SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 1, 1999
----------
THCG, INC.
(Exact name of registrant as specified in its charter)
Utah 0-26072 87-0415597
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification No.)
650 Madison Avenue, 21st Floor, New York, NY 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 223-0440
Walnut Financial Services, Inc.,
8000 Towers Crescent Drive, Suite 1070,
Vienna, Virginia 22182
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Items 3, 4, 5, 6, 8 and 9 are not applicable and are omitted from this Current
Report. The information required by Items 1, 2 and 7(c) has be previously filed.
This amended report is filed to provide the financial information required by
Items 7(a) and 7(b).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial statements of Tower Hill Securities, Inc.
Statements of Financial Condition as of December 31, 1998 and
September 30, 1999 (unaudited)
Statements of Operations for the three and nine months ended
September 30, 1998 and September 30, 1999 (unaudited)
Statements of Changes in Stockholders' Equity for the nine months
ended September 30, 1999 (unaudited)
Statements of Cash Flows for the nine months ended September 30,
1998 and September 30, 1999 (unaudited)
Notes to Financial Statements
Independent Auditors' Report
Statement of Financial Condition as of December 31, 1998
Statement of Operations for the nine months ended December 31, 1998
Statement of Changes in Stockholders' Equity for the nine months
ended December 31, 1998
Statement of Cash Flows for the nine months ended December 31, 1998
Notes to Financial Statements
Computation of Net Capital as of December 31, 1998
Independent Auditors' Report
Statement of Financial Condition as of March 31, 1998
Statement of Operations for the year ended March 31, 1998
Statement of Changes in Stockholders' Equity for the year ended
March 31, 1998
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<PAGE>
Statement of Cash Flows for the year ended March 31, 1998
Notes to Financial Statements
Computation of Net Capital as of March 31, 1998
Independent Auditors' Report
Statement of Financial Condition as of March 31, 1997
Statement of Operations for the year ended March 31, 1997
Statement of Changes in Stockholder's Equity for the year ended
March 31, 1997
Statement of Cash Flows for the year ended March 31, 1997
Notes to Statement of Financial Condition
(b) Pro forma financial information of THCG, Inc.
Introduction to Unaudited Pro Forma Condensed Combined Financial
Information
Unaudited Pro Forma Condensed Combined Balance Sheet as of September
30, 1999
Unaudited Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1998
Unaudited Pro Forma Condensed Combined Statement of Operations for
the nine months ended September 30, 1999
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
-3-
<PAGE>
TOWER HILL SECURITIES, INC.
Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 507,000 $ 610,000
Fees and other receivables, net of allowance 85,000 525,000
Prepaid expenses 44,000 38,000
Loan receivable, related party (note 4) 45,000 78,000
Loan receivable, stockholders (note 5) 221,000 216,000
Investments 190,000 0
Furniture and equipment, at cost, less accumulated
depreciation 78,000 70,000
Organizational costs, less accumulated amortization 9,000 11,000
------------ ------------
Total assets $ 1,179,000 $ 1,548,000
============ ============
Liabilities:
Accounts payable and accrued expenses $ 94,000 $ 222,000
Due to related party 20,000 10,000
Deferred revenues 0 23,000
Income taxes payable (note 6) 0 35,000
------------ ------------
Total liabilities 114,000 290,000
------------ ------------
Stockholders' equity (note 7)
Cumulative preferred stock - variable rate, $1.00 par
value, shares authorized 3,000,000 issued and
outstanding 1,000,000 1,000,000 1,000,000
Additional paid-in capital 11,261,000 11,327,000
Subscriptions receivable 0 (66,000)
Accumulated deficit (11,196,000) (11,003,000)
------------ ------------
Total stockholders' equity 1,065,000 1,258,000
------------ ------------
Total liabilities and stockholders' equity $ 1,179,000 $ 1,548,000
============ ============
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE>
TOWER HILL SECURITIES, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenue: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Advisory and corporate finance fees $ 2,345,000 $ 1,227,000 $ 354,000 $ 115,000
Interest 26,000 14,000 10,000 10,000
----------- ----------- ----------- -----------
Total Revenue 2,371,000 1,241,000 364,000 125,000
Expenses:
Compensation and benefits 933,000 933,000 304,000 169,000
Occupancy and equipment rental 284,000 95,000 118,000 50,000
General and administrative 315,000 182,000 137,000 104,000
Bad debt expenses 165,000 0 75,000 0
Travel & entertainment 84,000 63,000 40,000 50,000
Finders fees 17,000 75,000 0 75,000
Professional fees 735,000 170,000 288,000 50,000
Depreciation and amortization 16,000 9,000 5,000 5,000
----------- ----------- ----------- -----------
Loss before income taxes (178,000) (286,000) (603,000) (378,000)
Income taxes 15,000 0 0 0
----------- ----------- ----------- -----------
Net loss $ (193,000) $ (286,000) $ (603,000) $ (378,000)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
-5-
<PAGE>
TOWER HILL SECURITIES, INC.
Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Additional Subscriptions Accumulated
Amount Paid-in Capital Receivable Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, $ 1,000,000(1) $ 11,327,000 $ (66,000) $(11,003,000) $ 1,258,000
1998
Capital contribution
by stockholders -- (66,000) 66,000 -- --
Net loss for the nine
months ended -- -- -- (193,000) (193,000)
September 30, 1999
============ ============ ============ ============ ============
Balance, September
30, 1999 $ 1,000,000 $ 11,261,000 $ -- $(11,196,000) $ 1,065,000
============ ============ ============ ============ ============
</TABLE>
- ----------
(1) Cumulative Preferred Stock - variable rate, $1.00 par, 3,000,000 shares
authorized, 1,000,000 shares issued and outstanding.
See accompanying notes to financial statements
-6-
<PAGE>
TOWER HILL SECURITIES, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months ended
September 30,
1999 1998
---- ----
Cash flows from operating activities: (unaudited)
-----------
<S> <C> <C>
Net loss $(193,000) $(286,000)
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Depreciation and amortization 16,000 9,000
Changes in assets and liabilities:
Fees and other receivables 439,000 (296,000)
Prepaid expenses (6,000) 0
Accounts payable and accrued expenses (128,000) 63,000
Due to related party 10,000 0
Deferred Revenue (23,000) 0
Income taxes payable (35,000) 0
--------- ---------
Net cash provided by/(used) in operating
activities 80,000 (510,000)
--------- ---------
Cash flows from investing activities:
Purchase of furniture and equipment (21,000) 0
Purchase of portfolio securities (190,000) 0
Increase in organizational costs 0 (13,000)
Net increase in loan to related party 33,000 (73,000)
Net increase in loans to stockholders (5,000) 0
--------- ---------
Net cash used in investing activities (183,000) (86,000)
--------- ---------
Cash flows from financing activities:
Capital contribution by Hambro America, Inc. 0 905,000
--------- ---------
Net cash provided by financing activities 0 905,000
--------- ---------
Net increase (decrease) in cash and cash equivalents (103,000) 309,000
Cash and cash equivalents, beginning of period 610,000 272,000
--------- ---------
Cash and cash equivalents, end of period $ 507,000 $ 581,000
========= =========
</TABLE>
See accompanying notes to financial statements
-7-
<PAGE>
TOWER HILL SECURITIES, INC.
