SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________________ to ___________________
Commission File No. 0-26072
THCG, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0415597
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
512 Seventh Avenue, 17th Floor, New York, NY 10018
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (212) 223-0440
Indicate by check |X| whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No____
--------
As of November 10, 2000, there were 13,335,317 shares of the
registrant's Common Stock outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Statements of Financial Condition -
as of September 30, 2000(unaudited) and December 31, 1999........ 2
Consolidated Statements of Operations - for the nine
months and the three months ended September 30, 2000
(unaudited) and September 30, 1999 (unaudited)................... 3
Consolidated Statement of Changes in Stockholders'
Equity - for the nine months ended September 30, 2000
(unaudited) ..................................................... 4
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 2000 (unaudited) and
September 30, 1999 (unaudited).................................. 5
Notes to Consolidated Financial Statements (unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 13
Item 2. Changes in Securities and Use of Proceeds....................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 14
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of THCG, Inc.
and its subsidiaries are presented on pages 2 through 6 hereof as set forth
below:
Consolidated Statements of Financial Condition - as of
September 30, 2000 (unaudited) and December 31, 1999....................... 2
Consolidated Statements of Operations - for the nine
months and the three months ended September 30, 2000
(unaudited) and September 30, 1999 (unaudited)............................. 3
Consolidated Statements of Changes in Stockholders' Equity -
for the nine months ended September 30, 2000 (unaudited) .................. 4
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 2000 (unaudited) and
September 30, 1999 (unaudited)............................................ 5
Notes to Consolidated Financial Statements (unaudited)....................... 6
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share and per share data)
September 30, December 31,
2000 1999
(unaudited) (audited)
--------------- ---------------
(Note 1) (Note 1)
ASSETS
<S> <C> <C>
Cash and cash equivalents $4,635 $1,592
Marketable securities 14,763 2,812
Nonmarketable securities, partnership, limited liability company
and other interests (See Note 2) 10,032 7,104
Ownership interest in company accounted for on the equity method (See
Note 4) 4,281 ----
Fees and other receivables, net of allowance 2,737 352
Prepaid expenses and other assets 637 279
Loans receivable, related parties 415 312
Furniture, fixtures and equipment - net 1,743 104
Goodwill and other intangible assets, net of
accumulated amortization 22,425 16,610
Assets of discontinued operations (See Note 3) ---- 6,537
--------------- --------------
Total Assets $61,668 $35,702
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other current liabilities $5,200 $1,933
Loan payable ---- 565
Notes payable ---- 600
Deferred income taxes payable ---- 495
--------------- --------------
Total Liabilities 5,200 3,593
--------------- --------------
Stockholders' Equity:
Cumulative preferred stock - variable rate, $1,000 par value, 5,000
shares issued and outstanding at September 30, 2000 5,000 ----
Common stock, $.01 par value, 50,000,000 shares authorized; 13,404,169 and
11,751,113 issued and outstanding at September 30, 2000 and December
31,1999, respectively 134 118
Additional paid-in capital 89,060 68,777
Deferred compensation (21,337) (27,294)
Accumulated deficit (16,389) (9,492)
--------------- --------------
Total Stockholders' Equity 56,468 32,109
--------------- --------------
Total Liabilities and Stockholders' Equity $61,668 $35,702
=============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Nine Months Ended Three Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
------------- ------------- ------------- --------------
Revenues
<S> <C> <C> <C> <C>
Venture service fees $5,788 $2,250 $2,469 $312
Realized and unrealized gain (loss) in investments, net, and
interest income 13,885 28 698 10
------------- ------------- ------------- --------------
Total Revenues 19,673 2,278 3,167 322
Expenses
Selling, general and administrative 10,970 2,506 4,285 960
Equity-based compensation 7,144 ----- 2,144 -----
Amortization of acquired intangibles 2,776 ----- 994 -----
------------- ------------- ------------- --------------
Total Expenses 20,890 2,506 7,423 960
Income (loss) from continuing operations (1,217) (228) (4,256) (638)
Provision for income taxes (tax benefit) (97) ----- ----- -----
------------- ------------- ------------- --------------
Income (loss) before discontinued operations and equity in
losses of company accounted for on the equity method (1,120) (228) (4,256) (638)
Equity in losses of company accounted for on the equity
method (745) ----- (253) -----
------------- ------------- ------------- --------------
Net income (loss) before discontinued operations (1,865) (228) (4,509) (638)
Net (loss) from discontinued operations (4,951) ----- ----- -----
------------- ------------- ------------- --------------
