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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number
33-37534-NY
WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3577716
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(State or other jurisdiction of incorporation) (IRS Employer
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
Indicate by check mark X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark X whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 31, 2002, the
Registrant had the following number of shares of common stock, $0.001 par value
per share, outstanding: 1,512,024.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------- ------------
ASSETS
Cash and cash equivalents $ 308,866 547,761
Deposit with clearing organization, restricted -- 260,471
Receivable from clearing organization -- 1,905,338
Receivables from employees and stockholders 363,833 494,106
Federal income tax receivable 231,275 973
Securities owned, at market value 4,672,332 3,011,667
Other investment 1,650,000 --
Property and equipment, net 363,404 478,086
Deferred tax asset, net 79,051 84,915
Goodwill 138,215 138,215
Prepaid expenses and other assets 214,825 318,976
---------- ----------
Total assets $8,021,801 7,240,508
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $2,004,479 3,183,904
Securities sold, not yet purchased 108,088 332,581
Payable to clearing organization 760,285 --
Notes payable 1,650,050 500,000
Note payable - related party 950,000 --
Subordinated debt - related party -- 1,000,000
---------- ----------
Total liabilities 5,472,902 5,016,485
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value
10,000,000 shares authorized; 1,512,024
issued and outstanding at September 30, 2002 and
December 31, 2001 1,512 1,512
Additional paid in capital 2,222,281 2,222,281
Retained earnings 325,106 230
---------- ----------
Total stockholders' equity 2,548,899 2,224,023
---------- ----------
Total liabilities and stockholders' equity $8,021,801 7,240,508
========== ==========
See accompanying notes to consolidated financial statements.
2
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Commissions $ 4,323,577 5,301,055 14,456,087 17,418,884
Underwriting and investment banking income 5,600 32,815 315,663 316,927
Net dealer inventory and investment income (loss),
net of trading interest expense of $21,119, $121,998,
$38,491 and $154,577 for the three and nine months
ended September 30, 2002 and 2001, respectively (59,332) 530,550 1,345,868 (257,111)
Other income 37,857 3,929 109,227 17,202
----------- ----------- ----------- -----------
Total revenues 4,307,702 5,868,349 16,226,845 17,495,902
----------- ----------- ----------- -----------
Expenses:
Commissions, employee compensation
and benefits 3,329,978 4,018,319 12,063,264 12,782,190
Clearing and floor brokerage 97,272 68,923 300,123 252,125
Communications and occupancy 404,204 402,301 1,205,914 1,277,463
Professional fees 118,801 435,592 512,417 943,806
Interest, including $16,698, $28,986, $73,726 and
$114,280 for the three and nine months ended
September 30, 2002 and 2001, respectively, to
related parties 49,242 43,649 148,566 190,392
Other 400,000 396,054 1,402,686 1,253,110
----------- ----------- ----------- -----------
Total expenses 4,399,497 5,364,838 15,632,970 16,699,086
----------- ----------- ----------- -----------
Income (loss) before income tax expense
(benefit) and minority interest (91,795) 503,511 593,875 796,816
Income tax expense (benefit) (36,694) 188,273 268,999 303,190
----------- ----------- ----------- -----------
Income (loss) before minority interest (55,101) 315,238 324,876 493,626
Minority interest -- (100,876) -- (18,814)
----------- ----------- ----------- -----------
Net income (loss) $ (55,101) 416,114 324,876 512,440
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ (0.04) 0.31 0.21 0.40
=========== =========== =========== ===========
Diluted $ (0.04) 0.21 0.21 0.32
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 1,512,024 1,348,097 1,512,024 1,293,455
=========== =========== =========== ===========
Diluted 1,512,024 1,519,214 1,530,263 1,543,610
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 324,876 512,440
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred tax expense 5,864 266,593
Non-cash compensation expense 50,000 50,000
Depreciation and amortization expense 92,470 104,821
Loss on disposal of property and equipment 22,388 --
Minority interest -- (18,814)
Decrease (increase) in deposit with clearing organization 260,471 (9,389)
Increase (decrease) in payable to clearing organization, net of
receivable from clearing organization 2,665,623 (1,241,391)