Notes to Financial Statements
September 30, 1999
(Unaudited)
1. Organization
Effective January 20, 1999, Hambro America Securities, Inc. changed its
name to Tower Hill Securities, Inc. (the "Company").
The Company is a registered broker/dealer under the Securities Exchange
Act of 1934 and is a member of the National Association of Securities Dealers,
Inc. The Company is engaged in the private placement of corporate debt and
equity securities with accredited investors as defined by SEC Rule 501 of
Regulation D. In addition, the Company provides general financial advisory
services to corporations.
The Company does not hold customer funds or safekeep customer
securities pursuant to SEC Rule 15c3-3(k)(2)(i).
In April 1998, a group of investors purchased 99% of all of the issued
and outstanding equity securities of the Company for $74,250. In May 1998, the
same group purchased remaining 1% for $750. In connection with this acquisition,
Hambro America, Inc. contributed capital of $904,775 in April 1998.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents. The Company classifies cash held in a money
market account as a cash equivalent.
Depreciation. Depreciation is provided on furniture and equipment on
the straight-line method over the estimated useful lives of the assets.
Revenue Recognition. Advisory fee income is recognized as earned,
taking into consideration the terms of contractual arrangements and the period
in which services are rendered. Deferred revenue is recorded for fees which are
unearned. Corporate finance fees are generally recognized upon closing of the
transaction.
401(k) Profit Sharing Plan. The Company through a related entity
maintains a 401(k) profit sharing plan for all eligible employees. Employees can
defer up to 15% of their compensation subject to certain limitations. The
Company may make discretionary matching contributions to the plan. For the nine
months ended September 30, 1999, the Company made matching contributions of
approximately $8,000.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
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<PAGE>
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
Income Taxes. The Company accounts for the income taxes using the
assets and liability method. Deferred income taxes arise from the differences
between the financial reporting and income tax bases of assets and liabilities
based upon statutory tax rates enacted for the future periods. A valuation
allowance is recorded for deferred tax assets whose realization is more likely
than not.
3. Net Capital Requirement
The Company is subject to the SEC's Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum regulatory net capital and a
specified ratio of aggregate indebtedness to net capital, both as defined, which
shall not exceed 15 to 1. At September 30, 1999, the Company had regulatory net
capital and regulatory net capital requirements of $382,741 and $5,000,
respectively. The Company's aggregate indebtedness to net capital ratio was 0.30
to 1.
4. Transactions with Related Parties
In October 1998, the Company loaned $95,000 to a related party. This
loan is non-interest-bearing and is being repaid over 22 months at $4,318 per
month. As of September 30, 1999 the loan to related party balance is $44,896.
In addition, the Company leases its office space from a related party
under a month-to-month arrangement. Rent expense for the nine months ended
September 30, 1999 amounted to approximately $188,000.
5. Loans Receivable, Stockholders
As of September 30, 1999, the Company has loaned $221,000 to its
stockholders. These loans are non-interest-bearing and have no specified
maturity date.
6. Deferred Income Taxes
The Company has a deferred tax asset of approximately $148,000 at
December 31, 1998, resulting from the availability of the net operating loss
carry forwards and a temporary difference arising from allowance for doubtful
accounts. This deferred tax assets is offset by a valuation allowance in the
same amount.
As of December 31, 1998, the Company had approximately $326,000 of the
net operating loss carry forwards which expire in the year 2014. Such net
operating loss carry forwards are subject to limitation of $25,788 per year
because of an ownership change in 1998.
-9-
<PAGE>
7. Cumulative Preferred Stock--Variable Rate
The Company, at its option, may redeem the outstanding shares at $1 per
share. The Company has had no obligation to declare and pay any dividends.
8. Year 2000 Issue
Like other companies, the Company could be adversely affected if the
computer systems we, our suppliers or customers use do not properly process and
calculate date-related information and data from the period surrounding and
including January 1, 2000. This is commonly known as the "Year 2000" issue.
Additionally, This issue could impact non-computer systems and devices such as
production equipment, elevators, etc. At this time, because of the complexities
involved in the issue management cannot provide assurance that the Year 2000
issue will not have an impact on the Company's operations.
-10-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tower Hill Securities, Inc.
New York, New York
We have audited the accompanying statement of financial condition of
Hambro America Securities, Inc. as of December 31, 1998, and the related
statements of operations, changes in stockholder's equity, and cash flows for
the nine months then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hambro America
Securities, Inc. as of December 31, 1998, and the results of its operations and
its cash flows for the nine months then ended in conformity with generally
accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The information contained in the
supplemental material listed in the accompanying index is presented for purposes
of additional analysis and is not required for the fair presentation of the
financial statements, but is supplementary information required by Rule 17a-5 of
the Securities and Exchange Commission. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Cohen & Schaeffer, P.C.
