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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, 2002
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)
DELAWARE 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 [ ]
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 .[X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of March 31, 2003 there were 1,512,024 shares of the Registrant's common
stock, $0.001 par value, outstanding. The aggregate market value of common stock
held by non-affiliates was $359,409 using a market price of $2.38 on that date.
[price computed by reference to the price at which the common stock was last
sold, or the average bid and asked price of the common stock, as of the last
business day of the company's most recently completed second quarter]
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
1
PART I
ITEM 1. BUSINESS
GENERAL
Westech Capital Corp., a Delaware corporation ("Westech"), is a holding company
whose only operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas "). Tejas 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 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. On August 27, 1999,
Westech was acquired by Tejas in a reverse merger. On August 29, 2001, Westech
acquired all of the outstanding minority interest in Tejas.
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 prior periods.
Our business is conducted from our headquarters at 2700 Via Fortuna, Suite 400,
Austin, Texas, with branch offices in Houston, Texas and Tinton Falls, New
Jersey. Tejas 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, we
closed our Atlanta, Georgia branch office, which specialized in municipal debt
securities. The branch office in Tinton Falls, New Jersey was opened in
September 2002. The New Jersey branch office provides additional market making
services and municipal debt trading activity for the Texas offices.
HISTORICAL DEVELOPMENT
Tejas was formed as a Texas corporation in March 1994. Tejas' 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 or in bankruptcy. Tejas believes these
companies are not followed closely by a large number of research analysts. Tejas
used this opportunity to establish itself as a source of high quality research
products and trading support. Tejas 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'
research by individuals led to the expansion of our client base to include
retail accounts.
In 2000, we began an expansion in an attempt to provide the rapidly growing
central Texas market with a locally based, full-service brokerage firm. We
leased approximately 24,000 square feet of office space for our Austin
headquarters and hired additional brokers, investment bankers, research analysts
and support personnel. The fixed costs associated with our growth quickly
exceeded our revenue production, despite the overall market appreciation during
the first quarter of 2000.
As the equity markets rapidly declined beginning in the second quarter of 2000
we realized decreasing commission revenues and recognized substantial trading
losses on securities owned. In an effort to bring our fixed costs in line with
projected revenues, we undertook a company wide reorganization. We eliminated
redundant support personnel and quarterly bonuses to management. We also
downsized our market making capabilities and investment banking presence through
a reduction of personnel and support services. We also entered sublease
agreements for our office space and equipment in Austin, thereby reducing
additional fixed costs. While the reduction of personnel had an immediate
positive impact on fixed costs, many costs were embedded in contracts with
durations of between six months and two years, and took additional time to
positively adjust.
2
The economic downturn beginning in 2000 forced us to further refine our business
model and more effectively manage our business. The cost reductions implemented
during 2000 began to provide positive cash flow results during 2001. Additional
cost reductions were realized as we refocused on our core business of providing
investment opportunities to institutions and reduced costly research and market
making support to an increasingly conservative retail clientele base. The
actions of the Federal Reserve during 2001 also provided stimulus for our
government bond trading desk which produced additional revenue.
PRODUCTS AND SERVICES
We provide our customers with a broad range of products and services as
described below.
BROKERAGE SERVICES
We provide brokerage services to approximately 5,000 retail customers and 500
institutional customers. We offer customers the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. We provide our customers with the
ability to receive stock quotes, access research and customer account
information on the Internet through our website (www.Tejassec.com). Our
marketing strategy emphasizes our high level of service and unique knowledge of
the companies covered by our research department.
We generated $19,467,276, $25,615,989 and $16,818,686 in commission revenues for
the years ended 2002, 2001 and 2000, respectively, or 92%, 101% and 114% of
total revenue (before giving effect to trading losses), respectively.
RESEARCH
The cornerstone of our business is our research and trading capabilities.
Currently, our research department consists of four 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. We believe that the rapid changes in
each of these industries provide excellent investment opportunities. We
anticipate that we will continue to devote a substantial portion of our
resources to support our research department.
MARKET MAKING
In August 1999, the NASD approved Tejas to make markets in Nasdaq securities.
Making markets in securities facilitates the execution of security transactions
for our customers. Tejas acts as a market maker for approximately 100 public
corporations whose stocks are traded on the Nasdaq National Market System. The
increase in the number of public corporations that Tejas makes markets for is
due to the addition of the New Jersey branch.