Net income (loss) (6,816) (228) (4,509) (638)
Dividend on preferred stock 81 ----- 81 -----
------------- ------------- ------------- --------------
Net income (loss) available for common stock ($6,897) ($228) ($4,590) ($638)
============= ============= ============= ==============
Basic and Diluted Earnings Per Share
Basic income (loss) per share from continuing operations ($0.16) ($0.06) ($0.36) ($0.17)
Basic (loss) per share from discontinued operations (0.39) ----- ----- -----
------------- ------------- ------------- --------------
Basic income (loss) per share ($0.55) ($0.06) ($0.36) ($0.17)
============= ============= ============= ==============
Basic weighted average common shares outstanding 12,543,681 3,723,000 12,890,039 3,723,000
============= ============= ============= ==============
Diluted weighted average common shares outstanding 12,543,681 3,723,000 12,890,039 3,723,000
============= ============= ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Preferred Stock Common Stock Additional
Number of Number of Paid-in Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 0 $0 11,751,113 $118 $68,777 ($27,294) ($9,492) $32,109
Proceeds from exercise of warrants
for common stock 633,373 6 5,694 $5,700
Issuance of preferred stock and
related closing cost 5,000 $5,000 (311) $4,689
Proceeds from exercise of options
for common stock 7,500 1 26 $27
Issuance of common stock in
connection with investments 1,012,183 9 13,687 $13,696
Deferred compensation for stock
options issued to employees
Amortization of deferred 1,187 (1,187) $0
compensation 7,144 $7,144
Net loss (6,816) ($6,816)
Dividend on preferred stock (81) ($81)
------------------------------------------------------------------------------------------------
Balance, September 30, 2000 5,000 $5,000 13,404,169 $134 $89,060 ($21,337) ($16,389) $56,468
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Nine Months Ended
------------------------------------
September 30, September 30,
2000 1999
(unaudited) (unaudited)
--------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ($6,816) ($228)
Adjustment to reconcile net income (loss) to net
cash used in continuing operating activities:
Loss from discontinued operations 4,951 ---
Equity in losses of company accounted for on the equity method 745 ---
Net change in unrealized appreciation of investments (13,352) ---
Gain on sale of marketable securities (23) ---
Equity-based compensation 7,144 ---
Depreciation and amortization 69 14
Amortization of intangible assets 2,776 ---
Bad debt expense 250 165
Deferred income tax provision (495) ---
Changes in operating assets and liabilities:
Fees and other receivables (2,635) 310
Prepaid expenses and other assets (358) 5
Loans receivable, related parties (103) (72)
Accounts payable, accrued expenses
and other current liabilities 2,414 (242)
------------- -------------
Net cash used in operating activities (5,433) (48)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 3,678 ---
Investments in partnerships, limited liability companies and
other interests (3,428) (90)
Purchase of furniture and equipment (1,708) (32)
------------- -------------
Net cash used by investing activities (1,458) (122)
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of warrants for common stock 5,700 ---
Proceeds from the exercise of options for common stock 27 ---
Proceeds from issuance of preferred stock 5,000 ---
Principal payment on loan payable (565) ---
Dividend payment on preferred stock (81) ---
Repayment of subscription receivable --- 67
------------- -------------
Net cash provided by financing activities 10,081 67
------------- -------------
Net cash used in discontinued operations (147) ---
------------- -------------
Net increase (decrease) in cash and cash equivalents 3,043 (103)
Cash and cash equivalents - January 1, 1,592 610
------------- -------------
Cash and cash equivalents - September 30, $4,635 $507
============= =============
Supplemental disclosure of cash flow information:
Cash paid:
Interest $27 ---
Taxes $4 $48
Supplemental disclosure of noncash investing and financing
activities:
Issuance of stock in connection with investment in Global Credit
Services, Inc. $5,025 ---
Issuance of stock in connection with Zinook Ltd. acquisition $8,671 ---
Retirement of preferred stock in connection with the
recapitalization --- $1,000
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
THCG, Inc.
Notes to CONSOLIDATED financial statements
September 30, 2000
Note 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements as of September 30,
2000 are unaudited; however, in the opinion of the management of THCG, Inc., a
Delaware corporation ("THCG"), such statements include all adjustments
(consisting of normal recurring accruals) necessary to present a fair statement
of the information presented therein. The balance sheet at December 31, 1999 was
derived from the audited financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission (the "SEC") applicable to Quarterly Reports on Form 10-Q, the
accompanying financial statements and these Notes do not include all disclosures
required by generally accepted accounting principles for audited financial
statements. Accordingly, these statements should be read in conjunction with
THCG's audited financial statements included in Amendment No. 2 on Form 10-K/A
to its Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for fiscal years.