New York, New York
January 26, 1999
-11-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Financial Condition
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Assets:
Cash and cash equivalents ..................................... $ 610,499
Fees and other receivable, net of allowance for doubtful
accounts of $63,000 ........................................ 524,749
Prepaid expenses .............................................. 37,980
Loan receivable, related party (note 4) ....................... 77,728
Loans receivable, stockholders (note 5) ....................... 216,049
Furniture and equipment, at cost, less accumulated depreciation
of $117,845 ................................................ 69,633
Organizational costs, less accumulated amortization of $1,760 . 11,435
------------
$ 1,548,073
Liabilities and stockholders' equity:
Accounts payable and accrued expenses ......................... $ 222,111
Due to related party .......................................... 10,000
Deferred revenues ............................................. 22,917
Income taxes payable (note 6) ................................. 35,389
------------
Total liabilities .......................................... 290,417
------------
Stockholders' equity (note 7):
Cumulative preferred stock--variable rate, $1.00 par value,
shares authorized 3,000,000 issued and outstanding 1,000,000 1,000,000
Additional paid-in capital .................................... 11,327,443
Subscriptions receivable ...................................... (66,825)
Accumulated deficit ........................................... (11,002,962)
------------
1,257,656
------------
$ 1,548,073
============
</TABLE>
See accompanying notes to financial statements
-12-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Operations
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
-----------------
<S> <C>
Revenues:
Advisory and corporate finance fees ......................... $2,105,059
Interest .................................................... 20,459
----------
Total revenues .......................................... 2,125,518
Expenses:
Compensation and benefits ................................... 1,258,145
Occupancy and equipment rental .............................. 211,936
General and administrative .................................. 310,196
Finders fees ................................................ 172,000
Professional fees ........................................... 122,182
Depreciation and amortization ............................... 15,440
Total expenses .......................................... 2,089,899
----------
Income before provision for income taxes (note 6) ........ 35,619
Provision for income taxes ..................................... 35,389
----------
Net income ............................................... $ 230
==========
</TABLE>
See accompanying notes to financial statements
-13-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Changes in Stockholders' Equity
Nine Months Ended December 31, 1998
<TABLE>
<CAPTION>
Cumulative Preferred
Stock - Variable Rate
---------------------
Number of Additional Subscriptions Accumulated
Shares Amount Paid-In Capital Receivable Deficit Total
------ ------ --------------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 ... 1,000,000 $ 1,000,000 $ 10,348,418 $ -- $(11,003,192) $ 345,226
Capital Contribution by
Hambro America, Inc. ... -- -- 904,775 -- -- 904,775
Capital Contribution by
stockholders ........... -- -- 74,250 (66,825) -- 7,425
Net Income ................. -- -- -- -- 230 230
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 . 1,000,000 $ 1,000,000 $ 11,327,443 $ (66,825) $(11,002,962) $ 1,257,656
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
-14-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
-----------------
<S> <C>
Cash flows from operating activities:
Net income ............................................... $ 230
Adjustments to reconcile net income to net cash
(used) in operating activities:
Depreciation and amortization .......................... 15,440
Provision for doubtful accounts ........................ 63,000
Changes in assets and liabilities:
Fees and other receivables .......................... (553,486)
Prepaid expenses .................................... (12,944)
Accounts payable and accrued expenses ............... 170,588
Due to related party ................................ 10,000
Deferred Revenues ................................... 22,917
Income taxes payable ................................ 35,389
---------
Net cash (used) in operating activities ................ (248,866)
---------
Cash flows from investing activities:
Purchase of furniture and equipment ......................... (17,546)
Increase in organizational costs ............................ (13,195)
Net increase in loan to related party ....................... (77,728)
Net increase in loans to stockholders .................. (216,049)
---------
Net cash used in investing activities ....................... (324,518)
---------
Cash flows from financing activities:
Capital contribution by Hambro America, Inc. ................ 904,775
Capital contribution by stockholders: ....................... 7,425
---------
Net cash provided by financing activities .............. 912,200
---------
Net increase in cash and cash equivalents .............. 338,816
Cash and cash equivalents, beginning of period ................. 271,683
---------
Cash and cash equivalents, end of period ....................... $ 610,499
=========
</TABLE>
See accompanying notes to financial statements
-15-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Notes to Financial Statements
December 31, 1998
1. Organization
Effective January 20, 1999, the Hambro America Securities, Inc. changed
its name to Tower Hill Securities, Inc. (the "Company").
The Company is a registered broker/dealer under the Securities Exchange
Act of 1934 and is a member of the National Association of Securities Dealers,
Inc. The Company is engaged in the private placement of corporate debt and
equity securities with accredited investors as defined by SEC Rule 501 of
Regulation D. In addition, the Company provides general financial advisory
services to corporations.
The Company does not hold customer funds or safekeep customer
securities pursuant to SEC Rule 15c3-3(k)(2)(i).
In April 1998, a group of investors purchased 99% of all of the issued
and outstanding equity securities of the Company for $74,250. In May 1998, the
same group purchased the remaining 1% for $750. In connection with this
acquisition, Hambro America, Inc. contributed capital of $904,775 in April 1998.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents. The Company classifies cash held in a money
market account as a cash equivalent.
Depreciation. Depreciation is provided on furniture and equipment on
the straight-line method over the estimated useful lives of the assets.
Revenue Recognition. Advisory fee income is recognized as earned,
taking into consideration the terms of contractual arrangements and the period
in which services are rendered. Deferred revenue is recorded for fees which are
unearned. Corporate finance fees are generally recognized upon closing of the
transaction.
401(k) Profit Sharing Plan. The Company through a related entity
maintains a 401(k) profit sharing plan for all eligible employees. Employees can
defer up to 15% of their compensation subject to certain limitations. The
Company may make discretionary matching contributions to the plan. For the nine
months ended December 31, 1998, the Company made matching contributions of
approximately $8,000.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
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<PAGE>
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. Deferred income taxes arise from the differences between the
financial reporting and income tax bases of assets and liabilities based upon
statutory tax rates enacted for future periods. A valuation allowance is
recorded for deferred tax assets whose realization is more likely than not.
3. Net Capital Requirement
The Company is subject to the SEC's Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum regulatory net capital and a
specified ratio of aggregate indebtedness to net capital, both as defined, which
shall not exceed 15 to 1. At December 31, 1998, the Company had regulatory net
capital and a regulatory net capital requirement of $320,082 and $5,000,
respectively. The Company's aggregate indebtedness to net capital ratio was 0.91
to 1.
4. Transactions with Related Parties
In October 1998, the Company loaned $95,000 to a related party. This
loan is noninterest-bearing and is being repaid over 22 months at $4,318 per
month. As of December 31, 1998, the loan to related party balance is $77,728.
In addition, the Company leases its office space from a related party
under a month-to-month arrangement. Rent expense for the nine months ended
December 31, 1998 amounted to approximately $180,000.
5. Loans Receivable, Stockholders
During the nine months ended December 31, 1998, the Company loaned
$216,049 to its stockholders. These loans are noninterest-bearing and have no
specified maturity date.
6. Deferred Income Taxes
The Company has a deferred tax asset of approximately $148,000
resulting from the availability of net operating loss carryforwards and a
temporary difference arising from allowance for doubtful accounts. This deferred
tax assets is offset by a valuation allowance in the same amount.
At December 31, 1998, the Company has approximately $326,000 of net
operating loss carryforwards which expire in the year 2014. Such net operating
loss carryforwards are subject to a limitation of $25,788 per year because of an
ownership change in 1998.
7. Cumulative Preferred Stock--Variable Rate
The Company, at its option, may redeem the outstanding shares at $1 per
share. The Company has had no obligation to declare and pay any dividends.
8. Year 2000 Issue (Unaudited)
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<PAGE>
Like other companies, the Company could be adversely affected if the
computer systems we, our suppliers or customers use do not properly process and
calculate date-related information and data from the period surrounding and
including January 1, 2000. This is commonly known as the "Year 2000" issue.
Additionally, this issue could impact noncomputer systems and devices such as
production equipment, elevators, etc. At this time, because of the complexities
involved in the issue, management cannot provide assurances that the Year 2000
issue will not have an impact on the Company's operations.