Decrease in receivables from employees and stockholders 80,273 69,389
(Increase) decrease in federal income tax receivable (230,302) 1,808,214
Increase in securities owned (1,660,665) (252,343)
Increase in other investment (1,650,000) --
Decrease (increase) in prepaid expenses and other assets 104,151 (1,047)
(Decrease) increase in accounts payable, accrued expenses
and other liabilities (1,179,425) 1,378,485
Decrease in securities sold, not yet purchased (224,493) (415,069)
Increase in federal income tax payable -- 66,224
----------- -----------
Net cash provided by (used in) operating activities (1,338,769) 2,318,113
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (176) (66,740)
----------- -----------
Net cash used in investing activities (176) (66,740)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 2,750,050 --
Proceeds from note payable - related party 1,000,000 --
Repayment of notes payable (1,600,000) (850,000)
Repayment of note payable - related party (50,000) (750,000)
Repayment of subordinated debt - related party (1,000,000) --
Minority interest purchase of treasury stock -- (5,000)
----------- -----------
Net cash provided by (used in) financing activities 1,100,050 (1,605,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents (238,895) 646,373
Cash and cash equivalents at beginning of period 547,761 482,562
----------- -----------
Cash and cash equivalents at end of period $ 308,866 1,128,935
=========== ===========
Supplemental disclosures:
Interest paid $ 187,057 344,969
Taxes paid $ 459,600 6,464
Summary of non-cash transactions:
In August 2001, the minority interest shareholders of Tejas Securities exchanged
their shares of Tejas Securities common stock for those of the Company at a
ratio of .24825 to one. As a result, the Company issued a total of 245,890
shares of its common stock. In addition, the Company recognized $138,215 in
goodwill.
In both March 2002 and 2001, the Company forgave $50,000 of an officer's note
receivable which has been recorded as compensation expense.
See accompanying notes to consolidated financial statements.
4
(1) General
Westech Capital Corp. ("Westech"), a Delaware corporation, is a holding company
whose only significant 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-Q
are to Westech and its subsidiaries.
Westech was incorporated as a shell corporation in New York on July 18, 1990,
and made an initial public offering in November 1991. Westech was acquired by
Tejas Securities in a reverse merger effected on August 27, 1999. Pursuant to an
Agreement and Plan of Merger, Tejas Securities Group Holding Company ("Tejas
Holding"), a Texas corporation, holding approximately 81% of Tejas Securities,
became a wholly-owned subsidiary of Westech.
On August 29, 2001, the minority interest shareholders of Tejas Securities
exchanged their shares of Tejas Securities common stock for restricted stock of
Westech. As a result, Westech owns, directly or through Tejas Holding, 100% of
Tejas Securities as of September 30, 2002.
Effective June 29, 2001, Westech completed a 10-for-1 reverse stock split. As a
result of this stock split, earnings (loss) per share amounts and all share
amounts for prior periods have been restated to reflect the shares outstanding
as though the stock split had taken effect in the earliest period presented.
Effective June 20, 2002, Westech amended its certificate of incorporation to
decrease the number of shares of common stock that it has the authority to issue
from 50,000,000 to 10,000,000.
Tejas Securities' business is conducted from its headquarters at 2700 Via
Fortuna, Suite 400, Austin, Texas with branch offices in Tinton Falls, New
Jersey and Houston, Texas. 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. In September 2002, Tejas Securities closed its Atlanta, Georgia branch
office, which specialized in municipal debt securities. A branch office in
Tinton Falls, New Jersey was opened in September 2002. The New Jersey branch
office will provide additional market making services and municipal debt trading
activity for the Texas offices.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions for Form 10-Q and, therefore
should be read in conjunction with the Company's 2001 Form 10-K. All adjustments
(consisting of only normal recurring adjustments) that are necessary in the
opinion of management for a fair presentation of the interim consolidated
financial statements have been included. The results of operations for the three
and nine months ended September 30, 2002 are not necessarily indicative of the
results of the year ending December 31, 2002.
(2) Net Capital
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.