The financial statements of THCG include the accounts of its wholly
owned subsidiaries, Mercury Coast Inc. ("Mercury Coast") and Tower Hill
Securities, Inc. ("Tower Hill Securities") and its wholly owned subsidiaries,
THCG LLC and THCG Ventures LLC. THCG Ventures LLC is a management company for
two related venture capital companies, THCG Venture Partners I LLC ("Venture I")
and THCG Partners LLC. THCG Ventures LLC has a 0.45% member's interest in THCG
Partners LLC. THCG Partners LLC and THCG LLC have a 15.1% and a 9.9% membership
interest, respectively, in Venture I. All significant intercompany accounts and
transactions are eliminated in consolidation. Pacific Financial Services Corp.
("Pacific Financial") and Inland Financial Corporation ("Inland Financial") are
wholly owned subsidiaries of THCG whose operations have been discontinued. See
Note 3 of the Notes to Consolidated Financial Statements.
On April 11, 2000, THCG announced the acquisition of approximately $300
thousand of assets of certain businesses operated under the Giza Group ("Giza")
name in Israel. Zinook Ltd. ("Zinook") is the entity's new name. The transaction
closed on September 1, 2000 and is being accounted for using the purchase method
of accounting. The businesses acquired are the investment banking and equity
research operations of Giza. THCG issued 750,000 shares of common stock in
connection with the acquisition.
Note 2 - PARTNERSHIP, LIMITED LIABILITY COMPANY AND OTHER INTERESTS
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. ("webMethods") and WGP's positions in private companies. THCG
is currently settling the compensation due to a former employee. This
compensation will approximate 10% of the positions received by THCG in the
liquidation of WGP.
On February 11, 2000, webMethods, Inc., a company in the WGP portfolio,
issued stock to the public at $35.00 per share. The price of webMethods' stock
has been extremely volatile. On March 31, 2000, the stock price of webMethods
was $241.38 per share. The price of webMethods' stock declined to as low as
$44.50 per share on April 17, 2000. On September 29, 2000, the price of
webMethods' stock was $115.125 per share.
Venture I made an additional investment in an existing partner company
of $500 thousand during the three months ended September 30, 2000. As of
September 30, 2000, THCG's interest in its venture partner companies owned by
Venture I and THCG Partners LLC aggregated $1.9 million.
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Note 3 - DISCONTINUED OPERATIONS
As disclosed in Amendment No. 1 on Form 10-Q/A to its Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000, two of THCG's subsidiaries,
Pacific Financial and Inland Financial, engaged in the factoring business in the
state of Washington. THCG completed a strategic review in the first quarter and
concluded that the factoring business was not consistent with THCG's focus and
corporate objectives. Accordingly, THCG is winding down the operations of these
two subsidiaries and has accounted for these businesses as discontinued
operations.
NOTE 4 - OWNERSHIP INTEREST IN COMPANY ACCOUNTED FOR ON THE EQUITY METHOD
On February 7, 2000, THCG exchanged $5.0 million of its common stock
for a 25% interest in Global Credit Services, Inc. ("Global Credit") and Venture
I simultaneously invested in Global Credit. THCG is accounting for its holdings
in Global Credit using the equity method.
THCG has preliminarily identified certain intangible assets totaling
approximately $5.1 million which are being amortized over a seven year period.
Amortization expense of $470 thousand is included in "Equity in losses of
company accounted for on the equity method" in the accompanying Consolidated
Statements of Operations.
NOTE 5 - PREFERRED STOCK
On August 2, 2000, THCG issued 5,000 shares of its Series A Convertible
Participating Preferred Stock (the "Preferred Stock") and a related Warrant (the
"Warrant") in a private placement to Castle Creek Technology Partners LLC
("Castle Creek"), a private investment fund focused primarily on the technology
sector. The gross proceeds of the offering were $5.0 million.
The Preferred Stock is convertible (subject to anti-dilution
protections) into THCG common stock, par value $0.01 per share (the "Common
Stock"), at a fixed conversion price of $5.039 per share at any time prior to
December 29, 2000. Thereafter, the conversion price will be the lower of $5.039
per share and 90% of the prevailing market price of the Common Stock, provided
that regardless of the market price for the Common Stock, a maximum of 2,529,568
shares of Common Stock are issuable upon conversion of the Preferred Stock. If
the market price of the Common Stock is greater than 200% of the then fixed
conversion price of the Preferred Stock for at least 10 consecutive days and if
certain other conditions are met, THCG may cause the Preferred Stock to be
automatically converted into Common Stock. Unless previously converted by the
holder, the Preferred Stock automatically converts into Common Stock on August
2, 2003, and is subject to optional redemption by THCG at any time subject to
the payment of premiums and the satisfaction of other conditions.