Generally, we do not maintain inventories of securities for sale to our
customers. However, we do engage in certain principal transactions where, in
response to a customer order, we will go at risk to the marketplace in an
attempt to capture the spread between the bid and offer. Most of our larger
competitors are engaged in similar market making activities. We believe we can
maintain better control and be assured of proper executions of customer trades
by providing these market making services directly to our customers.
INVESTMENT BANKING
In the past, we raised capital for corporations through public and private
offerings of securities either as a syndicate member or as a managing
underwriter. We also provided advisory services for companies involved in merger
and acquisition activities. As a result of the prolonged economic downturn that
began in early 2000, the rate of business development in central Texas and
nationwide declined substantially negatively impacting our ability to generate
investment banking revenues. We continue to review investment banking
opportunities from time to time; however, the Company will not devote
substantial resources to this business segment unless there is a significant
increase in investment banking activities in our region.
We generated $335,663, $316,927 and $1,831,326 in investment banking revenues
for the years ended 2002, 2001 and 2000, respectively, or 2%, 1% and 12% of
total revenue, respectively.
3
MARGIN LOANS
We derive a portion of our income from fees generated on margin loans made to
our customers and financed through our clearing organization. A margin account
allows the customer to deposit less than the full cost of the securities
purchased while the clearing organization 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. We earn a fee equal to 50% of the interest charged on
customer margin loans. As of December 31, 2002, the total of all customer
securities pledges on debit balances and held in active margin accounts was
approximately $7,000,000.
CUSTOMERS
Historically, our customer base has been comprised of predominately large
institutional customers. These customers demand high quality research and
sophisticated trading capabilities. We believe that we have served the needs of
this segment of our customer base well, resulting in increased trading volume.
We believe that the increase in the scope of our research services should
increase customer satisfaction and increase our revenues from institutional
customers.
EMPLOYEES
On December 31, 2002, we had 53 employees, which was approximately the same
number as on December 31, 2001. Of these employees, 35 work in sales, 4 in
trading, 5 in research and investment banking and the remaining employees
perform management and administrative functions. It is our goal to use the sales
support functions that are currently in place to support additional sales staff.
We 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.
COMPETITION
All aspects of our business are highly competitive. In our general brokerage
activities, we compete directly with numerous other broker-dealers, many of
which are large well-known firms with substantially greater financial and
personnel resources. Many of our 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. We also
compete with a number of smaller regional brokerage firms in Texas and the
Southwest.
Since the adoption of the Gramm-Leach-Bliley Act of 199, commercial banks and
thrift institutions have been able to engage in traditional brokerage and
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 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 ours.
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 our retail equity business. However, we have historically
derived the majority of our 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, we have concentrated our research
efforts on debt securities, which have not experienced as significant of
discounting as equity securities.
4
SECURITIES INDUSTRY PRACTICES
Tejas is registered as a broker-dealer with the SEC and the NASD. Tejas is
registered as a securities broker-dealer in 39 states and the District of
Columbia. Tejas is also a member of the Securities Investors Protection
Corporation, which provides Tejas' customers with insurance protection for
amounts of up to $500,000 each, with a limitation of $100,000 on claims for cash
balances. Tejas has also acquired an additional $1,500,000 in insurance coverage
through Seabury & Smith, as added protection for individual customers'
securities, covering all clients of Tejas' institutional and retail customers.
Tejas 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 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 our ability to pay dividends to our stockholders.
Failure to comply with the Rule could require the Company to infuse additional
capital into Tejas, could limit the ability of Tejas to pay its debts and/or
interest obligations, and may subject Tejas 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 into compliance, Tejas would ultimately be forced to
cease operations. See "Forward-Looking Statements and Risk Factors" below.
At December 31, 2002 and 2001 Tejas 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 2002 and 2001 or 2% of
aggregate debit balances arising from customer transactions, as defined. At
December 31, 2002, Tejas had net capital of $945,765, which was $695,765 in
excess of the minimum amount required. At December 31, 2001, Tejas had net
capital of $884,276, which was $634,276 in excess of the minimum amount
required.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
From time to time, we make statements (including some contained in this report)
which predict or forecast future events or results, which depend on future
events for their accuracy, which embody projections or that otherwise contain
"forward-looking information." These statements may relate to anticipated
revenues or earnings per share, anticipated changes in our business or our
ability to successfully respond to such changes, the adequacy of our capital and
liquidity, the adequacy of our reserves for contingencies, including litigation,
or expectations regarding future financial market conditions.