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<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Computation of Net Capital Pursuant to Rule 15c3-1
and Statement Pursuant to Rule 17a-5(d)(4)
<TABLE>
<CAPTION>
December 31, 1998
<S> <C> <C>
Computation of net capital pursuant to Rule 15c3-1:
Net capital:
Total stockholder's equity from statement
of financial condition ....................... $1,257,656
Less nonallowable assets:
Fees and other receivables ................... $ 524,749
Prepaid expenses ............................. 37,980
Loan receivable, related party ............... 77,728
Loans receivable, stockholders ............... 216,049
Organizational costs--net .................... 11,435
Furniture and equipment--net ................. 69,633 937,574
---------- ----------
Net capital ............................... $ 320,082
----------
Computation of basic net capital requirement:
Minimum net capital required, 6 2/3% of $290,417
pursuant to Rule 15c3-1 ........................ $ 19,361
----------
Minimum dollar net capital requirement of
broker and dealer .............................. $ 5,000
----------
Net capital requirement ........................... $ 5,000
----------
Excess net capital ................................ $ 300,721
----------
Computation of aggregate indebtedness:
Accounts payable and accrued expenses ............. 222,111
Due to related party .............................. 10,000
Deferred revenues ................................. 22,917
Income taxes payable .............................. 35,389
----------
Total aggregate indebtedness liabilities ....... $ 290,417
==========
Ratio of aggregate indebtedness to net capital ....... 0.91 to 1
</TABLE>
Statement pursuant to Rule 17a-5(d)(4)
No material differences between the above computation and computation
included in the Company's corresponding unaudited amended Form X-17a-5 Part IIA
filing.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hambro America Securities, Inc.
New York, New York
We have audited the accompanying statement of financial condition of
Hambro America Securities, Inc. as of March 31, 1998, and the related statements
of operations, changes in stockholder's equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hambro America
Securities, Inc. as of March 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The information contained in the
supplemental material listed in the accompanying index is presented for purposes
of additional analysis and is not required for the fair presentation of the
financial statements, but is supplementary information required by Rule 17a-5 of
the Securities and Exchange Commission. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Cohen & Schaeffer, P.C.
New York, New York
May 20, 1998
-20-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Financial Condition
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Assets:
Cash ............................................................ $ 271,683
Fees receivable ................................................. 34,263
Prepaid expenses ................................................ 25,036
Furniture and equipment, at cost, less accumulated
depreciation of $104,165 ..................................... 65,767
------------
$ 396,749
============
Liabilities and stockholders' equity:
Liabilities:
Accrued expenses and other liabilities ....................... $ 51,523
------------
Stockholders' equity:
Cumulative preferred stock--variable rate, $1.00 par value,
shares authorized 3,000,000 issued and outstanding 1,000,000 1,000,000
Additional paid-in capital ................................... 10,348,418
Accumulated deficit .......................................... (11,003,192)
------------
345,226
------------
$ 396,749
============
</TABLE>
See accompanying notes to financial statements
-21-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
March 31, 1998
--------------
<S> <C>
Revenue:
Advisory and corporate finance fees .................... $ 210,461
Interest ............................................... 18,454
-----------
Total revenues .................................... 228,915
Expenses
Employee compensation and benefits ..................... 823,393
Occupancy .............................................. 110,912
General and administrative ............................. 381,188
Interest ............................................... 137,293
Depreciation ........................................... 12,893
Other .................................................. 87,966
-----------
Total expenses .................................... 1,553,645
-----------
Net loss .......................................... $(1,324,730)
===========
</TABLE>
See accompanying notes to financial statements
-22-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Changes in Stockholders' Equity
Year Ended March 31, 1998
<TABLE>
<CAPTION>
Cumulative Preferred
Stock-Variable Rate
-------------------
Number Additional Accumulated
of Shares Amount Paid-in Deficit Total
--------- ------ ------- ------- -----
Capital
-------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997 2,391,294 $ 2,391,294 $ 904,000 $ (3,068,255) $ 227,039
Merger of Hambro America -- -- 6,706,635 (6,610,207) 96,428
Securities, Inc.
Reclass of preferred stock to (2,391,294) (2,391,294) 2,391,294 -- --
additional paid-in capital
Conversion of debt to equity -- -- 346,489 -- 346,489
Issuance of preferred stock 1,000,000 1,000,000 -- -- 1,000,000
Net loss -- -- -- (1,324,730) (1,324,730)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1998 1,000,000 $ 1,000,000 $ 10,348,418 $(11,003,192) $ 345,226
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
-23-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended
March 31, 1998
--------------
<S> <C>
Cash flows from operating activities:
Net loss .......................................................... $(1,324,730)
Adjustments to reconcile net loss to net cash (used)
in operating activities:
Depreciation ................................................... 12,983
Realized loss on securities owned .............................. 10,000
Changes in assets and liabilities, net of effects of the merger:
Due from broker ............................................. 48,408
Fees and other receivable ................................... 10,319
Prepaid expenses ............................................ (8,740)
Other assets ................................................ 52,530
Accrued expenses and other liabilities ...................... (203,169)
-----------
Net cash (used) in operating activities ................... (1,402,399)
-----------
Cash flows from investing activities
Purchase of furniture and equipment ............................... (5,711)
-----------
Cash flows from financing activities
Issuance of preferred stock ....................................... 1,000,000
Loans from Parent ................................................. 469,228
-----------
Net cash provided by financing activities ................. 1,469,228
-----------
Net increase in cash ...................................... 61,118
Cash, beginning of year .............................................. 210,565
-----------
Cash, end of year .................................................... $ 271,683
-----------
Supplemental disclosure of cash flow information
Cash paid during the year for interest............................. $ 137,293
-----------
Supplemental schedule of non-cash financing activities
During the year ended March 31, 1998, the Company converted $346,489 of
debt with its Parent to equity.
</TABLE>
See accompanying notes to financial statements
-24-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Notes to Financial Statements
March 31, 1998
1. Organization
Hambro America Securities, Inc. (the "Company") is a registered
broker/dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. The Company is engaged in the
private placement of corporate debt and equity securities with accredited
investors as defined by SEC Rule 501 of Regulation D. In addition, the Company
provides general financial advisory services to corporations.
The Company does not hold customer funds or safekeep customer
securities pursuant to SEC Rule 15c3-3(k)(2)(i).
In May 1997, Hambro America Securities, Inc. was merged into Hambro
Resource Development, Inc. ("HRDI") and simultaneously HRDI changed its name to
Hambro America Securities, Inc.
The Company is a wholly-owned subsidiary of Hambro America,
Incorporated (the "Parent"), which was owned by Hambros PLC, a London based
merchant bank. In March 1998 Hambros PLC was acquired by Societe Generale, a
French bank.
In April 1998, a group of investors purchased 99% of all of the issued
and outstanding equity securities of the Company for $74,250. In May 1998, the
same group purchased the remaining 1% for $750. In connection with this
acquisition, Hambro America Incorporated contributed capital of $904,775 in
April 1998.
2. Summary of Significant Accounting Policies
Revenue Recognition. Advisory fee income is recognized as earned,
taking into consideration the terms of contractual arrangements and the period
in which services are rendered. Corporate finance fees are generally recognized
upon closing of the transaction.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. Deferred income taxes arise from the differences between the
financial reporting and income tax bases of assets and liabilities based upon
statutory tax rates enacted for future periods. There are no significant
differences between the Company's financial statement and taxable income.