Tejas Securities elects to use the basic method of the Rule, which requires it
to maintain minimum net capital equal to the greater of $250,000 or 6-2/3% of
aggregrate indebtedness. Minimum net capital requirements may be as great as
$1,000,000 depending upon the number and value of securities in which Tejas
Securities makes markets. As of September 30, 2002, Tejas Securities' net
capital of $807,290 was $557,290 in excess of the minimum required. Tejas
Securities' ratio of aggregate indebtedness to net capital was 2.63 to 1 at
September 30, 2002.
5
(3) Notes Payable and Subordinated Debt
In March 2002, the Company entered into an agreement with a bank to borrow
$2,500,050 for operating purposes at Tejas Securities. The loan is due and
payable on demand or by March 15, 2003 if no demand is made. The loan accrues
interest at a rate of 5.5% per annum and is to be paid on a monthly basis. Tejas
Securities has provided a certificate of deposit in a like amount as collateral
for the loan (included in other investment). In April 2002, the Company repaid
$250,000 of the loan to the bank. In addition, the Company repaid $600,000 of
the loan to the bank with proceeds from the promissory note agreement with John
Gorman. The bank in turn released $600,000 of the collateralized certificate of
deposit, which the Company used to repay the remaining balance on Clark Wilson's
subordinated loan.
On April 1, 2002, the Company extended the maturity date of a note payable to a
bank. Originally, the remaining balance of $350,000 was due and payable to the
bank on April 1, 2002. Under the restructured note payable, the Company was to
continue making monthly payments of $50,000 plus accrued interest through
November 1, 2002. The Company paid off the remaining balance of $150,000 with
proceeds from the promissory note agreement with John Gorman.
On July 1, 2002, the Company repaid $500,000 of the $1,000,000 in subordinated
loans to Clark Wilson, a Company director. The remaining $500,000 balance was
repaid on August 20, 2002 with proceeds from a partial redemption of the
Company's certificate of deposit.
On July 31, 2002, the Company entered into an agreement with a bank to borrow
$250,000 for short-term operating purposes at Tejas Securities. The loan was due
and payable in a single payment on October 1, 2002, and accrued interest at 7%
per annum. The Company repaid the $250,000 loan to the bank with proceeds from
the promissory note agreement with John Gorman.
On August 8, 2002, the Company entered into an unsecured promissory note
agreement with John Gorman, Chairman and Chief Executive Officer, to borrow
$1,000,000. Under the terms of the promissory note, the Company will make twenty
monthly installment payments of $50,000, plus accrued interest, beginning on
September 8, 2002. The promissory note accrues interest at 11.5% per annum.
Proceeds from the promissory note were used to retire existing debt.
On October 30, 2002, the Company entered into an agreement with a bank to borrow
$500,000 for operating purposes at Tejas Securities. The loan is due on demand
or by May 1, 2004 if no demand is made. The loan accrues interest at prime plus
1.5% and is to be paid in equal monthly payments commencing on December 1, 2002.
(4) Earnings (Loss) Per Share
Basic earnings (loss) per share is 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 the three and nine month periods ended September 30, 2002 and
2001. 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 net loss per share.
6
Earnings (loss) per share is calculated as follows.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (55,101) 416,114 324,876 512,440
Weighted average shares outstanding 1,512,024 1,348,097 1,512,024 1,293,455
Basic earnings (loss) per share $ (0.04) 0.31 0.21 0.40
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (55,101) 416,114 324,876 512,440
Income impact of assumed conversion of
subsidiary stock and recognition of
minority interest income -- (100,876) -- (18,814)
Income (loss) available to common
stockholders after assumed conversions (55,101) 315,238 324,876 493,626
Weighted average shares outstanding 1,512,024 1,348,097 1,512,024 1,293,455
Effect of dilutive securities:
Options -- 1,397 18,239 14,788
Assumed conversion of subsidiary stock -- 165,996 -- 223,521
Application of treasury stock method to
Subscriptions receivable -- 3,724 -- 11,846
Weighted average shares outstanding 1,512,024 1,519,214 1,530,263 1,543,610
Diluted earnings (loss) per share $ (0.04) 0.21 0.21 0.32
The Company has included the dilutive effect of 222,063 options to purchase
shares of the Company's common stock for the nine months ended September 30,
2002 in the computation of diluted earnings (loss) per share. Of the 222,063
options issued by the Company, 18,239 shares are included as dilutive securities
on a weighted average basis for the nine months ended September 30, 2002.
