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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
NEW YORK 13-3577716
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(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
2700 Via Fortuna, Suite 400, Austin, Texas 78746
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 306-8222
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 $0.001 per share
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(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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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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 . [ ]
As of December 29, 2000, there were 12,661,343 shares of the Registrant's common
stock, $0.001 par value, outstanding. The aggregate market value of common stock
held by non-affiliates was $995,646 using a market price of $1.375 on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
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PART I
ITEM 1. BUSINESS
GENERAL
Westech Capital Corp., a New York corporation, is a holding company whose
primary operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas Securities"). Tejas Securities is engaged in the business of
providing brokerage and related financial services to institutional and retail
customers nationwide. References to the Company within the Form 10-K are to
Westech Capital Corp. and its subsidiaries.
Westech Capital Corp. was incorporated as a shell corporation in New York on
July 18, 1990, and made an initial public offering in November 1991. Westech
Capital Corp. was acquired by Tejas Securities in a reverse merger effected on
August 27, 1999. See "-Reverse Merger."
Tejas Securities' business is conducted out of its primary office in Austin,
Texas, with branch offices in Atlanta, Georgia and Houston, Texas. Tejas
Securities moved its primary office in the first quarter of 2000 to 2700 Via
Fortuna, Suite 400, Austin, Texas 78746.
Tejas Securities is a registered broker-dealer and investment advisor offering:
(i) brokerage services to retail and institutional customers; (ii) high quality
investment research to institutional and retail customers; (iii) market-making
activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services.
During 1999, Tejas Securities assumed the management of a private investment
company (commonly referred to as a "hedge fund"). Tejas Securities purchased the
equity of TSG Capital, LLC, a Texas limited liability company, which served as
the general partner of TSG Internet Fund I, Ltd. (the "Fund"), a Texas limited
partnership. Tejas Securities managed the Fund for a one-time placement fee of
5% of each new dollar invested in the fund, an annual management fee of 1.5% of
the average monthly asset balance, and an annual performance fee of 20% of the
Fund's net gain. TSG Capital, LLC liquidated the Fund effective December 15,
2000. See Item 13 - "Certain Relationships and Related Transactions."
REVERSE MERGER
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and among
Westech Capital Corp., Tejas Securities, Tejas Securities Group Holding Company,
a Texas corporation ("Tejas Holding"), and newly formed Westech Merger Sub,
Inc., a Delaware corporation ("Merger Sub"), Tejas Securities acquired Westech
Capital Corp. through a reverse merger (the "Merger") of Tejas Holding and
Merger Sub. As a result of the Merger, Tejas Holding became a wholly owned
subsidiary of Westech Capital Corp. Tejas Holding is the holder of approximately
83% of the outstanding common stock issued by Tejas Securities. Under the terms
of the Merger, the shareholders of Tejas Holding exchanged their shares for
shares of Westech Capital Corp. at a ratio 2.4825 to one. The former
shareholders of Tejas Holding currently own approximately 95% of the issued and
outstanding common stock of Westech Capital Corp., $ .001 par value per share.
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EARLY OPERATIONS
Tejas Securities was formed as a Texas corporation in March 1994. The Company's
initial focus was to provide institutional money managers and mutual funds high
quality investment research covering large U.S. based companies which were
believed to be overly leveraged or which were in default on their liabilities or
in bankruptcy. Historically, these companies were not followed closely by a
large number of research analysts. Tejas Securities used this opportunity to
establish itself as a source of high quality research products and trading
support. Tejas Securities took advantage of its initial research success and
expanded its research coverage to special situation equities and began
underwriting initial public offerings of equity securities for a select group of
companies in 1997. These underwritings coupled with a demand for Tejas
Securities' research by individuals led us to expand our client base to include
retail accounts.
During 1999, Tejas Securities formulated an aggressive expansion plan to
capitalize on the overall economic growth occurring within Texas and in the
United States. Tejas Securities believed that it was poised to leverage its
recent growth through an expansion of products and services offered by its
Austin headquarters.
In 2000, Tejas Securities began its expansion by leasing approximately 24,000
square feet of office space for its Austin headquarters. This space was needed
to support additional brokers, investment bankers, research analysts and support
personnel. Tejas Securities hired the additional personnel in an attempt to
provide the rapidly growing central Texas market with a locally based,
full-service brokerage firm, offering both institutional and retail products and
services. Most of the hired employees were added in an effort to increase retail
brokerage and market making activities. The fixed costs associated with our
growth quickly exceeded our revenue production, despite the overall market
appreciation during the first quarter of 2000. Many of these costs were incurred
through contracts of varying lengths for telecommunications services, broker
quotes and news services, as well for developing Tejas Securities brand
awareness. Additionally, Tejas Securities compensation costs increased due to
additional salaries and bonuses.
CURRENT OPERATIONS
As the equity markets rapidly decreased beginning in the second quarter of 2000
through the remainder of the year, Tejas Securities realized a decreasing
commission revenue base and recognized substantial trading losses on securities
owned. In an effort to bring fixed costs of operations in line with projected
revenues, Tejas Securities undertook a company wide reorganization. This
reorganization included the elimination of redundant support personnel and
quarterly bonuses to management. Tejas Securities also downsized its market
making capabilities and investment banking presence through a reduction of
personnel and support services. While the reduction of personnel had an
immediate positive impact on fixed costs, many of the support services and
leases were for durations of between six months and two years. Tejas Securities
cancelled all contracts that were eligible for cancellation and will continue to
cancel contracts in the future to eliminate unnecessary services. Tejas
Securities also entered sublease agreements for its office space and equipment
in Austin, thereby reducing additional fixed costs.
Currently, Tejas Securities believes that its cost structure is manageable given
projected revenues for the year 2001, and anticipates further reductions in
service contracts to improve results during the year.
BROKERAGE SERVICES
Tejas Securities provides brokerage services to approximately 5,000 retail
customers and 500 institutional customers. Tejas Securities offers a menu of
services and products to customers, which includes the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. Tejas Securities' marketing strategy
has been to emphasize its high level of service and its unique knowledge of the
companies covered by its research department.
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Currently, Tejas Securities provides its customers with the ability to receive
stock quotes, access research and customer account information on the Internet
through its website (www.Tejassec.com). Tejas Securities anticipates that its
clients will have the ability to make trades over the Internet prior to the end
of the year 2001. Tejas Securities believes the availability of Internet trading
is a feature that many of its clients expect in the future.
Tejas Securities generated $16,818,686, $25,291,212 and $7,932,780 in commission
revenues for the years ended 2000, 1999 and 1998, respectively, or 114%, 83% and
77% of total revenue, respectively.
RESEARCH
The cornerstone of Tejas Securities' business model is to create proprietary
products for its clients that focus on its research and trading capabilities.
Tejas Securities distributes these products through traditional channels of
distribution.
Tejas Securities anticipates that it will continue to devote a substantial
portion of its resources to support its research department. Currently, the
research department consists of five analysts with proven expertise in special
situation equity research and in distressed securities. The analyst group has
the background to analyze many industries, but has a primary focus on
telecommunications and technology. Tejas Securities believes that the rapid
changes in each of these industries provide excellent investment opportunities.
Tejas Securities believes that the number of high quality technology companies
being formed in the Austin area is significant and will continue to grow. Tejas
Securities believes that its research department is well suited to cover these
companies and will focus some of its research resources to providing research
coverage of these companies. The research department will cover both public
companies as well as identify private companies that are candidates for becoming
publicly traded companies.
MARKET MAKING
In August 1999, the NASD approved Tejas Securities to make markets in Nasdaq
securities. Making markets in securities facilitates the execution of security
transactions for Tejas Securities' customers. Tejas Securities acts as a market
maker for approximately 25 public corporations whose stocks are traded on the
Nasdaq National Market System.
Generally, Tejas Securities does not maintain inventories of securities for sale
to its customers. However, Tejas Securities does engage in certain principal
transactions where, in response to a customer order, Tejas Securities will go at
risk to the marketplace to attempt to capture the spread between the bid and
offer. Most of Tejas Securities' larger competitors are engaged in similar
market making activities through subsidiaries or receive order flow payments
from companies engaged in such market making activities. Tejas Securities
believes it can maintain better control and be assured of proper executions of
customer trades by providing these market making services directly to its
customers.
INVESTMENT BANKING
Tejas Securities raises capital through public and private offerings of
securities for corporations that are engaged in a variety of businesses. Tejas
Securities participates in underwritings of corporate securities as a syndicate
member, and has in the past acted as the managing underwriter. Management of an
underwriting transaction is generally more profitable than participation as a
member of an underwriting syndicate. Tejas Securities also provides advisory
services for companies involved in merger and acquisition activities.
As an underwriter, Tejas Securities may also be subject to potential liability
under federal and state securities laws and other laws if the registration
statement or prospectus contains a material misstatement or omission. Tejas
Securities' potential liability as an underwriter is uninsured.
Tejas Securities' participation in or initiation of underwritings may be limited
by the financial requirements of the SEC and NASD. See "- Net Capital
Requirements."
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During 1998, Tejas Securities acted as the managing underwriter or co-managing
underwriter for initial public offerings of three common stock offerings and one
preferred stock offering, raising approximately $30 million for corporate
finance clients. During 1999 and 2000, Tejas Securities was active in the
private placement of securities for an external client and the Fund, and
established recurring corporate advisory fees. Tejas Securities generated
$1,831,326, $925,616 and $2,584,770 in investment banking revenues for the years
ended 2000, 1999 and 1998, respectively, or 12%, 3% and 25% of total revenue,
respectively.
CUSTOMERS
Historically, Tejas Securities' customer base has been comprised of
predominately large nationally known institutional customers. These customers
demand high quality research and sophisticated trading capabilities. Tejas
Securities believes that it has served the needs of this segment of its customer
base well, resulting in increased trading volume. Tejas Securities believes that
the increase in the scope of its research services should increase customer
satisfaction and increase its revenues from institutional customers.
EMPLOYEES
On December 31, 2000, Tejas Securities had approximately 55 employees, a
reduction of 35 employees from December 31, 1999. Of these employees, 39 work in
sales, 4 in trading, 6 in research and investment banking and the remaining
employees perform management and administrative functions. It is Tejas
Securities' goal to use the sales support functions that are currently in place
to support additional sales staff. Tejas Securities believes that taking
advantage of the infrastructure currently in place will allow an increase in
productivity in the sales area with minimal additional support cost. During
2000, Tejas Securities reduced the number of redundant positions, reduced bonus
payments to administrative and management personnel, and eliminated a few
revenue producing individuals in an effort to lower fixed costs.
COMPETITION
All aspects of Tejas Securities' business are highly competitive. In its general
brokerage activities, Tejas Securities competes directly with numerous other
broker-dealers, many of which are large well-known firms with substantially
greater financial and personnel resources. Many of Tejas Securities' competitors
employ extensive advertising and actively solicit potential clients in order to
increase business. In addition, brokerage firms compete by furnishing investment
research publications to existing clients, the quality and breadth of which are
considered important in the development of new business and the retention of
existing clients. Tejas Securities also competes with a number of smaller
regional brokerage firms in Texas and the Southwest.
Some commercial banks and thrift institutions offer securities brokerage
services. Many commercial banks offer a variety of investment banking services.
Competition among financial services firms also exists for investment
representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive since Tejas Securities was founded, as numerous securities firms
have either ceased operations or have been acquired by or merged into other
firms. In addition, companies not engaged primarily in the securities business,
but with substantial financial resources, have acquired leading securities
firms. These developments have increased competition from firms with greater
capital resources than those of Tejas Securities.
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Various legislative and regulatory developments have also tended to increase
competition within the industry or reduced profits for the industry. In
particular, on November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") became
law. Under the Act, a bank holding company that elects to become a financial
holding company may engage in any activity that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines by regulation or
order is (1) financial in nature, (2) identical to any such financial activity,
or (3) complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depositary institutions or the
financial system generally. The Act effects significant changes to United States
banking law, primarily by repealing restrictive provisions of the 1933
Glass-Steagall Act. The Act also provides for certain activities which are
financial in nature, including, among others, lending, exchanging, transferring,
investing for others, or safeguarding money or securities; and providing
financial, investment or economic advisory services, underwriting, dealing in or
making a market in securities. The Company anticipates that these changes will
result in an increase in the number, size and financial strength of potential
competitors.
The securities industry has experienced commission discounting by broker-dealers
competing for retail brokerage business. The continuation of such discounting
and an increase in the number of new and existing firms offering discounts could
adversely affect Tejas Securities' retail equity business. However, Tejas
Securities has historically derived the majority of its commission revenue from
institutional customers that tend to purchase larger blocks of securities than
individual customers. Transactions with institutional customers have not been
subject to the same level of discounting that brokerage firms experience with
retail customers due to the size of the transactions. In addition, Tejas
Securities has concentrated its research efforts on debt securities, which have
not experienced as significant of discounting as equity securities.
In its investment banking activities, Tejas Securities competes with other
brokerage firms, venture capital firms, banks and all other sources of capital
for small, growing companies. Large national and regional investment banking
firms routinely manage offerings of a size that is competitive with Tejas
Securities. When the market for initial public offerings is active, many small
regional firms that do not typically engage in investment banking activities may
also begin to compete with Tejas Securities.
FEES ON MARGIN LOANS
Tejas Securities derives a portion of its income from fees generated on margin
loans made to Tejas Securities' customers and financed through our clearing
organization, First Clearing Corporation. A margin account allows the customer
to deposit less than the full cost of the securities purchased while First
Clearing Corporation lends the balance of the purchase price to the customer,
secured by the purchased securities. Customers are charged interest on the
amount borrowed to finance their margin transactions ranging from 0.25% below to
2.75% above the broker call rate, which is the rate at which brokers can
generally obtain financing using margined and firm owned securities as
collateral. Tejas Securities earns a fee equal to 50% of the interest charged on
customer margin loans. As of December 31, 2000, the total of all customer
securities pledges on debit balances and held in active margin accounts was
approximately $6,500,000.
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SECURITIES INDUSTRY PRACTICES
Tejas Securities is registered as a broker-dealer with the SEC and the NASD.
Tejas Securities is registered as a securities broker-dealer in 35 states and
the District of Columbia. Tejas Securities is also a member of the Securities
Investors Protection Corporation, which provides Tejas Securities' customers
with insurance protection for amounts of up to $500,000 each, with a limitation
of $100,000 on claims for cash balances. Tejas Securities has also acquired an
additional $10,000,000 in insurance coverage through Seabury & Smith, as added
protection for individual customers' securities, covering all clients of Tejas
Securities' institutional and retail customers.
Tejas Securities is subject to extensive regulation by federal and state laws.
The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules,
subject to approval by the SEC, which govern the industry and conduct periodic
reviews of member broker-dealers. Securities firms are also subject to
regulation by state securities commissions in the states in which they do
business. The SEC, self-regulatory organizations, and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, suspension, or expulsion of a broker-dealer, its officers or employees.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than protection of
creditors and shareholders of broker-dealers. See "Forward-Looking Statements
and Risk Factors" below.
NET CAPITAL REQUIREMENTS
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a broker-dealer's position in securities. A deduction is made
against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with the Rule could require intensive
use of capital and could limit Tejas Securities' ability to pay dividends to the
Company, which in turn could limit the Company's ability to pay dividends to its
shareholders. Failure to comply with the Rule could require the Company to
infuse additional capital into Tejas Securities, could limit the ability of
Tejas Securities to pay its debts and/or interest obligations, and may subject
Tejas Securities to certain restrictions which may be imposed by the SEC, the
NASD, and other regulatory bodies. Moreover, in the event that the Company could
not or elected not to infuse the additional capital or otherwise bring Tejas
Securities into compliance, Tejas Securities would ultimately be forced to cease
operations. See "Forward-Looking Statements and Risk Factors" below.
At December 31, 2000 and 1999 Tejas Securities elected to use the alternative
method permitted by the Rule, which requires it to maintain minimum net capital,
as defined, equal to the greater of $250,000 in both 2000 and 1999 or 2% of
aggregate debit balances arising from customer transactions, as defined. At
December 31, 2000, Tejas Securities had net capital of $1,094,469, which was
$844,469 in excess of the minimum amount required. At December 31, 1999, Tejas
Securities had net capital of $2,813,049, which was $2,563,049 in excess of the
minimum amount required.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
We are including the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us. The factors identified in this
cautionary statement are important factors (but not necessarily all of the
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by us. Where any
forward-looking statement includes a statement of the assumptions underlying the
forward-looking statement, we caution you that while we believe the assumptions
to be reasonable and make them in good faith, assumed facts almost always vary
from actual results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances. Where, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there is no assurance that the statement of
expectation or belief will result or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by us, or on our behalf. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, the trading price of our
stock could decline, and you may lose all or part of your investment.
FAILURE TO EFFECTIVELY MANAGE A CHANGING BUSINESS COULD RESULT IN OUTDATED
SERVICES.
