
On February 11, 2000, webMethods, Inc. ("webMethods"), a company in the
WGP portfolio, issued stock to the public at $35.00 per share. The price of
webMethods' stock has been extremely volatile. The price of webMethods' stock
declined to as low as $44.50 per share on April 17, 2000. On June 30, 2000, the
stock price was $157.1875 per share and, on August 12, 2000, the stock price was
$97.75 per share.
Because WGP's position in webMethods was subject to a lock-up agreement
and market sentiment towards Internet companies had changed, THCG reduced the
value of its interest in and unrealized profit from the WGP portfolio in the
first quarter. As of March 31, 2000, THCG's interest in WGP was valued at $13.8
million, assuming a webMethods stock price of approximately $100. Continued
volatility in the price of webMethod's stock and the lock up agreement
restricted WGP's ability to sell its shares of webMethods and, therefore, no
change was made to the carrying value of WGP's position in THCG's financial
statements as of June 30, 2000.
Venture I increased the number of its investments during the three
months ended March 31, 2000. No new investments were made during the three
months ended June 30, 2000. As of June 30, 2000, THCG's interest in these
venture partner companies through Venture I and THCG Partners LLC aggregated
$1.7 million.
NOTE 3 - DISCONTINUED OPERATIONS
THCG's subsidiaries, Pacific Financial and Inland Financial, engaged in
the factoring business in the state of Washington. THCG completed a strategic
review in the first quarter and concluded that the factoring business was not
consistent with THCG's focus and corporate objectives. Accordingly, THCG is
winding down the operations of these two subsidiaries and has accounted for
these businesses as discontinued operations.
NOTE 4 - OWNERSHIP INTEREST IN COMPANY ACCOUNTED FOR ON THE EQUITY METHOD
On February 7, 2000, THCG exchanged $5.0 million of its common stock for
a 25% interest in Global Credit Services, Inc. ("Global Credit") and Venture I
simultaneously invested in Global Credit. THCG is accounting for its holdings in
Global Credit using the equity method.
THCG has preliminarily identified certain intangible assets totaling
approximately $5.1 million which are being amortized over a seven year period.
Amortization expense of $288 thousand is included in "Equity in losses of
company accounted for on the equity method" in the accompanying Consolidated
Statements of Operations.
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<PAGE>
NOTE 5 - SUBSEQUENT EVENTS
On April 11, 2000, THCG announced the acquisition of approximately $300
thousand of assets of certain businesses operated under Giza name in Israel.
Zinook is the entity's new name. The transaction closed on September 1, 2000 and
is being accounted for using the purchase method of accounting. The businesses
acquired are the investment banking and equity research operations of Giza. THCG
issued 750,000 shares of common stock in connection with the acquisition.
On August 2, 2000, THCG issued 5,000 shares of its Series A Convertible
Participating Preferred Stock (the "Preferred Stock") and a related Warrant (the
"Warrant") in a private placement to Castle Creek Technology Partners LLC
("Castle Creek"), a private investment fund focused primarily on the technology
sector. The gross proceeds of the offering were $5.0 million.
The Preferred Stock is convertible (subject to anti-dilution
protections) into THCG common stock, par value $0.01 per share (the "Common
Stock"), at a fixed conversion price of $5.039 per share at any time prior to
December 29, 2000. Thereafter, the conversion price will be the lower of $5.039
per share and 90% of the prevailing market price of the Common Stock, provided
that regardless of the market price for the Common Stock, a maximum of 2,529,568
shares of Common Stock are issuable upon conversion of the Preferred Stock. If
the market price of the Common Stock is greater than 200% of the then fixed
conversion price of the Preferred Stock for at least 10 consecutive days and if
certain other conditions are met, THCG may cause the Preferred Stock to be
automatically converted into Common Stock. Unless previously converted by the
holder, the Preferred Stock automatically converts into Common Stock on August
2, 2003, and is subject to optional redemption by THCG at any time subject to
the payment of premiums and the satisfaction of other conditions.