Options to purchase 222,063 shares of the Company's common stock for the three
months ended September 30, 2002 were not included in the computation of diluted
earnings (loss) per share because the options were antidilutive. For the three
and nine months ended September 30, 2001, the Company has included the dilutive
effect of 160,000 and 277,919 options, respectively, to purchase shares of the
Company's common stock in the computation of diluted earnings (loss) per share.
Of the 160,000 and 277,919 options issued by the Company, 1,397 and 14,788
shares are included as dilutive securities on a weighted average basis for the
three and nine months ended September 30, 2001, respectively. Options to
purchase 40,000 and 230,000 shares of the Company's common stock at September
30, 2002 and 2001, respectively, were not included in the computation of diluted
earnings (loss) per share because the options were antidilutive.
The Company has included the dilutive effect of shares of Tejas Securities'
common stock for the nine months ended September 30, 2001. Tejas Securities had
990,500 shares of its common stock issued and outstanding as of August 29, 2001
that were exchanged for common stock of the Company at a ratio of .24285 to one
(245,890 shares). The Company has included the dilutive effect of Tejas
Securities' subscriptions receivable based on the treasury stock method for the
nine months ended September 30, 2001. The Company recognized the incremental
effect on its shares outstanding assuming the subscriptions receivable were
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 period.
There were no Tejas Securities subscriptions receivable outstanding during the
nine months ended September 30, 2002.
(5) Industry Segment Data
Westech has two reportable segments: brokerage services and investment banking.
The primary operating segment, brokerage services, includes sales, trading and
market-making activities of Westech 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 a managing underwriter and a syndicate member, and provides
advisory services to companies.
7
The following table presents segment revenues, profits from operations before
income taxes, and assets for the nine months ended September 30, 2002.
Investment
Brokerage Banking Total
----------- ----------- -----------
Revenues from external
Customers $15,516,895 315,663 15,832,558
Interest revenue 432,778 -- 432,778
Interest expense 187,057 -- 187,057
Depreciation and amortization 92,470 -- 92,470
Segment profit 439,581 154,294 593,875
Segment assets 8,021,801 -- 8,021,801
Capital expenditures 176 -- 176
The following table presents segment revenues, profits from operations before
income taxes, and assets for the nine months ended September 30, 2001.
Investment
Brokerage Banking Total
----------- ----------- -----------
Revenues from external
Customers $17,287,432 316,927 17,604,359
Interest revenue 46,120 -- 46,120
Interest expense 344,969 -- 344,969
Depreciation and amortization 104,821 -- 104,821
Segment profit (loss) 633,571 163,245 796,816
Segment assets 10,495,862 -- 10,495,862
Capital expenditures 66,740 -- 66,740
(6) New Accounting Pronouncements
In June 2001, FASB issued Statement No. 142 ("Statement 142"), Goodwill and
Other Intangible Assets. Statement 142 requires that goodwill no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement 144 upon its adoption.
The Company adopted certain provisions of Statement 142 effective July 1, 2001
as required for goodwill resulting from business combinations consummated after
June 30, 2001. The Company recorded goodwill in connection with the acquisition
of the minority interest of Tejas Securities in August 2001. The remaining
provisions of Statement 142 were adopted effective January 1, 2002. Goodwill
acquired after June 30, 2001, but before Statement 142 was adopted in full was
not amortized during 2001, but was evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature, which includes FASB
Statement 121 ("Statement 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. FASB Statement No. 144
("Statement 144"), Accounting for the Impairment or Disposal of Long-Lived
Assets, supercedes Statement 121 and was adopted by the Company on January 1,
2002. The adoption of Statement 144 as of January 1, 2002 had no impact on the
Company's consolidated financial statements.
