SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2 ON FORM 10-K/A
TO FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
512 Seventh Avenue, 17th Floor, New York, NY
(Address of Principal Executive Office) 10018
(Zip Code)
Registrant's telephone number, including area code: (212) 223-0440
----------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
----------------------
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant, based on the closing sale price of the Common
Stock on November 10, 2000 as reported on the Nasdaq National Market, was
$8,887,702. As of November 10, 2000, there were 13,335,317 shares of the
registrant's Common Stock outstanding.
Documents Incorporated by Reference:
Parts I, II and IV of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
1
<PAGE>
THCG, Inc.
Amendment No. 2 on Form 10-K/A to the Annual Report on Form 10-K for the Year
Ended December 31, 1999
Explanatory Note
On August 31, 2000, THCG, Inc. (the "Company") filed a Registration
Statement on Form S-3 with the Securities and Exchange Commission (the "SEC").
The Registration Statement was filed to register common stock underlying the
Series A Convertible Preferred Stock and a related warrant issued by the Company
on August 2, 2000 in a private placement. In response to comments by the SEC
staff after its review of the financial statements incorporated by reference in
the Registration Statement, the Company, in consultation with Arthur Andersen
LLP, the Company's independent public accountants, has determined to restate its
financial statements for the fiscal year ended December 31, 1999. This Amendment
No. 2 on Form 10-K/A includes these restated financial statements, together with
the report thereon of Arthur Andersen LLP.
The restatement relates solely to the values assigned to Walnut
Financial Services, Inc. ("WFS") and Mercury Coast Inc. ("Mercury Coast") in
connection with the Company's acquisition of these two companies on November 1,
1999 and December 29, 1999, respectively. Both acquisitions were accounted for,
and continue in the restated financial statements to be accounted for, using the
purchase method.
Initially, the calculation of the equity consideration paid for each of
these acquisitions was based upon the market price of the Company's common stock
at the time the transaction closed. In the case of WFS, the calculation was
based upon the average of the high and low sales prices of WFS common stock on
November 1, 1999 ($3.625), resulting in equity consideration of $13,367,000. In
the case of Mercury Coast, the calculation was based on the average price of the
Company's common stock over the four days commencing two days prior to the close
of the transaction on December 29, 1999 ($29.69 per share), resulting in equity
consideration of $20,782,000.
The Company has determined that the more appropriate valuation date is
the date of the announcement of the transaction rather than the closing date. As
a result, the equity consideration in the WFS transaction has been recalculated
based on the closing price of WFS common stock on August 4, 1999 ($2.19),
resulting in equity consideration of $8,593,000. The equity consideration in the
Mercury Coast transaction has been recalculated based on the closing price of
THCG common stock on December 8, 1999 ($18.25), resulting in equity
consideration of $12,732,000.
The effect of reducing the equity consideration paid for these
acquisitions is that Goodwill and Other Intangible Assets on the Consolidated
Balance Sheet as at December 31, 1999 has been reduced to $16,610,000 (net of
amortization of $86,000) from $29,266,000 (net of amortization of $254,000) and
Stockholders' Equity has been reduced to $32,109,000 from $44,765,000.
Consequently, Amortization of Acquired Intangibles on the Consolidated Statement
of Operations for the year ended December 31, 1999 has also been reduced to
$86,000 from $254,000. Net Income for the year ended December 31, 1999 has been
increased to $1,511,000 from $1,343,000; Basic Earnings Per Share has been
increased to $0.30 from $0.27; and Diluted Earnings Per Share has been increased
to $0.30 from $0.27.
The Financial Statements, Notes, and Management's Discussion and
Analysis of Financial Condition and Results of Operations in this 10-K/A have
been restated to reflect these changes.
The items amended are as follows:
Part I, Item 1 Business
Part II, Item 6 Selected Financial Data
Part II, Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II, Item 8 Financial Statements and Supplementary Data
Part IV, Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K
2
<PAGE>
Part I
Item 1. Business
Item 1 is hereby amended by adding the following sentences to the end
of the first paragraph under the heading "Overview":
We receive fees in cash and securities, or a combination of the two, as
compensation for our venture funding, venture development and venture banking
services. In addition, our venture funding activities entitle us to management
fees for funds that we actively manage. In 1999, we derived approximately 62% of
our revenue from our venture funding and approximately 38% of our revenue from
our venture banking services. We commenced providing venture development
services in the last two months of 1999 and did not record any revenues from
these services in that year.
Part II
Item 6. Selected Financial Data
Our selected financial data for the four-year period ended December 31,
1999 is presented below. The information for these periods is derived from our
audited financial statements as of and for the four periods then ended. The data
for the periods ended March 31, 1998, December 31, 1998 and December 31, 1999
should be read in conjunction with the consolidated financial statements, the
related notes and the other financial information included elsewhere in this
Annual Report.
<TABLE>
<CAPTION>
Year ended Year ended Nine months ended Year ended
March 31, March 31, December 31, December 31,
1997 (1)(2) 1998 (2) 1998 (2) 1999 (3)
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Total revenues $ 197,000 $ 228,000 $ 2,125,000 $ 7,568,000
Net Income (loss) from continuing (387,000) (1,325,000) 0 1,635,000
operations
Basic Income (loss) per share from (0.10) (0.36) 0.00 0.33
continuing operations
Total assets 322,000 397,000 1,548,000 35,702,000
Total liabilities and redeemable $ 94,000 $ 52,000 $ 291,000 $ 3,593,000
Preferred Stock
</TABLE>
-----------------
(1) For the year ended March 31, 1996, the broker-dealer predecessor company
was inactive.
(2) Includes the results of operations and balance sheet data of our
wholly-owned subsidiary, Tower Hill Securities, Inc. or its predecessors.
(3) On November 1, 1999, we were acquired by Walnut Financial Services, Inc. in
a transaction that was accounted for as a reverse acquisition.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
See Management's Discussion and Analysis of Financial Condition and
Results of Operations which appears on pages 25 to 28 of this Form 10-K/A.
3
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following consolidated Financial Statements of THCG, Inc. and its
subsidiaries, together with the reports of the independent auditors thereon, are
presented on pages 5 through 24 hereof as set forth below:
THCG, INC. AND SUBSIDIARIES PAGE
Report of Arthur Andersen LLP 5
Independent Public Accountants.........................................
Report of Cohen & Schaeffer, P.C. 6
Independent Public Accountants.........................................
Consolidated Balance Sheets - December 31, 1999 and 1998.................... 7
Consolidated Statements of Operations - for the year
ended December 31, 1999, the nine months ended
December 31, 1998 and the year ended March 31, 1998.................... 8
Consolidated Statements of Stockholders' Equity -
for the year ended December 31, 1999, the nine months
ended December 31, 1998 and the year ended March 31, 1998.............. 9
Consolidated Statements of Cash Flows - for the year
ended December 31, 1999, the nine months ended
December 31, 1998 and the year ended March 31, 1998.................... 11
Notes to Consolidated Financial Statements................................12-24
4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of THCG, Inc.:
We have audited the accompanying consolidated balance sheet of THCG, Inc. and
subsidiaries as of December 31, 1999, and the related consolidated statement of
operations, changes in stockholders' equity and cash flows for the year then
ended as revised - see Note 1. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of THCG, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
New York, New York
November 10, 2000
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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
ended December 31, 1998 and the year ended March 31, 1998. 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 audits.
We conducted our audits 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 audits provide 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 ended December 31, 1998 and the year ended March 31, 1998 in
conformity with generally accepted accounting principles.
Cohen & Schaeffer, P.C.