5
We caution readers that any forward-looking information provided by us or on our
behalf is not a guarantee of future performance. Actual results may differ
materially as a result of various factors, many of which are outside of our
control, including the factors discussed below, those discussed under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies" and "Quantitative and Qualitative
Disclosure About Market Risk," and those discussed in our periodic reports filed
with and available from the Securities and Exchange Commission.
All forward-looking statements speak only as of the date on which they are made
and we undertake no obligation to update them to reflect events of circumstances
occurring after the date on which the were made or to reflect the occurrence of
unanticipated events.
FAILURE TO EFFECTIVELY MANAGE A CHANGING BUSINESS COULD RESULT IN OUDATED
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 fallen considerably and continued weakness in these markets could adversely
affect our operating results. The stock markets have suffered major declines and
many firms in the industry have suffered financial losses. Additionally, our
individual investor trading activity has decreased. Reduced trading volume and
prices have historically resulted in reduced revenues. When trading volume is
low, our profitability is 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.
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, which we may be required to fund. Any such losses could have a material
adverse effect on our business, financial condition and operating results.
6
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 their
business.
The SEC, 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, 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 of our marketing activities. 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' 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.
WE MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS THAT COULD SLOW OUR EXPANSION
PLANS OR PREVENT PAYMENTS OF DIVIDENDS.
The SEC, 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 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 pay dividends, repay debt and redeem or purchase
shares of our outstanding stock could be severely restricted. 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.
7
OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.
We receive and process trade orders through internal trading software and
touch-tone telephones and 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
DEVLEOP.
An active public market for our common stock does not currently exist. Over 80%
of our issued common stock is held by fewer than ten individuals. Until a
broader distribution of our common stock is made no active public market will
develop.
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,
which consist of approximately 24,700 square feet and 5,400 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 five years and one year, respectively, and contain renewal options. 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. In September 2002, the Company subleased
approximately 85% of its Atlanta, Georgia office space. The Company subleased
the remaining 15% of its Atlanta, Georgia office space in March 2003.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than litigation
incidental to the business, to which the Company or any of its subsidiaries is a
party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RECENT STOCK PRICES
The Company's common stock trades under the symbol "WSTH" on the NASDAQ
electronic bulletin board. The trading does not constitute a well-established
public trading market for our common stock. On December 31, 2002, there were in
excess of 350 holders of record of the Company's common stock and we believe in
excess of 5 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, which reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and my not necessarily represent actual transactions.
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.
2002:
Stock Price Range
High $ 5.00 $ 3.00 $ 2.25 $ 2.25
Low $ 3.50 $ 1.50 $ 1.50 $ 1.25
2001:
Stock Price Range
High $ 16.25 $ 12.50 $ 2.60 $ 5.00
Low $ 11.25 $ 2.00 $ 2.50 $ 3.25
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Following is a summary of the Company's compensation plans (including individual
compensation arrangements) under which the Company's common stock is authorized
for issuance. [See 201(d) of S-K]
NUMBER OF
NUMBER OF SECURITIES REMAINING
SECURITIES TO BE AVAILABLE FOR FUTURE
ISSUED UPON WEIGHTED-AVERAGE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OUTSTANDING PLANS (EXCLUDING
OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTED
PLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN (A))
- ------------------------------ --------------------- --------------------- -----------------------
(a) (b) (c)
Equity compensation plans 200,000 $6.00 200,000
approved by stockholders
Equity compensation plans 62,063 $4.00 -0-
not approved by
stockholders
RECENT SALES OF UNREGISTERED STOCK
None.