-25-
<PAGE>
The Company files a consolidated Federal return and a combined New York
State and New York City return with the Parent. For financial statement
purposes, the Company's provision for Federal, state and local taxes has been
computed on a stand-alone basis.
3. Net Capital Requirement
The Company is subject to the SEC Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum net capital and a specified
ratio of aggregate indebtedness to net capital, both as defined, which shall not
exceed 15 to 1. At March 31, 1998, the Company had regulatory net capital and a
regulatory net capital requirement of $220,160 and $5,000, respectively. The
Company's aggregate indebtedness to net capital ratio was 0.23 to 1.
4. Transactions with Related Parties
a. Balances at March 31, 1998 and income and expenses for the year
ended March 31, 1998 with related parties are as follows:
Statement of Operations
Interest expense paid to the Parent................................. $137,293
b. The Parent provided the Company with a working capital credit line
of $1,500,000. Outstanding borrowings under this arrangement bear interest at
the London Interbank Offered Rate plus one point. At March 31, 1998, there were
no borrowings under this arrangement.
c. The Company received administrative support from and utilized assets
owned by the Parent and other affiliates pursuant to agreements that did not
provide for intercompany charges.
5. Cumulative Preferred Stock--Variable Rate
In order to maintain sufficient levels of regulatory net capital, the
Company has periodically issued variable rate cumulative preferred stock to the
Parent at $1 per share. The Company, at its option, may redeem the outstanding
shares at $1 per share. The Company has had no obligation to declare and pay any
dividends.
-26-
<PAGE>
HAMBRO AMERICA SECURITIES, INC.
Computation of Net Capital Pursuant to Rule 15c3-1
and Statement Pursuant to Rule 17a-5(d)(4)
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C> <C>
Computation of net capital pursuant to Rule 15c3-1
Net capital
Total stockholder's equity from statement
of financial condition .............................. $345,226
Less nonallowable assets
Fees receivable ..................................... $ 34,263
Prepaid expenses .................................... 25,036
Furniture and equipment--net ........................ 65,767 125,066
-------- --------
Net capital ......................................... $220,160
--------
Computation of basic net capital requirement
Minimum net capital required, 6 2/3% of $51,523 pursuant
to Rule 15c3-1 ......................................... $ 3,435
--------
Minimum dollar net capital requirement of broker and dealer $ 5,000
--------
Net capital requirement ................................... $ 5,000
--------
Excess net capital ........................................ $215,160
========
Computation of aggregate indebtedness
Accrued expenses and other liabilities .................... $ 51,523
--------
Total aggregate indebtedness liabilities ............ $ 51,523
========
Ratio of aggregate indebtedness to net capital ............... 0.23 to 1
</TABLE>
Statement Pursuant to Rule 17a-5(d)(4)
No material differences between the above computation and computation
included in the Company's corresponding unaudited amended Form X-17a-5 Part IIA
filing.
-27-
<PAGE>
[LETTERHEAD OF BDO SELDMAN, LLP]
Independent Auditors' Report
The Board of Directors
Hambro Resource Development, Inc.
New York, New York
We have audited the accompanying statement of financial condition of Hambro
Resource Development, Inc. as of March 31, 1997, and the related statements of
operations, changes in stockholder's equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hambro Resource Development,
Inc. as of March 31, 1997, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The information contained in the supplemental
material listed in the accompanying index is presented for purposes of
additional analysis and is not required for the fair presentation of the
financial statements, but is supplementary information required by Rule 17a-5 of
the Securities and Exchange Commission. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/ BDO Seldman, LLP
April 25, 1997
-28-
<PAGE>
Hambro Resource Development, Inc.
Statement of Financial Condition
<TABLE>
<CAPTION>
==============================================================================================
March 31, 1997
- ----------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and cash equivalents $ 210,565
Due from brokers 48,408
Securities owned, not readily marketable - at fair value (cost $719,096) 10,000
Other assets 52,530
- ----------------------------------------------------------------------------------------------
$ 321,503
==============================================================================================
Liabilities and Stockholder's Equity
Liabilities:
Accrued expenses and other liabilities $ 94,464
- ----------------------------------------------------------------------------------------------
Commitments (Notes 3 and 7) Stockholder's equity (Note 6):
Cumulative preferred stock - variable rate, $1.00 par value, shares 2,391,294
authorized 3,000,000, issued and outstanding 2,391,294
Additional paid-in capital 904,000
Accumulated deficit (3,068,255)
- ----------------------------------------------------------------------------------------------
Total stockholder's equity 227,039
- ----------------------------------------------------------------------------------------------
$ 321,503
==============================================================================================
See accompanying notes to financial statements.
</TABLE>
-29-
<PAGE>
Hambro Resource Development, Inc.
Statement of Operations
<TABLE>
<CAPTION>
===================================================================================
Year ended March 31, 1997
- -----------------------------------------------------------------------------------
<S> <C>
Revenues:
Remarketing fees $ 245,135
Corporate finance fees 75,522
Interest and other income 31,087
Loss on securities owned, not readily marketable (154,679)
- -----------------------------------------------------------------------------------
Total revenues 197,065
- -----------------------------------------------------------------------------------
Expenses:
Employee compensation and benefits 233,182
Occupancy and equipment rental (Note 7) 192,728
Clearance and other brokerage expenses 68,347
Professional fees 44,534
Communications 12,338
Interest 9,170
Dues and subscriptions 7,086
Travel, meals and entertainment 6,186
Registration and licenses 3,227
Other 6,841
- -----------------------------------------------------------------------------------
Total expenses 583,639
- -----------------------------------------------------------------------------------
Net loss $(386,574)
===================================================================================
See accompanying notes to financial statements.
</TABLE>
-30-
<PAGE>
Hambro Resource Development, Inc.
Statement of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Cumulative preferred stock - Additional Accumulated Total
variable rate paid-in deficit
----------------- --------- capital
Number of Amount
shares
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 2,940,207 $ 2,940,207 $ 904,000 $(2,681,681) $ 1,162,526
Redemption of preferred stock (648,913) (648,913) -- -- (648,913)
Issuance of preferred stock 100,000 100,000 -- -- 100,000
Net loss -- -- -- (386,574) (386,574)
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 2,391,294 $ 2,391,294 $ 904,000 $(3,068,255) $ 227,039
================================================================================================================
See accompanying notes to financial statements.
</TABLE>
-31-
<PAGE>
Hambro Resource Development, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
============================================================================================
<S> <C>
Year ended March 31, 1997
- --------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(386,574)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Realized loss on securities owned 242,236
Unrealized gain on nonmarketable securities owned, not readily (87,559)
marketable
(Increase) decrease in operating assets:
Due from broker (48,406)
Fees receivable 697,084
Other assets 305
Decrease in operating liabilities:
Accrued expenses (205,968)
Other liabilities (46,786)
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 164,332
- --------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of securities owned 27,962
- --------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of preferred stock 100,000
Redemptions of preferred stock (648,913)
Repayment of loans from Hambro America, Inc. (135,266)
- --------------------------------------------------------------------------------------------
Net cash used in financing activities (684,179)
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (491,885)
Cash and cash equivalents, beginning of year 702,450
- --------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 210,565
============================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 9,170
============================================================================================
See accompanying notes to financial statements.