Our business and operations have changed substantially since we began offering
brokerage services, and we expect the pace of change in the brokerage business
to continue. This rapid change places significant demands on our administrative,
operational, financial and other resources. Failure to properly manage these
changes could result in our services becoming outdated, which would have a
material adverse effect on our business, financial condition and operating
results.
FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR
BUSINESS.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, service providers and market makers. While we have
selected these third-party vendors carefully, we do not control their actions.
Any problems caused by these third parties could have a material adverse effect
on our business, financial condition and operating results.
WE ARE SUBJECT TO MARKET FORCES BEYOND OUR CONTROL WHICH COULD IMPACT US MORE
SEVERELY THAN OUR COMPETITORS.
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets could adversely
affect our operating results. In October 1987, October 1998 and from April 2000
through March 2001, the stock market suffered major declines, as a result of
which many firms in the industry suffered financial losses. Additionally, the
level of individual investor trading activity decreased after these events.
Reduced trading volume and prices have historically resulted in reduced
transaction revenues. When trading volume is low, our profitability may be
adversely affected because our overhead remains relatively fixed, despite lower
compensation costs associated with commission revenues. Severe market
fluctuations in the future could have a material adverse effect on our business,
financial condition and operating results. Although we have diversified our
product and service revenue streams, some of our competitors with more diverse
product and service offerings might withstand such a downturn in the securities
industry better than we would.
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OUR CUSTOMERS MAY DEFAULT ON THEIR MARGIN ACCOUNTS, EFFECTIVELY PASSING THEIR
LOSSES ON TO US.
Our customers sometimes purchase securities on margin through our clearing
organization; therefore we are subject to risks inherent in extending credit.
This risk is especially great when the market is rapidly declining. In such a
decline, the value of the collateral could fall below the amount of a customer's
indebtedness. Specific regulatory guidelines mandate the amount that can be
loaned against various security types. We rigorously adhere to these guidelines
and in a number of instances exceed those requirements. Also, independent of our
review, our corresponding clearing organization independently maintains a credit
review of our customer accounts. If customers fail to honor their commitments,
the clearing organization would sell the securities held as collateral. If the
value of the collateral were not sufficient to repay the loan, a loss would
occur. Any such losses could have a material adverse effect on our business,
financial condition and operating results.
WE ARE SUBJECT TO STRICT GOVERNMENT REGULATION AND THE FAILURE TO COMPLY COULD
RESULT IN DISCIPLINARY ACTIONS.
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. See "- Securities Industry Practices" above.
Broker-dealers are subject to regulations covering all aspects of the securities
business.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our business, financial
condition and operating results.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
The NASD regulates all marketing activities by Tejas Securities. The NASD can
impose certain penalties for violations of its advertising regulations,
including censures or fines, suspension of all advertising, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer or any
of its officers or employees. Tejas Securities' compliance officer reviews all
marketing materials prior to release to ensure compliance with NASD regulations.
There can be no assurance that other federal, state or foreign agencies will not
attempt to regulate our business. If such regulations are enacted, our business
or operations would be rendered more costly or burdensome, less efficient or
even impossible or otherwise have a material adverse effect on our business,
financial condition and operating results.
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WE MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS THAT COULD SLOW OUR EXPANSION
PLANS OR PREVENT PAYMENTS OF DIVIDENDS.
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from Tejas Securities could be
restricted, which in turn could limit our ability to pay dividends, repay debt
and redeem or purchase shares of our outstanding stock. A large operating loss
or charge against net capital could adversely affect our ability to expand or
even maintain our present levels of business, which could have a material
adverse effect on our business, financial condition and operating results.
OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.
We receive and process trade orders through internal trading software and
touch-tone telephone. Thus, we depend heavily on the integrity of the electronic
systems supporting this type of trading. Heavy stress placed on our systems
during peak trading times could cause our systems to operate too slowly or fail.
If our systems or any other systems in the trading process slow down
significantly or fail even for a short time, our customers would suffer delays
in trading, potentially causing substantial losses and possibly subjecting us to
claims for such losses or to litigation claiming fraud or negligence. During a
systems failure, we may be able to take orders by telephone; however, only
associates with securities broker's licenses can accept telephone orders, and an
adequate number of associates may not be available to take customer calls in the
event of a systems failure. In addition, a hardware or software failure, power
or telecommunications interruption or natural disaster could cause a system
failure. Any systems failure that interrupts our operations could have a
material adverse effect on our business, financial condition and operating
results.
NO ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND NONE MAY
DEVELOP.
An active public market for our common stock does not currently exist. We cannot
predict the extent to which investor interest in us will lead to the development
of a trading market or how liquid that market might become. The trading price of
our common stock could be subject to wide fluctuations in response to factors
unrelated to our operating results such as:
o announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments
by us or our competitors;
o new products or services offered by us or our competitors;
o changes in financial estimates by securities analysts;
o additions or departures of key personnel; and
o sales of our common stock by our stockholders.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of listed companies. Some of these fluctuations may be due
to speculative trading by individual investors, including investors commonly
referred to as "day traders." These broad market factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance.
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ITEM 2. PROPERTIES
The Company's headquarters are located at 2700 Via Fortuna, Suite 400, Austin,
Texas. The Company leases space for its offices in Austin and Houston, Texas and
Atlanta, Georgia, which consist of approximately 24,700 square feet, 5,400
square feet and 2,500 square feet, respectively. Future commitments associated
with the leases are included in the footnotes to the consolidated financial
statements. These leases are for terms of seven years , three years and four
years, respectively, and contain renewal options. In December 2000, the Company
subleased approximately 60% of its space in the Austin location effective
January 1, 2001. In March 2001, the Company subleased approximately 15% of its
Houston office space.
ITEM 3. LEGAL PROCEEDINGS
There are no liabilities arising from claims or legal actions that management
believes would have a significant adverse effect on the consolidated financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was cleared for trading on the NASDAQ electronic
bulletin board on March 10, 2000. The Company's common stock trades under the
symbol "WSTE." On December 31, 2000, there were in excess of 350 holders of
record of the Company's common stock and in excess of 10 beneficial holders of
the Company's common stock. The following table sets forth for the periods
indicated the high and low market prices for the common stock. The Company has
not paid cash or stock dividends and has no present plan to pay any such
dividends. The payment of future dividends will be decided by the Board of
Directors and will be based upon the Company's future earnings, financial
condition and capital requirements.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
2000:
Stock Price Range
High $ 11.000 $ 11.000 $ 3.250 $ 4.000
Low $ 1.870 $ 2.500 $ 2.750 $ 1.187
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ITEM 6. SELECTED FINANCIAL DATA
The summary statement of operations data and the summary statement of financial
condition data as of and for each of the years in the five-year period ended
December 31, 2000 is as follows. Historical financial results may not be
indicative of future performance of the Company or its affiliates.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
STATEMENT OF OPERATIONS DATA:
Commissions $ 16,818,686 25,291,212 7,932,780 4,810,520 3,648,255
Investment banking 1,831,326 925,616 2,584,770 752,554 0
Trading income (loss) (4,076,629) 3,475,539 (272,811) 833,227 567,537
Other 135,902 740,342 23,530 9,248 41,720
Total revenue 14,709,285 30,432,709 10,268,269 6,405,549 4,257,512
Employee compensation 13,954,116 19,992,928 7,397,860 4,459,420 3,448,700
Other expenses 7,618,831 4,802,555 3,431,631 1,453,086 1,015,567
Total expenses 21,572,947 24,795,483 10,829,491 5,912,506 4,464,267
Income (loss) before income taxes
and minority interest (6,863,662) 5,637,226 (561,222) 493,043 (206,755)
Income tax expense (benefit) (2,214,012) 2,201,598 (163,900) 19,008 0
Minority interest (650,510) 297,285 0 0 0
Net income (loss) $ (3,999,140) 3,138,343 (397,322) 474,035 (206,755)
Earnings (loss) per share:
Basic $ (0.32) 0.25 (0.04)
Diluted $ (0.32) 0.22 (0.04)
Weighted average shares
outstanding:
Basic 12,617,210 12,501,191 10,664,369
Diluted 12,617,210 15,291,965 10,664,369
STATEMENT OF FINANCIAL CONDITION
DATA:
Cash and cash equivalents $ 482,562 2,732,175 201,312 170,474 275,165
Deposit with clearing organization 250,000 100,000 100,000 100,000 100,000
Receivable from clearing 2,842,196 4,540,052 1,405,648 725,707 351,357
organization
Securities owned 2,433,022 6,207,748 1,539,424 634,419 952,092
Other assets 3,397,959 2,534,127 695,843 343,978 267,229
Total assets $ 9,405,739 16,114,102 3,942,227 1,974,578 1,945,843
Accounts payable, accrued expenses
and other liabilities $ 1,869,821 2,905,020 577,736 141,330 38,480
Securities sold, not yet purchased 446,078 187,940 0 0 0
Payable to clearing organization 2,563,240 6,196,059 1,459,678 608,848 1,007,514
Line of credit 1,500,000 0 0 0 0
Notes payable 750,000 0 0 0 0
Subordinated debt 1,000,000 1,000,000 500,000 0 0
Total liabilities 8,129,139 10,289,019 2,537,414 750,178 1,045,994
Minority interest 377,382 976,725 0 0 0
Common stock 12,661 12,537 11,615 9,580 9,926
Additional paid in capital 1,719,349 1,669,473 1,461,456 937,298 855,085
Subscription receivable 0 0 (96,263) (100,000) 0
Treasury stock 0 0 0 (47,805) 0
Retained earnings (deficit) (832,792) 3,166,348 28,005 425,327 34,838
Total stockholders' equity 899,218 4,848,358 1,404,813 1,224,400 899,849
Total liabilities and
stockholders' equity $ 9,405,739 16,114,102 3,942,227 1,974,578 1,945,843
12
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company generated negative cash flows from operations in the year 2000 of
approximately $4.2 million. This use of cash was as a result of operating losses
incurred throughout the year. Management took several proactive steps to help
mitigate the negative cash flows from operations which include: reductions of
approximately 50% of staff primarily from non-revenue generating positions; the
sub-lease of approximately 60% of the Company's main corporate space; the change
to a new clearing organization in an effort to reduce clearing charges;
initiated a hiring freeze with the exception of revenue producers; and
reductions in redundant information systems. These and other cost control
measures were initiated beginning in May. Management believes that these
measures should provide positive results in 2001.
As of December 31, 2000, the Company's liabilities included $3,250,000 in
short-term debt and approximately $1,600,000 in payables for operating
activities. The short-term debt included $1,000,000 in subordinated debt issued
to Clark N. Wilson, a $1,500,000 line of credit with a bank, which matured on
February 15, 2001 (as described below), and $750,000 in short-term demand notes
to John J. Gorman and Charles H. Mayer, which both matured on February 7, 2001
(as described below).
In September 1998, Tejas Securities issued subordinated debt in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
subordinated debt was a short-term loan agreement used to increase equity
capital required for Tejas Securities' underwriting activities. In November
1998, Tejas Securities extended the repayment terms of the loan agreement so
that the loan became due and payable in November 2001. The loan accrues interest
at 11.5 percent per annum and is considered equity capital for NASD purposes. As
a condition of the loan agreement, Tejas Securities issued warrants to the
lender to purchase 112,500 shares of common stock of Tejas Securities (279,281
shares of the Company's common stock giving effect to the Merger), exercisable
at a price of $2.65 per share ($1.07 per share giving effect to the Merger).
In June 1999, Tejas Securities completed the second issuance of subordinated
debt in exchange for $500,000 from Clark Wilson. The proceeds from the loan
agreement were used to finance the expansion activities of Tejas Securities, as
well as contribute to operating activities. The loan accrues interest at 11.5
percent per annum and is also considered equity capital for NASD purposes. As a
condition of the loan agreement, Tejas Securities issued additional warrants to
the lender to purchase 112,500 shares of common stock of Tejas Securities
(279,281 shares of the Company's common stock giving effect to the Merger)
exercisable at a price of $2.65 per share ($1.07 per share giving effect to the
Merger) of common stock. The warrants associated with the September 1998 and
June 1999 subordinated debt were cancelled in 1999 in an agreement with Clark
Wilson. On January 1, 2000, the Company issued options to purchase 558,563
shares of the Company's common stock to Clark Wilson. The purchase price of the
shares is $1.07 per share and expires four years from the date of the grant. The
options were intended to constitute non-qualified stock options.
On February 27, 2001, the Company restructured the $1,000,000 of subordinated
debt with Clark Wilson. Clark Wilson granted the Company an option to extend the
maturity of the subordinated debt at its discretion for a period of at least one
year not to exceed three years. In consideration for this option, the Company
paid $20,000 to Clark Wilson. The subordinated debt was originally issued in
increments of $500,000 in September 1998 and June 1999.
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14
On March 6, 2001, the Company restructured its line of credit. The Company
secured the line of credit in June 2000 to facilitate its working capital needs.
Originally, the loan accrued interest at a rate of prime plus one, with interest
due on a quarterly basis. The Company pledged its ownership of 4,808,555 shares
of Tejas Securities common stock and John Gorman provided a personal guarantee.
Additionally, the line of credit contained loan covenants of $2,500,000 of
minimum net worth and $1,500,000 of working capital. The Company's shares of
Tejas Securities common stock and John Gorman's pledge remain as collateral for
the line of credit. The bank agreed to restructure the line of credit in
February 2001 in exchange for a $500,000 principal reduction and current
payments of interest. Upon modification, the line of credit was converted into a
term loan in the amount of $1,000,000. The modified note matures on April 1,
2002 and requires monthly payments of $50,000 plus accrued interest with
payments beginning April 1, 2001. Upon maturity of the note on April 1, 2002,
all unpaid principal plus interest will become due and payable. The $500,000
principal reduction paid on March 8, 2001 reduced the Company's outstanding debt
from $3,250,000 on December 31, 2000 to $2,750,000 as of March 15, 2001.
Additionally, there are no financial covenants governing the loan.
Effective February 7, 2001, the Company restructured the short-term demand notes
to John Gorman, Chairman and Chief Executive Officer, and Charles Mayer,
President and Chief Operating Officer, into term notes with new maturity dates
of March 7, 2002. In November 2000, the Company entered short-term loan
agreements with John Gorman and Charles Mayer for $500,000 and $250,000,
respectively. These loans were secured to facilitate short-term working capital
needs and to satisfy certain regulatory requirements of Tejas Securities. The
demand loans accrued at the prime rate, with interest due on a quarterly basis,
and were unsecured.
A material portion of the Company's commission revenues are generated by the
brokering of securities from United States domiciled companies that are rated
below investment grade and classified as distressed. The Company dedicates the
majority of its in-house research to analyzing distressed companies, which, in
turn, helps facilitate the brokering of these distressed securities. The recent
and ongoing economic slowdown in the domestic United States economy could
increase the opportunities in domestic distressed securities. Management expects
the slowing United States economy will provide increased opportunities for the
Company to research and generate additional commission revenues in the
distressed bond market, however, there can be no assurance that additional
revenues will be realized.
The Company is currently seeking additional funding in the form of short-term
loans and additional equity. However, there can be no assurance that additional
debt or equity funds will be raised. Management believes it will be able to
generate positive cash flows from operations to fund its liabilities as they
come due, although the Company's business is susceptible to the volatility of
the capital markets.
As a broker-dealer, Tejas Securities is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors affecting
Tejas Securities' liquidity include the value of securities held in trading
accounts, the value of non-current assets, the amount of unsecured receivables,
and the amount of general business liabilities, excluding amounts payable to its
clearing broker and NASD approved subordinated debt.
Tejas Securities' inventory balance fluctuates daily based on the current market
value and types of securities held. Tejas Securities typically invests in
securities in which it provides research coverage. The types of securities may
include publicly traded debt, equity, options and private security issuances. As
a market maker, Tejas Securities provides bid and ask quotes on certain equity
securities on the NASDAQ market. Tejas Securities' ability to generate revenues
from market making activities may depend upon the level and value of securities
held in inventory.
14
15
Market values for some of the securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, Tejas Securities' liquidity
may be affected depending on the value of the securities involved. During times
of general market declines, Tejas Securities may experience market value losses,
which ultimately affects the liquidity of Tejas Securities through its
broker-dealer net capital requirements. In addition, Tejas Securities may decide
not to liquidate its security holdings to increase cash availability if
management believes a market turnaround is likely in the near term or if
management believes the securities are undervalued in the current market.
Since Tejas Securities' inception in March of 1994, management has raised
capital from two primary sources: the issuance of common stock and subordinated
debt. Tejas Securities generally has issued stock to either raise capital for
expansion or as an incentive to members of management. In April 1999, the
Company issued 2,499,815 shares of the common stock (1,006,975 shares of Tejas
Securities common stock before the exchange ratio) for $704,833 in cash. The
April 1999 stock issuance to the Company's employees and management members was
a means of recognizing each individual's contribution to the Company and to
expand the stockholder base. Proceeds from the stock issuance were partially
used to finance the reverse merger and the expansion of Tejas Securities'
infrastructure.