A premium is payable quarterly on the Preferred Stock on the last
business day of each calendar quarter in an amount equal to 10% per annum of the
stated value of the Preferred Stock ($5.0 million). The premium is payable in
cash until THCG's registration statement described below is declared effective
and thereafter, if the conditions described in the certificate of designations
are satisfied, the premium is payable, at THCG's election, in cash, in
additional shares of common stock (valued at a price per share equal to the
market price, as defined in the certificate of designations, of the common stock
on the date the premium is paid) or in additional shares of Preferred Stock
valued at its stated value.
The Warrant has a four-year term and entitles the holder to purchase up
to 396,899 shares of Common Stock at a fixed exercise price of $5.039 per share
throughout the term of the Warrant (subject to anti-dilution protections). If
the market price of the Common Stock is greater than 200% of the then fixed
exercise price of the Warrant for at least 10 consecutive days and if certain
other conditions are met, THCG may cause the Warrant to be automatically
exercised for Common Stock.
Pursuant to a registration rights agreement, THCG filed a registration
statement under the Securities Act of 1933, as amended, registering for resale
by the holders thereof the Common Stock underlying the Preferred Stock and the
Warrant within 20 business days of the closing and to use its best efforts to
cause the registration statement to become effective as soon as practicable. The
registration statement has not yet been declared effective. THCG may be required
to pay Castle Creek certain amounts as specified in the registration rights
agreement if the registration statement is not declared effective within 120
days of August 2, 2000 and is not maintained effective.
On September 30, 2000, THCG negotiated the termination of WGP. THCG owns
100% of the general partner of WGP. The general partner owned 1% of WGP and
managed WGP's assets, for which services it was entitled to management fees and
additional compensation in the form of a carried interest equal to 20% of the
profits of WGP after the limited partner's capital was returned.
As a result of the termination of WGP, THCG received 133,932 shares of
webMethods and WGP's positions in private companies. THCG is currently settling
the compensation due to a former employee. This compensation will approximate
10% of the positions received by THCG in the liquidation of WGP. On September
29, 2000, the price of webMethods stock was $115.125 per share.
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<PAGE>
On October 23, 2000, THCG announced a plan to repurchase up to 500,000
shares of its stock from time-to-time in open market transactions at prevailing
market prices. As of November 8, 2000, THCG had repurchased 52,100 shares at a
cost of approximately $102 thousand.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used in this Item 2, "we," "our" and "us" refer to THCG.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Specifically, all statements
other than statements of historical facts included in this Report, or
incorporated herein by reference, regarding our financial position, business
strategy and the plans and objectives of management for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of management, as well as assumptions made by and information currently
available to management. When used in this Report, including the information
incorporated by reference, the words "anticipate," "believe," "estimate,"
"expect," "may," "will," "continue," "intend" and "plan" and words or phrases of
similar import, as they relate to our financial position, business strategy and
plans, or objectives of management, are intended to identify forward-looking
statements. These cautionary statements reflect our current view regarding
future events and are subject to risks, uncertainties and assumptions related to
various factors which include but may not be limited to those listed under the
heading "Factors Affecting our Future Performance" and other cautionary
statements in our Annual Report on Form 10-K for our fiscal year ended December
31, 1999, filed with the SEC, which information is incorporated into this Report
by reference.
Although we believe that our expectations are reasonable, we cannot
assure you that our expectations will prove to be correct. 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 in this Report as anticipated, believed,
estimated, expected, intended or planned. All subsequent written and oral
forward-looking statements attributable to us (or to persons acting on our
behalf) are expressly qualified in their entirety by these cautionary
statements.
Overview
We are an active Internet and technology accelerator providing V3 global
enterprise enhancing services -- a seamless integration of venture development,
venture banking and venture funding services--both to companies in which we
acquire direct or indirect equity interests as well as to third parties to which
we provide services for fees. We are penetrating new markets by developing our
international operations and by expanding our global coverage of the Internet
and technology sectors. Our venture partner and venture portfolio companies
include advanced technology and service companies, established "brick and
mortar" companies implementing an Internet-based strategy and global
Internet-based businesses. By providing our venture partner companies with our
unique V3 services offerings, we believe that we help our venture partner
companies focus on their core strengths, so that they may accelerate their
development and bring their products and services to market more rapidly.