New York, New York
January 26, 1999
6
<PAGE>
<TABLE>
<CAPTION>
THCG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
December 31,
ASSETS 1999 1998
------ ---- ----
(Note 1)
<S> <C> <C>
Cash and cash equivalents $ 1,592,000 $ 610,000
Marketable securities 2,812,000 -
Nonmarketable securities, Partnership, 7,104,000 -
Limited Liability Company and other interests
Fees and other receivables 352,000 525,000
Prepaid expenses and other assets 279,000 49,000
Loans receivable, related parties 312,000 294,000
Furniture, fixtures and equipment, net 104,000 70,000
Goodwill and other intangible assets, net of accumulated amortization of $86,000 16,610,000 -
Assets of discontinued operations 6,537,000 -
--------------- --------------
Total assets $ 35,702,000 $ 1,548,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other current liabilities $ 1,933,000 $ 256,000
Loan payable 565,000 -
Notes payable 600,000 -
Deferred income taxes payable 495,000 35,000
--------------- ---------------
Total current liabilities 3,593,000 291,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)
STOCKHOLDERS' EQUITY:
Cumulative preferred stock - variable rate, $1.00 par value, 5,000,000 shares - 1,000,000
authorized; 1,000,000 issued and outstanding in 1998
Common stock, $.01 par value, 50,000,000 shares authorized; 11,751,113 and 118,000 37,000
3,722,815 issued and outstanding in 1999 and 1998, respectively
Additional paid-in capital 68,777,000 11,290,000
Subscriptions receivable - (67,000)
Deferred compensation (27,294,000) -
Accumulated deficit (9,492,000) (11,003,000)
--------------- ---------------
Total stockholders' equity 32,109,000 1,257,000
--------------- ---------------
Total liabilities and stockholders' equity $ 35,702,000 $ 1,548,000
=============== ===============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THCG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999,
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
AND FOR THE YEAR ENDED MARCH 31, 1998
Year Ended Nine Months
December 31, Ended December Year Ended
1999 31, 1998 March 31, 1998
---- -------- --------------
(Note 1)
REVENUES:
<S> <C> <C> <C>
Venture service fees $ 2,963,000 $ 2,105,000 $ 210,000
Realized and unrealized gains on investments 4,605,000 20,000 18,000
-------------- -------------- --------------
Total revenues 7,568,000 2,125,000 228,000
-------------- -------------- --------------
EXPENSES:
Selling, general and administrative 4,170,000 2,090,000 1,553,000
Equity-based compensation 595,000 - -
Amortization of acquired intangibles 86,000 - -
-------------- -------------- -------------
Total expenses 4,851,000 2,090,000 1,553,000
-------------- -------------- --------------
Income (loss) from continuing operations 2,717,000 35,000 (1,325,000)
before income taxes
Provision for income taxes 1,082,000 35,000 -
-------------- -------------- -------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 1,635,000 - (1,325,000)
Loss from discontinued operations (124,000) - -
-------------- -------------- -------------
NET INCOME (LOSS) $ 1,511,000 $ - $ (1,325,000)
============= ============ ==============
BASIC EARNINGS PER SHARE:
Basic income (loss) per share from continuing operations $ .33 $ - $ (.36)
Basic loss per share from discontinued operations (.03) - -
------------- -------------- -------------
Basic income (loss) per share $ .30 $ - $ (.36)
============== ============ =============
SHARES USED IN CALCULATION 4,916,000 3,723,000 3,723,000
DILUTED EARNINGS PER SHARE:
Diluted income (loss) per share from continuing operations $ .32 $ - $ (.36)
Diluted loss per share from discontinued operations (.02) - -
-------------- -------------- -------------
Diluted income (loss) per share $ .30 $ - $ (.36)
============= ============ =============
SHARES USED IN CALCULATION 5,010,000 3,723,000 3,723,000
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
8
<PAGE>
THCG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, NINE MONTHS
ENDED DECEMBER 31, 1998 AND THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Cumulative Preferred Common Stock Additional
Stock-Variable Rate
Number of Number of Paid-in
Shares Amount Shares Amount Capital
--------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1997 2,391,294 $ 2,391,000 3,722,817 $ 37,000 $ 867,000
Merger of Hambro America Securities, Inc. -- -- -- -- 6,707,000
Reclass of preferred stock to additional (2,391,294) (2,391,000) -- -- 2,391,000
paid-in capital
Conversion of debt to equity -- -- -- -- 346,000
Issuance of preferred stock 1,000,000 1,000,000 -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ -----------
Balance, March 31, 1998 1,000,000 1,000,000 3,722,817 37,000 10,311,000
Capital contribution by Hambro America -- -- -- -- 905,000
Securities, Inc.
Capital contributions by stockholders -- -- -- -- 74,000
------------ ------------ ------------ ------------ -----------
Balance, December 31, 1998 1,000,000 1,000,000 3,722,817 37,000 11,290,000
Recapitalization in connection with the Merger (1,000,000) (1,000,000) -- -- 1,000,000
Issuance of restricted common stock to -- -- 372,281 4,000 1,350,000
employees
Shares of common stock and assumption of -- -- 3,411,510 35,000 8,558,000
options and warrants representing purchase
price in connection with the reverse
acquisition, including finders fee of
100,000 shares of common stock
Proceeds from issuance of common stock and -- -- 2,600,000 26,000 5,174,000
warrants in a private placement, including
fees of 100,000 shares of common stock
Proceeds from issuance of common stock in -- -- 932,500 9,000 1,856,000
private placement
Issuance of common stock in connection with -- -- 712,005 7,000 13,081,000
acquisition, including finders fee of
12,000 shares of common stock
Cancellation of subscriptions receivable -- -- -- -- (67,000)
Compensatory options issued to consultants -- -- -- -- 86,000
Deferred compensation for stock options -- -- -- -- 26,449,000
issued to employees
Amortization of deferred compensation -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ -----------
Balance, December 31, 1999 -- $ -- 11,751,113 $ 118,000 $ 68,777,000
============ ============ ============ ============ ============
9
<PAGE>
Deferred Subscriptions Accumulated
Compensation Receivable Deficit Total
------------ ------------ ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1997 $ -- $ -- $ (3,068,000) $ 227,000
Merger of Hambro America Securities, Inc. -- -- (6,610,000) 97,000
Reclass of preferred stock to additional -- -- -- --
paid-in capital
Conversion of debt to equity -- -- -- 346,000
Issuance of preferred stock -- -- -- 1,000,000
Net loss -- -- (1,325,000) (1,325,000)
------------ ------------ ------------ ------------
Balance, March 31, 1998 -- -- (11,003,000) 345,000
Capital contribution by Hambro America -- -- -- 905,000
Securities, Inc.