Tejas Securities also utilizes the receivable balance from its clearing
organization, First Clearing Corporation to fund operating and investing
activities. The receivable balance represents the residual equity due to Tejas
Securities from First Clearing Corporation if Tejas Securities liquidated all of
its investment security holdings. The receivable balance from the clearing
organization is also used to secure temporary financing from First Clearing
Corporation for the purchase of investments in Tejas Securities' trading
accounts. The receivable balance held at First Clearing Corporation may
fluctuate depending on factors such as the market valuation of securities held
in Tejas Securities' trading accounts, realized trading profits, commission
revenue, cash withdrawals and clearing costs charged to Tejas Securities for
conducting its trading activities. As of December 31, 2000, the receivable
balance from the clearing organization was $2,842,196.
Cash Flows From Operating Activities
A material portion of the Company's commission revenues are generated by the
brokering of securities from United States domiciled companies that are rated
below investment grade and classified as distressed. The Company dedicates the
majority of its in-house research to analyzing distressed companies, which, in
turn, helps facilitate the brokering of these distressed securities. The recent
and ongoing economic slowdown in the United States economy could increase the
opportunities in distressed securities. Management expects the slowing United
States economy will provide increased opportunities for the Company to research
and generate additional commission revenues in the distressed bond market,
however, there can be no assurance that additional revenues will be realized.
Net cash provided (used) by operating activities was $(4,191,924), $1,481,301
and $(858,413) in 2000, 1999 and 1998, respectively. The net cash provided
(used) by operating activities is impacted primarily by the brokerage operating
activities and changes in the brokerage-related assets and liabilities.
In 2000, the most significant uses of cash were from the decrease in the payable
to the clearing organization and the increase in federal income taxes
receivable. The $1,934,963 decrease in the payable to the clearing organization
resulted from decreases in securities owned of $3,774,726, taking into account
market value adjustments. The increase in federal income taxes receivable
resulted from payment of 1999 accrued income taxes of $863,821 in 2000, and the
subsequent receivable balance of $1,808,214 due to operating losses incurred in
2000. The primary sources of cash related to the reduction of securities owned
of $3,774,726 and the reduction of other investments of $932,253. These
decreases represented the liquidation of investments needed to fund operating
expenses during the year. The net effect of these transactions was $99,981 in
cash proceeds, with the remaining $4,291,905 reduction consisting of $3,999,140
net loss plus changes in other assets and liability accounts.
15
16
In 1999, the most significant sources of cash related to the increase in the
payable to the clearing organization and the increase in accrued liabilities.
The $4,736,381 increased payable to the clearing organization corresponds to the
overall increase in securities owned of $4,668,324, taking into account market
value adjustments. The $2,327,284 increase in accounts payable, accrued expenses
and other liabilities related to the remaining 1999 estimated income tax
liability for the Company and employee compensation accruals. The primary uses
of cash included the increase in securities owned and the increase in the
receivable from clearing organization of $3,134,404. The increase in the
receivable from clearing organization was due to the increased level of
commission and trading activity during 1999, and the retention of a portion of
the proceeds. Other significant uses of cash related to the conversion of the
$700,088 performance fee earned by the manager of the Fund into equity of the
Fund, and the $500,955 increase in employee and shareholder receivables. The net
cash effect of these transactions was the use of $1,940,106 in cash, with the
remaining $3,421,407 addition consisting of net income plus changes in other
asset and liability accounts.
In 1998, the most significant use of cash related to the $679,941 increase in
the receivable from the clearing organization. The increased receivable was
indirectly the result of Tejas Securities' use of proceeds from the $500,000
subordinated debt agreement. Proceeds from the debt were used for operations
thereby allowing Tejas Securities to retain a larger receivable balance with the
clearing organization. In addition, Tejas Securities' overall investment in
securities increased by $905,005 from 1997 to 1998. This increase corresponds to
the $850,830 increase in payable to the clearing organization, taking into
account market value appreciation of the securities. The net cash effect of
these transactions was the use of $734,116, with the remaining reduction of
$124,297 consisting of net income plus changes in other asset and liability
accounts.
The Company anticipates that a significant portion of the cash provided from
future operating activities of Tejas Securities might be used to reduce the
Company's overall debt structure. In addition, future operating cash flows may
be used to facilitate additional investing activities.
Cash Flows Used In Investing Activities
Net cash used by investing activities was $358,856, $318,918 and $188,484 in
2000, 1999 and 1998, respectively. In 2000, the Company purchased $422,540 in
furniture, fixtures and leasehold improvements as it expanded its corporate
headquarters and established a presence in Houston, Texas. In 1999, Tejas
Securities advanced $116,004 to TSG Capital, LLC in conjunction with the
organizing of the Fund. The remaining cash uses in 1999 and 1998 are directly
the result of capital expenditures for office expansion in Austin, Atlanta and
New York. During 1998, Tejas Securities opened an additional office in New York
as part of its expansion into the investment banking and retail brokerage
segments of the industry. The New York office was subsequently closed during
1999.
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Cash Flows From Financing Activities
Net cash provided by financing activities was $2,301,167, $1,368,480 and
$1,077,735 in 2000, 1999 and 1998, respectively.
In May 2000, an employee of the Company exercised non-qualified stock options to
purchase 124,125 shares of the Company's common stock at $0.40 per share
($50,000 in stock proceeds). During November 2000, the Company issued $750,000
in short-term demand notes to John J. Gorman and Charles H. Mayer as described
above. In June 2000, the Company established a line of credit for $1,500,000
with a bank as described above.
During 1999, Tejas Securities issued $500,000 of subordinated debt to Clark N.
Wilson as described above. In addition, the Company issued 2,698,415 shares of
stock (1,086,975 shares of Tejas Securities common stock before the exchange
ratio) with a value of $775,884 through a subscription program. In 1999,
$750,164 of the current and prior year subscriptions was collected.
Financing activities provided $1,000,000 in cash during 1998 through the
issuance of subordinated debt as noted above. Of the $1,000,000 of debt issued
in 1998, $500,000 was repaid to the lender. In addition, Tejas Securities
received $475,405 in proceeds from common stock issuance to management, as well
as $98,593 on the sale of treasury stock to members of management.
Results Of Operations
The following table presents additional information regarding the results of
operations as presented in Item 6.
Year Ended December 31,
2000 1999 1998
------------------------ ----------------------- --------
(000's) % Change (000's) % Change (000's)
-------- -------- -------- -------- --------
Revenues:
Commissions $ 16,819 (33) 25,291 219 7,933
Underwriting and
investment 1,831 98 926 (64) 2,585
banking
Net dealer inventory and
investment income (4,077) (217) 3,476 -- (273)
Other income 136 (82) 740 2,983 24
-------- -------- -------- -------- --------
$ 14,709 (52) 30,433 196 10,269
Expenses:
Commissions, employee
compensation and benefits $ 13,954 (30) 19,993 170 7,398
Clearing and floor 966 57 615 40 439
brokerage
Underwriting -- -- -- (100) 590
Communications and
occupancy 2,033 64 1,242 52 817
Professional 1,868 92 971 121 440
Other 2,752 39 1,974 72 1,145
-------- -------- -------- -------- --------
$ 21,573 (13) 24,795 129 10,829
The decrease in commission revenues during 2000 resulted from the overall
downturn in the equity markets during the year. The NASDAQ decreased
approximately 50% from its all time high achieved in March 2000. In addition,
the Company reduced the number of employees servicing its retail broker division
as a result of the downturn in the NASDAQ market. The increase in commission
revenues during 1999 is due to increased activity in agency and principal
transactions during the periods. During the latter part of 1999 and the first
quarter of 2000, Tejas Securities expanded its presence in Texas and Georgia
through the addition of established brokers and through additional product and
securities offerings. As the equity markets retreated beginning in the second
quarter of 2000, Tejas Securities gradually reduced the number of brokers to a
level comparable to early 1999.
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18
Underwriting and investment banking revenues increased in 2000 through the
increase in advisory fee income and participation in equity syndicates. In
addition, Tejas Securities was involved in a secondary placement of TSG Internet
Fund I, Ltd., (the "Fund") along with one other private placement. Underwriting
and investment banking revenues declined in 1999 as a result of the
discontinuation of IPO underwriting activities in October 1998. During 1999,
Tejas Securities was involved in the private placement of the Fund. The
remaining fees in 1999 were for advisory services and syndicate participation.
Net dealer inventory and investment income decreased during 2000 primarily from
the overall market decline and the losses generated in proprietary positions.
Many of the companies that Tejas Securities followed through research are
involved in the telecommunications industry, which experienced substantial
valuation declines. Net dealer inventory and investment income increased during
1999 primarily from favorable investment performance of companies in the
telecommunications and Internet industries. Much of this increase was due to
merger and acquisition activity within those sectors, and consequently the
appreciation in the underlying securities, both debt and equity.
During 2000, the Fund generated substantial losses, thereby eliminating any
performance fee income for Tejas Securities, and reducing other income from the
1999 amounts. Other income increased in 1999 from the addition of the year-end
performance fee received from the Fund. Tejas Securities earned 20% of the
increase in market value of the Fund on an annual basis. Otherwise, other
revenues were consistent between 1999 and 1998.
Commissions, employee compensation and benefits decreased in 2000 due to market
declines. Commission revenues decreased significantly during the year, thereby
reducing commission expense to brokers. In addition, Tejas Securities eliminated
redundant administrative positions and reduced its bonus payments to
administrative and management personnel. Commissions, employee compensation and
benefits increased in 1999 primarily because of the increase in commission
revenue. General and administrative salaries and other employee benefits
increased due to overall salary increases and additional hires. Incentive
compensation and year-end bonus accruals increased as a result of higher
profits.
Clearing and floor brokerage costs increased in 2000 as Tejas Securities
aggressively expanded its market making activities and the number of retail
brokers during the first quarter of 2000. As the markets declined after the
first quarter, clearing and floor brokerage costs gradually declined due to
lower trading volume and a reduction in market making activities. In addition,
Tejas Securities sought to lower its future clearing charges by entering an
agreement with First Clearing Corporation to provide clearing services. Clearing
and floor brokerage costs increased in 1999 as a result of greater trading
activity in the over-the-counter equity markets and on the national exchanges.
Tejas Securities' percentage of revenues derived from equity securities
increased during 1999 in comparison to the volume of fixed income securities
being traded.
No underwriting expenses were incurred during 2000 or 1999 as Tejas Securities
did not actively engage in underwriting or investment banking activities, other
than the private placement and syndicate participations. The only expenses
associated with the private placement were legal fees and commission expense,
which were not material to the overall financial results.
Communications and occupancy charges increased significantly during 2000 due to
three factors: the Company leased new office space for its corporate
headquarters in Austin, Texas, beginning in January 2000; Tejas Securities
expanded its presence in Texas through the addition of a Houston office; and as
a result of the expansion of its market making activities, Tejas Securities
incurred additional costs associated with telecommunications and support for a
larger sales force. During the second half of 2000, Tejas Securities undertook a
careful examination of its fixed costs associated with communications and
occupancy charges. Due to reduction in personnel and revenues, the Company
sought to sublease excess office space and discontinue services that were no
longer required. Communications and occupancy charges increased significantly in
1999. The increase is attributed to two factors. Tejas Securities expanded its
market presence in other cities, and subsequently abandoned those markets as
revenue production did not cover the fixed costs. In addition, Tejas Securities
increased the availability of quote and news services to its brokers and traders
in the Austin and Atlanta offices. This increase in services provided was needed
to support the increase in commission generating employees.
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19
Professional fees increased during 2000 due to increases in legal expenses,
accounting fees and consulting fees. In 2000, the Company incurred approximately
$600,000 in legal fees associated with the registration of the Company's common
stock and legal fees for the settlement of private equity transactions. In
addition, the Company incurred approximately $400,000 for settlements with
clients and former employees. Tejas Securities also incurred approximately
$300,000 in marketing costs associated with developing its internet site and
brand awareness. The Company also incurred additional accounting costs
associated with its annual reporting requirements and the registration of its
common stock. Professional fees for 1999 increased significantly due primarily
to the increased legal fees during the third quarter of 1999. Of the total
increase for the year, $344,020 was accrued legal expenses relating to the
merger of the Company; legal fees for the settlement of private equity
securities transactions with its customers; and fees for general legal counsel.
The remaining costs during 1999 related to consulting and accounting fees
incurred during the normal course of business.
The increase in other expenses during 2000 is attributed to the first quarter
increase in administrative services needed to support the expanding
infrastructure. In addition, Tejas Securities added equipment leases for the
expansion of the Austin office and the establishment of the Houston office. The
overall increase in other expenses in 1999 is the result of increases in
personnel and general and administrative services needed to support those
personnel.
The income tax benefit increased during 2000 due to the $6.9 million pre-tax
loss incurred. The Company's effective tax rate was 32% for 2000. Income tax
expense increased during 1999 as a result of the increase in taxable income
during the year. The Company's effective tax rate was 39% for 1999.
Minority interest in net income (loss) resulted from the minority stockholders
of Tejas Securities subsequent to the Merger on August 27, 1999.
Effects Of Inflation
The effects of inflation have been minimal on the results of operations and the
financial condition of Tejas Securities in recent years. However, the rising
cost of labor and competitive market for brokers could effect general and
administrative costs in the near term.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Tejas Securities' principal business activities are, by their nature, risky and
volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect Tejas Securities' business. Managing risk
is critical to Tejas Securities' profitability and to reducing the likelihood of
earnings volatility. Tejas Securities' risk management policies and procedures
have been established to continually identify, monitor and manage risk. The
major types of risk that Tejas Securities faces include credit risk, operating
risk and market risk.
Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. Tejas Securities clears its securities
transactions through a clearing organization. Under the terms of the clearing
agreement, the clearing organization has the right to charge Tejas Securities
for its losses that result from its customers' failure to fulfill their
contractual obligations. In order to mitigate risk, Tejas Securities' policy is
to monitor the credit standing of its customers and maintain collateral to
support customer margin balances. Further, significant portions of Tejas
Securities' assets are held at its clearing organization, First Clearing
Corporation. Therefore, Tejas Securities could incur substantial losses if its
clearing organization were to become insolvent or otherwise unable to meet its
financial obligations. First Clearing Corporation has in excess of $486 million
in capital and has historically met all of its obligations to Tejas Securities.
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20
Operating risk arises from the daily conduct of Tejas Securities' business and
relates to the potential for deficiencies in control processes and systems,
mismanagement of Company activities or mismanagement of customer accounts by its
employees. Tejas Securities relies heavily on computer and communication systems
in order to conduct its brokerage activities. Third party vendors, such as the
clearing organization and news and quote providers, provide many of the systems
critical to Tejas Securities' business. Tejas Securities' business could be
adversely impacted if any of these systems were disrupted. Tejas Securities
mitigates the risk associated with systems by hiring experienced personnel, and
providing employees with alternate means of acquiring or processing information.
In order to mitigate the risk associated with mismanagement of Company
activities or customer accounts, Tejas Securities utilizes compliance and
operations personnel to review the activities of administrative and sales
personnel. In addition, the activities of management are actively reviewed by
other members of management on a regular basis and by the Board of Directors.
Tejas Securities' primary market risk exposure is to market price changes and
the resulting risk of loss that may occur from the potential change in the value
of a financial instrument as a result of price volatility or changes in
liquidity for which Tejas Securities has no control. Securities owned by Tejas
Securities are either related to daily trading activity or Tejas Securities'
principal investing activities. Market price risk related to trading securities
is managed primarily through the daily monitoring of funds committed to the
various types of securities owned by Tejas Securities and by limiting exposure
to any one investment or type of investment.
Tejas Securities' trading securities were $2,433,022 in long positions and
$446,078 in short positions at December 31, 2000. These trading securities may
be exchange listed, Nasdaq or other over-the-counter securities on both long and
short positions. The potential loss in fair value, using a hypothetical 10%
decline in prices, is estimated to be $288,000 as of December 31, 2000. A 10%
hypothetical decline was used to represent a significant and plausible market
change.
Tejas Securities' investment securities are typically those reported on by Tejas
Securities' research analysts. These positions often consist of high-yield debt
securities and the related equity securities. Tejas Securities monitors this
risk by maintaining current operating and financial data on the companies
involved, and projecting future valuations based upon the occurrence of critical
future events. Any transactions involving the investment securities are
typically based upon the recommendations of Tejas Securities' research analysts
versus current market performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information sets forth certain information with respect to our
executive officers and directors. Each of the directors is elected to serve
until the next election of directors at a meeting of the stockholders. Their
respective backgrounds are described below.