8
The Company adopted the remaining provisions of Statement 142 as of January 1,
2002. In connection with the transitional goodwill impairment evaluation
required by Statement 142, the Company performed an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. This
transitional goodwill impairment evaluation was completed prior to June 30, 2002
and resulted in no indication that goodwill was impaired as of January 1, 2002.
As of January 1, 2002, the Company had unamortized goodwill in the amount of
$138,215, all of which was subject to the transition provisions of Statement
142. As of January 1, 2002 and September 30, 2002, the Company had no other
intangible assets.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements and Risk Factors
This Form 10-Q includes statements that predict or forecast future events,
depend on future events for their accuracy or embody assumptions that may prove
to have been inaccurate. The Company cautions that these forward-looking
statements, and the Company's business and prospects, are subject to a number of
factors which could cause actual results to differ materially, including:
effectively managing changes in its business and operations, the ability of
third-party vendors to provide critical services, changes in economic and
political trends in business and finance and changes in volumes and price levels
of securities transactions, defaults by the Company's customers on their margin
accounts, failing to comply with strict governmental regulations, failure to
maintain the net capital requirements imposed by the SEC, the NASD and various
other regulatory agencies, failure of its trading systems and the resultant
negative impact on the Company's sales and revenues. Certain factors that may
materially affect the Company's business, prospects and results are described in
the Company's Form 10-K for fiscal year 2001 available from the Securities and
Exchange Commission.
Results of Operations
The revenues and operating expenses of the Company's significant operating
subsidiary, Tejas Securities, are influenced by fluctuations in the equity and
debt markets, general economic and market conditions, as well as Tejas
Securities' ability to identify investment opportunities for its trading
accounts and its customer accounts. Currently, Tejas Securities revenue is
derived primarily from principal debt and equity transactions, which generate
both commission revenue and investment income.
The Company's total revenues decreased by $1,269,057 or 7% to $16,226,845 for
the nine months ended September 30, 2002, compared to the prior year period. The
Company's total revenues decreased by $1,560,647 or 27% to $4,307,702 for the
three months ended September 30, 2002 compared to the prior year period. The
reasons for the decreases are set forth below.
Commission revenues from principal and agency transactions decreased $2,962,797
or 17% to $14,456,087 for the nine months ended September 30, 2002. For the
three months ended September 30, 2002, commission revenues from principal and
agency transactions decreased $977,478 or 18% to $4,323,577. The decrease is the
result of a decrease in distressed securities commissions from the same period
in the prior year.
Underwriting and investment banking income decreased $1,264 or less than 1% to
$315,663 and $27,215 or 83% to $5,600 for the nine months and three months ended
September 30, 2002. The decrease in investment banking revenues for the three
months ended September 30, 2002 is due to a reduction in advisory fees earned.
Net dealer inventory and investment income (loss) increased by $1,602,979 to
$1,345,868 and decreased by $589,882 to $(59,332) for the nine months and three
months ended September 30, 2002, respectively. The increase in inventory and
investment income for the nine months ended September 30, 2002 resulted from
trading activity in distressed corporate debt securities. However, during the
three months ended September 30, 2002, the Company recognized an increase in
unrealized trading losses, resulting in the overall decrease. Net unrealized
trading losses for the nine months ended September 30, 2002 and 2001 were
$(1,614,737) and $(742,838), respectively.
For the nine months and three months ended September 30, 2002, other income
increased $92,025 or 535% to $109,227 and $33,928 or 864% to $37,857,
respectively. The increase for the nine and three months ended September 30,
2002 resulted from the increase in miscellaneous receipts and interest income on
notes receivable and deposit accounts.
10
Total expenses decreased by $1,066,116 or 6% to $15,632,970 for the nine months
ended September 30, 2002. For the three months ended September 30, 2002, total
expenses decreased $965,341 or 18% to $4,399,497. Net income (loss) for the nine
months and three months ended September 30, 2002 decreased by $187,564 or 37% to
$324,876 and $471,215 or 113% to $(55,101), respectively. The explanations for
the changes are set forth below.