Capital contributions by stockholders -- (67,000) -- 7,000
------------ ------------ ------------ ------------
Balance, December 31, 1998 -- (67,000) (11,003,000) 1,257,000
Recapitalization in connection with the Merger -- -- -- --
Issuance of restricted common stock to (1,354,000) -- -- --
employees
Shares of common stock and assumption of -- -- -- 8,593,000
options and warrants representing purchase
price in connection with the reverse
acquisition, including finders fee of
100,000 shares of common stock
Proceeds from issuance of common stock and -- -- -- 5,200,000
warrants in a private placement, including
fees of 100,000 shares of common stock
Proceeds from issuance of common stock in -- -- -- 1,865,000
private placement
Issuance of common stock in connection with -- -- -- 13,088,000
acquisition, including finders fee of
12,000 shares of common stock
Cancellation of subscriptions receivable -- 67,000 -- --
Compensatory options issued to consultants -- -- -- 86,000
Deferred compensation for stock options (26,449,000) -- -- --
issued to employees
Amortization of deferred compensation 509,000 -- -- 509,000
Net income -- -- 1,511,000 1,511,000
------------ ------------ ------------ ------------
Balance, December 31, 1999 $(27,294,000) $ -- (9,492,000) $ 32,109,000
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THCG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, NINE MONTHS
ENDED DECEMBER 31, 1998 AND THE YEAR ENDED MARCH 31, 1998
Year Ended Nine Months Year Ended
December 31, Ended March 31,
December 31,
1999 1998 1998
---- ---- ----
(Note 1)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,511,000 $ -- $(1,325,000)
Adjustments to reconcile net income (loss) to net cash (used in)
continuing operating activities-
Loss from discontinued operations (124,000) -- --
Depreciation and amortization 70,000 15,000 13,000
Provision for credit loss (9,000) 63,000
Realized loss on securities owned -- -- 10,000
Amortization of deferred compensation 509,000 -- --
Equity-based compensation 86,000 -- --
Amortization of acquired intangibles 86,000 -- --
Bad debt expense 221,000 -- --
Changes in-
Due from broker -- -- 49,000
Fees and other receivables 81,000 (553,000) 10,000
Loans receivable related parties (61,000) -- --
Nonmarketable securities, Partnership, Limited Liability (1,175,000) -- --
Company and other interests
Marketable securities (3,704,000) -- --
Prepaid expenses (229,000) (13,000) (9,000)
Other assets -- -- 53,000
Accounts payable and accrued expenses 381,000 171,000 (203,000)
Due to related party 43,000 10,000 --
Deferred Revenue -- 23,000 --
Deferred income taxes 460,000 35,000 --
------------ ------------ ------------
Net cash used in continuing operating activities (1,854,000) (249,000) (1,402,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (3,000) (18,000) (6,000)
Mercury Coast acquisition, net of acquired company's cash of $3,000 (278,000) -- --
WFS acquisition, net of acquired company's cash of $799,000 334,000 -- --
Purchase of minority interest (533,000) -- --
Increase in organizational costs -- (13,000) --
Net increase in loan to related party -- (78,000) --
Net increase in loan to stockholders -- (216,000) --
------------ ------------ ------------
Net cash used in investing activities of continuing (480,000) (325,000) (6,000)
------------ ------------ ------------
operations
Cash flows from financing activities:
Proceeds from the issuance of preferred stock -- -- 1,000,000
Principal payments on line of credit (132,000) -- --
Proceeds from sale of common stock, net of related costs 6,865,000 -- --
Principal payments on notes payable (1,823,000) -- --
Principal payment on SBA loan (1,500,000) -- --
Loans from parent -- -- 469,000
Capital contribution by Hambro America Securities, Inc. -- 905,000 --
Capital contribution by stockholders -- 7,000 --
------------ ------------ ------------
Net cash provided by financing activities of continuing 3,410,000 912,000 1,469,000
operations ------------ ------------ ------------
Net cash (used in) discontinued operations (94,000) -- --
------------ ------------ ------------
Net increase in cash and cash equivalents 982,000 338,000 61,000
Cash and cash equivalents, beginning of period 610,000 272,000 211,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,592,000 $ 610,000 $ 272,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for-
Interest $ 43,000 $ -- $ 137,000
Taxes 17,000 -- --
Supplemental disclosure of noncash investing and financing activities:
Issuance of stock in connection with Mercury Coast acquisition 13,088,000 -- --
Issuance of equity instruments in connection with WFS acquisition 8,593,000 -- --
Deferred compensation to consultants and employees by issuance of 27,803,000 -- --
options
Cancellation of subscription receivable in connection with the Merger (67,000) -- --
Retirement of preferred stock in connection with the recapitalization 1,000,000 -- --
Issuance of stock as a finders fee in private placement 200,000 -- --
Conversion of loans from parent to equity -- -- 346,000
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
11
<PAGE>
1. Description of Business and Basis of Presentation
THCG, Inc. ("THCG" or the "Company") is an Internet incubator company that
provides venture funding, venture development and venture banking services. The
Company is penetrating new markets by developing its international operations
and by expanding its global coverage of the Internet industry. The Company
provides services to Internet-based businesses, established "brick and mortar"
companies implementing an Internet-based strategy and advanced technology and
service companies. By providing companies with capital and a combination of
enterprise-enhancing venture development and venture banking services, the
Company believes that it helps companies focus on their core strengths so that
they may bring their products and services to market more rapidly.
The consolidated financial statements for the year ended December 31, 1999
included herein have been reclassified to reflect as discontinued operations the
Company's two factoring subsidiaries (see Note 12). These statements have also
been restated to reflect an adjustment in the purchase prices relating to two
mergers (see below).
On November 1, 1999, the Company consummated the transactions contemplated by
the Amended and Restated Agreement and Plan of Merger (the "Agreement"), dated
August 5, 1999, by and among the Company, Tower Hill Acquisition Corp.
("Newco"), a wholly owned subsidiary of the Company, and Tower Hill Securities,
Inc. ("Tower Hill"). Pursuant to the Agreement, Newco merged with and into Tower
Hill, with Tower Hill surviving as a wholly owned subsidiary of the Company (the
"Merger"). As a result of the Merger, the Company changed its name from Walnut
Financial Services, Inc. ("WFS") to THCG, Inc. Tower Hill, formerly known as
Hambro America Securities, Inc., is a registered broker-dealer under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Tower Hill is engaged in the private placement of
corporate debt and equity securities with accredited investors as defined by SEC
Rule 501 of Regulation D. Tower Hill does not hold customer funds or safekeep
customer securities pursuant to SEC Rule 15c3-3(k)(2)(1).
In connection with the Merger, the Company (i) issued 3,722,817 shares of common
stock for all of the outstanding common stock of Tower Hill; (ii) entered into
employment agreements with the two former shareholders of Tower Hill, who became
the Co-Chief Executive Officers of the Company, and a former officer of Tower
Hill, who became the Chief Operating Officer of the Company and who received
372,281 shares of restricted common stock (see Note 10 with respect to
employment agreements); (iii) issued 2,500,000 shares of common stock and
warrants to purchase an aggregate of 2,000,000 shares of common stock for
aggregate proceeds of $5,000,000 to Greenwich Street Capital Partners II, L.P.
("GSCP") and certain of its affiliates in a private placement transaction; and,
(iv) issued 932,500 shares of common stock in two additional private placements,
one to an outside investor group and one to an investor group consisting of
former Tower Hill employees. In connection with the Merger, the outstanding
preferred stock of Tower Hill was cancelled.
For financial accounting purposes, the acquisition was accounted for as a
reverse merger, using the purchase method, by the Company with Tower Hill (as
the accounting acquiror). After the transaction, the former shareholders of
Tower Hill owned approximately 53% of the combined Company (prior to the
issuance of the shares in the private placements described above), the
management of Tower Hill became the management of the Company and a majority of
the new Board of Directors of the combined company was nominated by Tower Hill.
The purchase price for the Company consisted of 3,311,510 shares of common
stock, representing the outstanding shares of common stock of WFS as of the date
of acquisition and the assumption of all of the outstanding options and warrants
of WFS. The Company issued 100,000 shares of common stock as a finders fee in
connection with the Merger. The aggregate purchase price was $8,593,000, based
on the closing price of $2.19 per share on the date the acquisition was
announced and the fair value of the assumed warrants and options. In addition,
the Company incurred closing costs of approximately $785,000. The Company
recorded excess of cost over fair value of net assets acquired (Goodwill and
other intangible assets) of $9,201,000 in connection with the Merger. The
historical financial statements presented herein are the historical financial
statements of Tower Hill adjusted for the capitalization of WFS. Tower Hill's
accumulated deficit is carried over in the accompanying consolidated financial
statements.
Revised Financial Statement
Initially, the calculation of the equity consideration paid for the acquisitions
of WFS and Mercury Coast Inc. ("Mercury Coast") were based upon market prices of
common stock at the time the transactions closed.
12
<PAGE>
In the case of WFS, the calculation was based on the average of the high and low
sales prices of WFS common stock on November 1, 1999 ($3.625), resulting in
equity consideration of $13,367,000. In the case of Mercury Coast, the
calculation was based on the average price of the Company's common stock over
the four days commencing two days prior to the closing of the transaction on
December 29, 1999 ($29.69 per share), resulting in equity consideration of
$20,782,000.
The Company has determined that the more appropriate valuation date is the date
of the announcement of the transaction rather than the closing date. As a
result, the equity consideration in the WFS transaction has been recalculated
based on the closing price of WFS common stock on August 4, 1999 ($2.19),
resulting in equity consideration of $8,593,000. The equity consideration in the
Mercury Coast transaction has been recalculated based on the closing price of
THCG common stock on December 8, 1999 ($18.25), resulting in equity
consideration of $12,732,000.
The effect of changing the values of these transactions is that Goodwill and
Other Intangible Assets on the Consolidated Balance Sheet as at December 31,
1999 has been reduced to $16,610,000 (net of amortization of $86,000) from
$29,266,000 (net of amortization of $254,000) and Stockholders' Equity has been
reduced to $32,109,000 from $44,765,000. Consequently, Amortization of Acquired
Intangibles on the Consolidated Statement of Operations for the year ended
December 31, 1999 has also been reduced to $86,000 from $254,000. Net Income for
the year ended December 31, 1999 has been increased to $1,511,000 from
$1,343,000; Basic Earnings Per Share has been increased to $0.30 from $0.27; and
Diluted Earnings Per Share has been increased to $0.30 from $0.27.
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.