NAME AGE POSITION
- ------------------- --- -----------------------------------------------
John J. Gorman 40 Director, Chairman and Chief Executive Officer
Charles H. Mayer 53 Director, President and Chief Operating Officer
Robert E. Gillette 35 Secretary
A. Reed Durant 46 Director of Compliance
Kurt J. Rechner 40 Chief Financial Officer and Treasurer
John F. Garber 31 Director of Finance
Barry A. Williamson 42 Director
Clark N. Wilson 43 Director
JOHN J. GORMAN. Mr. Gorman became our Chairman of the Board of Directors and
Chief Executive Officer in August 1999. He has been the Chairman and Chief
Executive Officer of Tejas Securities since July 1997. Mr. Gorman has over 16
years of experience in the brokerage industry. Mr. Gorman became a principal of
Tejas Securities on April 18, 1995. From 1988 until joining Tejas Securities,
Mr. Gorman worked at APS Financial Inc., most recently as a Senior Vice
President. Mr. Gorman served primarily in a broker capacity at APS Financial
Inc., a broker-dealer in Austin, Texas. Mr. Gorman has held positions at APS
Financial Inc., Landmark Group, Shearson Lehman and Dean Witter. In addition,
Mr. Gorman serves on the Board of Directors of Lincoln Heritage Corporation, a
publicly traded company. Mr. Gorman is the nephew of Charles H. Mayer through
marriage. Mr. Gorman received his B.B.A. from Southern Methodist University in
1983.
CHARLES H. MAYER. Mr. Mayer joined us in September 1999 as the Chief Operating
Officer and a Director. Mr. Mayer became our President in December 2000. From
1995 until he joined Tejas Securities, Mr. Mayer was self-employed and managed
personal investments in a number of companies not related to the securities
industry. From 1990 to 1995, Mr. Mayer was the Managing Director and Chief
Information Officer with CS First Boston. Other experience includes 21 years in
senior positions with Morgan Stanley, Tech Partners, Salomon Brothers, Lehman
Brothers and the Federal Reserve Bank of New York. Mr. Mayer earned a BBA and
MBA from Seton Hall University.
ROBERT E. GILLETTE. Mr. Gillette became Secretary and Treasurer in January 2000.
Mr. Gillette served as our Treasurer until September 2000. Mr. Gillette joined
Tejas Securities in March 1998 as Senior Vice President and manager of the
Atlanta branch office. Prior to joining Tejas Securities, Mr. Gillette was a
Vice President at Marion Bass Securities from April 1996 to December 1997, a
Vice President at Addison Securities from November 1994 to April 1996, a Vice
President at the GMS Group from July 1994 to November 1994 and a Vice President
at APS Financial Inc. from December 1993 to July 1994. Mr. Gillette graduated
from the University of Georgia with a B.A. in Political Science in 1988 and
received his J.D. degree with honors from the Atlanta Law School in 1993.
A. REED DURANT. Mr. Durant became our Director of Compliance in August 1999. Mr.
Durant joined Tejas Securities in November 1998 as the Compliance Director. From
January 1996 until joining Tejas Securities, Mr. Durant worked as Senior
Compliance Examiner for the NASD in the Regulation and Enforcement area. From
1988 until joining the NASD, Mr. Durant worked at Principal Financial
Securities. Mr. Durant brings over 20 years experience in the securities
industry, including 8 years as Compliance Director of a 400-broker, 30-branch
NYSE member firm. Mr. Durant graduated from Texas Tech University with a BA in
economics.
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KURT J. RECHNER, CPA, CFA. Mr. Rechner became our Chief Financial Officer in
January 2000 and our Treasurer in September 2000. Mr. Rechner has spent the past
nineteen years in the financial services industry. Prior to joining Tejas
Securities, Mr. Rechner was employed from 1997 through 1999 as an Executive Vice
President, Finance & Operations, CFO for Xerox Federal Credit Union. From May
1995 to 1997 Mr. Rechner was the Chief Executive Officer for Prism Capital
Management, LLC, which managed a global fixed income hedge fund. From 1990
through May 1995, Mr. Rechner was the Senior Vice President of Accounting and
Finance for Security Service Federal Credit Union. Mr. Rechner earned a B.S. in
Business Administration from the University of Illinois in 1984 and an M.B.A.
from Trinity University in 1985. Mr. Rechner also holds the professional
designations of Certified Public Accountant and Chartered Financial Analyst.
JOHN F. GARBER, CPA. Mr. Garber became our Director of Finance in August 1999.
Mr. Garber joined Tejas Securities in October 1998 as Director of Finance. From
April 1999 until joining Tejas Securities, Mr. Garber was employed as the
Controller for Loewenbaum & Co. Inc., an Austin based broker-dealer. Prior to
joining Loewenbaum & Co., Inc. in April 1998, he was employed by KPMG LLP from
1995 to 1998 as a supervising auditor in the financial assurance department. Mr.
Garber graduated from the University of Florida in 1992 with a B.S.B.A. in
Finance. Mr. Garber holds the professional designation of Certified Public
Accountant.
BARRY A. WILLIAMSON. Mr. Williamson became a Director in October 1999. Mr.
Williamson was elected in 1992 as the 38th Texas Railroad Commissioner and
served from January 1993 to January 1999. He served as the Commission's Chairman
in 1995. During the late 1980's and early 1990's, Mr. Williamson served under
the Bush administration at the U.S. Department of Interior as the Director of
Minerals Management Service. Under President Bush, he managed mineral leases on
the nation's 1.4 billion-acre continental shelf and oversaw an annual budget of
almost $200 million. During the 1980's, Mr. Williamson served under the Reagan
administration as a principle advisor to the U.S. Secretary of Energy in the
creation and formation of a national energy policy. Mr. Williamson began his
career with the firm of Turpin, Smith, Dyer & Saxe, and in 1985 established the
Law Offices of Barry Williamson and founded an independent oil and gas company.
Mr. Williamson graduated from the University of Arkansas with a B.A. in
Political Science in 1979, and received his J.D. degree from the University of
Arkansas Law School in 1982.
CLARK N. WILSON. Mr. Wilson became a Director in October 1999. Mr. Wilson is the
President and Chief Executive Officer of Clark Wilson Homes, Inc., a subsidiary
of Capital Pacific Holdings. Previously, Mr. Wilson was the President of Doyle
Wilson Homebuilder, Inc., serving in that position in 1992. Mr. Wilson served as
Vice President of Doyle Wilson homebuilder, Inc. from 1986 to 1992. Mr. Wilson
took Doyle Wilson Homebuilder, Inc. through a turbulent market and formed Clark
Wilson Acceptance Corporation in 1989 as a finance corporation, personally
financing over $35,000,000 of construction loans for Doyle Wilson Homebuilder,
Inc. Mr. Wilson has won numerous MAX awards between 1994 and 1998, including the
MAX Award for Grand Builder of the Year and best Quality Project in 1994. Mr.
Wilson is a Life Member of the National Association of Homebuilders Spike Club.
Mr. Wilson attended Amarillo College and the University of Texas at Austin, and
has nearly twenty-five years of experience in the homebuilding industry.
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BOARD COMMITTEES
The Compensation Committee consists of Barry A. Williamson and Clark N. Wilson.
The Compensation Committee administers the Westech Capital Corp. Stock Option
Plan. See "-Westech Capital Corp. 1999 Stock Option Plan." The Compensation
Committee's responsibilities include:
o making recommendations to the board of directors regarding the
Company's policies relating to, and the amounts and terms of all
compensation to the Company's executive officers;
o administering and discharging the employee stock plans, option plans
and such other compensation plans that are established by the board of
directors from time to time;
o engaging any professional advisors as it deems appropriate; and
o fulfilling such other powers and duties as determined and delegated by
the board of directors from time to time.
The Audit Committee was formed in May 2000, and consists of Barry A. Williamson
and Clark N. Wilson. The Audit Committee's responsibilities include:
o reviewing, with our independent auditors, the Company's financial
statements and internal accounting controls and the plans and results
of the audit engagement;
o reviewing the independence of the Company's independent auditors;
o reviewing the adequacy of the Company's internal accounting controls;
o preparing an annual report on executive compensation for inclusion in
the Company's proxy statement for the annual meeting of shareholders;
and
o fulfilling such other powers and duties as determined and delegated by
the board of directors from time to time.
All of the members of both the Compensation Committee and the Audit Committee
have attended all of the meetings during the year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company served as a member of the compensation or
similar committee or Board of Directors of any other entity, other than the
Company's subsidiaries, of which an executive officer served on the Company's
Compensation Committee or Board of Directors.
In October 1999, the Company and Barry Williamson entered into a consulting
agreement. The agreement called for Mr. Williamson to provide the Company with
consulting services on a month-to-month basis at the rate of $12,500 per month,
plus out of pocket expenses. In 2000, the Company restructured its agreement
with Mr. Williamson, whereby he would receive $6,250 per month for consulting
services, plus out of pocket expenses. The consulting agreement with Mr.
Williamson was terminated effective February 28, 2001.
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ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information concerning compensation of our Chief
Executive Officer and other highly compensated executive officers whose salary
and bonuses exceeded $100,000 for the year ended December 31, 2000, the "named
executive officers."
NAME AND PRINCIPAL
POSITION YEAR SALARY (1) BONUS FORGIVEN DEBT COMMISSIONS (2)
- ----------------------- ---- ---------- ---------- ------------- ---------------
John J. Gorman 2000 $ 0 $ 0 $ 0 $1,983,699
Chairman and Chief 1999 0 0 0 5,850,050
Executive Officer 1998 125,000 0 135,114 709,309
Charles H. Mayer (3) 2000 153,000 200,000 0 0
President and Chief 1999 66,667 25,000 0 0
Operating Officer
Robert Gillette (5) 2000 80,000 0 5,000 244,771
Secretary 1999 72,000 0 0 504,659
1998 0 1,000 0 87,175
Kurt J. Rechner (5) 2000 146,731 46,000 0 0
Chief Financial Officer
and Treasurer
Jay W. Van Ert (3) 2000 176,667 300,000 0 83,397
1999 250,000 156,386 0 285,256
1998 183,333 0 0 47,255
Joseph F. Moran (4) 2000 0 0 0 183,434
1999 0 0 0 1,016,538
1998 0 0 0 1,023,280
(1) Does not include certain prerequisites and other personal benefits that
are standard in the industry and have a total value of less than 10% of
the total annual salary, bonus and commissions reported for the named
executive officer.
(2) In association with its underwriting activities, Tejas Securities was
given warrants to purchase stock as partial consideration. All of the
warrants had a strike price that was greater than the initial public
offering price of the underlying stock. Tejas Securities distributed
these warrants to certain members of the working group on these public
offerings. None of the executive officers listed received warrants that
are currently exercisable for less than the current trading price of
the underlying stock. Consequently, no value is included in the
commissions for these warrants.
(3) Mr. Van Ert acted as the President from August 1999 to December 13,
2000. Mr. Mayer became the President on December 14, 2000.
(4) Mr. Moran acted as the Managing Director and Vice Chairman from August
1999 to October 30, 2000.
(5) Mr. Gillette acted as the Treasurer from January 2000 to September 20,
2000, at which point Mr. Rechner was appointed Treasurer.
OPTION GRANTS AND EXERCISES
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 2000 to
the named executive officers. No stock appreciation rights were granted during
2000.
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Potential Realizable Value
At Assumed Annual
Rates of Stock Price
Appreciation for Option
Individual Grants Term(3)
-------------------------------------------------------------- --------------------------
Number
of
Securities % of Total Options
Underlying Granted
Options To Employees for Exercise Price Expiration
Name Granted(1) Fiscal Year(2) ($/share) Date 5% 10%
- ------------------- ---------- ------------------ -------------- --------------- -------- --------
John J. Gorman 200,000 8.85% $2.20 January 1, 2005 $121,564 $268,624
Jay W. Van Ert 75,000 3.32% $2.00 January 1, 2005 $ 41,442 $ 91,577
Joseph F. Moran 100,000 4.43% $2.20 January 1, 2005 $ 60,782 $134,312
Charles H. Mayer 75,000 3.32% January 1, 2005 $ 41,442 $ 91,577
620,625 27.46% $0.40 January 1, 2005 $ 68,587 $151,559
Kurt R. Rechner 50,000 2.21% $2.00 January 1, 2005 $ 27,628 $ 61,051
Robert E. Gillette -- -- -- -- -- --
(1) One-third of the options become exercisable on each of January 1, 2000,
2001 and 2002, with the exception of the 620,625 options issued to Mr.
Mayer, which were immediately exercisable.
(2) In 2000, we granted employees options to purchase an aggregate of
2,259,750 shares of common stock, of which 1,515,000 were issued under
the 1999 Stock Option Plan.
(3) The 5% and 10% assumed annual rates of compounded stock price
appreciation are based on the assumption that the exercise price was
the fair market value of the shares on the date of the grant. There is
no assurance provided to any executive officer or any other holder of
our securities that the actual price appreciation over the 5 year
option term will be at the assumed 5% and 10% levels or at any other
defined level.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table provides information concerning unexercised options held as
of December 31, 2000 by the named executive officers. No options were exercised
during this period.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 2000 OPTIONS AT DECEMBER 31, 2000(1)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ------------- ----------- -------------
John J. Gorman 266,667 333,333 $ -- $ --
Jay W. Van Ert 216,667 183,333 $ -- $ --
Joseph F. Moran 66,667 133,333 $ -- $ --
Charles H. Mayer 787,292 158,333 $605,109 $ --
Kurt R. Rechner -- 50,000 $ -- $ --
Robert E. Gillette -- -- $ -- $ --
(1) The amount set forth represents the difference between the fair market
value of the underlying stock on December 31, 2000 and the exercise
price of the option. The fair market value was determined by the
closing price of $1.375 per share on December 29, 2000.
DIRECTOR COMPENSATION
As part of their incentive to join the Board of Directors, Mr. Wilson and Mr.
Williamson were each provided with options to purchase 100,000 shares of common
stock. The options are exercisable at $2.00 per share and expire on October 15,
2004. The options vest in three equal installments beginning on October 15,
1999. Currently no other directors receive any form of cash or non-cash
compensation for fulfilling their roles on the Board of Directors.
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WESTECH CAPITAL CORP. 1999 STOCK OPTION PLAN
In October 1999, the Company adopted a stock option plan (the Stock Option Plan)
to strengthen its ability to attract, motivate, compensate and retain employees,
directors, and consultants by providing a means for such persons to acquire a
proprietary interest in the Company and to participate in its growth through
ownership of its common stock. The Compensation Committee of the Board of
Directors administers the Stock Option Plan, provided, however, that the Board
of Directors may also take all actions to administer the Stock Option Plan,
including granting options.
SHARES SUBJECT TO THE PLAN
Under the Stock Option Plan, the Company can grant awards consisting of either
incentive stock options or nonqualified stock options not to exceed 4,000,000
shares of the Company's common stock. That number will be adjusted automatically
if the outstanding shares of common stock are increased or decreased or changed
into or exchanged for a different number of shares or kind of shares or other
securities of the Company or of another corporation, by reason of
reorganization, split, combination of shares, or a dividend payable in common
stock. Equitable adjustments to the number of shares subject to each award and
to the payment required to obtain such shares will also be made so that the same
proportion of shares will be subject to the award and the aggregate
consideration to acquire all shares subject to the award will remain as it was
prior to the re-capitalization.
For the year ended December 31, 2000, the Company granted options under the
Stock Option Plan to acquire 1,515,000 shares of common stock, none of which had
been exercised during the year. Of the options granted, 390,000 options were
cancelled or forfeited during the year due to employee terminations. The Company
had 2,400,000 options outstanding as of December 31, 2000. As of December 31,
1999, the Company had granted options under the Stock Option Plan to acquire
1,425,000 shares of common stock, none of which had been exercised or cancelled
and all of which remained outstanding as of December 31, 1999. For the year
ended December 31, 2000, 150,000 of the options outstanding on December 31, 1999
were cancelled or forfeited due to employee terminations.
ELIGIBILITY
All of the Company's and its subsidiaries' employees, directors and consultants
are eligible to receive awards under the Stock Option Plan, but only employees
are eligible to receive incentive stock options. The Compensation Committee, as
administrator of the Stock Option Plan, determines the persons to whom stock
option awards are to be granted; whether an option shall be an incentive stock
option or nonqualified stock option or both; the number of shares of our common
stock subject to each grant; and the time or times at which stock option awards
will be granted and the time or times of the exercise period, which shall not
exceed the maximum period described below.
TYPES OF AWARDS
Options granted under the Stock Option Plan may be either options that are
intended to qualify for treatment as "incentive stock options" under Section 422
of the Internal Revenue Code or options that are not, which are "nonqualified
stock options". The exercise price of incentive stock options must be at least
the fair market value of a share of the common stock on the date of grant, and
not less than 110% of the fair market value in the case of an incentive stock
option granted to an optionee owning 10% or more of the common stock. The
aggregate fair market value of common stock (calculated on the date of grant)
with respect to which incentive stock options are exercisable for the first time
by an optionee during any calendar year shall not exceed $100,000. The term of
an option may not exceed ten years (or five years in the case of an incentive
stock option granted to an optionee owning 10% or more of the Company's common
stock).