9
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, 2002 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,
2002 2001 2000 1999 1998
STATEMENT OF OPERATIONS DATA:
Commissions $ 19,467,276 $ 25,615,989 $ 16,818,686 25,291,212 7,932,780
Investment banking 335,663 316,927 1,831,326 925,616 2,584,770
Trading income (loss) 1,296,933 (630,687) (4,076,629) 3,475,539 (272,811)
Other 135,055 25,920 135,902 740,342 23,530
Total revenue 21,234,927 25,328,149 14,709,285 30,432,709 10,268,269
Employee compensation 15,667,467 18,666,284 13,954,116 19,992,928 7,397,860
Other expenses 4,979,208 5,352,183 7,618,831 4,802,555 3,431,631
Total expenses 20,646,675 24,018,467 21,572,947 24,795,483 10,829,491
Income (loss) before income taxes
and minority interest 588,252 1,309,682 (6,863,662) 5,637,226 (561,222)
Income tax expense (benefit) 298,200 495,474 (2,214,012) 2,201,598 (163,900)
Minority interest 0 (18,814) (650,510) 297,285 0
Net income (loss) $ 290,052 $ 833,022 $ (3,999,140) 3,138,343 (397,322)
Earnings (loss) per share:
Basic $ 0.19 $ 0.62 $ (3.17) 2.51 (0.37)
Diluted $ 0.19 $ 0.53 $ (3.17) 2.25 (0.37)
Weighted average shares outstanding:
Basic 1,512,024 1,348,097 1,261,721 1,250,119 1,066,437
Diluted 1,525,703 1,546,112 1,261,721 1,529,197 1,066,437
STATEMENT OF FINANCIAL
CONDITION DATA:
Cash and cash equivalents $ 750,746 $ 547,761 $ 482,562 2,732,175 201,312
Deposit with clearing organization 0 260,471 250,000 100,000 100,000
Receivable from clearing organization 0 1,905,338 735,616 63,620 37,224
Securities owned 5,985,305 3,011,667 2,433,022 6,207,748 1,539,424
Other assets 2,538,887 1,515,271 3,397,959 2,534,127 695,843
Total assets $ 9,274,938 $ 7,240,508 $ 7,299,159 11,637,670 2,573,803
Accounts payable, accrued expenses
and other liabilities $ 2,380,552 $ 3,183,904 $ 1,869,821 2,905,020 577,736
Securities sold, not yet purchased 985,210 332,581 446,078 187,940 0
Payable to clearing organization 971,651 0 456,660 1,719,627 91,254
Notes payable 2,423,450 500,000 2,250,000 0 0
Subordinated debt 0 1,000,000 1,000,000 1,000,000 500,000
Total liabilities 6,760,863 5,016,485 6,022,559 5,812,587 1,168,990
Minority interest 0 0 377,382 976,725 0
Common stock 1,512 1,512 1,266 12,537 11,615
Additional paid in capital 2,222,281 2,222,281 1,730,744 1,669,473 1,461,456
Subscription receivable 0 0 0 0 (96,263)
Treasury stock 0 0 0 0 0
Retained earnings (deficit) 290,282 230 (832,792) 3,166,348 28,005
Total stockholders' equity 2,514,075 2,224,023 899,218 4,848,358 1,404,813
Total liabilities and
stockholders' equity $ 9,274,938 $ 7,240,508 $ 7,299,159 11,637,670 2,573,803
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company has identified the policies set forth below as critical to the
Company's operations and the understanding of the Company's results of
operations. The impact of these policies is further discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations, where these policies affect the Company's reported amounts. The
Company's significant accounting policies are described in Note 2 in the Notes
to Consolidated Financial Statements.
FAIR VALUE OF SECURITIES
The Company routinely purchases and sells securities for its proprietary
accounts and its customers, including employees. Financial securities used in
the Company's trading activities are recorded at fair value, with unrealized
gains and losses reflected in investment income. Securities with readily
determinable market values are based on quoted market prices. Many of the
securities held are those of distressed companies in which there may be limited
market activity. The value of securities with limited market activity for which
quoted market values are not readily determinable are based on management's best
estimate, which may include dealer price quotations and price quotations for
similar instruments traded.
RECEIVABLE (PAYABLE) TO CLEARING ORGANIZATION
The Company utilizes its equity in securities owned at its clearing organization
to facilitate the purchase of additional securities for trading purposes. The
value of the equity at the clearing organization is primarily affected by
realized trading gains and losses, unrealized gains and losses, the purchase and
sale of accrued interest on debt securities, and cash withdrawals and deposits
at the clearing organization. As a result of this activity, including the
purchase and sale of securities, the Company may have either a receivable or
payable balance to the clearing organization. In the event that the Company has
a payable balance to the clearing organization, the Company may be restricted in
its ability to withdraw funds from the clearing organization to cover routine
operating expenses. Additionally, if the value of the equity at the clearing
organization is insufficient to cover the margin requirements on the value of
the securities borrowed, the Company may be required to either liquidate its
holdings at the clearing organization or provide additional funds to cover
margin requirements. For these reasons, the Company carefully monitors its
receivable or payable balance so that it can provide sufficient funds for
operations.
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 broker and NASD approved subordinated debt.
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.
11
Market values for some of the distressed 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.