A premium is payable quarterly on the Preferred Stock on the last
business day of each calendar quarter in an amount equal to 10% per annum of the
stated value of the Preferred Stock ($5.0 million). The premium is payable in
cash until THCG's registration statement described below is declared effective
and thereafter, if the conditions described in the certificate of designations
are satisfied, the premium is payable, at THCG's election, in cash, in
additional shares of common stock (valued at a price per share equal to the
market price, as defined in the certificate of designations, of the common stock
on the date the premium is paid) or in additional shares of Preferred Stock
valued at its stated value.
The Warrant has a four-year term and entitles the holder to purchase up
to 396,899 shares of Common Stock at a fixed exercise price of $5.039 per share
throughout the term of the Warrant (subject to anti-dilution protections). If
the market price of the Common Stock is greater than 200% of the then fixed
exercise price of the Warrant for at least 10 consecutive days and if certain
other conditions are met, THCG may cause the Warrant to be automatically
exercised for Common Stock.
Pursuant to a registration rights agreement, THCG filed a registration
statement under the Securities Act of 1933, as amended, registering for resale
by the holders thereof the Common Stock underlying the Preferred Stock and the
Warrant. THCG 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. THCG may be required to pay Castle Creek certain
amounts as specified in the registration rights agreement if the registration
statement is not declared effective within 120 days of August 2, 2000 and is not
maintained effective.
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NOTE 6 - 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 thousand.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used in this Item 2, "we," "our" and "us" refer to THCG.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Specifically, all statements
other than statements of historical facts included in this Report, or
incorporated herein by reference, regarding our financial position, business
strategy and the plans and objectives of management for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of management, as well as assumptions made by and information currently
available to management. When used in this Report, including the information
incorporated by reference, the words "anticipate," "believe," "estimate,"
"expect," "may," "will," "continue," "intend" and "plan" and words or phrases of
similar import, as they relate to our financial position, business strategy and
plans, or objectives of management, are intended to identify forward-looking
statements. These cautionary statements reflect our current view regarding
future events and are subject to risks, uncertainties and assumptions related to
various factors which include but may not be limited to those listed under the
heading "Factors Affecting our Future Performance" and other cautionary
statements in our Annual Report on Form 10-K for our fiscal year ended December
31, 1999, filed with the SEC, which information is incorporated into this Report
by reference.
Although we believe that our expectations are reasonable, we cannot
assure you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this Report as anticipated, believed,
estimated, expected, intended or planned. All subsequent written and oral
forward-looking statements attributable to us (or to persons acting on our
behalf) are expressly qualified in their entirety by these cautionary
statements.
Overview
Based in New York City, we are an international merchant banking firm
actively engaged in building and supporting our global portfolio of industry
leading technology companies. We help our partner companies succeed through an
integrated matrix of financial, business and technology development services
consisting of Venture Funding, Venture Banking and Venture Development ("V3
Services"'). Within the technology sector, our V3 service offerings are targeted
in key segments, including Internet-enabling technologies, broadband, wireless,
telecommunications and telecom infrastructure, among others. Zinook Ltd.
("Zinook") serves as one of our global technology "Centers of Excellence,"
sourcing, screening and developing promising early-stage technology companies.
On November 1, 1999, Walnut Financial Services, Inc. ("Walnut Financial
Services") acquired Tower Hill Securities. However, for financial statement
purposes, Tower Hill Securities acquired Walnut Financial Services and is the
surviving entity. Tower Hill Securities is the successor to Hambro America
Securities, Inc., the former U.S. investment banking subsidiary of Hambros, plc,
a British merchant banking firm. In March 1998, the investment banking
operations of Hambros, plc were sold to Societe Generale, a French bank. On
April 1, 1998, Joseph D. Mark and Adi Raviv, the principal executives of Hambro
America Securities, Inc., acquired the company from Societe Generale.
As part of our new business strategy, on December 29, 1999, we acquired
Mercury Coast, Inc. ("Mercury Coast") a corporation engaged in the business of
providing business acceleration services, including strategic planning,
operations and marketing consulting services, to Internet-based businesses. In
addition, we acquired Giza as described in Note 1 of the Notes to
Consolidated Financial Statements.