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TERMINATION OF AWARDS
The Stock Option Plan limits the time during which a holder of an option can
exercise an option to no more than ten years. In addition, an optionee who
leaves the Company's employment will generally have no more than three months to
exercise an option, reduced to no days after employment is terminated for cause,
and additional rules apply to cases of death and disability. Upon the occurrence
of certain events which constitute a change of control, all granted options
shall become exercisable during the period beginning on the date of the
occurrence of the change of control and ending sixty days later. The
Compensation Committee may, however, override the Stock Option Plan's rules,
other than the ten year limit. The Company cannot grant additional options under
the Stock Option Plan after October 15, 2009, the tenth anniversary of its
adoption.
AMENDMENTS TO OUR STOCK OPTION PLAN
The Board of Directors may amend or terminate the Stock Option Plan, as long as
no amendment or termination affects options previously granted. However, the
plan requires stockholder approval of any amendment that increases the number of
shares available under the plan which may be issued as incentive stock options
or that modify the requirements as to eligibility to receive incentive stock
options under the plan. On October 3, 2000, stockholders of the Company approved
the board of directors' recommendation to increase the number of options
available under the Stock Option Plan from 3,000,000 to 4,000,000 shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information with respect to ownership of the
Company's common stock at February 28, 2001 by each beneficial owner of five
percent or more of the common stock; each director; each of the named executive
officers; and all directors and officers as a group.
Except as indicated on the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. Options exercisable on or before
February 28, 2001, are included as shares beneficially owned. For purposes of
calculating percent ownership as of February 28, 2001, 12,661,343 shares were
issued and outstanding and for any individual who beneficially owns shares
represented by options exercisable on or before February 28, 2001, these shares
are treated as if outstanding for that person but not for any other person.
PERCENT
NAME AND ADDRESS OF BENEFICIALLY
BENEFICIAL OWNER NUMBER OWNED
- -------------------------------------------- ---------------- ------------
John J. Gorman (1)(2) 6,048,603 46.79%
Jay W. Van Ert (1)(3) 1,362,162 10.58%
Joseph F. Moran (1)(4) 2,549,288 20.03%
John R. Ohmstede (5) 789,435 6.24%
Charles H. Mayer (1)(6) 787,292 4.71%
Barry A Williamson(4) 66,667 *
Clark N. Wilson(4)(7) 625,229 4.71%
All owners of more than five percent, 77.87%
officers and directors as a group (10 total)
- ----------
* Less than 1%.
(1) The address for Messrs. Gorman, Van Ert, Moran and Mayer is 2700 Via
Fortuna, Suite 400, Austin, Texas 78746.
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(2) Includes 266,667 shares of common stock issuable pursuant to options
granted under the 1999 Plan, which are immediately exercisable as of
February 28, 2001.
(3) Includes 216,667 shares of common stock issuable pursuant to options
granted under the 1999 Plan, which are immediately exercisable as of
February 28, 2001.
(4) Includes 66,667 shares of common stock issuable pursuant to options
granted under the 1999 Plan, which are immediately exercisable as of
February 28, 2001.
(5) The address for Mr. Ohmstede is 5905 Overlook Drive, Austin, Texas
78731.
(6) Includes 166,667 shares of common stock issuable pursuant to an option
granted under the 1999 Plan, which is immediately exercisable as of
February 28, 2001. Includes 620,625 shares of common stock issuable
pursuant to an option granted outside the 1999 Plan, which is
immediately exercisable as of February 28, 2001.
(7) Includes 558,562 shares of common stock issuable pursuant to an option
granted outside the 1999 Plan, which is immediately exercisable as of
February 28, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALE LEASEBACK
In September 1997, Tejas Securities entered into a sale-leaseback transaction
with Sandy Hook Management, a company owned by Charles H. Mayer, a member of the
Board of Directors. Sandy Hook Management purchased the assets for $204,268 from
Tejas Securities. Tejas Securities purchased the assets from June 1995 through
September 1997 for a total cost of $272,072. The book value of the assets as of
the date of the transaction was determined in accordance with generally accepted
accounting principles, including depreciation calculated by the straight-line
method. The previous Chief Financial Officer of Tejas Securities made the
determination of the book value. Under the terms of this transaction, Tejas
Securities agreed to lease the furniture and fixtures commencing in October 1998
through September 2000.
LINE OF CREDIT
The Company received a $1,500,000 line of credit from its bank in June 2000. In
exchange for the line of credit, John Gorman provided the bank with a personal
guarantee, as collateral should the Company default on its obligation. The
transaction is described in Item 7 - "Liquidity and Capital Resources."
NOTES PAYABLE
The Company issued term short-term demand notes in November 2000 in exchange for
$500,000 from John Gorman, Chairman and Chief Executive Officer and $250,000
from Charles Mayer, President and Chief Operating Officer. The transactions are
described in Item 7 - "Liquidity and Capital Resources."
SUBORDINATED DEBT
Tejas Securities issued subordinated debt in September 1998 in exchange for
$500,000 from Clark N. Wilson, a current member of the Board of Directors. The
transaction is described in Item 7 - "Liquidity and Capital Resources."
Tejas Securities completed the second issuance of subordinated debt in June 1999
in exchange for $500,000 from Clark Wilson. The transaction is described in Item
7 - "Liquidity and Capital Resources."
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TSG INTERNET FUND I, LTD.
In April 1999, John J. Gorman, Jay W. Van Ert, Joseph F. Moran and Clark N.
Wilson, along with three other owners of less than 5% of the Company,
established TSG Capital, LLC (the "General Partner"), a Texas limited liability
company, for the purpose of acting as general partner of TSG Internet Fund I,
Ltd. (the "Fund"). In addition to the investment in the General Partner, Messrs.
Gorman, Van Ert, Moran and Wilson invested as limited partners in the Fund.
Their contributions were as follows: Mr. Gorman $200,000; Mr. Van Ert $120,520;
Mr. Moran $200,000; and Mr. Wilson $100,000. John Ohmstede, a beneficial owner
of more than 5% of the Company, also invested $200,000 in the Fund as a limited
partner through a Trust. The total capital contribution by the General Partner
was less than $50,000.
TSG Capital, LLC acted as the General Partner of the Fund and has no other
operations. The managers and principal executive officers include two officers
of the Company. The General Partner received a management fee equal to .375% of
the average monthly net asset value of the Fund after the end of a fiscal
quarter. In addition, the General Partner received a performance fee equal to
20% of the annual net profits of the Fund after the end of each fiscal year.
These fees were in turn paid to the Company in exchange for providing services
to the General Partner for investment management, compliance and accounting and
reporting.
TSG Capital, LLC's ownership interest in the Fund was approximately 15% of the
total equity of the Fund as of December 31, 1999. The Company recognized
approximately $734,000 of income during 1999 from the Fund comprised of
management fees of $34,066 and a performance fee of $700,088. The Company
converted the $700,088 performance fee to an additional equity ownership in the
Fund as of December 31, 1999. During 2000, the Company recognized approximately
$79,000 in management fees. The General Partner did not earn a performance fee
in 2000.
The Fund engaged the Company to solicit subscriptions for the initial $2,500,000
private placement of limited partnership interests in the Fund. In exchange for
acting as the placement agent, the Company received a placement agent fee equal
to 5% of the total initial capital contributions to the Fund. The total
placement agent fee equaled approximately $136,000 and was paid in May 1999. In
2000, the Fund once again engaged the Company to solicit subscriptions for a
secondary private placement of limited partnership interests. In exchange for
acting as the placement agent, the Company received placement fees totaling
approximately $230,000 for the year ended December 31, 2000.
On December 1, 2000, the General Partner elected to dissolve and liquidate the
Fund effective December 15, 2000. As a result of the dissolution, the Fund had a
deficit in partners' capital of $1,384, as of December 31, 2000, which will be
funded by the Company.
OFFICER AND DIRECTOR RECEIVABLES
During 1999, Tejas Securities received a $200,000 note from Charles H. Mayer in
conjunction with his employment agreement. The note bears no interest and is due
on demand if Mr. Mayer resigns as an employee of the Company prior to December
31, 2000. In October 2000, the note was transferred to Westech at cost. In
January 2001, Mayer's employment agreement was modified to allow the company to
forgive the $200,000 note in equal installments of $50,000 per year for the
years 2001, 2002, 2003 and 2004. Additionally, Mayer forfeited his guaranteed
annual bonuses of $200,000 for the years 2000 and 2001.
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SALE OF STOCK TO EMPLOYEES
In April 1999, the Company issued 2,499,315 shares of its common stock
(1,006,975 shares of Tejas Securities common stock before the exchange ratio)
with a value of $704,833 to employees and management of the Company. Of the
shares issued, 248,250 shares (100,000 shares of Tejas Securities) were issued
to a director and executive officer of the Company. An additional 50,000 shares
of Tejas Securities common stock were issued to executive officers of the
Company, however have not yet been converted to Company shares of common stock.
The transaction was recorded as a stock subscription receivable, and was
collected in full by August 1999. The following reflects the April 1999 issuance
of common stock to directors or executive officers of the Company:
DIRECTOR/EXECUTIVE TEJAS SECURITIES COMPANY SHARES
OFFICER SHARES SUBSCRIBED CONVERTED SUBSCRIPTION PRICE
- ------------------- ----------------- -------------- ------------------
John J. Gorman 100,000 248,250 $70,000
A. Reed Durant 25,000 * $17,500
John F. Garber 25,000 * $17,500
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
See Financial Statements attached hereto.
2. Exhibits
Incorporated by reference to the Exhibit Index at the end of
this report.
(B) Reports on Form 8-K
On December 19, 2000, the Company reported the resignation of
Jay W. Van Ert as President of the Company, and the subsequent
appointment of Charles H. Mayer as President.
On December 21, 2000, the Company reported the resignation of
Jay W. Van Ert as a member of the Company's board of
directors.
30
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTECH CAPITAL CORP.
By: /s/ CHARLES H. MAYER
----------------------------------------
Charles H. Mayer, President
Date: April 2, 2001
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the date indicated:
SIGNATURE TITLE DATE
- ---------------------------------- ------------------------------- ------------
/s/ JOHN J. GORMAN Chief Executive Officer, April 2, 2001
- ---------------------------------- Chairman of the Board
John J. Gorman
/s/ CHARLES H. MAYER President, Chief Operating
- ---------------------------------- Officer and Director April 2, 2001
Charles H. Mayer
/s/ KURT J. RECHNER Chief Financial Officer and
- ---------------------------------- Treasurer April 2, 2001
Kurt J. Rechner
/s/ JOHN F. GARBER Director of Finance (Principal
- ---------------------------------- Accounting Officer) April 2, 2001
John F. Garber
31
32
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(With Independent Auditors' Report Thereon)
33
WESTECH CAPITAL CORP. AND SUBSIDIARIES
INDEX
PAGE
----
Independent Auditors' Report 1
FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition as of December 31, 2000 and 1999 2
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999
and 1998 4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Westech Capital Corp.:
We have audited the consolidated financial statements of Westech Capital Corp.
and subsidiaries (the Company) as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westech Capital
Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Austin, Texas
March 22, 2001
1
35
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2000 and 1999
ASSETS 2000 1999
----------- -----------
Cash and cash equivalents $ 482,562 2,732,175
Deposit with clearing organization, restricted 250,000 100,000
Receivable from clearing organization, partially restricted 2,842,196 4,540,052
Receivables from employees and stockholders 334,200 627,454
Federal income taxes receivable 1,808,214 --
Securities owned, at market value 2,433,022 6,207,748
Other investments -- 932,253
Furniture and equipment, net 540,477 323,281
Deferred tax asset, net 471,552 54,086
Prepaid expenses and other assets 243,516 597,053
----------- -----------
Total assets $ 9,405,739 16,114,102
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,869,821 2,041,199
Securities sold, not yet purchased 446,078 187,940
Payable to clearing organization 2,563,240 6,196,059
Federal income taxes payable -- 863,821
Line of credit 1,500,000 --
Notes payable to stockholders 750,000 --
Subordinated debt 1,000,000 1,000,000
----------- -----------
Total liabilities 8,129,139 10,289,019
----------- -----------
Minority interest in subsidiary 377,382 976,725
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value
50,000,000 shares authorized; 12,661,343 and
12,537,218 issued at December 31, 2000 and
1999, respectively $ 12,661 12,537
Additional paid in capital 1,719,349 1,669,473
Retained earnings (deficit) (832,792) 3,166,348
----------- -----------
Total stockholders' equity 899,218 4,848,358
----------- -----------
Total liabilities and stockholders' equity $ 9,405,739 16,114,102
=========== ===========
See accompanying notes to consolidated financial statements.
2
36
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Revenue:
Commissions $ 16,818,686 25,291,212 7,932,780
Underwriting and investment banking income 1,831,326 925,616 2,584,770
Net dealer inventory and investment income
(loss), net of trading interest expense of
$151,946, $516,975 and $39,072, respectively (4,076,629) 3,475,539 (272,811)
Other income 135,902 740,342 23,530
------------ ------------ ------------
Total revenue 14,709,285 30,432,709 10,268,269
------------ ------------ ------------
Expenses:
Commissions, employee compensation
and benefits 13,954,116 19,992,928 7,397,860
Clearing and floor brokerage 965,889 615,273 438,944
Underwriting expenses -- -- 590,202
Communications and occupancy 2,033,463 1,242,370 817,382
Professional fees 1,868,244 971,250 439,835
Interest 194,503 97,029 26,355
Other 2,556,732 1,876,633 1,118,913
------------ ------------ ------------
Total expenses 21,572,947 24,795,483 10,829,491
------------ ------------ ------------
Income (loss) before income tax expense
(benefit) and minority interest (6,863,662) 5,637,226 (561,222)
Income tax expense (benefit) (2,214,012) 2,201,598 (163,900)
------------ ------------ ------------
Income (loss) before minority interest (4,649,650) 3,435,628 (397,322)
Minority interest (650,510) 297,285 --
------------ ------------ ------------
Net income (loss) $ (3,999,140) 3,138,343 (397,322)
============ ============ ============
Earnings (loss) per share:
Basic $ (0.32) 0.25 (0.04)
============ ============ ============
Diluted $ (0.32) 0.22 (0.04)
============ ============ ============
Weighted average shares outstanding:
Basic 12,617,210 12,501,191 10,664,369
============ ============ ============
Diluted 12,617,210 15,291,965 10,664,369
============ ============ ============
See accompanying notes to consolidated financial statements.
3
37
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
ADDITIONAL
COMMON PAID IN SUBSCRIPTIONS RETAINED TREASURY
SHARES STOCK CAPITAL RECEIVABLE EARNINGS (DEFICIT) STOCK TOTAL
----------- ----------- ---------- ------------- ------------------ ---------- ----------
Balance at December 31, 1997 9,580,344 $ 9,580 937,298 (100,000) 425,327 (47,805) 1,224,400
Stock issuances 1,685,337 1,685 473,720 -- -- -- 475,405
Treasury stock sales 350,313 350 50,438 -- -- 47,805 98,593
Subscription collected -- -- -- 3,737 -- -- 3,737
Net loss -- -- -- -- (397,322) -- (397,322)
----------- ----------- ---------- ----------- ----------- ----------- ----------
Balance at December 31, 1998 11,615,994 11,615 1,461,456 (96,263) 28,005 -- 1,404,813
Stock issuances 2,796,295 2,796 825,973 (775,884) -- -- 52,885
Contributed capital -- -- 94,613 -- -- -- 94,613
Treasury stock purchases (708,339) (708) -- -- -- (173,739) (174,447)
Treasury stock sales 700,065 700 -- -- -- 171,414 172,114
Subscription collected -- -- -- 750,164 -- -- 750,164
Subscription cancelled (4,138) (4) (31,162) 31,166 -- -- --
Effect of reverse merger (Note 1) (1,862,659) (1,862) (681,407) 90,817 -- 2,325 (590,127)
Net income -- -- -- -- 3,138,343 -- 3,138,343
----------- ----------- ---------- ----------- ----------- ----------- ----------
Balance at December 31, 1999 12,537,218 $ 12,537 1,669,473 -- 3,166,348 -- 4,848,358
Stock issuances 124,125 124 49,876 -- -- -- 50,000
Net loss -- -- -- -- (3,999,140) -- (3,999,140)
----------- ----------- ---------- ----------- ----------- ----------- ----------
Balance at December 31, 2000 12,661,343 $ 12,661 1,719,349 -- (832,792) -- 899,218
=========== =========== ========== =========== =========== =========== ==========
See accompanying notes to consolidated financial statements.