Commissions, employee compensation and benefits decreased $718,926 or 6% to
$12,063,264 for the nine months ended September 30, 2002. For the three months
ended September 30, 2002, commissions, employee compensation and benefits
decreased $688,341 or 17% to $3,329,978. Commission expense decreased $1,664,908
or 19% to $7,203,333 and $711,066 or 25% to $2,111,277 for the nine months and
three months ended September 30, 2002, respectively. The decrease in commission
expense for both periods is due to the decrease in commission revenues. General
and administrative salaries and other employee benefits increased as a result of
quarterly bonuses based upon increases in net dealer inventory and investment
income for the nine months ended September 30, 2002.
Clearing and floor brokerage costs increased $47,998 or 19% to $300,123 and
$28,349 or 41% to $97,272 for the nine months and three months ended September
30, 2002. The overall increase in clearing and floor brokerage costs for the
nine months and three months ended September 30, 2002 resulted from greater
trading activity in the over-the-counter equity markets and on the national
exchanges. Much of the cost increase is attributed to an increase in
institutional equity trading activity.
Communications and occupancy charges decreased $71,549 or 6% to $1,205,914 and
increased $1,903 or less than 1% to $404,204 for the nine months and three
months ended September 30, 2002. The decrease for the nine months ended
September 30, 2002 is due to reductions and restructurings in telecommunication
service agreements.
Professional fees for the nine months and three months ended September 30, 2002
decreased $431,389 or 46% to $512,417 and $316,791 or 73% to $118,801,
respectively. The decrease corresponds to the elimination of legal and
consulting fees from the prior year.
Interest expense for the nine months and three months ended September 30, 2002
decreased $41,826 or 22% to $148,566 and increased $5,593 or 13% to $49,242,
respectively. The decrease is due to the repayment of $750,000 of notes payable
to officers during May and June 2001.
Other expenses increased $149,576 or 12% to $1,402,686 and $3,946 or 1% to
$400,000 for the nine months and three months ended September 30, 2002. The
overall increase in other expenses during the nine and three months ended
September 30, 2002 is the result of increases in general and administrative
services needed to support administrative infrastructure.
Income tax expense (benefit) decreased $34,191 or 11% to $268,999 and $224,967
or 119% to $(36,694) for the nine months and three months ended September 30,
2002. The overall decrease in income tax expense for the nine and three months
ended September 30, 2002 is due to the decrease in taxable income during the
respective periods. The Company's effective tax rate was 45% for the nine months
ended September 30, 2002.
Minority interest in net income resulted from the minority interest stockholders
of Tejas Securities subsequent to the Merger on August 27, 1999. There were no
longer minority stockholders as of August 29, 2001.
Liquidity and Capital Resources
As a broker-dealer, the Company is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors affecting
the Company's 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 organization and NASD approved subordinated debt.
11
The Company's inventory balance fluctuates daily based on the current market
value and types of securities held. The Company 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, the Company provides bid and ask quotes on certain equity
securities on the NASDAQ market. The Company's ability to generate revenues from
market making activities may depend upon the level and value of securities held
in inventory.
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, the Company's liquidity may
be affected depending on the value of the securities involved. During times of
general market declines, the Company may experience market value losses, which
ultimately affects the liquidity of the Company through its broker-dealer net
capital requirements. In addition, the Company 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.
The Company utilizes the receivable balance from its clearing organization to
fund operating activities. The receivable balance at the clearing organization
is also used to secure temporary financing for the purchase of investments in
the Company's trading accounts. The receivable balance held at the clearing
organization may fluctuate depending on factors such as the market valuation of
securities held in the Company's trading accounts, realized trading profits,
commission revenue, cash withdrawals and clearing costs charged to the Company
for conducting its trading activities.
In December 2001, the Company entered into an agreement with Correspondent
Services Corporation ("CSC") to provide clearing services for the Company and
its customers. In February 2002, the Company began the process of transitioning
its business and its accounts to CSC. The process was completed in March 2002
and did not have any adverse effects on the Company's liquidity.
