SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 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
of Incorporation or Organization) Identification No.)
650 Madison Avenue, 21st Floor, New York, NY 10022
(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 August 14, 2000, there were 12,654,169 shares of the registrant's
Common Stock outstanding.
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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...........2
Consolidated Statements of Operations - for the six
months and the three months ended June 30, 2000
(unaudited) and June 30, 1999 (unaudited)........................3
Consolidated Statement of Changes in Stockholders'
Equity - for the six months ended June 30, 2000
(unaudited) .....................................................4
Consolidated Statements of Cash Flows - for the six
months ended June 30, 2000 (unaudited) and June 30, 1999
(unaudited)......................................................5
Notes to Consolidated Financial Statements (unaudited)...........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................13
Item 4. Submission of Matters to a Vote of Security Holders.............13
Item 6. Exhibits and Reports on Form 8-K................................14
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of THCG, Inc.
and its subsidiaries are presented on pages 2 through 6 hereof as set forth
below:
Consolidated Statements of Financial Condition - as of
June 30, 2000 (unaudited) and December 31, 1999............................. 2
Consolidated Statements of Operations - for the six months and the
three months ended June 30, 2000 (unaudited) and June 30, 1999 (unaudited).. 3
Consolidated Statement of Changes in Stockholders' Equity - for
the six months ended June 30, 2000 (unaudited) ............................. 4
Consolidated Statements of Cash Flows - for the six months
ended June 30, 2000 (unaudited) and June 30, 1999 (unaudited)............. 5
Notes to Consolidated Financial Statements (unaudited)...................... 6
1
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except per share data)
June 30, December 31,
2000 1999
(unaudited) (audited)
---------------- ----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $4,226 $1,592
Marketable and nonmarketable securities 6,203 7,863
Partnership, limited liability company and other interests (See Note 2) 15,673 2,053
Ownership interest in company accounted for on the equity method (See 4,533 ----
Note 4)
Fees and other receivables, net of allowance 2,257 352
Prepaid expenses and other assets 346 279
Loans receivable, related parties 375 312
Furniture, fixtures and equipment - at cost, less accumulated depreciation 200 104
Excess of cost over fair value of net assets acquired, net of
accumulated amortization 26,203 29,266
Assets of discontinued operations (See Note 3) ---- 6,537
---------------- -----------------
Total Assets $60,016 $48,358
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and others $2,207 $131
Liabilities of discontinued operations 889 2,967
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 93,690 81,601
Accumulated deficit (13,248) (9,660)
Unearned compensation (23,649) (27,294)
---------------- -----------------
Total Stockholders' Equity 56,920 44,765
---------------- -----------------
Total Liabilities and Stockholders' Equity $60,016 $48,358
================ =================
See Notes to Consolidated Financial Statements
</TABLE>
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Six Months Ended Three Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
------------- ------------- ------------- --------------
Revenues
<S> <C> <C> <C> <C>
Venture service fees $3,319 $1,938 $1,836 $1,672
Realized and unrealized gain (loss) in securities, net, and
interest income 13,187 16 375 16
------------- ------------- ------------- --------------
Total Revenues 16,506 1,954 2,211 1,688
Expenses
Selling, general and administrative 6,685 1,531 3,679 1,028
Equity-based compensation 5,000 ----- 2,913 -----
Amortization of acquired intangibles 3,064 ----- 1,532 -----
------------- ------------- ------------- --------------
Total Expenses 14,749 1,531 8,124 1,028
Income (loss) from continuing operations 1,757 423 (5,913) 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 1,251 253 (5,418) 502
Equity in losses of company accounted for on the equity
method (492) ---- (492) ----
------------- ------------- ------------- --------------
Net income (loss) before discontinued operations 759 253 (5,910) 502
Net (loss) from discontinued operations (4,347) ---- ---- ----
------------- ------------- ------------- --------------
Net income (loss) ($3,588) $253 ($5,910) $502
============= ============= ============= ==============
Basic Earnings Per Share
Basic income (loss) per share from continuing operations $0.06 $0.07 ($0.47) $0.13
Basic (loss) per share from discontinued operations (0.35) ----- ----- -----
------------- ------------- ------------- --------------
Basic income (loss) per share ($0.29) $0.07 ($0.47) $0.13
============= ============= ============= ==============
Diluted Earnings Per Share
Diluted income (loss) per share from continuing operations $0.05 $0.07 ($0.47) $0.13
Diluted (loss) per share from discontinued operations (0.28) ----- ----- -----
------------- ------------- ------------- --------------
Diluted income (loss) per share ($0.23) $0.07 ($0.47) $0.13
============= ============= ============= ==============
Basic weighted average common shares outstanding 12,368,839 3,723,000 12,635,592 3,723,000
============= ============= ============= ==============
Diluted weighted average common shares outstanding 15,387,539 3,723,000 12,635,592 3,723,000
============= ============= ============= ==============
See Notes to Consolidated Financial Statements
</TABLE>
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Common Stock Additional
Number of Paid-in Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 11,751,113 $118 $81,601 ($27,294) ($9,660) $44,765
Proceeds from exercise of warrants for
common stock 633,373 6 5,694 $5,700
Proceeds from exercise of options for
common stock 5,000 1 17 $18
Issuance of common stock in connection
with investment 262,183 2 5,023 $5,025
Unearned compensation for stock options
issued to employees 1,355 (1,355) $0
Amortization of unearned compensation 5,000 $5,000
Net income (loss) (3,588) ($3,588)
------------------------------------------------------------------------
Balance, June 30, 2000 (unaudited) 12,651,669 $127 $93,690 ($23,649) ($13,248) $56,920
========================================================================
See Notes to Consolidated Financial Statements
</TABLE>
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended
---------------------------------------
June 30, 2000 June 30, 1999
(unaudited) (unaudited)
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,588) $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) ---
Loss (gain) on sale of marketable securities (31) ---
Equity-based compensation 5,000 ---
Depreciation and amortization 47 11
Amortization of intangible assets 3,064 ---
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 and accrued expenses 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 - beginning of period 1,592 610
----------------- --------------
Cash and cash equivalents - end of period $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 ---
See Notes to Consolidated Financial Statements
</TABLE>
5
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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"), 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 most recent audited financial statements included in 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.