4
38
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- --------- --------
Cash flows from operating activities:
Net income (loss) $(3,999,140) 3,138,343 (397,322)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred tax expense (benefit) (417,466) 124,414 (178,500)
Depreciation and amortization expense 141,660 74,506 38,110
Non-cash compensation expense 50,000 -- --
Loss on disposition of furniture and equipment -- 14,011 --
Performance fee converted to equity interest -- (700,088) --
Minority interest (650,510) 297,285 --
Increase in deposit with clearing organization (150,000) -- --
(Decrease) increase in payable to clearing organization, net of
receivable from clearing organization (1,934,963) 1,601,977 208,113
Decrease (increase) in receivable from employees and stockholders 293,254 (500,955) 135,949
Increase in federal income taxes receivable (1,808,214) -- --
Decrease (increase) in securities owned 3,774,726 (4,668,324) (905,005)
Decrease (increase) in prepaid expenses other assets 353,537 (415,092) (196,164)
Decrease in other investments 932,253 -- --
(Decrease) increase in accounts payable, accrued expenses
and other liabilities (171,378) 2,327,284 436,406
Increase in securities sold, not yet purchased 258,138 187,940 --
Decrease in federal income taxes payable (863,821) -- --
----------- ----------- -----------
Net cash provided (used) by operating activities (4,191,924) 1,481,301 (858,413)
----------- ----------- -----------
Cash flows from investing activities:
Advances to limited partnership -- (116,004) --
Proceeds from sale of furniture and equipment 63,684 -- --
Purchase of furniture and equipment (422,540) (202,914) (188,484)
----------- ----------- -----------
Net cash used by investing activities (358,856) (318,918) (188,484)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable and subordinated debt 750,000 500,000 1,000,000
Principal payments on notes payable -- -- (500,000)
Net change in line of credit 1,500,000 -- --
Sale of treasury stock -- 172,114 98,593
Purchase of treasury stock -- (174,447) --
Subscription collected 1,167 750,164 3,737
Capital contribution from acquired enterprise -- 3,115 --
Capital contribution from minority interest -- 64,649 --
Proceeds from stock issuances 50,000 52,885 475,405
----------- ----------- -----------
Net cash provided by financing activities 2,301,167 1,368,480 1,077,735
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (2,249,613) 2,530,863 30,838
Cash and cash equivalents at beginning of year 2,732,175 201,312 170,474
----------- ----------- -----------
Cash and cash equivalents at end of year $ 482,562 2,732,175 201,312
=========== =========== ===========
Supplemental disclosures:
Interest paid $ 336,299 614,004 65,427
Taxes paid $ 1,003,749 1,110,407 23,738
Summary of non-cash transactions:
During 2000, the Company forgave $50,000 of common stock subscription receivable
related to shares issued by Tejas Securities Group, Inc., a wholly-owned
subsidiary, in 1999. The subscription receivable was from a former employee and
has been recorded as compensation expense. (Note 5)
TSG Capital, LLC (General Partner), a wholly-owned subsidiary, acted as the
general partner of TSG Internet Fund I, Ltd. (the Fund). The Fund was liquidated
effective December 15, 2000. The Company recognized $700,088 of income during
1999 related to a performance fee paid by the Fund. The Company converted the
full amount of the performance fee to an equity ownership of the Fund as of
December 31, 1999. (Note 7)
The Company also received a non-cash contribution in 1999 totaling $116,161,
representing the general partner interest of the former owners of the general
partnership interest of TSG Capital, LLC. These individuals also have an
ownership interest in the Company. Of this amount, $21,549 has been allocated to
minority interest. (Note 7)
The Company received a non-cash capital contribution in 1999 totaling $590,127
in association with the Merger (Note 1). Of this amount, $90,817 and $2,325 of
subscriptions receivable and treasury stock, respectively, which existed as of
the date of the Merger, have been allocated to minority interest since these
rights were not converted at the time of the Merger.
See accompanying notes to consolidated financial statements.
5
39
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) ORGANIZATION AND BASIS OF PRESENTATION
Westech Capital Corp., a New York corporation, is a holding company whose
primary operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas Securities"). Westech Capital Corp. was incorporated as
a shell corporation in New York on July 18, 1990, and made an initial
public offering in November 1991. Westech Capital Corp. was acquired by
Tejas Securities in a reverse merger effected on August 27, 1999.
Tejas Securities is primarily engaged in securities brokerage, investment
banking and trading activities. Tejas Securities is registered as a broker
and dealer in securities with the National Association of Securities
Dealers, Inc. and clears its transactions on a fully disclosed basis
through First Clearing Corporation. Tejas Securities' headquarters are
located in Austin, Texas and have been since incorporation on March 2,
1994. In June 2000, Tejas Securities dissolved its wholly-owned operating
subsidiary, Tejas Securities Group - East, LLC ("Tejas - East"), a Georgia
limited liability company. The operations of the Atlanta, Georgia office
are included as a division of Tejas Securities subsequent to June 2000. TSG
Capital, LLC, a wholly-owned subsidiary of Tejas Securities, was acquired
in 1999. It was the general partner in TSG Internet Fund I, Ltd., an
investment hedge fund managed by Tejas Securities, which was liquidated
effective December 15, 2000.
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and
among Westech Capital Corp., Tejas Securities, newly-formed Tejas
Securities Group Holding Company, a Texas corporation ("Tejas Holding"),
and newly-formed Westech Merger Sub, Inc., a Delaware corporation ("Merger
Sub"), Tejas Securities acquired Westech Capital Corp. through a reverse
merger (the "Merger") of Tejas Holding and Merger Sub. Tejas Holding and
Merger Sub were established for the sole purpose of effecting this
transaction. As a result of the Merger, Tejas Holding became a wholly owned
subsidiary of Westech Capital Corp. Tejas Holding is the holder of
approximately 83% of the outstanding common stock of its subsidiary, Tejas
Securities. Under the terms of the Merger, the stockholders of Tejas
Holding exchanged their shares for shares of Westech Capital Corp. at a
ratio 2.4825 to one. The former stockholders of Tejas Holding currently
own approximately 95% of the issued and outstanding common stock of
Westech Capital Corp., $ .001 par value per share.
On August 27, 1999, the assets and liabilities of Westech Capital Corp.
consisted of $4,466 in cash and $1,351 in accrued expenses. These assets
and liabilities were recorded at fair value as required by the purchase
method of accounting and the tangible net assets were credited to
additional paid in capital.
Prior to the effective date of the Merger, the Board of Directors of
Westech Capital Corp. approved a stock split in the form of a stock
dividend by issuing 2.28767 shares of common stock for each one share of
common stock outstanding to stockholders of record on August 13, 1999. The
stock split occurred on August 27, 1999 in conjunction with the Merger and
has been reflected in the accompanying consolidated financial statements.
6
40
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Westech Capital Corp. was previously a shell corporation and had no
substantial operations. Tejas Securities is the operating enterprise and is
the acquiring enterprise for financial reporting purposes. The historical
financial statements of Tejas Securities (accounting acquirer) are
presented as the historical financial statements of the combined
enterprise. The results of operations of Westech Capital Corp. (the
acquired enterprise) are included in the financial statements of the
combined enterprise only from the date of acquisition.
The equity of Tejas Securities is presented as the equity of the combined
enterprise giving effect to the minority interest in Tejas Securities at
August 27, 1999, however, the common stock account of Tejas Securities has
been adjusted to reflect the par value of the outstanding stock of Westech
Capital Corp. after giving effect to the number of shares used in the
business combination. The difference between the common stock account of
Tejas Securities and the common stock account of Westech Capital Corp.
(presented as the common stock account of the combined enterprise) has been
recorded as an adjustment to additional paid in capital of the combined
enterprise. For periods prior to August 27, 1999, the equity of the
combined enterprise is the historical equity of Tejas Securities prior to
the merger retroactively restated to reflect the number of shares received
in the business combination. Earnings (loss) per share for periods prior to
the business combination have been restated to reflect the post merger
number of shares outstanding.
References to the Company within the accompanying notes to the consolidated
financial statements are to Westech Capital Corp. and subsidiaries, which
are the historical amounts for Tejas Securities prior to the reverse
merger.
(2) LIQUIDITY
The Company generated negative cash flows from operations in the year 2000
of approximately $4.2 million. This use of cash was as a result of
operating losses incurred throughout the year. Management took several
proactive steps to help mitigate the negative cash flows from operations
which include: reductions of approximately 50% of staff primarily from
non-revenue generating positions; the sub-lease of approximately 60% of the
Company's main corporate space; the change to a new clearing organization
in an effort to reduce clearing charges; initiated a hiring freeze with the
exception of revenue producers; and reductions in redundant information
systems. These and other cost control measures were initiated beginning in
May. Management believes that these measures should provide positive
results in 2001.
As of December 31, 2000, the Company's liabilities included $3,250,000 in
short-term debt and approximately $1,600,000 in payables for operating
activities. The short-term debt included $1,000,000 in debt subordinated to
claims of general creditors, a $1,500,000 line of credit with a bank, and
$750,000 in short-term demand notes to officers, all of which have been
restructured as described below.
On February 27, 2001, the Company's subordinated debt was restructured. The
holder of the debt granted the Company an option to extend the maturity of
the subordinated debt at its discretion for a period of at least one year
not to exceed three years. In consideration for this option, the Company
paid $20,000 to the holder of the debt (Note 11).
7
41
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
As further described in Note 9, on March 6, 2001, the Company restructured
its line of credit with a bank. In exchange for a $500,000 principal
reduction and interest being brought current, the line of credit was
converted into a term loan in the amount of $1,000,000. The modification
was restructured into a note to mature April 1, 2002 and requires monthly
payments of $50,000 plus accrued interest with payments beginning April 1,
2001 through maturity of the note on April 1, 2002 when all unpaid
principal plus interest becomes due and payable.
Effective February 7, 2001, the Company restructured the short-term demand
notes to officers into term notes with new maturity dates of March 7, 2002
(Note 10).
A material portion of the Company's commission revenues are generated by
the brokering of securities from United States domiciled companies that are
rated below investment grade and classified as distressed. The Company
dedicates the majority of its in-house research to analyzing distressed
companies, which, in turn, helps facilitate the brokering of these
distressed securities. The recent and ongoing economic slowdown in the
United States economy could increase the opportunities in distressed
securities. Management expects the slowing United States economy will
provide increased opportunities for the Company to research and generate
additional commission revenues in the distressed bond market, however,
there can be no assurance that additional revenues will be realized.
The Company is currently seeking additional funding in the form of
short-term loans and additional equity. However, there can be no assurance
that additional debt or equity funds will be raised. Management believes it
will be able to generate positive cash flows from operations to fund its
liabilities as they come due, although the Company's business is
susceptible to the volatility of the capital markets.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the
consolidated accounts of the Company and its first and second
tier subsidiaries, Tejas Securities Group Holding Company, Tejas
Securities Group, Inc. and TSG Capital, LLC. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
8
42
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(b) SECURITIES TRANSACTIONS
Securities transactions and the related commission revenue and
expense are recorded on a trade date basis.
The Company does not carry or clear customer accounts, and all
customer transactions are executed and cleared with other brokers
on a fully disclosed basis. These brokers have agreed to maintain
such records of the transaction effected and cleared in the
customers' accounts as are customarily made and kept by a
clearing broker pursuant to the requirements of Rules 17a-3 and
17a-4 of the Securities and Exchange Commission, and to perform
all services customarily incident thereto.
(c) INVESTMENT BANKING
Investment banking revenues include gains, losses, and fees, net
of syndicate expenses, arising from securities offerings in which
the Company acts as an underwriter or agent. Investment banking
revenues also include fees earned from providing
merger-and-acquisition and advisory services. Investment banking
management fees are recorded on offering date, sales concessions
on settlement date, and underwriting fees at the time the
underwriting is completed and the income is reasonably
determinable.
(d) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid
investments with an original maturity date of ninety days or
less.
As of December 31, 2000, a certificate of deposit in the amount
of approximately $88,000 was pledged by the Company as security
on an irrevocable letter of credit issued in conjunction with the
Atlanta office lease.
(e) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Long and short positions in securities are reported at market
value. The difference between cost and market has been included
in net dealer inventory and investment income (loss). These
investments are subject to the risk of failure of the issuer and
the risk of changes in market value based on the ability to trade
such securities on the open market.
(f) FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful
lives of the respective assets. Estimated useful lives
approximate those used for Federal income tax purposes and range
from 3 to 7 years.
9
43
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(g) REPURCHASE AND RESALE AGREEMENTS
Repurchase and resale agreements are treated as financing
transactions and are carried at the amounts at which the
securities will be subsequently reacquired or resold as specified
in the respective agreements. There were no repurchase or resale
agreements outstanding at December 31, 2000 or 1999.
(h) FEDERAL INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. 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 and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(j) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement), and SFAS No. 138,
an Amendment to SFAS No. 133. The Company is required to
implement this Statement effective with its 2001 fiscal year
(after deferral by SFAS No. 137). Statement 133 addresses the
accounting for derivative instruments, including certain
instruments embedded in other contracts, and for hedging
activities. Under this Statement, the Company will be required to
recognize all derivative instruments as either assets or
liabilities in the statement of financial condition and measure
those at fair value. If certain conditions are met a derivative
may be specifically designated as a hedge, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-dominated forecasted transaction. The adoption
of the Statement on January 1, 2001 had no impact on the
Company's consolidated financial position or results of
operations. The Company did not hold any derivatives as of
December 31, 2000 and 1999.
10
44
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(k) STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation, but applies Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for its stock option plan.
(l) MARKETABLE SECURITIES
The Company's investments in debt and equity securities are
classified as trading securities. The Company accounts for
trading securities at fair value with unrealized gains and losses
included in operations.
(m) RECLASSIFICATIONS
Certain reclassifications have been made to amounts presented in
previous years to be consistent with the 2000 presentation.
(4) RECEIVABLES FROM AND PAYABLES TO CLEARING ORGANIZATION
At December 31, 2000 and 1999, the Company had receivables from and
payables to its clearing organization consisting of the following:
2000 1999
---------- ----------
Receivable:
Receivable from clearing organization $2,327,826 4,361,732
Receivable for securities borrowed 514,370 178,320
---------- ----------
Total receivable $2,842,196 4,540,052
========== ==========
Payable:
Payable to clearing organization $2,563,240 6,196,059
========== ==========
(5) RECEIVABLES FROM EMPLOYEES AND STOCKHOLDERS
The Company makes advances to certain employees in months when their
commission payout does not meet a predetermined amount. As of December 31,
2000 and 1999, $71,319 and $251,740, respectively, had been advanced to
employees under this agreement. These receivables are to be repaid through
reductions of future commissions.
During 2000, the Company forgave $60,000 in advances receivable from
employees. In 1999, the Company forgave $69,599 in advances receivable from
its employees. The amounts forgiven are included in commission expense in
the accompanying financial statements.
11
45
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
During 1999 the Company received a $200,000 note from an officer of the
Company. The note bears no interest and is due on demand if the officer
resigns as an employee of the Company prior to December 31, 2000. Under the
terms of the note, matured unpaid principal and interest shall bear
interest at the lesser of 5.55% per annum or the maximum rate allowed by
law from the earlier of December 31, 2000 or the officer's voluntary
termination. Effective January 1, 2001, the Company agreed to forgive the
note in $50,000 increments beginning in December 2001 and continuing
through December 2004.
During 1999, the Company received a $50,000 note from an employee and
stockholder of the Company to supplement the employee's commission payout
during 1999. The note bears interest of 8% per annum, and was due and
payable on August 27, 2000. The Company elected to extend the maturity date
of the note to August 27, 2001. The note is secured by a stock pledge
agreement for the employee's shares issued by the Company.
The Company has notes receivable, and related interest accrued, from other
employees and related parties of the Company totaling $12,881 and $125,714
as of December 31, 2000 and 1999, respectively. The notes have terms which
either require settlement by pre-determined dates or which allow the notes
to be forgiven based on pre-determined conditions, which are based on
employee compensation arrangements.
In April 1999, the Company issued 1,006,975 shares of Tejas Securities
common stock (2,499,815 shares of the Company's common stock giving effect
to the Merger) for $704,833 in both cash and subscriptions receivable to
employees of the Company. Subsequent to this issuance, the Company issued
another 30,000 shares of Tejas Securities common stock (74,475 shares of
the Company's common stock giving effect to the Merger) to an employee
under the terms of the April 1999 offering for $27,000. Of the 1,036,975
shares of Tejas Securities issued under the April 1999 common stock
offering, the Company collected $723,550 in cash. In 1999, the Company
cancelled a subscription for 1,667 shares of Tejas Securities common stock
(4,138 shares of the Company's common stock giving effect to the Merger)
valued at $1,166 upon the termination of employment by an employee. In
2000, the Company collected an additional $1,167 from subscriptions
receivable related to shares issued in 1999.
In 1997, the Company received a $100,000 note from an employee in
consideration for the issuance of common stock for $1 per share. The note
was non interest bearing and was originally due and payable on December 31,
1999. This amount was recorded as a stock subscription receivable. During
1998, the Company collected $3,737 of the subscription receivable,
resulting in a balance of $96,263 as of December 31, 1998. In April 1999,
the terms of the note were restructured so that the employee could purchase
the original 100,000 shares of Tejas Securities common stock (248,250
shares of the Company's common stock giving effect to the Merger) at the
April 1999 offering price of $0.70 per share. This restructuring resulted
in the reduction of the subscription receivable and common stock balances
by $30,000. The remaining balance was collected in 1999.