In March 2002, the Company entered into an agreement with a bank to borrow
$2,500,050 for operating purposes at Tejas Securities. The loan is due and
payable on demand or by March 15, 2003 if no demand is made. The loan accrues
interest at a rate of 5.5% per annum and is to be paid on a monthly basis. Tejas
Securities has provided a certificate of deposit in a like amount as collateral
for the loan (included in other investment). In April 2002, the Company repaid
$250,000 of the loan to the bank. In addition, the Company repaid $600,000 of
the loan to the bank with proceeds from the promissory note agreement with John
Gorman. The bank in turn released $600,000 of the collateralized certificate of
deposit, which the Company used to repay the remaining balance on Clark Wilson's
subordinated loan.
On April 1, 2002, the Company extended the maturity date of a note payable to a
bank. Originally, the remaining balance of $350,000 was due and payable to the
bank on April 1, 2002. Under the restructured note payable, the Company was to
continue making monthly payments of $50,000 plus accrued interest through
November 1, 2002. The Company paid off the remaining balance of $150,000 with
proceeds from the promissory note agreement with John Gorman.
On July 1, 2002, the Company repaid $500,000 of the $1,000,000 in subordinated
loans to Clark Wilson, a Company director. The remaining $500,000 balance was
repaid on August 20, 2002 with proceeds from a partial redemption of the
Company's certificate of deposit.
On July 31, 2002, the Company entered into an agreement with a bank to borrow
$250,000 for short-term operating purposes at Tejas Securities. The loan was due
and payable in a single payment on October 1, 2002,
12
and accrued interest at 7% per annum. The Company repaid the $250,000 loan to
the bank with proceeds from the promissory note agreement with John Gorman.
On August 8, 2002, the Company entered into an unsecured promissory note
agreement with John Gorman, Chairman and Chief Executive Officer, to borrow
$1,000,000. Under the terms of the promissory note, the Company will make twenty
monthly installment payments of $50,000, plus accrued interest, beginning on
September 8, 2002. The promissory note accrues interest at 11.5% per annum.
Proceeds from the promissory note were used to retire existing debt.
On October 30, 2002, the Company entered into an agreement with a bank to borrow
$500,000 for operating purposes at Tejas Securities. The loan is due on demand
or by May 1, 2004 if no demand is made. The loan accrues interest at prime plus
1.5% and is to be paid in equal monthly payments commencing on December 1, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's 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 the Company's business. Managing risk is
critical to the Company's profitability and to reducing the likelihood of
earnings volatility. The Company's risk management policies and procedures have
been established to continually identify, monitor and manage risk. The major
types of risk that the Company 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. The Company clears its securities
transactions through a clearing organization. Under the terms of the clearing
agreement, the clearing organization has the right to charge the Company for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, the Company's policy is to monitor the
credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of the Company's assets are held
at its clearing organization, Correspondent Services Corporation. Therefore, the
Company could incur substantial losses if its clearing organization were to
become insolvent or otherwise unable to meet its financial obligations.
Correspondent Services Corporation has in excess of $200 million in capital and
has historically met all of its obligations to the Company.
Operating risk arises from the daily conduct of the Company's 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. The Company 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 the Company's business. The Company's business could be adversely
impacted if any of these systems were disrupted. The Company 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, the Company 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.
The Company's 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 the Company has no control. Securities owned by the Company are either
related to daily trading activity or the Company's 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 the Company and by limiting exposure to any one investment
or type of investment.
The Company's trading securities were $4,672,332 in long positions and $108,088
in short positions at September 30, 2002. 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 approximately $478,000 as of September 30,
2002. A 10% hypothetical decline was used to represent a significant and
plausible market change.
13
The Company's investment securities are typically those reported on by the
Company's research analysts. These positions often consist of high-yield debt
securities and the related equity securities. The Company 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 recommendations of the Company's research analysts versus current market
performance.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including our Chief Executive Officer, Chief Financial Officer
and Director of Finance, of the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days before the filing of this
quarterly report. Based on that evaluation, our management, including our Chief
Executive Officer, Chief Financial Officer and Director of Finance, concluded
that our disclosure controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to their evaluation
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the claims or legal actions in which the
Company is involved since December 31, 2001. Additionally, there are no other
liabilities arising from claims or legal actions that management believes would
have a significant adverse effect on the consolidated financial condition or
results of operations of the Company.