In April 1998, a group of investors purchased 99% of all of the issued and
outstanding equity securities of Hambro America Securities, Inc. for $74,250. In
May 1998, the same group purchased the remaining 1% for $750. In connection with
this acquisition, the former parent contributed capital of $904,775 in April
1998.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its
wholly owned subsidiaries, Mercury Coast and Tower Hill 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
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 THCG Venture Partners I LLC. All significant
intercompany accounts and transactions are eliminated in consolidation. Pacific
Financial Services Corp. ("Pacific Financial") and Inland Financial Corporation
("Inland") are wholly owned subsidiaries of the Company whose operations have
been discontinued (see Note 12). Certain prior year amounts have been
reclassified to conform with the current year's presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
dates of three months or less to be cash equivalents.
Marketable Securities
The Company has classified its marketable securities as trading securities. As
such, these securities, are accounted for in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" at fair value
based on quoted market prices as of December 31, 1999. Unrealized gains and
losses are reported in the Statement of Operations.
13
<PAGE>
Nonmarketable Securities, Partnership, Limited Liability Company and Other
Interests
Nonmarketable securities held by Tower Hill, a broker-dealer, are valued at fair
value. Other nonmarketable securities are valued at the lower of cost or fair
value.
The Company's interest in a partnership and limited liability companies, which
reflect their portfolios at fair value, are recorded in unrealized gains on
investments.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation or amortization. Depreciation is computed using the straight-line
method of accounting over the estimated useful lives of three to seven years.
Intangibles
Goodwill and other intangibles, which represent the excess of purchase price
over fair value of net assets acquired, are currently amortized on a
straight-line basis over a period of five years. The amortization period will be
evaluated by management on a continuing basis, and will be adjusted if the
useful lives of the related intangible assets are impaired. The Company engaged
an independent valuation expert to determine the fair value of the intangibles
acquired and their useful life. Management will adjust the amortization period
based on the results of the valuation.
The Company's operational policy for the assessment and measurement of any
impairment in the value of the intangible assets acquired that is other than
temporary is to evaluate the recoverability and remaining life of the intangible
assets and to determine whether the intangible assets should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize impairment in the value of the intangible assets if the undiscounted
estimated future operating cash flows of the relevant assets acquired are
determined to be less than their carrying amount. If the Company determines that
impairment has occurred, the measurement of the impairment will be equal to the
excess of the carrying amount of the intangible assets over the amount of the
discounted estimated operating cash flows.
Revenue Recognition
The Company recognizes venture service fees as services are performed.
Income Taxes
The Company accounts for income taxes under the guidelines of SFAS No. 109,
"Accounting for Income Taxes." Accordingly, deferred tax assets and liabilities
are recognized for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period in which the tax change occurs. Valuation allowances are established,
when necessary, to reduce deferred tax asset amounts expected to be realized.
Stock Options
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation," and
has chosen to continue to account for stock-based compensation awards to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options
awarded to employees and directors is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee or director must pay to acquire the stock.
14
<PAGE>
As required, the Company follows SFAS No. 123 to account for stock-based
compensation awards to non-employees. Accordingly, compensation costs for stock
option awards granted to non-employees is measured at the date of grant based on
the fair value of the award using the Black-Scholes option pricing model.
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, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, marketable securities, fee and
other receivables, loans receivable, and loans, notes and accounts payable
approximate book value.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to a concentration
of credit risk, consist of cash and cash equivalents, and receivables and loans
receivable. Cash and cash equivalents consist of deposits placed with various
high credit quality financial institutions.
Net Income (Loss) Per Share
The Company adopted the provision of SFAS No. 128 " Earnings per Share." The
standard requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is calculated by dividing income available to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income
available for common stockholders by the weighted average number of shares of
common stock outstanding adjusted to reflect the potential dilution from the
exercise of options and warrants to purchase common stock. EPS for the nine
months ended December 31, 1998 and the year ended March 31, 1998 does not give
effect to the outstanding shares of preferred stock as the preferred stock was
canceled pursuant to the Merger and no dividends were accrued or paid.
Recently Issued Accounting Standards
During March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which clarifies the
application of APB Opinion No. 25, regarding (a) the definition of an employee
for purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 became effective on July
1, 2000. Certain events, as defined by Interpretation No. 44, may require
earlier consideration if they occurred after December 15, 1998 or January 12,
2000, depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management has reviewed its stock compensation events
covered by Interpretation No. 44 and has determined that no events require early
consideration.
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.
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." The
15
<PAGE>
Statement defers for one year the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in June
1998 and establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management believes that the implementation of
SFAS No. 133 will not have a material impact on the Company's results of
operations.
3. Acquisitions
Walnut Financial Services, Inc.
As described in Note 1, the Company acquired WFS on November 1, 1999 in a
transaction accounted for as a reverse acquisition under the purchase method of
accounting. The aggregate purchase price, including acquisition costs, exceeded
the fair value of WFS' assets by $9,201,000. The Company has allocated
approximately $5,300,000 to the factoring companies and the balance to excess of
cost over fair value of net assets acquired and is being amortized using the
straight-line method over five years. The results of operations of WFS have been
included in the accompanying consolidated statements of operations from the date
of acquisition.
Mercury Coast Inc.
On December 29, 1999, the Company acquired 100% of the outstanding stock of
Mercury Coast for 700,005 shares of its common stock and issued 12,000 shares of
common stock as a finders fee. In connection with this transaction, the Company
entered into employment agreements with the three former shareholders of Mercury
Coast (see Note 10). The aggregate purchase price, including acquisition costs,
exceeded the fair value of the net assets acquired by $12,804,000. This amount
has been allocated to excess of cost over fair value of net assets acquired and
is being amortized using the straight-line method over five years. The
acquisition was accounted for as a purchase and accordingly, the results of
operations have been included in the accompanying consolidated statements of
operations from the date of acquisition.
Assets acquired and liabilities assumed and the consideration paid is summarized
as follows:
Mercury Coast WFS
------------- ---
Cash $ 3,000 $ 14,000
Investment and receivables 460,000 5,640,000
Factoring company receivables - 1,477,000
Other assets 66,000 192,000
------------- -----------
Total assets 529,000 7,323,000
------------- -----------
Assumption of liabilities 245,000 7,146,000
Net assets acquired 284,000 177,000
Closing costs 356,000 785,000
Fair value of common stock, and warrants 12,732,000 8,593,000
and options assumed
Excess of cost over fair value 12,804,000 9,201,000
16
<PAGE>
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma financial information is presented as if the
Company had completed the Merger as of January 1, 1998 and the acquisition of
Mercury Coast as of March 11, 1999, the date of incorporation of Mercury Coast.
The pro forma information for WFS is as adjusted to present WFS as an operating
company instead of as an investment company and includes amortization of
goodwill and deferred compensation. The pro forma information is not necessarily
indicative of what the results of operations would have been had the
acquisitions taken place at those dates, or of the future results of operations.
1999 1998
(Unaudited)
Revenues $ 9,216,000 $ 5,046,000
Net loss (6,750,000) (1,867,000)
EPS:
Basic and diluted (.79) (.26)
4. Marketable Securities, Nonmarketable Securities, Partnership, Limited
Liability Company and Other Interests.
The Company classifies marketable securities as trading securities. As of
December 31, 1999, the market value of marketable securities was approximately
$2,800,000 and the unrealized gain recorded in respect of these securities
amounted to approximately $1,200,000.
Included in partnership interests is a 1% direct holding in an investment
partnership in which the Company also has a 20% participation in net gains.
For the year ended December 31, 1999, the Company has recorded approximately
$3,300,000 of unrealized gains representing the appreciation of nonmarketable
securities and its share in the gain of the partnership interest through that
date.
5. Notes Payable
In connection with the Merger, the Company assumed all of the liabilities of
WFS, including notes payable to the former shareholders of Pacific Financial.
The notes aggregate $600,000, bear interest at 8% per annum and are due in
accordance with the terms set forth in the Pacific Financial acquisition
agreement. The Company believes it has valid defenses to the payment of the
notes. The Company is considering an action against the former shareholders of
Pacific Financial to recoup the purchase price paid for Pacific Financial and
correspondingly reduce the amount of the notes payable. The Company, however, is
unable to determine at this time if it will be successful. Therefore, the notes
payable are carried at their full amount in the accompanying consolidated
financial statements.