12
46
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Subsequent to the April 1999 stock offering to employees, the Company
received a $50,000 and $100,000 note from two employees for 50,000 shares
and 100,000 shares of Tejas Securities common stock, respectively (124,125
and 248,250 shares of the Company's common stock giving effect to the
Merger). The $50,000 did not bear interest and was due and payable on June
1, 2000. The $100,000 note bears no interest and is due in two
installments, beginning with a $25,000 payment on October 1, 1999 and the
remaining $75,000 on August 23, 2001. The first installment of $25,000 was
collected in 1999. The balance of $125,000 for the two notes is included in
minority interest in the accompanying consolidated financial statements as
of December 31, 1999. In June 2000, the Company forgave the $50,000 note,
and included the amount in compensation expense. The remaining balance of
$75,000 is included in minority interest in the accompanying consolidated
financial statements as of December 31, 2000. The remaining balance of the
$100,000 note is secured by stock pledge agreements for the shares issued
by Tejas Securities as of December 31, 2000.
(6) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
At December 31, 2000 and 1999, securities owned and sold, not yet purchased
consisted of the following:
2000 1999
-------------------------- --------------------------
SOLD, NOT SOLD, NOT
YET YET
OWNED PURCHASED OWNED PURCHASED
---------- ---------- ---------- ----------
State and municipal
obligations $1,497,469 119,628 28,761 18,475
US Government bonds 4,979 -- -- --
Corporate bonds 428,220 230,000 3,582,228 30,480
Equity securities 502,354 96,450 2,596,759 77,720
Options and warrants -- -- -- 61,265
---------- ---------- ---------- ----------
$2,433,022 446,078 6,207,748 187,940
========== ========== ========== ==========
13
47
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(7) OTHER INVESTMENTS
Other investments at December 31, 1999 represented the Company's investment
in TSG Internet Fund I, Ltd. (the "Fund"), a Texas Limited Partnership, in
the amount of $932,253. On January 1, 2000, the Company elected to withdraw
$100,000 of its investment in the Fund. As of June 30, 2000, the Company
elected to withdraw its remaining investment holdings in the Fund valued at
$521,527. The Company recorded a loss of $310,726 during 2000 related to
its investment in the Fund.
In April 1999, certain owners and directors of the Company, established TSG
Capital, LLC, a Texas limited liability company, for the purpose of acting
as general partner of the Fund. In addition to the investment in TSG
Capital, LLC (the "General Partner"), five shareholders and/or directors of
the Company invested as limited partners in the Fund. Their combined
contributions were $820,520. On December 28, 1999, the Company purchased
TSG Capital, LLC for $50,000 through the conversion of liabilities owed to
the Company by TSG Capital, LLC. In addition, the Company received a
capital contribution from the former owners of TSG Capital, LLC in the
amount of $116,161 in conjunction with the purchase. Of this amount,
$94,613 is included as contributed capital in the consolidated financial
statements, with the remaining $21,549 included in the minority interest in
the consolidated financial statements.
TSG Capital, LLC acted as the General Partner of the Fund and has no other
operations. The managers and principal executive officers include two
officers of the Company. The General Partner received a management fee
equal to .375% of the average monthly net asset value of the Fund after the
end of a fiscal quarter. In addition, the General Partner received a
performance fee equal to 20% of the annual net profits of the Fund after
the end of each fiscal year. These fees were in turn paid to the Company in
exchange for providing services to the General Partner for investment
management, compliance and accounting and reporting.
TSG Capital, LLC's ownership interest in the Fund was approximately 15% of
the total equity of the Fund as of December 31, 1999. Due to the degree of
control of the Fund exercised by the General Partner, the Company accounted
for its ownership on the equity method. The Company recognized
approximately $734,000 of income during 1999 from the Fund comprised of
management fees of $34,066 and a performance fee of $700,088 which is
included in other income in the consolidated statements of operations. The
Company converted the $700,088 performance fee to an additional equity
ownership in the Fund as of December 31, 1999 as disclosed in the summary
of non-cash transactions in the consolidated statements of cash flows.
During 2000, the Company recognized approximately $79,000 in management
fees, which is included in other income in the consolidated statements of
operations. The General Partner did not earn a performance fee in 2000.
14
48
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Fund engaged the Company to solicit subscriptions for the initial
$2,500,000 private placement of limited partnership interests in the Fund.
In exchange for acting as the placement agent, the Company received a
placement agent fee equal to 5% of the total initial capital contributions
to the Fund. The total placement agent fee equaled approximately $136,000
and was paid in May 1999. In 2000, the Fund once again engaged the Company
to solicit subscriptions for a secondary private placement of limited
partnership interests. In exchange for acting as the placement agent, the
Company received placement fees totaling approximately $230,000 for the
year ended December 31, 2000. Placement fees are included in underwriting
and investment banking income in the accompanying consolidated statements
of operations.
On December 1, 2000, the General Partner elected to dissolve and liquidate
the Fund effective December 15, 2000. As a result of the dissolution, the
Fund had a deficit in partners' capital of $1,384, as of December 31, 2000,
which will be funded by the Company.
(8) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-------------------------
2000 1999
--------- ---------
Furniture and equipment $ 413,947 374,463
Leasehold improvements 363,361 66,663
--------- ---------
777,308 441,126
Accumulated depreciation (236,831) (117,845)
--------- ---------
$ 570,477 323,281
========= =========
(9) LINE OF CREDIT
The Company had a $1,500,000 line of credit with a bank at December 31,
2000. Advances made under the line of credit were secured by the common
stock of the Company's primary operating subsidiary, Tejas Securities, as
well as the personal guaranty of an officer of the Company. Funds advanced
under the agreement were $1,500,000 at December 31, 2000. The average
interest rate on amounts outstanding under this agreement at December 31,
2000 was approximately 10.5%. All interest was to be paid quarterly and any
outstanding principal was to be paid at maturity in February 2001. The
credit agreement contained certain affirmative covenants including
maintenance of certain financial balances as defined in the agreement. As
of December 31, 2000, the Company was not in compliance with all debt
covenants.
15
49
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
On March 6, 2001, the Company restructured its line of credit with a bank.
In exchange for a $500,000 principal reduction and interest being paid to
the restructure date, the line of credit was converted into a term loan in
the amount of $1,000,000. The modified note matures April 1, 2002 and
requires monthly payments of $50,000 plus accrued interest with payments
beginning April 1, 2001 through maturity of the note on April 1, 2002 when
all unpaid principal plus interest becomes due and payable. The collateral
securing the loan consists of the stock of Tejas Securities owned by the
Company and the personal guaranty of an officer of the Company.
Additionally, there are no financial covenants governing the loan.
The Company paid $69,038 in interest related to this debt for the year
ended December 31, 2000.
(10) NOTES PAYABLE TO STOCKHOLDERS
During 2000, the Company issued an unsecured short-term demand note to an
officer of the Company in return for $500,000. Also in 2000, the Company
issued an additional unsecured short-term demand note to another officer of
the Company in return for $250,000. The short-term demand notes bore
interest of 9.50% per annum and were due and payable, with accrued
interest, on February 7, 2001. The Company accrued $10,150 in interest
related to this debt for the year ended December 31, 2000. Effective
February 7, 2001, the Company restructured the short-term demand notes into
term notes with new maturity dates of March 7, 2002. The restructured
short-term demand notes bear interest at 9% per annum, with payment due
upon maturity.
(11) SUBORDINATED DEBT
The Company had $1,000,000 in debt subordinated to claims of general
creditors as of December 31, 2000 and 1999. The subordinated debt was due
November 1, 2001 and bears interest at 11.5% and is owed to a director of
the Company. Interest is paid monthly. On February 27, 2001, the Company's
subordinated debt was restructured. The holder of the debt granted the
Company an option to extend the maturity of the subordinated debt at its
discretion for a period of at least one year not to exceed three years. In
consideration for this option, the Company paid $20,000 to the holder of
the debt.
As a condition of the original subordinated debt agreements, Tejas
Securities issued to the lender warrants to purchase 112,500 shares of
common stock of Tejas Securities (279,281 shares of the Company's common
stock giving effect to the Merger) in 1998 and additional 112,500 shares
(279,281 shares of the Company's common stock giving effect to the Merger)
in 1999. The warrants were exercisable at a price of $2.65 per share of
common stock ($1.07 giving effect to the Merger) and were to expire on
November 12, 2003. As of December 31, 1999, the warrants were cancelled by
Tejas Securities' board of directors and subsequently replaced with the
Company's options with an effective date of January 1, 2000. The options
were granted outside of the Company's stock option plan adopted in 1999 as
the warrants were originally granted in conjunction with the subordinated
debt. This transaction is being accounted for as a non-substantive exchange
and the options are reflected as outstanding for computing diluted earnings
per share for the year ended December 31, 1999.
16
50
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Company paid $115,315, $90,582 and $26,355 in interest related to this
debt for the years ended December 31, 2000, 1999 and 1998, respectively.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are
carried at market value or at amounts which, because of their short-term
nature or because they carry market rates of interest, approximate current
fair value. The Company's short-term borrowings, notes payable and
subordinated debt, if recalculated based on current interest rates, would
not significantly differ from the amounts recorded at December 31, 2000 and
1999.
(13) INCOME TAXES
The Company files a consolidated tax return. Income tax expense (benefit)
consists of the following:
2000 1999 1998
----------- ----------- ----------
Federal
Current $(1,767,531) 1,941,198 --
Deferred (417,466) 124,414 (178,500)
State (29,015) 135,986 14,600
----------- ----------- ---------
$(2,214,012) 2,201,598 (163,900)
=========== =========== =========
A reconciliation of expected income tax expense (benefit) (computed by
applying the statutory income tax rate of 34% to income (loss) before
income tax expense (benefit) and minority interest) to total tax expense
(benefit) in the accompanying consolidated statements of operations
follows:
2000 1999 1998
----------- ----------- ----------
Expected federal income expense (benefit) $(2,333,645) 1,916,657 (190,815)
Meals and entertainment 27,578 84,634 34,325
State income tax (52,211) 135,986 14,600
Change in valuation allowance 48,902 -- --
Other, net 95,364 64,321 (22,010)
----------- ----------- ---------
$(2,214,012) 2,201,598 (163,900)
=========== =========== =========
17
51
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000
and 1999 are as follows:
2000 1999
--------- ---------
Deferred tax assets:
Net operating loss and capital loss carryforwards $ 278,445 --
Accrued expenses 89,394 15,364
Other 152,615 44,879
--------- ---------
Gross deferred tax assets 520,454 60,243
Valuation allowance (48,902) --
--------- ---------
Net deferred tax asset 471,552 60,243
--------- ---------
Deferred tax liabilities:
Property and equipment -- (291)
Other -- (5,866)
--------- ---------
Total gross deferred tax liability -- (6,157)
--------- ---------
Net deferred tax asset $ 471,552 54,086
========= =========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences net
of the existing valuation allowances at December 31, 2000 and 1999. At
December 31, 2000, the Company had capital loss carryforwards of
approximately $147,000 and additional state net operating loss
carryforwards which are scheduled to expire beginning in the year 2005 and
Federal net operating loss carryforwards of approximately $610,000, which
are scheduled to expire in the year 2020. There was no valuation allowance
as of December 31, 1998.
(14) PROFIT SHARING AND STOCK OPTION PLANS
PROFIT SHARING PLAN
In January 1997, Tejas Securities instituted a profit sharing plan under
section 401(k) of the Internal Revenue Code. The plan allows all employees
who are over 21 years old to defer a predetermined portion of their
compensation for federal income tax purposes. Contributions by Tejas
Securities are discretionary. No contributions were made for 2000 and 1999.
In 1998, contributions of $84,000 were made to the plan.
18
52
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
STOCK OPTION PLANS
Tejas Securities had a stock option plan for employees, which was rescinded
on October 26, 1999. Under the plan, Tejas Securities had agreed to sell
stock to employees at specified prices. As provided by SFAS No. 123, Tejas
Securities elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plans.
During 1997, an employee was granted options, vesting in 1997, to purchase
up to 5 percent of the total shares issued and outstanding of Tejas
Securities on the grant date. In 1997, one-half of the 5 percent option (or
2.5 percent) was exercised resulting in the issuance of 100,000 shares of
Tejas Securities common stock (248,250 shares of the Company's common stock
giving effect to the Merger). The remaining options totaled 100,000 shares
of Tejas Securities common stock (248,250 shares of the Company's common
stock giving effect to the Merger) and expired in September 1999. No
compensation cost was recognized for the options granted. During 1998, no
options were exercised, and no new options were granted.
During 1999, options totaling 300,000 shares of Tejas Securities common
stock (744,750 shares of the Company's common stock giving effect to the
Merger) were granted to employees. The option price was $1 per share ($0.40
giving effect to the Merger). The options were not exercised in 1999 and
were cancelled by Tejas Securities' board of directors prior to December
31, 1999 and subsequently replaced with the Company's options with
substantially the same terms and an effective date of January 1, 2000. The
options were granted outside of the Company's stock option plan adopted in
1999 as they were originally granted under Tejas Securities' option plan.
This transaction is being accounted for as a non-substantive exchange and
the options are reflected as outstanding for computing diluted earnings per
share for the year ended December 31, 1999.
In May 2000, an employee of the Company exercised non-qualified stock
options to purchase 124,125 shares of the Company's common stock at $0.40
per share ($50,000 in stock proceeds).
The Company established the Westech Capital Corp. 1999 Stock Option Plan
("the 1999 Plan") for employees, directors and consultants of the Company
and its subsidiaries on October 15, 1999. Under the 1999 Plan, the Company
was originally able to grant up to 3,000,000 shares of the Company's common
stock through incentive stock options or nonqualified stock options. In
August 2000, the board of directors of the Company amended the 1999 Plan to
increase the number of shares available to 4,000,000 shares of the
Company's common stock. The exercise price of each incentive stock option
is determined by the Option Committee of the Company, and shall not be less
than 100% of the fair market value of the stock on the grant date.
Incentive stock options awarded to ten-percent owners of the Company's
common stock shall not have an exercise price of less than 110% of the fair
market value of the stock on the grant date. Incentive stock options may
only be granted to employees of the Company or a subsidiary.
19
53
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Options become exercisable as determined at the date of the grant by the
Option Committee or the Board, in the case of non-employee directors. No
option under the 1999 Plan shall be exercisable after the expiration of ten
years from the date of the grant. Options granted to a ten-percent owner of
the Company shall not be exercisable after the expiration of five years
from the date of the grant. The aggregate fair market value of stock
purchased under the 1999 Plan by an employee during any calendar year shall
not exceed $100,000. In the event that the purchased stock exceeds
$100,000, the excess amount shall constitute a nonqualified stock option.
During 1999, options totaling 1,425,000 shares were granted to employees
under the 1999 Plan. The options vest ratably over two years, and expire
five years from the date of the grant. The purchase price of the common
stock ranges from $2.00 to $2.20 per share. As there was no active public
market for the Company's stock, fair value was determined by the Board of
Directors. No options were exercised in 1999.
During 2000, options totaling 1,515,000 shares were granted to employees
under the 1999 Plan. The options vest ratably over two years, and expire
five years from the date of the grant. The purchase price of the common
stock ranges from $2.00 to $5.00 per share. The options were granted at or
above the market value of the Company's common stock.
20
54
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies APB Opinion No. 25, in accounting for its stock option plans. No
cost from stock-based compensation awards was recognized in 2000, 1999 and
1998. If the Company had elected to recognize compensation cost of options
granted based on the fair value at the grant dates, consistent with SFAS
No. 123, net income (loss) and earnings (loss) per share would have changed
to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
2000 1999 1998
------------- --------- --------
Net income (loss) as reported
for basic $ (3,999,140) 3,138,343 (397,322)
Net income (loss) as reported
for diluted (3,999,140) 3,435,628 (397,322)
Pro forma net income (loss)
for basic (4,139,740) 3,053,589 (397,322)
Pro forma net income (loss)
for diluted (4,139,740) 3,350,874 (397,322)
Earnings (loss) per share as Reported:
Basic $ (0.32) 0.25 (0.04)
Diluted $ (0.32) 0.22 (0.04)
Pro forma earnings (loss) per Share:
Basic $ (0.33) 0.24 (0.04)
Diluted $ (0.33) 0.22 (0.04)
The fair value of the options used to compute the pro forma amounts is
estimated using the Black Scholes option-pricing model with the following
assumptions:
2000 1999 1998
------- ------- -------
Risk-free interest rate 5.51% 5.75% 5.75%
Expected holding period 3 years 3 years 3 years
Expected volatility .001 .001 .001
Expected dividend yield 0.00% 0.00% 0.00%
21
55
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
A summary of the Company's stock option and warrant activity, and related
information for the years ended December 31, follows. As of December 31,
1999, Tejas Securities' board of directors cancelled options to purchase
300,000 shares of Tejas Securities' common stock (744,750 shares of the
Company's common stock giving effect to the Merger) and warrants to
purchase 225,000 shares of Tejas Securities' common stock (558,562 shares
of the Company's common stock giving effect to the Merger). Options to
purchase 1,303,312 shares of the Company's common stock were subsequently
reissued by the Company on January 1, 2000. Stock option and warrant
activity associated with the subordinated debt prior to August 27, 1999 has
been adjusted giving effect to the Merger.