On April 11, 2000, THCG announced the acquisition of certain businesses
operated under the Giza Group ("Giza") name in Israel. This transaction is
expected to close by the end of the third quarter and will be accounted for
using the purchase method of accounting. The businesses acquired are the
investment banking and equity research operations of Giza. Upon the closing of
this transaction, THCG will issue 750,000 shares of common stock. The businesses
will be run as THCG Giza Israel. 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 in 20% of the profits of WGP after the partners'
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
has 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 webMethods stock and the
6
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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
Two of 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 of Global
Credit 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.
NOTE 5 - SUBSEQUENT EVENTS
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 or 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.
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 has agreed to file 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. 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 90 days (120 days if the SEC reviews the filing)
of August 2, 2000 and is not maintained effective.
7
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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, 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 intend to
acquire Giza as described in Note 1 of the Notes to Consolidated Financial
Statements.
8
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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 pending 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 $3.4 million (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.
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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 pending 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.
10
<PAGE>
Amortization of acquired intangibles for the three months ended June
30, 2000 increased by $1.8 million (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
venture partner companies, to support our operations and expand our venture
development and venture banking services, and to support the operation and
growth of our existing venture partner companies. Our future capital
requirements will depend in large part on the number of venture 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 changes in the capital markets and investor sentiment,
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 to execute our current
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 redemption 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 Giza. This transaction is expected to close by
the end of the third quarter and will be 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
its 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.
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.
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<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing THCG is the fluctuation in the market
value of the securities THCG acquires in its venture partner and venture
portfolio companies, and the securities THCG receives in payment of fees for its
venture development and venture banking services. The market prices for those
companies that are publicly held have been very volatile, experiencing wide
fluctuations. THCG's profitability may be materially and adversely affected by
period-to-period declines in the market values of its venture partner and
venture portfolio companies. Historically, THCG has not generally engaged in
hedging transactions to minimize this risk.
THCG is not subject to market risk associated with risk sensitive
instruments because THCG does not invest in instruments that are not United
States instruments and THCG does not enter into hedging transactions.
Historically, THCG has had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. For the quarter ended
June 30, 2000 and at present, THCG does not believe that its exposure to changes
in foreign currency exchange rates has increased. As THCG develops its
international operations and expands its global coverage of the Internet
industry, including through Giza, THCG's risk of foreign currency exchange rate
fluctuation may increase significantly. Therefore, in the future, THCG may
consider utilizing derivative instruments to mitigate these risks.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to the action brought against Tower Hill Securities Inc.
("Tower Hill") by Yoav Bitter, previously described in THCG's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, Mr. Bitter filed a motion
on April 13, 2000 seeking reargument or modification of the March 14, 2000
decision and order of the New York State Supreme Court Appellate Division, First
Department, that dismissed Mr. Bitter's appeal. In the alternative, the motion
sought permission to appeal to the New York State Court of Appeals. On May 25,
2000, the Appellate Division issued an order unanimously denying Mr. Bitter's
April 13, 2000 motion. On July 6, 2000, Mr. Bitter filed a motion with the Court
of Appeals requesting leave to appeal to that court. On July 20, 2000, Tower
Hill opposed that motion. The Court of Appeals has yet to issue a decision on
the motion.
In addition, on June 18, 1999, Tower Hill initiated an NASD arbitration
against Mr. Bitter for reimbursement of unauthorized expenses and return of
company property. Mr. Bitter filed a counterclaim against Tower Hill on
September 9, 1999, in which he denied liability for Tower Hill's claims and also
alleged that the company was liable to him for $158,000 for severance pay, an
unpaid bonus, and certain tuition expenses. On September 17, 1999, Tower Hill
filed an answer to the counterclaim, denying all the substantive allegations.