6. Stockholders' Equity
Common Stock and Warrant Transactions
In connection with the acquisition of Mercury Coast, the Company issued 700,005
shares of common stock in exchange for all of the outstanding stock of Mercury
Coast. The Company issued 12,000 shares of common stock as a finders fee in
connection with this transaction. The shares were valued at $18.25 based on the
share price on the date of the announcement of the transaction.
In connection with the Merger, the Company:
o Issued 3,722,817 shares of common stock for all of the outstanding shares
of Tower Hill. The Company also issued 387,684 options and 633,373 warrants
to former option and warrant holders of WFS and issued 100,000 shares of
common stock as a finders fee in connection with the Merger. The total
consideration paid, including transaction costs, aggregated $9,378,000.
o Issued 2,500,000 shares of common stock and warrants to purchase an
aggregate of 2,000,000 shares of common stock to GSCP and several of its
affiliates for gross proceeds of $5,000,000. 1,000,000 warrants are
exercisable at $5.44 per share and 1,000,000 warrants are exercisable at
$7.25 per share, and all of the warrants expire in November 2002. The
Company issued 100,000
17
<PAGE>
shares of common stock as a finders fee in connection with the private
placement. The shares were valued at $200,000 based on the $2.00 price per
share in the private placement.
o Issued 932,500 shares of common stock, in the aggregate, in two private
placements: one to an outside investor group and one to an investor group
consisting of former employees of Tower Hill, for aggregate proceeds of
$1,865,000.
o Issued 372,281 shares of restricted common stock to one of its officers for
no consideration (see Note 10).
7. Stock Options
On November 1, 1999, the Company adopted the 1999 Walnut Financial Services,
Inc. Stock Incentive Plan (the "1999 Plan"). The 1999 Plan is administered by an
administrative committee appointed by the Company's Board of Directors (the
"1999 Plan Committee"). The 1999 Plan Committee has the authority to select the
persons to whom awards may be granted, to determine the terms of each award, to
interpret the provisions of the 1999 Plan and to make all other determinations
that it may deem necessary or advisable for the administration of the 1999 Plan.
The 1999 Plan provides for the grant of incentive stock options, nonqualified
options, and restricted stock and stock appreciation rights ("SARs"), as
determined in each individual case by the 1999 Plan Committee. In connection
with an employment agreement entered into in 1999, the Company issued 372,281
shares of restricted stock under the 1999 Plan (see Note 10). The Company
recorded unearned compensation of $1,354,000 which will be charged to operations
over the three year vesting period. As of December 31, 1999, the Company has
granted 2,833,500 options under the 1999 Plan.
The options under the 1999 Plan generally vest over a period of one to four
years. In addition, in connection with the Mercury Coast acquisition, the
Company issued an aggregate of 930,000 options to three individuals pursuant to
their employment agreements (see Note 10). The options vest over a four year
period and are exercisable at $6.00 per share, which was less than the quoted
market price on the date of grant. The Company recorded an aggregate of
$26,449,000 of deferred compensation which will be charged to operations over
the vesting periods of the options issued.
The following table summarizes information about options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
Weighted Average Number of
Exercise Remaining Contractual Options
Price Number of Years Exercisable
----- --------- ----- -----------
<S> <C> <C> <C> <C> <C>
$ 3.625 2,332,500 (1) 4.83 1,907,499
6.000 930,000 5.00 -
10.000 455,700 4.83 -
10.800 23,350 4.00 23,350
11.020 14,334 4.00 14,334
--------- ---------
3,755,884 1,945,183
========= =========
</TABLE>
(1) Includes 850,000 options granted to individuals in connection with the
Merger.
18
<PAGE>
The Company accounts for all plans under APB Opinion No. 25. Had compensation
cost for stock option grants been determined in accordance with SFAS No. 123,
the Company's net income and EPS would have been reduced as follows:
Year Ended
December 31, 1999
-----------------
Net income:
As reported $ 1,511,000
Less Proforma adjustment 1,245,000
-------------
Proforma $ 266,000
=============
Basic and Diluted EPS:
As reported $0.33
Proforma $0.05
Under SFAS No. 123, the fair value of each option is estimated on the date of
grant using the Black Scholes option pricing model with the following weighted
average assumptions used for the options granted as of December 31, 1999: (1)
expected life of options of 1 to 3 years, (2) dividend yield of 0%, (3) expected
volatility of 70%, and (4) risk-free interest rate of 6%.
In connection with the Merger, the Company assumed the NFS Services, Inc. (Utah)
1994 Incentive Stock Option Plan, which was amended and restated and approved by
the Company's stockholders in December 1997 (as amended, the "1994 Plan"). The
1994 Plan is administered by a stock incentive plan administrative committee
appointed by the Company's Board of Directors (the "1994 Plan Committee"). The
1994 Plan Committee had the authority, subject to approval by the Company's
Board of Directors, the terms of the 1994 Plan and the Investment Company Act,
to select the persons to whom awards could be granted, to determine the terms of
each award, to interpret the provisions of the 1994 Plan and to make all other
determinations that it may have deemed necessary or advisable for the
administration of the 1994 Plan. The 1994 Plan provided for the grant of
incentive stock options, nonstatutory options, and restricted stock and SARs, as
determined in each individual case by the 1994 Plan Committee. The Company's
Board of Directors had reserved 1,000,000 shares of common stock for issuance
under the 1994 Plan. No further awards will be granted under the 1994 Plan. At
December 31, 1999, the Company had options outstanding under the 1994 Plan as
follows:
Weighted Average
shares Exercise Price
------ --------------
Options granted as of acquisition 14,334 $11.04
Options exercisable at end of year 14,334 11.04
The weighted average life of options outstanding is 3.6 years.
In connection with the Merger, the Company assumed the Walnut Capital
Corporation 1987 Stock Option Plan (as amended, the "1987 Plan"). The 1987 Plan
is administered by a stock option plan administrative committee appointed by the
Board of Directors (the "1987 Plan Committee"). The 1987 Plan Committee had the
authority, subject to approval by the Company's Board of Directors and the terms
of the 1987 Plan, to select the persons to whom awards could be granted, to
determine the terms of each award, to interpret the provisions of the 1987 Plan
and to make all other determinations that it may have deemed necessary or
advisable for the administration of the 1987 Plan. The 1987 Plan provided for
the grant of incentive stock options or nonstatutory options, as determined in
each individual case by the 1987 Plan Committee. There were 806,930 shares of
common stock reserved for issuance under the 1987 Plan. Awards of nonstatutory
options to purchase 23,350 shares of common stock all of which expire in 2004,
had been granted pursuant to the 1987 Plan. The exercise price of the options
outstanding
19
<PAGE>
pursuant to the 1987 Plan is $10.80 per share of common stock. The average
exercise price of options outstanding under the 1987 Plan is $10.80. No further
awards will be granted under the 1987 Plan.
8. Income Taxes
The significant components of the Company's deferred income tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Deferred income tax assets:
<S> <C> <C>
Net operating losses $ 702,000 $ 148,000
Unrealized losses 355,000 -
Preacquisition unrealized losses 1,079,000 -
Preacquisition net operating losses 2,270,000 -
-------------- -----------
4,406,000 148,000
Deferred income tax liability:
Option compensation (321,000) -
Unrealized gain (1,231,000) -
Valuation allowance (3,349,000) (148,000)
-------------- ------------
Net deferred income tax liability $ (495,000) $ -
============== ===========
The valuation allowance represents the unutilized tax benefit of the
preacquisition net operating losses and unrealized losses of WFS.