</TABLE>
-32-
<PAGE>
Hambro Resource Development, Inc.
Notes to Financial Statements
================================================================================
1. Organization Hambro Resource Development, Inc. (the "Company") is
a registered broker/dealer under the Securities
Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The Company
is engaged in investment banking activities which
include restructuring and public placement of
corporate and municipal debt with institutional
clients and corporate financial advisory services.
The Company was involved in the remarketing of
variable rate demand, tax-exempt bonds prior to the
sale of its remarketing division. The Company has an
agreement with a clearing broker to clear securities
transactions, carry customers' accounts on a fully
disclosed basis and perform certain recordkeeping
functions. Accordingly, the Company operates under
the exemptive provisions of Securities and Exchange
Commission ("SEC") Rule 15c3-3(k)(2)(ii). In June
1996, the Company ceased to accept new business. The
Company will continue to honor existing commitments.
Management has no plans or intentions to liquidate
the Company. In July 1996, the Company transferred
all of its remarketing contracts to Fleet Services in
return for a four-year royalty stream. The Company
has no further obligations or responsibilities with
respect to these contracts. The Company is a
wholly-owned subsidiary of Hambro America,
Incorporated (the "Parent"), which is ultimately
owned by Hambros PLC, a London based merchant bank.
2. Summary of
Significant
Accounting Policies Cash and Cash Equivalents The Company classifies cash
held in a money market account as a cash equivalent.
Revenue Recognition
Remarketing and advisory fee income are recognized as
earned, taking into consideration the terms of
contractual arrangements and the period in which
services are rendered. Corporate finance fees are
generally recognized upon closing of the transaction.
-33-
<PAGE>
Hambro Resource Development, Inc.
Notes to Financial Statements
================================================================================
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the year. Actual results could differ from
those estimates.
Income Taxes
The Company accounts for income taxes using the asset
and liability method. Deferred income taxes arise
from the differences between the financial reporting
and income tax bases of assets and liabilities based
upon statutory tax rates enacted for future periods.
There are no significant differences between the
Company's financial statement and taxable income.
The Company files a consolidated Federal return and a
combined New York State and New York City return with
the Parent. For financial statement purposes, the
Company's provision for Federal, state and local
taxes has been computed on a stand-alone basis.
3. Net Capital
Requirement The Company is subject to the SEC Uniform Net Capital
Rule (Rule 15c3-1), which requires the maintenance of
minimum net capital and a specified ratio of
aggregate indebtedness to net capital, both as
defined, which shall not exceed 15 to 1. At March 31,
1997, the Company had regulatory net capital and a
regulatory net capital requirement of $164,509 and
$100,000, respectively. The Company's aggregate
indebtedness to net capital ratio was .57 to 1.
4. Transactions with
Related Parties (a) Balances at March 31, 1997 and income and
expenses for the year ended March 31, 1997 with
related parties are as follows:
-----------------------------------------------------
Statement of operations:
Interest expense paid to the Parent $8,936
=====================================================
(b) The Parent provides the Company with a
working capital credit line of $1,500,000.
Outstanding borrowings under this
arrangement bear interest at the London
Interbank Offered Rate plus one point. At
-34-
<PAGE>
Hambro Resource Development, Inc.
Notes to Financial Statements
================================================================================
December 31, 1996, there were no borrowings
under this arrangement.
(c) The Company receives administrative support
from and utilizes assets owned by the Parent
and other affiliates pursuant to agreements
that do not provide for intercompany
charges.
5. Income Taxes The Company provides for income tax expense on a
stand alone basis; however, it does not provide for
any benefits which would be realized by its Parent
for using its loss to offset income taxes due in the
consolidated or combined filings because the Parent
does not reimburse the Company for this use. As a
result, income tax recoveries, with respect to the
current year, of approximately $155,000 have not been
recorded by the Company.
6. Cumulative In order to maintain sufficient levels of regulatory
Preferred Stock- net capital, the Company has periodically issued
Variable Rate variable rate cumulative preferred stock to the
Parent at $1 per share, which accrete dividends at
the Boston Safe Deposit and Trust Company's prime
rate. The Company, at its option, may redeem the
outstanding shares at $1 per share.
Effective July 1, 1996, the Company and its
stockholder agreed to terminate the accumulation of
dividends on the variable rate cumulative preferred
stock. The Company has had no obligation to declare
and pay any dividends. At March 31, 1997, undeclared
cumulative dividends approximate $469,000.
-35-
<PAGE>
Hambro Resource Development, Inc.
Notes to Financial Statements
================================================================================
7.Commitments and The Company leases certain facilities under operating
Contingencies lease agreements. Rent expense and sublease income
for the year, which were recorded net in occupancy
expense, amounted to $246,258 and $72,289,
respectively.
Future minimum rental commitments, net of sublease
income, for operating leases approximate the
following:
Fiscal Minimum rental Minimum sublease Net
payments income
--------------------------------------------
1997 $111,000 $67,000 $44,000
--------------------------------------------
-36-
<PAGE>
Hambro Resource Development, Inc.
Notes to Financial Statements
<TABLE>
<CAPTION>
=====================================================================================================
<S> <C> <C>
March 31, 1997
- -----------------------------------------------------------------------------------------------------
Computation of Net Capital Pursuant to Rule 15c3-1
Net Capital
Total stockholder's equity from statement of financial condition $227,039
Less:Nonallowable assets:
Nonmarketable securities $ 10,000
Other assets 52,530 62,530
- -----------------------------------------------------------------------------------------------------
Net capital $164,509
=====================================================================================================
Computation of Basic Net Capital Requirement
Minimum net capital required, 6-2/3% of $94,464 pursuant to Rule 15c3-1 $ 6,298
=====================================================================================================
Minimum dollar net capital requirement of broker and dealer $100,000
=====================================================================================================
Net capital requirement $100,000
=====================================================================================================
Excess net capital $ 64,509
=====================================================================================================
Computation of Aggregate Indebtedness
Accrued expenses and other liabilities $ 94,464
- -----------------------------------------------------------------------------------------------------
Total aggregate indebtedness liabilities $ 94,464
=====================================================================================================
Ratio of aggregate indebtedness to net capital 0.57 to 1
=====================================================================================================
</TABLE>
Statement Pursuant to Rule 17a-5(d)(4)
No material differences between the above computation and computation included
in the Company's corresponding unaudited amended Form X-17A-5 Part IIA filing.
-37-
<PAGE>
THCG, INC.