In March 2003, the Company successfully transmitted all its clearing agent
business and accounts to Correspondent Services Corporation.
The Company utilizes the receivable balance at its clearing organization to fund
operating and investing 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. As of December 31, 2002, the
payable balance to the clearing organization was $971,651.
Cash Flows From Operating Activities
Net cash provided by (used in) operating activities was $(710,296), $1,897,460
and $(4,191,924) in 2002, 2001 and 2000, respectively. The net cash provided by
(used in) operating activities is impacted primarily by the brokerage operating
activities and changes in the brokerage-related assets and liabilities.
During 2002, the primary uses of cash were from the increase in securities
owned, increase in other investments, and the decrease in accounts payable,
accrued expenses and other liabilities. Securities owned increased by
$2,973,638, which were financed primarily through the increase in the net
payable to clearing organization. Other investments increased by $1,250,000 as
the Company was required to collateralize one of its notes payable to a bank
with a certificate of deposit. Accounts payable, accrued expenses and other
liabilities decreased by $803,352 from the prior year as a result of reduced
bonuses and commissions payable at year-end compared with December 31, 2001. The
primary sources of cash consisted of the net increase in the net payable to
clearing organization of $2,876,989 and the increase in securities sold, not yet
purchased of $652,629. The net effect of these transactions on cash flows from
operating activities was $1,497,372 in cash used in operations, with the
remaining increase consisting of $290,052 in net income plus changes in other
asset and liability accounts.
During 2001, the primary use of cash resulted from the $1,626,382 decrease in
the net payable to clearing organization. The Company's increased commission
revenue and decrease in investment losses allowed the Company to increase its
cash balances on deposit at the clearing organization. In addition, the
increased revenues allowed the Company to increase its security holdings by
$578,645. The primary sources of cash related to the receipt of income tax
refunds for prior year carrybacks and the reduction in cash paid due to the
increase in accounts payable and accrued expenses related to year-end bonus
accruals. The net effect of these transactions on cash flows from operating
activities was $916,297 in cash availability, with the remaining $981,163
increase consisting of $833,022 in net income plus changes in other asset and
liability accounts.
12
The Company generated negative cash flows from operations in the year 2000 of
approximately $4.2 million. This use of cash was the result of operating losses
incurred throughout the year. Management took several proactive steps to help
mitigate the negative cash flows from operations which included: staff
reductions of approximately 50% in non-revenue generating positions; subletting
approximately 60% of the Company's main corporate space; changing to a new
clearing organization in an effort to reduce clearing charges; initiating a
hiring freeze with the exception of revenue producers; and reducing redundant
information systems.
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.
The Company anticipates that a significant portion of the cash provided from
future operating activities of Tejas will be used to reduce the Company's
overall debt structure. Future operating cash flows may also be used to
facilitate additional investing activities.
Cash Flows From Investing Activities
Net cash used in investing activities was $10,169, $77,261 and $358,856 in 2002,
2001 and 2000, respectively. During 2002, the Company purchased $10,169 of
furniture and equipment in the ordinary course of business. During 2001, the
Company purchased $77,261 of furniture and equipment in the ordinary course of
business. 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.
Cash Flows From Financing Activities
Net cash provided by (used in) financing activities was $923,450, $(1,755,000)
and $2,301,167 in 2002, 2001 and 2000, respectively.
In March 2002, the Company entered into a term loan agreement with a bank to
borrow $2,500,000 for operating purposes. The loan was originally due and
payable on demand or by March 15, 2003 if no demand was made. The loan accrues
interest at 5.5% per annum. The Company purchased a certificate of deposit in
the amount of $2,500,000 as collateral for the loan. During 2002, the Company
repaid $1,100,000 of the loan from the bank through its own financing
arrangements. The bank in turn released from collateralization $1,100,000 of the
certificate of deposit to the Company, of which $1,000,000 was used for
operations, including repayment of $500,000 of the Company's subordinated debt.
The remaining $100,000 was not redeemed and is included in other investments at
December 31, 2002. In addition, the Company repaid $250,000 of a loan from the
bank through the redemption of $250,000 of the certificate of deposit during
2002. As of December 31, 2002, the term loan agreement balance is $1,150,000,
which is collateralized by the certificate of deposit in the amount of
$1,250,000 (which is included as other investments in the accompanying
consolidated statements of financial condition). On March 15, 2003, the Company
extended the maturity date of the loan to March 15, 2004.