The NASD has appointed a three-person arbitration panel. The arbitrators held a
pre-hearing conference on July 20, 2000 and scheduled hearings on September 7,
2000 and October 23-24, 2000.
In litigation described in THCG's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, THCG, Inland Financial Corporation, a
wholly owned subsidiary of THCG ("Inland"), and the chief executive officer of
Inland were sued in the Superior Court of Washington for Spokane County in
November 1999 regarding participations sold by Inland in certain factoring
transactions initiated by Inland. On May 9, 2000, certain former employees of
Inland, including its chief executive officer, filed an involuntary bankruptcy
petition against Inland in the Bankruptcy Court for the Eastern District of
Washington. Inland, an inactive subsidiary, is contesting the petition and is
evaluating possible claims against the chief executive officer and other former
employees of Inland (see Note 3 of the Notes to Consolidated Financial
Statements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) THCG held its annual meeting of stockholders on May 15, 2000.
(b) The directors elected at the meeting were:
Broker
Votes For Votes Against Abstain Non-Votes
--------- ------------- ------- ---------
Joseph D. Mark 9,512,991 4 5,038 0
Evan M. Marks 9,330,593 182,402 5,038 0
Larry W. Smith 9,330,593 182,402 5,038 0
Stanley B. Stern 9,330,593 182,402 5,038 0
Other directors whose terms of office continued after the
meeting are as follows: Keith Abell, Gene E. Burleson, Burton W. Kanter, Joel S.
Kanter, Henry Klein and Adi Raviv.
13
<PAGE>
(c) Other matters voted upon at the meeting and the results of
those votes are as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstain Broker Non-Votes
--------- ------------- ------- ----------------
<S> <C> <C> <C> <C>
Approval of THCG 2000 Stock Incentive Plan 7,042,112 529,514 3,838 0
Approval of THCG 2000 Employee Stock Purchase Plan
7,113,262 458,230 3,972 0
Approval of THCG 2000 Non-Employee Director Stock
Option Plan 7,330,830 229,920 14,714 0
Approval of the reincorporation of THCG in
Delaware pursuant to the Agreement and Plan of
Merger, dated April 6, 2000, by and between
THCG and THCG, Inc., a Delaware corporation and
wholly-owned subsidiary of THCG 7,823,664 6,593 3,542 0
Ratification of the appointment of Arthur Andersen
LLP as independent auditors for the fiscal year
ending December 31, 2000 9,508,861 4,923 4,249 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated April 6,
2000, by and between THCG and THCG, Inc.
(incorporated by reference to Exhibit 2.1 of the
Current Report on Form 8-K filed with the SEC on
May 17, 2000).
3.1 Certificate of Incorporation of THCG
(incorporated by reference to Exhibit 3.1 of the
Current Report on Form 8-K filed with the SEC on
May 17, 2000).
3.2 By-laws of THCG (incorporated by reference to
Exhibit 3.2 of the Current Report on Form 8-K
filed with the SEC on May 17, 2000).
3.3 Certificate of Designations of THCG's Series A
Convertible Participating Preferred Stock
(incorporated by reference to Exhibit 10.2 of
the Current Report on Form 8-K filed with the
SEC on August 3, 2000).
10.1 Lease Agreement, dated April 13, 2000, between
THCG and 500-512 Seventh Avenue Limited
Partnership.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
THCG filed a Current Report on Form 8-K, dated April 6, 2000, with the
Securities and Exchange Commission (the "SEC") on April 6, 2000 to report its
replacement of Richard A. Eisner & Company, LLP as THCG's independent auditors
under Item 4 ("Changes in Registrant's Certifying Accountant") of said report.
THCG filed a Current Report on Form 8-K, dated May 16, 2000, with the
SEC on May 17, 2000 to report the reincorporation of THCG in Delaware pursuant
to the Agreement and Plan of Merger, dated April 6, 2000, by and between THCG
and THCG, Inc., a Delaware corporation and wholly-owned subsidiary of THCG,
under Item 5 ("Other Events") of said report.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
THCG, Inc.
By: /s/ Adi Raviv
---------------------------------------
Name: Adi Raviv
Title: Co-Chairman of the Board and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 14, 2000
<PAGE>
EXHIBIT LIST
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated April 6, 2000, by and
between THCG and THCG, Inc. (incorporated by reference to
Exhibit 2.1 of the Current Report on Form 8-K filed with the
SEC on May 17, 2000).
3.1 Certificate of Incorporation of THCG (incorporated by
reference to Exhibit 3.1 of the Current Report on Form 8-K
filed with the SEC on May 17, 2000).
3.2 By-laws of THCG (incorporated by reference to Exhibit 3.2 of
the Current Report on Form 8-K filed with the SEC on May 17,
2000).
3.3 Certificate of Designations of THCG's Series A Convertible
Participating Preferred Stock (incorporated by reference to
Exhibit 10.2 of the Current Report on Form 8-K filed with the
SEC on August 3, 2000).
10.1 Lease Agreement, dated April 13, 2000, between THCG and
500-512 Seventh Avenue Limited Partnership.
27.1 Financial Data Schedule.