Unaudited Pro Forma Condensed Combined Financial Information
On November 1, 1999 Tower Hill Securities, Inc. ("Tower Hill") merged
with a wholly owned subsidiary of Walnut Financial Services, Inc. ("Walnut"), a
publicly held company. As a result of this merger (the "Merger"), Tower Hill
became a wholly-owned subsidiary of Walnut. Because of the nature of the
transaction, the Merger has been accounted for as a reverse acquisition. In
connection with the Merger, Walnut deregistered as a business development
company under the Investment Company Act of 1940 ("BDC") and changed its name to
THCG, Inc. ("THCG") and THCG privately placed 3,432,500 shares of its common
stock for $6,865,000 in cash.
The unaudited condensed combined financial statements of THCG, after
giving effect to the Merger, are referred to as "pro forma" information. In
presenting these unaudited pro forma condensed combined financial statements,
Walnut and Tower Hill were treated as if they had always been combined for
accounting and financial reporting purposes. These unaudited pro forma condensed
combined financial statements are presented for illustrative purposes only and
may not be indicative of the operating results or financial position that would
have occurred or that will occur after the consummation of the Merger.
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999 includes the impact of transaction costs and various material
transactions contractually associated with the Merger. The unaudited pro forma
condensed combined statements of operations for the nine month period ended
September 30, 1999 and the twelve month period ended December 31, 1998, assume
that the Merger had occurred on January 1, 1998 and is adjusted for contractual
material transactions to reflect the ongoing business.
Certain historical Walnut results have been restated to reflect the
presentation as an operating company, instead of as an investment company.
Walnut has been using investment company accounting since its election to become
regulated as a BDC on October 15, 1997. The effect of this restatement has been
to record the assets and liabilities of Walnut's subsidiaries, instead of
recording only the investment in subsidiaries as a single asset on Walnut's
balance sheet. Additionally, unrealized gains and losses are recorded directly
to Shareholders' Equity instead of being recorded in Net Income.
-38-
<PAGE>
THCG, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 1999
<TABLE>
<CAPTION>
(Restated) Pro Forma THCG
Historical
Historical -------------------------------------------
Tower Hill Walnut Adjustments Combined
------------ ------------ ------------ -----------
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 507,000 $ 1,164,000 $ 1,889,000 $ 3,560,000
Accounts receivable, net of allowance 85,000 3,537,000 3,622,000
Interest receivable 368,000 368,000
Loans receivable 45,000 435,000 480,000
------------ ------------ ------------ -----------
Total Current Assets $ 637,000 $ 5,504,000 $ 1,889,000 $ 8,030,000
Fixed Assets, net of accumulated depreciation 78,000 99,000 177,000
Available for sale securities 90,000 1,723,000 1,813,000
Non-marketable securities 4,283,000 4,283,000
Notes receivable 100,000 1,121,000 1,221,000
Loan Receivable S/H 221,000 221,000
Goodwill 4,682,000 9,421,000 14,103,000
Other assets 53,000 289,000 342,000
------------ ------------ ------------ ----------
TOTAL ASSETS $ 1,179,000 $ 17,701,000 $ 11,310,000 $ 30,190,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to banks $ $ 1,855,000 $ (725,000) $ 1,130,000
Notes payable to related parties 1,263,000 (1,093,000) 170,000
Notes payable to others 205,000 205,000
Accounts payable, accrued expenses, and 114,000 1,036,000 (372,000) 778,000
other current liabilities
Customer Retention Payable 1,236,000 1,236,000
Current portion of long-term debts 1,500,000 (1,500,000) 0
------------ ------------ ------------ ------------
Total current liabilities $ 114,000 $ 7,095,000 $ (3,690,000) $ 3,519,000
Long Term Notes, net of current portion 455,000 455,000
Participation Loans Payable 2,079,000 2,079,000
------------ ------------ ------------ ------------
Total liabilities $ 114,000 $ 9,629,000 $ (3,690,000) $ 6,053,000
Minority Interest 386,000 (386,000) 0
Stockholders' equity: 1,065,000 7,686,000 15,386,000 24,137,000
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,179,000 $ 17,701,000 $ 11,310,000 $ 30,190,000
============ ============ ============ ============
</TABLE>
-39-
<PAGE>
THCG, INC
Unaudited Pro Forma Condensed Combined Statement of Operations
For The Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(Restated) Pro Forma THCG
Historical Historical --------------
Tower Hill Walnut Adjustments Combined
---------- ------ ----------- --------
<S> <C> <C> <C> <C>
Revenue
Consulting income $ 2,114,000 $ -- $ -- $ 2,114,000
Factoring income 0 1,873,000 1,873,000
Investment and other income 22,000 1,037,000 1,059,000
------------ ------------ ------------ ------------
Total revenue $ 2,136,000 $ 2,910,000 $ -- $ 5,046,000
Costs and expenses
Cost of services 0 84,000 84,000
General and administrative expenses 2,221,000 2,850,000 1,681,000 6,752,000
------------ ------------ ------------ ------------
$ 2,221,000 $ 2,934,000 $ 1,681,000 $ 6,836,000
Operating (loss) (85,000) (24,000) (1,681,000) (1,790,000)
Interest and other financial costs 20,000 1,652,000 (532,000) 1,140,000
------------ ------------ ------------ ------------
(Loss) before income taxes and realized gain $ (105,000) $ (1,676,000) $ (1,149,000) $ (2,930,000)
Income tax benefit/(expenses) 0 44,000 44,000
Realized gains/(losses) on sale of securities, net 0 1,019,000 1,019,000
of tax
Effect on net income of minority interest 0 88,000 (88,000) 0
------------ ------------ ------------ ------------
NET LOSS $ (105,000) $ (525,000) $ (1,237,000) $ (1,867,000)
============ ============ ============ ============
Loss per share - basic and diluted $ (0.03) $ (0.17)
============ ============
Weighted average shares outstanding - 4,095,096 6,983,033 11,078,129
basic and diluted ============ ============ ============
</TABLE>
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<PAGE>
THCG, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
For The Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(Restated) Pro Forma THCG
Historical Historical --------------
Tower Hill Walnut Adjustments Combined
<S> <C> <C> <C> <C>
Revenue
Consulting income $ 2,285,000 $ -- $ -- $ 2,285,000
Factoring income 0 914,000 914,000
Investment and other income 87,000 286,000 373,000
------------ ------------ ------------ ------------
Total revenue $ 2,372,000 $ 1,200,000 $ -- $ 3,572,000
Costs and expenses
Cost of services 0 205,000 205,000
General and administrative expenses 2,565,000 1,559,000 1,257,000 5,381,000
------------ ------------ ------------ ------------
$ 2,565,000 $ 1,764,000 $ 1,257,000 $ 5,586,000
Operating (loss) (193,000) (564,000) (1,257,000) (2,014,000)
Interest and other financial costs 0 501,000 (410,000) 91,000
------------ ------------ ------------ ------------
(Loss) before income taxes and realized gain $ (193,000) $ (1,065,000) $ (847,000) $ (2,105,000)
Income tax benefit/(expenses) 0 0 0
Realized gains/(losses) on sale of securities, 0 2,456,000 2,456,000
net of tax
Effect on net income of minority interest 0 29,000 (29,000) 0
------------ ------------ ------------ ------------
NET INCOME/(LOSS) $ (193,000) $ 1,420,000 $ (876,000) $ 351,000
============ ============ ============ ============
Income/(Loss) per share - basic and
diluted $ (0.05) $ 0.03
============ ============
Weighted average shares outstanding -
basic and diluted 4,095,096 6,983,033 11,078,129
============ ============ ============
</TABLE>
-41-
<PAGE>
THCG, INC.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Basis of Presentation
The unaudited pro forma condensed combined financial statements assume
a business combination between Walnut Financial Services, Inc. ("Walnut") and
Tower Hill Securities, Inc. ("Tower Hill") accounted for using the purchase
method of accounting and are based upon the respective restated historical
financial statements and the accompanying notes of Walnut Financial Services,
Inc. and the historical financial statements and the accompanying notes of Tower
Hill Securities, Inc. Because of the nature of the transaction, the Merger has
been accounted for as a reverse acquisition (due to a change in control).