2000 1999 1998
----------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- ---------- --------
Outstanding - beginning
of year 1,425,000 $2.04 248,250 $0.20 248,250 $0.20
Granted 2,818,312 $1.52 2,169,750 $1.48 -- $0.00
Exercised (124,125) $0.40 -- $0.00 -- $0.00
Forfeited (5,000) $2.00 (248,250) $0.20 -- $0.00
Cancelled (535,000) $2.00 (744,750) $0.40 -- $0.00
Outstanding - end of year 3,579,187 $1.69 1,425,000 $2.04 248,250 $0.20
========== ===== ========== ===== ========== =====
Exercisable - end of year 2,029,187 $1.28 475,000 $2.04 248,250 $0.20
========== ===== ========== ===== ========== =====
1999 1998
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE
-------- -------- -------- --------
Outstanding - beginning
of year 279,281 $1.07 -- $0.00
Granted 279,281 $1.07 279,281 $1.07
Cancelled (558,562) $1.07 -- --
Outstanding - end of
year -- $0.00 279,281 $1.07
======== ===== ======== =====
Exercisable - end of year -- $0.00 279,281 $1.07
======== ===== ======== =====
The weighted average fair value of Company stock options, calculated using
the Black Scholes option pricing model, granted during the years ended
December 31, 2000 and 1999 were $0.21 and $0.28 per option,
respectively.
22
56
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 2000:
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
-------------------------------------- ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- -------------- --------- ----------- -------- --------- --------
$0.40 620,625 4.0 years $0.40 620,625 $0.40
$1.07 558,562 3.0 years $1.07 558,562 $1.07
$2.00 1,675,000 3.8 years $2.00 616,667 $2.00
$2.20 550,000 3.8 years $2.20 233,333 $2.20
$2.75 100,000 4.7 years $2.75 -- $2.75
$5.00 75,000 4.4 years $5.00 -- $5.00
--------- --------- ----- ------- -----
3,579,187 2,029,187
========= =========
(15) EARNINGS (LOSS) PER SHARE
After the completion of the Merger, the Company had 12,537,218 shares of
common stock issued and outstanding. Prior to the Merger, the Company
completed a stock split in the form of a stock dividend by issuing 2.28767
new shares of the Company's common stock for each one share of the
Company's common stock outstanding to stockholders of record on August 13,
1999, resulting in 599,981 shares outstanding immediately following the
stock split. Under the terms of the Merger, stockholders of Tejas Holding
exchanged their shares for shares of the Company at a ratio of 2.4825 to
one. The effect of this exchange was to issue an additional 11,937,237
shares of the Company's stock in exchange for 100% of the outstanding stock
of Tejas Holding.
Basic earnings (loss) per share are based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings
(loss) per share reflects dilution from all contingently issuable shares,
including options issued during 2000 and 1999. Contingently issuable shares
are not included in the weighted average number of shares when the
inclusion would increase net income per share or decrease the loss per
share. Earnings (loss) per share for the periods prior to the Merger have
been restated to reflect the number of acquired shares received by the
accounting acquirer (Note 1).
23
57
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following calculations give effect to the Merger on August 27, 1999.
2000 1999 1998
------------ ------------ ------------
Basic earnings (loss) per share:
Net income (loss) $ (3,999,140) 3,138,343 (397,322)
Weighted average shares outstanding 12,617,210 12,501,191 10,664,369
Basic earnings (loss) per share $ (0.32) 0.25 (0.04)
============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) $ (3,999,140) 3,138,343 (397,322)
Income impact of assumed conversion of
subsidiary stock and recognition of minority
interest income -- 297,285 --
------------ ------------ ------------
Income available to common stockholders after
assumed conversions $ (3,999,140) 3,435,628 (397,322)
============ ============ ============
Weighted average shares outstanding 12,617,210 12,501,191 10,664,369
Effect of dilutive securities:
Warrants -- -- --
Options -- 212,840 --
Assumed conversion of subsidiary stock -- 2,352,036 --
Application of treasury stock method to
subscriptions receivable -- 225,898 --
------------ ------------ ------------
Weighted average shares outstanding 12,617,210 15,291,965 10,664,369
============ ============ ============
Diluted earnings (loss) per share $ (0.32) 0.22 (0.04)
============ ============ ============
Options to purchase 3,579,187, 1,425,000 and 248,250 shares of the
Company's common stock at December 31, 2000, 1999 and 1998 were not
included in the computation of diluted earnings (loss) per share because
the options' exercise price was either greater than the estimated market
value per share or because the effect of including the options would
decrease the loss per share during the respective period. Warrants to
purchase 279,281 shares of the Company's common stock as of December 31,
1998 were not included in the computation of diluted earnings (loss) per
share because the warrants' exercise price was greater than the estimated
market value per share of common stock for the period.
In 1999, the Company included the dilutive effect of 1,303,312 options
issued by the Company on January 1, 2000 as a non-substantive exchange of
Tejas Securities' options and warrants, which were cancelled by the board
of directors as of December 31, 1999. Of the 1,303,312 options issued by
the Company, 212,840 options were included as dilutive securities on a
weighted average basis. Tejas Securities' board of directors cancelled
744,750 options and 558,562 warrants. For purposes of computing diluted
earnings per share, this transaction was accounted for as a non-substantive
exchange at December 31, 1999.
24
58
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
For the year ended December 31, 2000, the Company did not include the
dilutive effect of shares of Tejas Securities' common stock that are
convertible into the Company's common stock. Tejas Securities has 1,017,000
shares of its common stock issued and outstanding at December 31, 2000 that
are convertible into common stock of the Company at a ratio of 2.4825 to
one (2,524,703 shares). In 1999, the Company included the dilutive effect
of shares of Tejas Securities' common stock that were convertible into the
Company's common stock. Tejas Securities had 965,333 shares of its common
stock issued and outstanding at December 31, 1999 that were convertible
into common stock of the Company at the ratio of 2.4825 to one (2,396,439
shares). Of the 2,396,439 shares of Tejas Securities common stock that were
convertible into common stock of the Company, 2,352,036 shares were
included as dilutive securities on a weighted average basis. In addition,
the Company included the dilutive effect of Tejas Securities' subscriptions
receivable based on the treasury stock method in 1999. The Company
recognizes the incremental effect on its shares outstanding assuming the
subscriptions receivable are fully paid for and exchanged for the Company's
common stock versus the Company repurchasing those shares using a weighted
average market price for the year.
(16) OFF STATEMENT OF FINANCIAL CONDITION RISK
The Company is responsible to its clearing organization for payment of all
transactions executed both on its behalf and on behalf of its customers.
Therefore, the Company is exposed to off statement of financial condition
risk in the event a customer cannot fulfill its commitment and the clearing
organization must purchase or sell a financial instrument at prevailing
market prices. The Company and its clearing organization seek to control
risk associated with customer transactions through daily monitoring to
assure margin collateral is maintained under regulatory and internal
guidelines.
The Company's receivable from clearing organization represents amounts on
deposit with First Clearing Corporation. The Company is exposed should
First Clearing Corporation be unable to fulfill its obligations for
securities transactions. First Clearing Corporation requires the Company to
maintain $250,000 in its account at all times.
The Company deposits its cash with financial institutions. Periodically
such balances exceed applicable FDIC insurance limits.
(17) INDUSTRY SEGMENT DATA
The Company has two reportable segments: brokerage services and investment
banking. The primary operating segment, brokerage services, includes sales,
trading and market-making activities of the Company and encompasses both
retail and institutional customer accounts. These segments require the
commitment of significant human capital and financial resources, as well as
industry specific skills. The investment banking segment participates in
underwriting of corporate securities as managing underwriter and as a
syndicate member. Income or loss associated with other investments
accounted for under the equity method is included in other segment activity
in 1999 and 2000.
25
59
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
The following table presents segment revenues, profits (losses) from
operations before income taxes and minority interest, and assets for the
year ended December 31, 2000.
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
------------ ---------- ------- ----------
Revenues from external customers
$ 12,742,620 1,831,326 135,902 14,709,848
Interest revenue 151,383 -- -- 151,383
Interest expense 346,449 -- -- 346,449
Depreciation and amortization 141,660 -- -- 141,660
Segment profit (loss) (8,310,719) 1,311,155 135,902 (6,863,662)
Segment assets 9,405,739 -- -- 9,405,739
Capital expenditures 422,540 -- -- 422,540
The following table presents segment revenues, profits and assets for the
year ended December 31, 1999.
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
----------- ---------- ------- ----------
Revenues from external customers
$29,110,979 925,616 734,154 30,770,749
Interest revenue 178,935 -- -- 178,935
Interest expense 614,004 -- -- 614,004
Depreciation and amortization 74,506 -- -- 74,506
Segment profit 4,156,319 765,835 715,072 5,637,226
Segment assets 15,181,849 -- 932,253 16,114,102
Capital expenditures 202,914 -- -- 202,914
26
60
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following table presents segment revenues, profits and assets for the
year ended December 31, 1998.
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
----------- ---------- ------- ---------
Revenues from external customers
$ 7,022,776 2,584,770 -- 9,607,546
Interest revenue 699,795 -- -- 699,795
Interest expense 65,427 -- -- 65,427
Depreciation and amortization 37,995 115 -- 38,110
Segment profit (loss) (1,892,566) 1,331,344 -- (561,222)
Segment assets 3,954,309 1,267 -- 3,955,576
Capital expenditures 187,102 1,382 -- 188,484
(18) LEASE COMMITMENTS
The Company leases its office facilities and certain office equipment under
operating leases. The future minimum payments due under these operating
leases as of December 31, 2000 are as follows:
2001 $1,887,000
2002 1,791,000
2003 922,000
2004 727,000
2005 665,000
Thereafter 827,000
----------
$6,819,000
==========
Rent expense amounted to approximately $1,765,000, $885,000 and $515,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
On February 1, 2000, the Company subleased a portion of its office space,
previously serving as the Company's Austin headquarters. Under the terms of
the sublease agreement, the future minimum payments to be received are
approximately $193,000 and $32,000 for 2001 and 2002, respectively.
On December 22, 2000, the Company subleased a portion of its Austin
headquarters, furniture and equipment effective January 1, 2001. Under the
terms of these sublease agreements, the future minimum payments to be
received are approximately $544,000 during 2001 and 2002 and approximately
$167,000 during 2003.
On September 30, 1997, the Company entered into a sale-leaseback
transaction with a related party, whereby the Company sold furniture and
fixtures for their book value of approximately $204,000. As part of this
transaction, the Company agreed to lease the furniture and fixtures with
payment of $6,373 commencing on October 1, 1998 through September 30, 2000.
27
61
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(19) CONTINGENCIES
In January 2001, the Company settled a complaint with a client of the
Company regarding securities purchased during the year ended December 31,
2000. Under the terms of the settlement, the Company has agreed to pay the
client a total amount of $264,000 in equal monthly installments of $24,000
beginning in February 2001 and ending in December 2001. Amounts related to
this settlement have been included in accrued expenses in the accompanying
consolidated statement of financial condition as of December 31, 2000.
The Company is involved in other various claims and legal actions that have
arisen in the ordinary course of business. It is management's opinion that
liabilities, if any, arising from these actions will not have a significant
adverse effect on the consolidated financial position or results of
operations of the Company.
(20) NET CAPITAL REQUIREMENTS
Tejas Securities, as a registered fully licensed broker and dealer in
securities, is subject to the Securities and Exchange Commission Uniform
Net Capital Rule (Rule 15c3-1). Under this rule, Tejas Securities is
required to maintain a minimum "net capital" to satisfy rule 15c3-1. At
December 31, 2000, the minimum "net capital" requirement for Tejas
Securities was $250,000. "Net capital" at December 31, 2000 aggregated
$1,094,469. Tejas Securities' ratio of aggregate indebtedness to net
capital was 1.38 to 1 at December 31, 2000.
(21) RELATED PARTY TRANSACTIONS
The Company engaged a director to act as a consultant for the Company on a
month to month basis beginning in October 1999. Under the terms of the
agreement, the Company compensated the consultant for professional services
rendered at a rate of $12,500 per month, plus out of pocket expenses. As of
December 31, 1999, the total amount paid for services was approximately
$29,000. In 2000, the Company modified the agreement so that the director
would receive $6,250 per month for professional services, plus out of
pocket expenses. For the year ended December 31, 2000, the total amount
paid for services was approximately $113,000. The consulting agreement with
the director was terminated in February 2001.
(22) QUARTERLY RESULTS UNAUDITED
The following tables set forth selected quarterly consolidated statements
of operations information for the years ended December 31, 2000 and 1999.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- --------- ---------
2000
Total revenue $ 9,703,600 1,573,153 1,543,992 1,888,540
Income (loss) before income tax
expense (benefit) and minority
interest 1,373,372 (3,469,453) (2,356,783) (2,410,798)
Net income (loss) 658,325 (1,909,630) (1,363,178) (1,384,657)
Basic earnings (loss) per share:
Net income (loss) 0.05 (0.15) (0.11) (0.11)
Diluted earnings (loss) per share:
Net income (loss) 0.05 (0.15) (0.11) (0.11)
1999
Total revenue $ 6,785,327 12,242,072 6,037,893 5,367,417
Income (loss) before income tax
expense (benefit) and minority
interest 3,331,781 1,407,393 1,308,364 (410,312)
Net income (loss) 2,022,357 851,393 375,373 (110,780)
Basic earnings (loss) per share:
Net income (loss) 0.18 0.07 0.03 (0.01)
Diluted earnings (loss) per share:
Net income (loss) 0.18 0.07 0.03 (0.01)
28
62
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger (Incorporated herein by reference
to Exhibit 1.1 to the registrant's Current Report on Form
8-K/A filed on October 22, 1999)
3.1 Certificate of Incorporation (Incorporated herein by reference
to Exhibit 3.1 to the registrant's Registration Statement on
Form 10-12(g) (File No. 000-29235))
3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
4.1 NASD Subordinated Loan Agreement, Form SL-1, dated October 13,
1998, between Clark N. Wilson and the Company (Incorporated
herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))
4.2 NASD Subordinated Loan Agreement, Form SL-1, dated June 4,
1999, between Clark N. Wilson and the Company (Incorporated
herein by reference to Exhibit 4.2 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))
4.3 Shareholder Agreement, dated November 23, 1999, between John
Ohmstede, John Glade, Michael Hidalgo, Jon McDonald, Britt
Rodgers, Bob Sternberg, Mike Wolf, Greg Woodby and the Company
(Incorporated herein by reference to Exhibit 4.3 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
4.4 Certificate of Incorporation (Incorporated herein by reference
to Exhibit 3.1 above)
4.5 Bylaws (Incorporated herein by reference to Exhibit 3.2 above)
10.13 Agreement, dated May 19, 2000, with First Clearing Corporation
(Incorporated herein by reference to Exhibit 10.13 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000
10.14 Promissory note agreement, dated November 9, 2000, between
Charles H. Mayer and the Company (Incorporated herein by
reference to Exhibit 10.14 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000)
10.15 Promissory note agreement, dated November 9, 2000, between
John J. Gorman and the Company (Incorporated herein by
reference to Exhibit 10.15 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000)
10.16* Promissory note agreement, dated February 7, 2001, between
Charles H. Mayer and the Company
10.17* Promissory note agreement, dated February 7, 2001, between
John J. Gorman and the Company
10.18* Promissory note agreement, dated June 7, 2000, between First
United Bank and the Company
10.19* Modification of employment agreement between Charles H. Mayer
and Tejas Securities Group, Inc., dated January 1, 2001
10.20* Promissory note agreement, dated March 6, 2001, between First
United Bank and the Company (modification to Exhibit 10.18)
99.1 Articles of Incorporation of Tejas Securities Group, Inc.
(Incorporated herein by reference to Exhibit 99.1 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
99.2 Bylaws of Tejas Securities Group, Inc. (Incorporated herein by
reference to Exhibit 99.2 to the registrant's Registration
Statement on Form 10-12(g) (File No. 000-29235))
99.3 Articles of Incorporation of Tejas Securities Group Holding
Company (Incorporated herein by reference to Exhibit 99.3 to
the registrant's Registration Statement on Form 10-12(g) (File
No. 000-29235))
99.4 Bylaws of Tejas Securities Group Holding Company (Incorporated
herein by reference to Exhibit 99.4 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))
* Filed herewith.