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The financial statements contained in this Report reflect the
operations of THCG for the nine months and the three months ended September 30,
2000 and the operations of Tower Hill Securities for the nine months and three
months ended September 30, 1999.
Nine Months Ended September 30, 2000 as compared to the Nine Months Ended
September 30, 1999
Revenues
Revenues for the nine months ended September 30, 2000 increased to
$19.7 million from $2.3 million for the nine months ended September 30, 1999.
The increase in revenues was primarily due to significant appreciation of our
venture partner and venture portfolio company securities and an increase in the
number of engagements and fee-based services of our venture banking and venture
development activities.
Venture service fees for the nine months ended September 30, 2000
increased to $5.8 million from $2.3 million for the nine months ended September
30, 1999. The increase in these fees was primarily due to an increase in the
number of engagements and the fees earned from providing our venture banking and
venture development activities.
Realized and unrealized gain (loss) in securities, net, and interest
income consist of the net increases (decreases) in the value of the venture
partner and venture portfolio company securities that we acquired or that we
received in exchange for services, as well as interest income. The gain in
securities, net, increased to $13.9 million for the nine months ended September
30, 2000. The increase was due primarily to the $13.7 million increase in the
value of our wholly owned subsidiary that is the general partner of WGP (see
Note 2 of the Notes to Consolidated Financial Statements).
Expenses
Selling, general and administrative expenses for the nine months ended
September 30, 2000 increased to $11.0 million from $2.5 million for the nine
months ended September 30, 1999. The increase was primarily due to increases in
the number of employees, their compensation and related benefits, and
professional fees. Compensation and related benefits expense increased to $3.4
million for the nine months ended September 30, 2000 from $933 thousand for the
nine months ended September 30, 1999. Compensation expenses included bonuses to
professionals related to the improved results from our venture banking services,
as well as additional employees we hired to provide venture development and
venture banking services to our venture partner companies on a fee-for-service
basis. Professional fees for the nine months ended September 30, 2000 increased
to $2.3 million from $735 thousand for the nine months ended September 30, 1999.
The increase in professional fees results from fees paid to legal and accounting
professional services firms for services in connection with the preparation and
filing of documents with the SEC and for professional fees related to our
provision of venture funding services, which services Tower Hill Securities did
not provide during the nine months ended September 30, 1999. Consulting costs
related to venture development income were $1.3 million for the nine months
ended September 30, 2000. Tower Hill Securities did not provide venture
development services during the comparable period in 1999. Foreign affiliated
company expenses, which began in April 2000 and are related to the acquisition
of Zinook, amounted to $1.6 million for the nine months ended September 30, 2000
(see Note 1 of the Notes to Consolidated Financial Statements).
Equity-based compensation expenses for the nine months ended September
30, 2000 were $7.1 million. There were no equity-based compensation expenses for
the nine months ended September 30, 1999. Equity-based compensation expenses
consist of non-cash charges related to the amortization of unearned compensation
associated with stock options granted at below fair market value and restricted
stock grants. Amortization is over the vesting periods of the stock options and
restricted stock, which vesting periods generally range from ninety days to five
years.
Amortization of acquired intangibles for the nine months ended
September 30, 2000 increased by $2.8 million (including the $468 thousand of
amortization associated with Global Credit --see Note 4 of the Notes to
Consolidated Financial Statements). The increase in amortization expenses is
primarily related to the amortization of goodwill from our merger with Walnut
Financial Services on November 1, 1999, the acquisition of Mercury Coast on
December 29, 1999, the acquisition of an interest in Global Credit on February
7, 2000 and to a lesser extent the acquisition of Zinook on September 1, 2000.
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Our deferred income tax benefits amounted to $97 thousand as a result
of loss from continuing operations and $398 thousand was the result of a loss
from discontinued operations for the nine months ended September 30, 2000. There
were no provisions for income taxes or tax benefits for the nine months ended
September 30, 1999.
We decided to discontinue the accounts receivable factoring business in
the first quarter (see Note 3 of the Notes to Consolidated Financial
Statements). We incurred a loss in the nine months ended September 30, 2000 from
discontinued operations of $5.3 million ($5.0 million after-tax).
Three Months Ended September 30, 2000 as compared to the Three Months Ended
September 30, 1999
Revenues
Revenues for the three months ended September 30, 2000 increased to
$3.2 million from $322 thousand for the three months ended September 30, 1999.