The significant components of the provision for income taxes from continuing
operations for the year ended December 31, 1999, the nine months ended December
31, 1998 and the year ended March 31, 1998 are as follows:
Year Ended Nine Months Year Ended
December 31, Ended March 31,
1999 December 31, 1998
1998
Current:
<S> <C> <C> <C>
Federal $ - $ 12,000 $ -
State - 23,000 -
--------------- ------------- -----------
Total current taxes - 35,000 -
--------------- ------------- -----------
Deferred:
Federal, including utilization of net operating losses
credited to excess of cost over fair value of net
<S> <C> <C> <C>
assets acquired 991,000 - -
State 228,000 - -
Change in valuation allowance (137,000) - -
--------------- ------------- -----------
Total deferred taxes 1,082,000 - -
--------------- ------------- -----------
Provision for income taxes $ 1,082,000 $ 35,000 $ -
============= ========== ========
The difference between the statutory federal income tax rate on the Company's
income from continuing operations before income taxes and the Company's
effective income tax rate for the year ended December 31, 1999, the nine months
ended December 31, 1998, and the year ended March 31, 1998 are summarized as
follows:
Year Ended Nine Months Ended Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
----------------- ----------------- --------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income tax, net of federal benefit 8.0 66.0
Nondeductible amortization of intangibles 3.2 - -
Reduction in valuation allowance (4.3) - -
Net operating losses (unutilized) (1.1) - (34.0)
----- ----- -----
Effective income tax rate 39.8% 100.0% - %
==== ===== ======
</TABLE>
20
<PAGE>
As of December 31, 1999, the Company has net operating loss carryforwards
("NOL"), attributable to losses incurred by WFS prior to the Merger for income
tax purposes of $6,379,000 expiring through 2019. As a result of the change in
ownership occurring in connection with the Merger, the utilization of the NOL's
of WFS is limited to approximately $700,000 annually. The tax benefit realized
upon utilization of such carryforwards will be credited to excess of cost over
fair value of net assets acquired.
9. Related Party Transactions
The Company leases office space from Hambro America Securities, Inc. which is
owned by the Co-Chief Executive Officers and the Chief Operating Officer of the
Company. The lease requires payments of $21,650 and expires on August 30, 2000.
Under this lease, rent expense for the year ended December 31, 1999 and the nine
months ended December 31, 1998 was $337,000 and $180,000, respectively,
including payments in 1999 for additional space leased on a month-to-month
basis.
In October 1998, the Company loaned $95,000 to a related party. The loan is
non-interest bearing and is being repaid over 22 months at $4,318 per month.
During the nine months ended December 31, 1998, the Company loaned an aggregate
of $216,000 to certain of its officers. The loans were noninterest bearing and
had no specific repayment date. In addition during 1999, the Company loaned an
additional $100,000, in the aggregate, to certain of its officers. Prior to the
consummation of the Merger, the Company forgave loans to one of those officers
in the amount of $132,237, which was charged to compensation expense.
A stockholder of the Company and certain of its affiliates own 75% of the
membership interests in THCG Venture Partners I LLC in which the Company has a
9.9% interest. The remaining 15.1% membership interest in THCG Venture Partners
I LLC is owned by THCG Partners, LLC, whose managing member is a wholly owned
subsidiary of the Company.
10. Commitments and Contingencies
Operating Leases
The Company has entered into a non-cancelable operating lease for office space
for a period of 10 years commencing on September 1, 2000. This lease provides
for minimum annual lease payments and additional operating expense charges.
The future minimum lease payments required under the above mentioned operating
lease for the years ended December 31, are as follows:
Year
2000 $ 607,613
2001 889,840
2002 889,840
2003 889,840
2004 889,840
2005 and thereafter 5,576,331
--------------
Total minimum lease payments $ 9,743,304
==============
21
<PAGE>
In addition to the above mentioned lease, the Company has committed to
additional leasehold improvements of approximately $2,000,000.
Employment Agreements
The Company entered into employment agreements with each of its two Co-Chief
Executive Officers. The agreements, which expire in 2004, provide for aggregate
annual base salaries of $400,000 and annual bonuses to be determined by the
Compensation Committee. In connection with the agreements, the Company issued
900,000 options to purchase common stock under the 1999 Plan.
The Company entered into an employment agreement with its Chief Operating
Officer, which expires in 2004, that provides for a base salary of $150,000 and
an annual bonus to be determined by the Compensation Committee. In connection
with the agreement, the Company issued 372,281 shares of restricted stock which
vest in differing amounts over a period of three years. In connection with the
issuance of restricted stock, the Company recorded unearned compensation of
$1,354,000 which is being charged to income as the shares vest.
In connection with the acquisition of Mercury Coast, the Company entered into
employment agreements with each of the three former shareholders of Mercury
Coast. Each agreement provides for an annual base salary of $150,000, a minimum
bonus of $50,000 in 2000, and future bonuses to be determined by the
Compensation Committee, and each agreement expires three years from the date of
the acquisition. The agreements are automatically renewable on an annual basis
unless the Company or the employee gives written notice. In connection with the
employment agreements, the Company issued options to purchase 310,000 shares of
common stock to each of the three individuals. The options have an exercise
price of $6.00 per share, are exercisable for five years and vest over four
years. In connection with the issuance of these options, the Company recorded
unearned compensation in the aggregate amount of $23,715,000, which is being
charged to earnings over the vesting period of the options.
Litigation
On April 21, 1999, Yoav Bitter commenced an action against Tower Hill pursuant
to the New York Business Corporation Law Section 1104-a, for, inter alia,
judicial dissolution of Tower Hill and appointment of a receiver. On April 26,
1999, New York Supreme Court Justice Emily Jane Goodman, upon the application of
Mr. Bitter, issued an Order to Show Cause through which Mr. Bitter sought, inter
alia, reinstatement of his employment with Tower Hill. The Order to Show Cause
contained a Temporary Restraining Order requiring Tower Hill to pay Mr. Bitter
his salary pending hearing of Mr. Bitter's Order to Show Cause. On April 29,
1999, the parties executed a stipulation providing that Tower Hill would pay Mr.
Bitter his salary through May 13, 1999, the return date of the Order to Show
Cause. On May 13, 1999, the Court heard argument on Mr. Bitter's dissolution
petition and Mr. Bitter's Order to Show Cause for reinstatement of his
employment, continuation of his salary and appointment of a temporary receiver.
The Court also heard Tower Hill's cross-motion to dismiss. On June 17, 1999,
Justice Goodman denied the relief sought by Mr. Bitter, and granted Tower Hill's
cross motion to dismiss the matter. On July 1, 1999, Tower Hill served Notice of
Entry of Order. On July 26, 1999, Justice Goodman entered judgment dismissing
Mr. Bitter's dissolution petition and awarded Tower Hill costs and disbursements
in the amount of $200.00.
On August 3, 1999, Mr. Bitter filed a Notice of Appeal of the judgment of
Justice Goodman with the New York State Supreme Court Appellate Division, First
Department. Mr. Bitter filed his appellate brief on November 5, 1999, Tower Hill
filed its brief in opposition on January 5, 2000, and Mr. Bitter filed a reply
brief on January 13, 2000. The Appellate Division heard oral argument on the
appeal on February 22, 2000. On March 14, 2000, the Appellate Division issued
its decision and order unanimously affirming the dismissal of Mr. Bitter's
application for judicial dissolution. On April 13, 2000, Mr. Bitter moved for
reargument, modification, or clarification of, or in the alternative, for leave
to appeal to the Court of Appeals, from the decision and order of the court
entered on March 14, 2000. On April 24, 2000, Tower Hill opposed this motion. 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 October 12, 2000, the Court of Appeals denied
Mr. Bitter's motion.
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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 appointed
a three-person arbitration panel. The arbitrators held pre-hearing conferences
on July 20, 2000 and September 7, 2000. In August 2000, Tower Hill dropped its
claim for return of company property after Mr. Bitter returned the property that
was the subject of the claim. In October 2000, Tower Hill dropped its claim for
unauthorized expenses. On October 4, 2000, Mr. Bitter purported to file
additional counterclaims that would raise his alleged claim for damages to in
excess of $498,500, but the arbitrators ruled that they would not consider the
additional counterclaims. The arbitrators conducted a hearing concerning the
counterclaims on October 24-25, 2000; an additional hearing day will be
scheduled at some point in the future.
By First Amended Complaint dated November 22, 1999 and filed on November 23,
1999 (the "Miller Complaint"), the Company, Inland and the former President of
Inland, Henry Wozow, and his wife, Patricia Wozow, were sued in the Superior
Court for the State of Washington for Spokane County in an action entitled
Miller Capital Group, L.L.C. et al. v. Inland Financial Corporation, et al. (No.
99206566-7. The Company was named as successor to WFS, the corporate parent of
Inland. The Miller Complaint generally alleges that Inland and Mr. Wozow
fraudulently induced the plaintiffs to purchase participations in various
transactions relating to Inland's factoring business and that funds obtained by
Inland and/or WFS in connection with those transactions were improperly diverted
or converted. It is alleged that WFS controlled Inland in general and with
respect to the specific challenged transactions. Plaintiffs allege causes of
action for breach of promissory notes, state securities law fraud and
registration violations, common law misrepresentation and conversion. The Miller
Complaint seeks unspecified injunctive relief, unspecified damages and an
accounting. The plaintiffs have recently sought leave to amend the Miller
Complaint to seek relief under the Washington Consumer Protection Act arising
out of the same alleged facts.