On November 1, 1999, Walnut Financial Services, Inc. ("Walnut Financial
Services") acquired Tower Hill Securities. However, for financial statement
purposes, Tower Hill Securities acquired Walnut Financial Services and is the
surviving entity. Tower Hill Securities is the successor to Hambro America
Securities, Inc., the former U.S. investment banking subsidiary of Hambros, plc,
a British merchant banking firm. In March 1998, the investment banking
operations of Hambros, plc were sold to Societe Generale, a French bank. On
April 1, 1998, Joseph D. Mark and Adi Raviv, the principal executives of Hambro
America Securities, Inc., acquired the company from Societe Generale.
As part of our new business strategy, on December 29, 1999, we acquired
Mercury Coast, Inc. ("Mercury Coast"), a corporation engaged in the business of
providing business acceleration services, including strategic planning,
operations and marketing consulting services, to Internet-based businesses. In
addition, we acquired Giza as described in Note 1 of the Notes to Consolidated
Financial Statements.
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<PAGE>
The financial statements contained in this Report reflect the operations
of THCG for the six months and the three months ended June 30, 2000 and the
operations of Tower Hill Securities for the six months and three months ended
June 30, 1999.
Six Months Ended June 30, 2000 as compared to the Six Months Ended June 30, 1999
Revenues
Revenues for the six months ended June 30, 2000 increased to $16.5
million from $2.0 million for the six months ended June 30, 1999. The increase
in revenues was primarily due to significant appreciation of our venture partner
and venture portfolio company securities and an increase in the number of
engagements and fee-based services of our venture banking and venture
development activities.
Venture service fees for the six months ended June 30, 2000 increased to
$3.3 million from $1.9 million for the six months ended June 30, 1999. The
increase in these fees was primarily due to an increase in the number of
engagements and the fees earned from providing our venture banking and venture
development activities.
Realized and unrealized gain (loss) in securities, net, and interest
income consist of the net increases (decreases) in the value of the venture
partner and venture portfolio company securities that we acquired or that we
received in exchange for services, as well as interest income. The gain in
securities, net, increased to $13.2 million for the six months ended June 30,
2000. The increase was due primarily to the $12.3 million increase in the value
of our wholly owned subsidiary that is the general partner of WGP (see Note 2 of
the Notes to Consolidated Financial Statements).
Expenses
Selling, general and administrative expenses for the six months ended
June 30, 2000 increased to $6.7 million from $1.5 million for the six months
ended June 30, 1999. The increase was primarily due to increases in the number
of employees, their compensation and related benefits, and professional fees.
Compensation and related benefits expense increased to $1.8 million for the six
months ended June 30, 2000 from $629 thousand for the six months ended June 30,
1999. Compensation expenses included bonuses to professionals related to the
improved results from our venture banking services, as well as additional
employees we hired to provide venture development and venture banking services
to our venture partner companies on a fee-for-service basis. Professional fees
for the six months ended June 30, 2000 increased to $1.6 million from $447
thousand for the six months ended June 30, 1999. The increase in professional
fees results from fees paid to legal and accounting professional services firms
for services in connection with the preparation and filing of documents with the
SEC and for professional fees related to our provision of venture funding
services, which services Tower Hill Securities did not provide during the six
months ended June 30, 1999. Consulting costs related to venture development
income were $630 thousand for the six months ended June 30, 2000. Tower Hill
Securities did not provide venture development services during the comparable
period in 1999. Foreign affiliated company expenses, which began in April 2000
and are related to the acquisition of Giza, amounted to $766 thousand for the
six months ended June 30, 2000 (see Note 1 of the Notes to Consolidated
Financial Statements).
Equity-based compensation expenses for the six months ended June 30,
2000 were $5.0 million. There were no equity-based compensation expenses for the
six months ended June 30, 1999. Equity-based compensation expenses consist of
non-cash charges related to the amortization of unearned compensation associated
with stock options granted at below fair market value and restricted stock
grants. Amortization is over the vesting periods of the stock options and
restricted stock, which vesting periods generally range from ninety days to five
years.
Amortization of acquired intangibles for the six months ended June 30,
2000 increased by $1.8 million (including the $288 thousand of amortization
associated with Global Credit --see Note 4 of the Notes to Consolidated
Financial Statements). The increase in amortization expenses is primarily
related to the amortization of goodwill from our merger with Walnut Financial
Services on November 1, 1999, the acquisition of Mercury Coast on December 29,
1999 and the acquisition of an interest in Global Credit on February 7, 2000.