The increase in revenues was primarily due to an increase in the number of
engagements and fee-based services of our venture development and our venture
banking activities and a continued appreciation of our venture partner and
venture portfolio company securities.
Venture service fees for the three months ended September 30, 2000
increased to $2.5 million from $312 thousand for the three months ended
September 30, 1999. The increase in these fees was primarily due to an increase
in fees earned from providing our venture development services, which services
we did not provide in the three months ended September 30, 1999.
Realized and unrealized gain (loss) in securities, net, and interest
income consist of the net increases (decreases) in the value of the venture
partner and venture portfolio company securities that we acquired or that we
received in exchange for services, as well as interest income. The gain in
securities, net, increased to $698 thousand for the three months ended September
30, 2000 from $10 thousand for the three months ended September 30, 1999. The
increase was due primarily to the increase in the value of our wholly owned
broker-dealer subsidiary, Tower Hill Securities.
Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2000 increased to $4.3 million from $960 thousand for the three
months ended September 30, 1999. The increase was primarily due to increases in
the number of employees, their compensation and related benefits, and
professional fees. Compensation and related benefits expense increased to $1.6
million for the three months ended September 30, 2000 from $304 thousand for the
three months ended September 30, 1999. Compensation expenses included additional
employees we hired to provide venture development and venture banking services
to our venture partner companies on a fee-for-service basis. Professional fees
for the three months ended September 30, 2000 increased to $564 thousand from
$288 thousand for the three months ended September 30, 1999. The increase in
professional fees primarily related an increase in the fees paid to legal and
accounting professional services firms for services in connection with the
preparation and filing of documents with the SEC and for professional fees
related to our provision of venture funding services, which services Tower Hill
Securities did not provide during the three months ended September 30, 1999.
Foreign affiliated company expenses, which began in April 2000 and are related
to the acquisition of Zinook, amounted to $834 thousand for the three months
ended September 30, 2000 (see Note 1 of the Notes to Consolidated Financial
Statements).
Equity-based compensation expenses for the three months ended September
30, 2000 were $2.1 million. There were no equity-based compensation expenses for
the three months ended September 30, 1999. Equity-based compensation expenses
consist of non-cash charges related to the amortization of unearned compensation
associated with stock options granted at below fair market value and restricted
stock grants. Amortization is over the vesting periods of the stock options and
restricted stock, which vesting periods generally range from ninety days to five
years.
Amortization of acquired intangibles for the three months ended
September 30, 2000 increased by $944 thousand (including $182 thousand of
amortization associated with Global Credit -- see Note 4 of the Notes to
Consolidated Financial Statements). The increase in amortization expenses is
primarily related to the amortization of goodwill from our merger with Walnut
Financial Services on November 1, 1999, the acquisition of Mercury Coast on
December 29, 1999 and the acquisition of an interest in Global Credit on
February 7, 2000 and to a lesser extent the acquisition of Zinook on September
1, 2000.
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There were no provisions for income taxes or tax benefits for the three
months ended September 30, 2000 and September 30, 1999.
Liquidity and Capital Resources
Our business is capital intensive. In the future, we expect
periodically to raise funds to acquire equity interests in and establish new
partner companies, to support our operations and expand our venture development
and venture banking services, and to support the operations and growth of our
partner companies. Our future capital requirements will depend in large part on
the number of partner companies in which we acquire equity interests and which
we establish, the amounts of capital we provide to these companies and the
timing of these payments. Our plans and the related capital requirements will be
dependent on various factors, such as developments in our markets, and the
availability of acquisition and entrepreneurial opportunities. If we are
successful in selling additional equity securities, our then existing
stockholders may suffer significant dilution. However, we may not be able to
obtain financing on acceptable terms, or at all, when we need it. If we require,
but are unable to obtain, additional financing in the future on acceptable
terms, or at all, we will not be able to continue our business strategy, respond
to changing business or economic conditions, withstand adverse operating results
or compete effectively, and our business, financial condition and operating
results may be materially and adversely affected as a result.
In February 2000, we called for the redemption of our outstanding
Class A Warrants (the "Warrants"), thereby causing the holders to exercise all
of the Warrants for $9 per share of common stock. This resulted in proceeds to
us of approximately $5.7 million. We issued 633,373 new shares of common stock
upon exercise of the Warrants. We filed a registration statement with the SEC
covering the resale of these shares for a period of 90 days. This period ended
on August 7, 2000, and on August 8, 2000, we filed a post-effective amendment
with the SEC to deregister any unsold shares of common stock.