The closing expenses have been estimated to be $1,000,000, and have
been accounted for as additional goodwill on the condensed combined balance
sheets. The unaudited pro forma condensed combined statements of operations for
all periods presented include the effects of the costs of the combined
companies.
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999 includes the impact of all transactions, whether of a
recurring or non-recurring nature, that can be reasonably estimated and should
be reflected as of that date.
Certain historical Walnut Financial Services, Inc. results have been
restated to reflect the presentation as an operating company, instead of as an
investment company. The effect of this restatement has been to consolidate the
assets and liabilities of its subsidiaries, Universal Partners L.P., Pacific
Financial Services, Inc. and Inland Financial Services, Inc., instead of
recording only the investment in unconsolidated subsidiaries as a single asset
on Walnut's balance sheet. This has had the impact of having Walnut's reported
assets increase by $5,430,000 as of September 30, 1999 and Walnut's reported
liabilities increased by $6,381,000 as of September 30, 1999. The asset
increases were primarily due to the reporting of consolidated receivables of
Inland Financial Services and Pacific Financial Services. The increase in
liabilities were primarily due to the reporting of Notes Payable, Customer
Retention Payable and Participations Payable at Inland Financial Services and
Pacific Financial Services. Additionally, unrealized gains and losses on
securities available for sale are recorded directly to Stockholders' Equity,
instead of being recorded in Net Income. The effect on the historical nine month
period ended September 30, 1999 was an increase in Net Income equal to the
unrealized loss for the same period of $2,300,000 net of taxes. The amount of
unrealized loss recorded directly to Stockholder's Equity for the 12 months
ended December 31, 1998 was $8,328,000.
2. Pro Forma Adjustments
Intercompany Transactions. All material inter-company transactions are
eliminated from the unaudited pro forma condensed combined statements of
operation or balance sheet.
-42-
<PAGE>
Balance Sheet.
Current Assets. Cash has been adjusted to reflect the various
transactions associated with the merger
and private placement. The adjustments are:
Private placements $6,865,000
Payment of long term debenture (1,500,000)
Payment of note to ANB (725,000)
Payment of closing costs (1,000,000)
Payment of subsidiary debt (893,000)
Payment of accrued salary and other (272,000)
Payment for minority interest (386,000)
Payment of related party debt (200,000)
-------------
$ 1,889,000
=============
Other Noncurrent Assets. Goodwill has been increased by $9,421,000 as
of September 30, 1999. This was the result of the addition due to closing costs
($1,000,000), finders fees for the private placement ($750,000), and goodwill
associated with the acquisition based on a preliminary allocation of cost
($7,671,000).
Accounts Payable, Accrued Liabilities, and Income Taxes Payable.
Accounts Payable and Accrued Liabilities have been decreased to reflect the
payment and negotiated settlement of accrued salary at Walnut ($372,000).
Notes Payable--Related Parties. There was a reduction of $293,000 due
to the subsequent payment of subordinated debt at Inland Financial Services, and
a reduction of $600,000 due to the subsequent payment of subordinated debt at
Pacific Financial Services.
Notes Payable--Banks. There was a reduction of $725,000 due to the
assumed payment of the American National Bank note of Walnut.
Long Term Notes. There was a reduction of $1,500,000 as of September
30, 1999 due to the assumed payment of the SBA debenture.
Minority Interest. Minority interest was adjusted to reflect the
purchase of the minority ownership of UPLP. This resulted in a decrease in
minority interest of $386,000 as of September 30, 1999.
Stockholders Equity. Stockholders' Equity has been increased to reflect
the transactions involving additional capital contributions to Walnut from
various transactions involving conversion of existing debt and payables and a
planned private placement of Walnut shares.
-43-
<PAGE>
The adjustments are:
Amount No. of shares
------ -------------
Private Placement of WFS common shares $ 6,865,000 3,432,500
Forgiveness of salary payments 100,000 0
Issuance of shares for finders' fees 750,000 200,000
Goodwill from acquisition 7,671,000 0
Shares issued for acquisition of Walnut 0 3,350,533
----------- -----------
$15,386,000 6,983,033
=========== ===========
Statement of Operations.
General and Administrative Costs. Costs net of additional amortization
of goodwill were reduced by $156,000 in the pro forma condensed combined
statement of operations for the nine months ended September 30, 1999 and
$203,000 for the twelve months ended December 31, 1998. The adjustments were due
to reduced personnel costs of $111,000 for the nine months ended September 30,
1999 and $145,000 for the twelve months ended December 31, 1998 based on new
employment agreements. Costs were reduced by the termination of Walnut's
existing lease by $45,000 for the nine months ended September 30, 1999 and
$58,000 for the twelve months ended December 31, 1998. Amortization of goodwill
increased by $1,413,000 for the nine month period ended September 30, 1999 and
$1,884,000 for the twelve month period ended December 31, 1998. Compensatory
shares issued to an officer of Tower Hill were not considered in the calculation
of additional expenses.
Interest Expense. Interest expense was adjusted by a reduction
reflecting the subsequent payment of subordinated debt at Pacific and Inland,
the reduction in debentures payable to the SBA, and the payment of the American
National Bank loan. The amount of the pro forma adjustment for the nine months
ended September 30, 1999 was a reduction in interest expense of $410,000 and a
reduction of $532,000 for the twelve months ended December 1998.
Effect on Net Income of Minority Interest. The income (loss) associated
with the minority interest is adjusted to reflect the conversion of the minority
ownership. This resulted in an increase in net income in the pro forma condensed
combined statement of operations for the nine months ended September 30, 1999 of
$29,000 and for the 12 months ended December 31, 1998 of $88,000.
Income (Loss) per Common Share. Historical and unaudited pro forma per
share date of Walnut and Tower Hill include the issuance of an estimated
additional 6,983,033 shares. This is reflective of the additions to
Stockholders' Equity outlined above.
-44-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: January 13, 2000
THCG, INC.
By:
---------------------------------
Name: Shai Novik
Title: Chief Operating Officer