14
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
Exhibit list
b) Current reports on Form 8-K
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westech Capital Corp.
Date: November 13, 2002
/s/ JOHN J. GORMAN
----------------------------------------
John J. Gorman
Chief Executive Officer
/s/ KURT J. RECHNER
----------------------------------------
Kurt J. Rechner
Chief Financial Officer
/s/ JOHN F. GARBER
----------------------------------------
John F. Garber
Director of Finance (Principal
Accounting Officer)
CERTIFICATIONS
I, John J. Gorman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westech
Capital Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
16
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ JOHN J. GORMAN
----------------------------------------
John J. Gorman
Chief Executive Officer
17
I, Kurt J. Rechner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westech
Capital Corp.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ KURT J. RECHNER
----------------------------------------
Kurt J. Rechner
Chief Financial Officer
18
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Westech
Capital Corp. (the "COMPANY") hereby certifies:
(i) that the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 (the "REPORT") fully complies
with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(ii) that the information contained in the Report fairly presents,
in all material respects, the consolidated financial condition
and results of operations of the Company.
Dated: November 13, 2002 /s/ JOHN J. GORMAN
----------------------------------------
John J. Gorman
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Westech
Capital Corp. (the "COMPANY") hereby certifies:
(i) that the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 (the "REPORT") fully complies
with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(ii) that the information contained in the Report fairly presents,
in all material respects, the consolidated financial condition
and results of operations of the Company.
Dated: November 13, 2002 /s/ KURT J. RECHNER
----------------------------------------
Kurt J. Rechner
Chief Financial Officer
19
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
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))
3.3 Certificate of Amendment to Certificate of Incorporation
(Incorporated herein by reference to the registrant's
Current Report on Form 8-K filed on June 25, 2001)
3.4 Certificate of Amendment to Certificate of Incorporation
(Incorporated herein by reference to Exhibit 3.4 to the
Registrant's Current Report on Form 8-K filed on June 20,
2002)
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 Exhibits 3.1 and 3.3 above)
4.5 Bylaws (Incorporated herein by reference to Exhibit 3.2
above)
10.1 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)
10.2 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)
10.3 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)
10.4 Promissory note agreement, dated February 7, 2001, between
Charles H. Mayer and the Company (Incorporated herein by
reference to Exhibit 10.16 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2000)
10.5 Promissory note agreement, dated February 7, 2001, between
John J. Gorman and the Company (Incorporated herein by
reference to Exhibit 10.17 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2000)
10.6 Promissory note agreement, dated June 7, 2000, between
First United Bank and the Company (Incorporated herein by
reference to Exhibit 10.18 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2000)
10.7 Modification of employment agreement between Charles H.
Mayer and Tejas Securities Group, Inc., dated January 1,
2001 (Incorporated herein by reference to Exhibit 10.19 to
the registrant's Annual Report on Form 10-K for the year
ended December 31, 2000)
10.8 Promissory note agreement, dated March 6, 2001, between
First United Bank and the Company (modification to Exhibit
10.6) (Incorporated herein by reference to Exhibit 10.20
to the registrant's Annual Report on Form 10-K for the
year ended December 31, 2000)
10.9 Agreement, dated December 3, 2001, with Correspondent
Services Corporation (Incorporated herein by reference to
Exhibit 10.9 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2001)
10.10 Promissory note agreement, dated March 15, 2002, between
First United Bank and the Company (Incorporated herein by
reference to Exhibit 10.9 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2001)
10.11 Promissory note agreement, dated April 1, 2002, between
First United Bank and the Company (modification to Exhibit
10.8) (Incorporated herein by reference to Exhibit 10.11
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002)
10.12 Promissory note agreement dated July 31, 2002 between
First United Bank and the Company 10.13 Promissory note
agreement dated August 8, 2002 between John J. Gorman and
the Company 10.14* Promissory note agreement dated October
21, 2002 between First United Bank and the Company 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))
10.13 Promissory note agreement dated August 8, 2002 between
John J. Gorman and the Company
10.14* Promissory note agreement dated October 21, 2002 between
First United Bank and the Company
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))
20
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))
21