On April 11, 2000, THCG announced the acquisition of approximately $300
thousand in assets of certain businesses operated under the Giza Group ("Giza")
name in Israel. Zinook is the entity's new name. The transaction closed on
September 1, 2000 and is being accounted for using the purchase method of
accounting. Cash advanced by THCG to Zinook to fund Zinook's current operations,
which totaled $1.3 million for the nine months ended September 30, 2000, are
being expensed in the consolidation. We expect that we may fund any increase in
the expenses for Zinook's current operations.
On August 2, 2000, THCG issued 5,000 shares of series A preferred stock
and a related warrant in a private placement to Castle Creek. The gross proceeds
of the offering were $5.0 million (see Note 5 of the Notes to Consolidated
Financial Statements).
During the nine months ended September 30, 2000, cash used in operating
activities was $5.4 million compared to $48 thousand used in the six months
ended September 30, 1999.
Cash used in investing activities was $1.4 million for the nine months
ended September 30, 2000 compared to $122 thousand used in the six months ended
September 30, 1999.
Cash provided by financing activities was $10.1 million for the nine
months ended September 30, 2000 compared to $67 thousand provided in the nine
months ended September 30, 1999. This consisted primarily of $5.7 million of
proceeds from the exercise of the Warrants in March 2000 and the sale of the
Preferred Stock and the Warrant in August 2000. We intend to continue to raise
capital to finance our strategy of building dominant venture partner companies
and investing in our operating business.
Certain of our venture partner companies have the right to require that
we purchase additional equity interests in these companies in an aggregate
amount of cash approximating $350 thousand.
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New Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 expresses the
views of the SEC staff in applying generally accepted accounting principles to
certain revenue recognition issues. In June 2000, the SEC issued SAB No. 101B to
defer the effective date of the implementation of SAB No. 101 until the fourth
quarter of fiscal 2000. Management is currently evaluating the impact of
adopting this SAB, but does not believe that this SAB will have a material
impact on its financial position or its results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing THCG is the fluctuation in the market
value of the securities THCG acquires in its venture partner and venture
portfolio companies, and the securities THCG receives in payment of fees for its
venture development and venture banking services. The market prices for those
companies that are publicly held have been very volatile, experiencing wide
fluctuations. THCG's profitability may be materially and adversely affected by
period-to-period declines in the market values of its venture partner and
venture portfolio companies. Historically, THCG has not generally engaged in
hedging transactions to minimize this risk.
THCG is not subject to market risk associated with risk sensitive
instruments because THCG does not invest in instruments that are not United
States instruments and THCG does not enter into hedging transactions.
Historically, THCG has had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. For the quarter ended
September 30, 2000 and at present, THCG does not believe that its exposure to
changes in foreign currency exchange rates has increased. As THCG develops its
international operations and expands its global coverage of the Internet
industry, including through Giza, THCG's risk of foreign currency exchange rate
fluctuation may increase significantly. Therefore, in the future, THCG may
consider utilizing derivative instruments to mitigate these risks.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to the action brought against Tower Hill Securities Inc.
("Tower Hill") by Yoav Bitter, previously described in THCG's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, Mr. Bitter filed a motion
on April 13, 2000 seeking reargument or modification of the March 14, 2000
decision and order of the New York State Supreme Court Appellate Division, First
Department, that dismissed Mr. Bitter's appeal. In the alternative, the motion
sought permission to appeal to the New York State Court of Appeals. On May 25,
2000, the Appellate Division issued an order unanimously denying Mr. Bitter's
April 13, 2000 motion. On July 6, 2000, Mr. Bitter filed a motion with the Court
of Appeals requesting leave to appeal to that court. On October 12, 2000, the
Court of Appeals denied Mr. Bitter's motion.
As noted in THCG's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2000, on June 18, 1999, Tower Hill initiated an NASD arbitration
against Mr. Bitter for reimbursement of unauthorized expenses and return of
company property. Mr. Bitter filed a counterclaim against Tower Hill on
September 9, 1999, in which he denied liability for Tower Hill's claims and also
alleged that the company was liable to him for $158,000 for severance pay, an
unpaid bonus, and certain tuition expenses. On September 17, 1999, Tower Hill
filed an answer to the counterclaim, denying all the substantive allegations.
The NASD has appointed a three-person arbitration panel. The arbitrators held
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.