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Our provision for income taxes from operating income for the six months
ended June 30, 2000 increased to $506 thousand from $170 thousand for the six
months ended June 30, 1999. This increase was primarily due to the increase in
operating income for the six month period ended June 30, 2000. Our deferred tax
benefit amounted to $1.0 million for the six months ended June 30, 2000. The
deferred tax benefit was the result of a loss from discontinued operations.
We decided to discontinue the accounts receivable factoring business in
the first quarter (see Note 3 of the Notes to Consolidated Financial
Statements). We incurred a loss in the six months ended June 30, 2000 from
discontinued operations of $5.3 million ($4.3 million after-tax).
Three Months Ended June 30, 2000 as compared to the Three Months Ended June 30,
1999
Revenues
Revenues for the three months ended June 30, 2000 increased to $2.2
million from $1.7 million for the three months ended June 30, 1999. The increase
in revenues was primarily due to an increase in the number of engagements and
fee-based services of our venture development and our venture banking activities
and a continued appreciation of our venture partner and venture portfolio
company securities.
Venture service fees for the three months ended June 30, 2000 increased
to $1.8 million from $1.7 million for the three months ended June 30, 1999. The
increase in these fees was primarily due to an increase in fees earned from
providing our venture development services, which services we did not provide in
the three months ended June 30, 1999.
Realized and unrealized gain (loss) in securities, net, and interest
income consist of the net increases (decreases) in the value of the venture
partner and venture portfolio company securities that we acquired or that we
received in exchange for services, as well as interest income. The gain in
securities, net, increased to $375 thousand for the three months ended June 30,
2000 from $16 thousand for the three months ended June 30, 1999. The increase
was due primarily to the increase in the value of our wholly owned broker-dealer
subsidiary, Tower Hill Securities.
Expenses
Selling, general and administrative expenses for the three months ended
June 30, 2000 increased to $3.7 million from $1.0 million for the three months
ended June 30, 1999. The increase was primarily due to increases in the number
of employees, their compensation and related benefits, and professional fees.
Compensation and related benefits expense increased to $949 thousand for the
three months ended June 30, 2000 from $323 thousand for the three months ended
June 30, 1999. Compensation expenses included additional employees we hired to
provide venture development and venture banking services to our venture partner
companies on a fee-for-service basis. Professional fees for the three months
ended June 30, 2000 decreased to $351 thousand from $427 thousand for the three
months ended June 30, 1999. The decrease in professional fees primarily related
to lower finders fees paid to third parties, partially offset by an increase in
the fees paid to legal and accounting professional services firms for services
in connection with the preparation and filing of documents with the SEC and for
professional fees related to our provision of venture funding services, which
services Tower Hill Securities did not provide during the three months ended
June 30, 1999. Consulting costs related to venture development income were $630
thousand for the three months ended June 30, 2000. Tower Hill Securities did not
provide venture development services during the comparable period in 1999.
Foreign affiliated company expenses, which began in April 2000 and are related
to the acquisition of Giza, amounted to $766 thousand for the three months ended
June 30, 1999 (see Note 1 of the Notes to Consolidated Financial Statements).
Equity-based compensation expenses for the three months ended June 30,
2000 were $2.9 million. There were no equity-based compensation expenses for the
three months ended June 30, 1999. Equity-based compensation expenses consist of
non-cash charges related to the amortization of unearned compensation associated
with stock options granted at below fair market value and restricted stock
grants. Amortization is over the vesting periods of the stock options and
restricted stock, which vesting periods generally range from ninety days to five
years.
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Amortization of acquired intangibles for the three months ended June 30,
2000 increased by $891 thousand (including $288 thousand of amortization
associated with Global Credit -- see Note 4 of the Notes to Consolidated
Financial Statements). The increase in amortization expenses is primarily
related to the amortization of goodwill from our merger with Walnut Financial
Services on November 1, 1999, the acquisition of Mercury Coast on December 29,
1999 and the acquisition of an interest in Global Credit on February 7, 2000.