On May 10, 2000, Mr. and Mrs. Wozow cross-claimed against Inland and the Company
alleging that the Company controlled Inland, failed to provide financing to
Inland as allegedly represented and interfered with Inland's operations to the
detriment of Mr. Wozow's business expectations and his employment agreement with
Inland. The cross-claim alleges misrepresentation, breach of contract,
intentional interference with business expectancy and contractual relations,
indemnification, quantum meruit and a fraudulent conveyance and seeks
unspecified damages.
As a result of the involuntary bankruptcy petition referred to below, this
action has been stayed with respect to Inland, although not the other
defendants, including the Company and the Wozows. The litigation is in its early
stages and discovery is on-going.
On May 9, 2000, Mr. Wozow and two other purported creditors filed an involuntary
bankruptcy petition against Inland in the Bankruptcy Court for the Eastern
District of Washington. (In re Inland Financial Corp. (No. 0003014W17).) Inland
contested the petition and hearings were held before the Court in October and
November 2000. The Court has not yet issued a decision. The Company and Inland
are evaluating possible claims against Mr. Wozow and others in connection with
Mr. Wozow's actions during and after his period of employment with Inland.
The Company is involved in other litigation in the normal course of its
business, the outcome of which the Company does not believe will be material.
Net Capital Requirements
Tower Hill is subject to the SEC's Uniform Net Capital Rule 15c 3-1, which
requires the maintenance of minimum regulatory net capital and that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed the
greater of 15 to 1 or $100,000. At December 31, 1999, Tower Hill was in
compliance with the net capital requirement.
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11. Subsequent EventS
On October 23, 2000, THCG announced a plan to repurchase up to 500,000 shares of
its stock from time-to-time in open market transactions at prevailing market
prices. As of November 8, 2000, THCG had repurchased 52,100 shares at a cost of
approximately $102,000.
On September 30, 2000, THCG negotiated the termination of Walnut Growth
Partners, L.P. ("WGP"). THCG owns 100% of the general partner of WGP. The
general partner owned 1% of WGP and managed WGP's assets, for which services it
was entitled to management fees and additional compensation in the form of a
carried interest equal to 20% of the profits of WGP after the limited partner's
capital was returned.
As a result of the termination of WGP, THCG received 133,932 shares of
webMethods, Inc. and WGP's positions in private companies. THCG is settling the
compensation due to a former employee. This compensation will approximate 10% of
the positions received by THCG in the termination of WGP.
On August 2, 2000, the Company 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"). The gross proceeds of the offering were $5.0 million.
The Preferred Stock is convertible (subject to anti-dilution protections) into
the Company's common stock, par value $0.01 per share, 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, the Company 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 the Company at any time subject to the payment of
premiums and the satisfaction of other conditions.
A premium is payable quarterly on the Preferred Stock on the last business day
of each calendar quarter in an amount equal to 10% per annum of the stated value
of the Preferred Stock. ($5.0 million). The premium is payable in cash until the
Company's registration statement described below is declared effective and
thereafter, if the conditions described in the certificate of designations are
satisfied, the premium is payable, at the Company's election, in cash, in
additional shares of common stock (valued at a price per share equal to the
market price, as defined in the certificate of designations, of the common stock
on the date the premium is paid) or in additional shares of Preferred Stock
valued at its stated value.
The Warrant has a four-year term and entitles the holder to purchase up to
396,899 shares of common stock at a fixed exercise price of $5.039 per share
throughout the term of the Warrant (subject to antidilution 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, the Company may cause the Warrant to be automatically
exercised for common stock.
Pursuant to a registration rights agreement, the Company filed a registration
statement under the Securities Act of 1933, as amended, registering for resale
by the holders thereof the common stock underlying the Preferred Stock and the
Warrant. The Company must use its best efforts to cause the registration
statement to become effective as soon as practicable. The registration statement
has not yet been declared effective. The Company may be required to pay Castle
Creek certain amounts as specified in the registration rights agreement if the
registration statement is not declared effective within 120 days of August 2,
2000 and is not maintained effective.
On April 11, 2000, THCG announced the acquisition of approximately $300,000 of
assets of certain businesses operated under the Giza Group ("Giza") name in
Israel. Zinook Ltd. ("Zinook") is the entity's new name. The transaction closed
on September 1, 2000 and is being accounted for using the purchase method of
accounting. The
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businesses acquired are the investment banking and equity research operations of
Giza. THCG issued 750,000 shares of common stock in connection with the
acquisition.
On February 7, 2000, the Company exchanged $5.0 million of its common stock for
a 25% interest in Global Credit Services, Inc. ("Global Credit") and THCG
Venture Partners I simultaneously invested in Global Credit. The Company will be
accounting for its holdings in Global Credit using the equity method of
accounting, whereby the Company will reflect it's proportional share of profits
and losses.
In February 2000, Class A warrants issued in a 1997 private placement were
exercised. Common stock issued totaled 633,373 and proceeds from the exercise
approximated $5.7 million dollars.
12. Discontinued Operations
Two of the Company's subsidiaries, Pacific Financial and Inland, engage in the
factoring business in the state of Washington. In the first quarter of 2000, the
Company completed a strategic review and concluded that the factoring business
is not consistent with the Company's current focus and corporate objectives.
Accordingly, the Company is winding down the operations of these two
subsidiaries and has accounted for them as discontinued operations.
The accompanying consolidated financial statements have been restated to report
separately the assets, operating result and net cash flows of these discontinued
operations.
1999
----
Revenues $ 135,000
Expenses 287,000
------------
Loss before tax benefit (152,000)
Tax benefit 28,000
------------
Net loss $ (124,000)
============
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The discussion in this report contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Factors
Affecting Our Future Performance" in Item 1 of our Annual Report on Form 10-K
for December 31, 1999 as well as those discussed in this section and elsewhere
in this report.
Overview
We are an Internet incubator company that provides venture funding,
venture development and venture banking services. We are penetrating new markets
by developing our international operations and by expanding our global coverage
of the Internet industry. We provide services to Internet-based businesses,
established "brick and mortar" companies implementing an Internet-based strategy
and advanced technology and service companies. By providing our partner
companies with capital and a combination of enterprise-enhancing venture
development and venture banking services, we believe that we help our partner
companies focus on their core strengths so that they may bring their products
and services to market more rapidly.
On November 1, 1999, WFS acquired Tower Hill. However, for financial
statement purposes, Tower Hill acquired WFS and is the surviving entity. Tower
Hill 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, which is engaged in the business of
providing business development services, including strategic planning,
operations and marketing consulting services, to Internet-based businesses.
The financial statements contained in this annual report reflect the
operations of Hambro America Securities for the year ended March 31, 1998 and
the operations of Tower Hill for the nine months ended December 31, 1998.
The financial statements for the year ended December 31, 1999 reflect
the operations of Tower Hill for the full year then ended, the operations of WFS
for the period between November 1, 1999 and December 31, 1999, and the
operations of Mercury Coast for the period between December 29, 1999 and
December 31, 1999.
We decided to discontinue the accounts receivable factoring business in
the first quarter of 2000 (see Note 12 of the Notes to Consolidated Financial
Statements).
Twelve Months Ended December 31, 1999 as compared to the Nine Months Ended
December 31, 1998
Revenues
Revenues for the year ended December 31, 1999 increased to $7.6 million
from $2.1 million for the nine months ended December 31, 1998. The increase in
revenue was primarily due to a significant increase in revenues derived from the
sales of our venture banking services and to the fact that the 1999 period
reflects four quarters of revenue while the 1998 period reflects three quarters
of revenue.
Venture service fees for the year ended December 31, 1999 increased to
$3.0 million from $2.1 million for the nine months ended December 31, 1998. The
increase in these fees was primarily due to an increase in fees earned from
providing our venture banking services.