In litigation described in THCG's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, THCG, Inland Financial Corporation, a
wholly owned subsidiary of THCG ("Inland"), and the chief executive officer of
Inland were sued in the Superior Court of Washington for Spokane County in
November 1999 regarding participations sold by Inland in certain factoring
transactions initiated by Inland. On May 9, 2000, certain former employees of
Inland, including its chief executive officer, filed an involuntary bankruptcy
petition against Inland in the Bankruptcy Court for the Eastern District of
Washington. The Court held hearings in October and November of 2000 and has not
issued a decision. THCG and Inland, an inactive subsidiary, are contesting the
petition and are evaluating possible claims against the chief executive officer
and other former employees of Inland (see Note 3 of the Notes to Consolidated
Financial Statements).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 2, 2000, THCG issued 5,000 shares of its Series A Convertible
Participating Preferred Stock (the "Preferred Stock") and a related Warrant (the
"Warrant") in a private placement to Castle Creek Technology Partners LLC
("Castle Creek"), a private investment fund. The gross proceeds of the offering
were $5.0 million.
The Preferred Stock is convertible (subject to anti-dilution
protections) into THCG common stock, par value $0.01 per share (the "Common
Stock"), at a fixed conversion price of $5.039 per share at any time prior to
December 29, 2000. Thereafter, the conversion price will be the lower of $5.039
per share and 90% of the prevailing market price of the Common Stock, provided
that regardless of the market price for the Common Stock, a maximum of 2,529,568
shares of Common Stock are issuable upon conversion of the Preferred Stock. If
the market price of the Common Stock is greater than 200% of the then fixed
conversion price of the Preferred Stock for at least 10 consecutive days and if
certain other conditions are met, THCG may cause the Preferred Stock to be
automatically converted into Common Stock. Unless previously converted by the
holder, the Preferred Stock automatically converts into Common Stock on August
2, 2003, and is subject to optional redemption by THCG at any time subject to
the payment of premiums and the satisfaction of other conditions.
A premium is payable quarterly on the Preferred Stock on the last
business day of each calendar quarter in an amount equal to 10% per annum of the
stated value of the Preferred Stock ($5.0 million). The premium is
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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 anti-dilution protections). If
the market price of the Common Stock is greater than 200% of the then fixed
exercise price of the Warrant for at least 10 consecutive days and if certain
other conditions are met, THCG may cause the Warrant to be automatically
exercised for Common Stock.
Pursuant to a registration rights agreement, THCG filed a registration
statement under the Securities Act of 1933, as amended, registering for resale
by the holders thereof the Common Stock underlying the Preferred Stock and the
Warrant. 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. THCG may be required to pay Castle Creek
certain amounts as specified in the registration rights agreement if the
registration statement is not declared effective within 120 days of August 2,
2000 and is not maintained effective.
To the extent the Preferred Stock is converted and the Warrant is
exercised, a significant number of shares of Common Stock may be sold into the
market, which could decrease the price of the Common Stock, encourage short
sales and substantially dilute the interest of other holders of Common Stock.
Short sales could place further downward pressure on the price of the Common
Stock. In that case, THCG would be required to issue an increasingly greater
number of shares of Common Stock upon future conversions of the Preferred Stock
of up to a maximum of 2,529,568 shares, sales of which could continue to depress
the price of the Common Stock.
Holders of the Preferred Stock are entitled to priority over holders of
Common Stock in any liquidation of THCG. THCG may not pay dividends on the
Common Stock nor may it purchase Common Stock without first obtaining the
approval of the holders of two-thirds of the Preferred Stock.
As part of the compensation paid to its placement agent for the private
placement, THCG issued to Ladenburg Thalmann & Co. a warrant to purchase 39,474
shares of Common Stock at a fixed exercise price of $5.70 per share of Common
Stock. The warrant was issued on August 2, 2000 and expires on August 2, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
----------- -----------
10.1 Amendment dated as of August 9, 2000 to the
Employment Agreement dated as of February 1, 200
between THCG Ventures, LLC and Evan Marks.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
THCG filed a Current Report on Form 8-K, dated August 2, 2000, with the
SEC on August 3, 2000 to report the issuance of 5,000 shares of its Series A
Convertible Participating Preferred Stock and a related warrant in a private
placement.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
THCG, Inc.
By: /s/ Adi Raviv
-------------------------------
Name: Adi Raviv
Title: Co-Chairman of the Board of
Directors and Chief Financial
Officer (Principal Financial
and Accounting Officer)
Date: November 14, 2000
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EXHIBIT LIST
Exhibit No. Description
----------- -----------
10.1 Amendment dated as of August 9, 2000 to the Employment
Agreement dated as of February 1, 2000 between THCG
Ventures, LLC and Evan Marks.
27.1 Financial Data Schedule.
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