Our deferred tax benefit for the three months ended June 30, 2000
amounted to $495 thousand compared to a provision for income taxes of $158
thousand for the three months ended June 30, 1999. This tax benefit was
primarily due to an operating loss in the three months ended June 30, 2000
compared to operating income in the three months ended June 30, 1999.
Liquidity and Capital Resources
Our business is capital intensive. In the future, we expect periodically
to raise funds to acquire equity interests in and establish new partner
companies, to support our operations and expand our venture development and
venture banking services, and to support the operations and growth of our
partner companies. Our future capital requirements will depend in large part on
the number of partner companies in which we acquire equity interests and which
we establish, the amounts of capital we provide to these companies and the
timing of these payments. Our plans and the related capital requirements will be
dependent on various factors, such as developments in our markets and the
availability of acquisition and entrepreneurial opportunities. If we are
successful in selling additional equity securities, our then existing
stockholders may suffer significant dilution. However, we may not be able to
obtain financing on acceptable terms, or at all, when we need it. If we require,
but are unable to obtain, additional financing in the future on acceptable
terms, or at all, we will not be able to continue our business strategy, respond
to changing business or economic conditions, withstand adverse operating results
or compete effectively, and our business, financial condition and operating
results may be materially and adversely affected as a result.
In February 2000, we called for the redemption of our outstanding Class
A Warrants (the "Warrants"), thereby causing the holders to exercise all of the
Warrants for $9 per share of common stock. This resulted in proceeds to us of
approximately $5.7 million. We issued 633,373 new shares of common stock upon
exercise of the Warrants. We filed a registration statement with the SEC
covering the resale of these shares for a period of 90 days. This period ended
on August 7, 2000, and on August 8, 2000, we filed a post-effective amendment
with the SEC to deregister any unsold shares of common stock.
On April 11, 2000, THCG announced the acquisition of approximately $300
thousand of assets of certain businesses operated by Giza. Zinook is the
entity's new name. This transaction closed on September 1, 2000 and is being
accounted for using the purchase method of accounting. Cash advanced by THCG to
Giza to fund Giza's current operations, which totaled $766 thousand for the six
months ended June 30, 2000, are being expensed as advanced. We expect that we
may fund any increase in the expenses for Giza's current operations.
On August 2, 2000, THCG issued 5,000 shares of series A preferred stock
and a related warrant in a private placement to Castle Creek. The gross proceeds
of the offering were $5.0 million (see Note 5 of the Notes to Consolidated
Financial Statements).
During the six months ended June 30, 2000, cash used in operating
activities was $4.5 million compared to $486 thousand provided in the six months
ended June 30, 1999.
Cash provided by investing activities was $1.5 million for the six
months ended June 30, 2000 compared to $147 thousand used in the six months
ended June 30, 1999. This consisted primarily of proceeds from the sale of
marketable securities. We intend to continue to sell marketable securities when
appropriate.
Cash provided by financing activities was $5.7 million for the six
months ended June 30, 2000 compared to $0 in the six months ended June 30, 1999.
This consisted primarily of proceeds from the exercise of the Warrants. We
intend to continue to raise capital to finance our strategy of building dominant
venture partner companies and investing in our operating business.
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Certain of our venture partner companies have the right to require that
we purchase additional equity interests in these companies in an aggregate
amount of cash approximating $350 thousand.
New Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 expresses the
views of the SEC staff in applying generally accepted accounting principles to
certain revenue recognition issues. In June 2000, the SEC issued SAB No. 101B to
defer the effective date of the implementation of SAB No. 101 until the fourth
quarter of fiscal 2000. Management is currently evaluating the impact of
adopting this SAB, but does not believe that this SAB will have a material
impact on its financial position or its results of operations.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibit replaces the previously filed Exhibit No. 27.1
in its entirety:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on
Form 10-Q/A to be signed on its behalf by the undersigned, thereunto duly
authorized.
THCG, INC.
By: /s/ Adi Raviv
-------------------------
Name: Adi Raviv
Title: Co-Chairman of the Board of Directors
and Chief Financial Officer
Date: November 14, 2000
<PAGE>
EXHIBIT LIST
Exhibit No. Description
27.1 Financial Data Schedule.