Realized and unrealized gain on investments consists 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 on
investments, net, was $4.6 million for the year ended December 31, 1999 compared
to $20,000 for the nine months
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ended December 31, 1998. The increase in 1999 was due primarily to the $1.5
million increase in the value of our warrants to purchase stock of Interleaf,
Inc., which we received for providing venture banking services, and to the $1.5
million increase in the value of our wholly owned subsidiary that is the general
partner of Walnut Growth Limited Partnership. This wholly owned subsidiary is
generally entitled to 1% of the partnership's assets plus 20% of the net value
of the partnership's assets after the limited partner's capital contribution of
$6 million is returned to it. In addition to positions in other companies,
Walnut Growth Limited Partnership owns 769,248 shares of webMethods, Inc., which
completed its initial public offering in February 2000.
Expenses
Selling, general and administrative expenses for the year ended
December 31, 1999 increased to $4.2 million from $2.1 million for the nine
months ended December 31, 1998. The increase in selling, general and
administrative expenses was primarily due to the increase in compensation and
related benefits to $2.0 million for the year ended December 31, 1999 from $1.3
million for the nine months ended December 31, 1998. Compensation expenses in
selling, general and administrative expenses included bonuses to professionals
related to the improved results from our venture banking services, as well as
our hiring of additional employees to provide venture development services to
our partner companies. In addition, the 1998 period reflects only three quarters
of expenses, while the 1999 period reflects a full year of expenses.
Professional and related fees for the year ended December 31, 1999 increased to
$869,000 from $294,000 for the nine months ended December 31, 1998. The increase
in professional and related fees was primarily related to the increased volume
and complexity of client engagements in 1999.
Occupancy and equipment rental expenses for the year ended December 31,
1999 increased to $470,000 from $212,000 for the nine months ended December 31,
1998. The increase in occupancy and equipment rental expenses was caused by an
increase in our rental space. In addition, the 1998 total reflects only three
quarters of rental expense, while the 1999 total reflects a full year of rental
expense. It is anticipated that our occupancy costs will increase significantly
from the end of the third quarter of 2000 as we move into new space (see Note 10
to of the Notes to Consolidated Financial Statements).
Equity-based compensation expenses for the year ended December 31, 1999
was $595,000. There were no equity-based compensation expenses for the nine
months ended December 31, 1998. 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 expenses for the year ended December 31, 1999 increased to
$86,000 from zero for the nine months ended December 31, 1998. The increase in
amortization expenses is primarily related to the amortization of goodwill from
our merger with WFS on November 1, 1999 and the acquisition of Mercury Coast on
December 29, 1999.
Our provision for income taxes for income from continuing operations
for the year ended December 31, 1999 increased to $1.1 million from $35,000 for
the nine months ended December 31, 1998. This increase was primarily due to the
increase in net income from continuing operations for 1999.
We decided to discontinue the accounts receivable factoring business in
the first quarter of 2000 (see Note 12 of the Notes to Consolidated Financial
Statements). The assets, revenues and expenses of the factoring business have
been reclassified in these financial statements as discontinued operations. The
net loss from the discontinued operations for the year ended December 31, 1999
amounted to $124,000.
Nine Months Ended December 31, 1998 as compared to the Twelve Months Ended March
31, 1998
Revenues
Revenues for the nine months ended December 31, 1998 increased to $2.1
million from $228,000 for the year ended March 31, 1998. The increase in revenue
was primarily due to an increase in revenues derived from the sales of our
venture banking services.
27
<PAGE>
Expenses
Selling, general and administrative expenses for the nine months ended
December 31, 1998 increased to $2.1 million from $1.6 million for the year ended
March 31, 1998. The increase in selling, general and administrative expenses was
primarily due to increases in compensation, primarily due to the payment of
bonuses to professionals and related benefits for the nine months ended December
31, 1998.
Occupancy and equipment rental expenses for the nine months ended
December 31, 1998 increased to $211,000 from $111,000 for the year ended March
31, 1998. The increase in occupancy and equipment rental expenses was caused by
an increase in equipment rentals to support our professional staff and the need
to increase expenses as an independent company, no longer part of Hambros or
Societe Generale.
Professional and related fees for the nine months ended December 31,
1998 increased to $294,000 from zero for the year ended March 31, 1998. The
increase in professional and related fees was due to our need to retain
additional outside professionals as an independent company.
Our provision for income taxes for the nine months ended December 31,
1998 increased to $35,000 from zero for the year ended March 31, 1998. The
increase in income tax was primarily due to an increase in income generated by
our business in the last nine months of 1998.
Liquidity and Capital Resources
Our business is capital intensive. In the future, we expect
periodically to raise funds to acquire equity interests in and establish new
partner companies, to support our operations and expand our venture development
and venture banking services, and to support the operations and growth of our
partner companies. Our future capital requirements will depend in large part on
the number of partner companies in which we acquire equity interests and which
we establish, the amounts of capital we provide to these companies and the
timing of these payments. Our plans and the related capital requirements will be
dependent on various factors, such as developments in our markets and the
availability of acquisition and entrepreneurial opportunities. If we are
successful in selling additional equity securities, our then existing
stockholders may suffer significant dilution. However, we may not be able to
obtain financing on acceptable terms, or at all, when we need it. If we require,
but are unable to obtain, additional financing in the future on acceptable
terms, or at all, we will not be able to continue our business strategy, respond
to changing business or economic conditions, withstand adverse operating results
or compete effectively, and our business, financial condition and operating
results may be materially and adversely affected as a result.
We funded operations primarily through private placements of our common
stock on November 1, 1999 in connection with our merger with WFS. We raised $6.9
million from the sale of common stock in those private placements. Our principal
sources of liquidity as of December 31, 1999 consisted of $2.8 million in
marketable securities and $1.6 million in cash and cash equivalents.
During 1999, net cash used in continuing operating activities was $1.9
million compared to $249,000 for the nine months ended December 31, 1998. The
increase in cash used in operations in 1999 reflects the need for working
capital required to fund expanding operations.
Net cash used in investing activities of continuing operations for 1999
was $480,000 compared to $325,000 for the nine months ended December 31, 1998.
The change was due mainly to our purchase of the minority interest in Universal
Partners, L.P., which we acquired in the merger with WFS.
Net cash provided by financing activities of continuing operations was
$3.4 million for the year ended December 31, 1999. This consisted primarily of
proceeds of $6.9 million received through the private placements of common stock
on November 1, 1999 in connection with our merger with WFS. We intend to
continue to raise capital to finance our strategy of building dominant partner
companies and expanding our operations.
In February, 2000, we called for the redemption of our outstanding
Class A Warrants (the "Class A Warrants"), thereby causing the holders to
exercise all of the Class A Warrants for $9 per share of common stock.
28
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This resulted in proceeds to us of approximately $5.7 million. We issued 633,373
new shares of common stock upon exercise of the Class A Warrants. We filed a
registration statement with the SEC covering the resale of these shares for a
period of 90 days. This period ended on August 7, 2000, and on August 8, 2000,
we filed a post-effective amendment with the SEC to deregister any unsold shares
of common stock.
On April 11, 2000, THCG announced the acquisition of approximately
$300,000 of assets of certain businesses operated under the Giza Group ("Giza")
name in Israel. Zinook Ltd. ("Zinook") is the entity's new name. The transaction
closed on September 1, 2000 and is being accounted for using the purchase method
of accounting. The businesses acquired are the investment banking and equity
research operations of Giza. THCG issued 750,000 shares of common stock in
connection with the acquisition. Cash advanced by us to Giza to fund Giza's
current operations, which totaled $766,000 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, we issued 5,000 shares of our 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 11 of the Notes to Consolidated
Financial Statements).
We also committed approximately $2.5 million relating to the move of
our new U.S. office location in the third quarter of 2000. The landlord has
reimbursed us for approximately $490,000 and will reimburse us for an additional
$510,000 in construction costs after certain criteria have been met.
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 $350,000.
New Accounting Pronouncements
In December 1999, the SEC issued 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.
29
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(c) Exhibits
The following exhibit replaces the previously filed Exhibit No. 27.1 in
its entirety:
Exhibit No. Description
----------- -----------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Cohen & Schaeffer, P.C.
27.1 Financial Data Schedule.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on November 14, 2000.
THCG, INC.
By: /s/ Adi Raviv
---------------------------------
Name: Adi Raviv
Title: Co-Chairman of the Board of
Directors and Chief Financial
Officer
31
<PAGE>
EXHIBIT LIST
Exhibit No. Description
----------- -----------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Cohen & Schaeffer, P.C.
27.1 Financial Data Schedule.
32