On July 31, 2002, the Company entered into an agreement with a bank to borrow
$250,000 for short-term operating purposes. The loan was due and payable in a
single payment on October 1, 2002, and accrued interest at 7% per annum. The
loan plus accrued interest was paid in full on August 15, 2002.
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, which began on
September 8, 2002. The promissory note accrues interest at 11.5% per annum. The
balance of the promissory note was $800,000 as of December 31, 2002.
13
On October 30, 2002, the Company entered into a loan agreement with a bank to
borrow $500,000 for operating purposes. 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 which commenced on December 1, 2002. The
balance on the loan agreement was $473,450 as of December 31, 2002.
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 percent, with
interest due on a quarterly basis and was secured by the Company's shares of
Tejas common stock and a personal guarantee of John Gorman. 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. The note was paid in full
on August 15, 2002.
On February 27, 2001, the Company restructured the $1,000,000 of subordinated
debt with Clark Wilson, which was originally issued in two $500,000 increments
in September 1998 and June 1999. The loan agreements were used to increase
equity capital for the Company's underwriting activities and to finance the
Company's expansion activities. The loans accrued interest at 11.5 percent per
annum and were considered equity capital for NASD purposes. As a condition of
the loan agreements, Tejas issued warrants to the lender to purchase 225,000
shares of common stock of Tejas (55,856 shares of the Company's common stock
giving effect to the Merger), exercisable at $2.65 per share ($10.70 per share
giving effect to the Merger). The warrants associated with the September 1998
and June 1999 subordinated debt were canceled in 1999 in an agreement with Clark
Wilson. On January 1, 2000, the Company issued options to purchase 55,856 shares
of the Company's common stock to Clark Wilson. The purchase price of the shares
was $10.70 per share with an expiration date of four years from the date of the
grant. The options were intended to constitute non-qualified stock options. In
April 2002, Clark Wilson forfeited his options. 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. In November 2001, the
Company exercised its option to extend the maturity of the loan agreements
through November 1, 2002. On July 1, 2002, the Company repaid $500,000 of the
subordinated debt, and repaid the remaining $500,000 on August 20, 2002.
As of December 31, 2002, our contractual cash obligations and the periods in
which payments under such cash obligations are due are as follows:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ------------------------------------- ------------ ------------ --------- --------- -----------
Notes Payable $ 1,623,450 -- 1,623,450 -- --
Note Payable to Stockholder 800,000 -- 800,000 -- --
Operating Lease Obligations 4,351,000 1,544,000 2,623,000 184,000 --
------------ ------------ --------- --------- -----------
Total Contractual Cash Obligations $ 6,774,450 1,544,000 5,046,450 184,000 --
============ ============ ============ ========= ===========
14
Results Of Operations
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 ongoing
economic slowdown in the domestic United States economy could increase the
opportunities in domestic distressed securities. Management expects that the
slow down in the 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 following table presents additional information regarding the results of
operations as presented in Item 6.
Year Ended December 31,
2002 2001 2000
---- ---- ----
(000's) % Change (000's) % Change (000's)
------------- ---------- ----------- ---------- ---------
Revenues:
Commissions $ 19,467 (24) 25,616 52 16,819
Underwriting and
investment banking 336 6 317 (83) 1,831
Net dealer inventory and
investment income (loss) 1,297 306 (631) 85 (4,077)
Other income 135 419 26 (81) 136
------------- --- ------ --- ------
$ 21,235 (16) 25,328 72 14,709
Expenses:
Commissions, employee
compensation and benefits $ 15,667 (16) 18,666 34 13,954
Clearing and floor brokerage 413 -- 413 (57) 966
Communications and
occupancy 1,631 (1) 1,646 (19) 2,033
Professional 705 (40) 1,169 (37) 1,868
Other 2,231 5 2,124 (23) 2,752
------------- --- ------ --- ------
$ 20,647 (14) 24,018 11 21,573
The decrease in commission revenues during 2002 was due to continued uncertainty
in the US economy and abroad. Many of the Company's customers sought safety by
reducing their investment exposure. A combination of low interest rates,
increased corporate bond defaults and instability in the equity markets were
compelling reasons for investors to increase their cash positions by reducing
their investment holdings. Partially offsetting these negative trends was an
increase in commission revenues during 2001 due to an increase in distressed
securities and mortgage-backed securities transactions. As the overall economy
continued to struggle, more US companies experienced downgrades in corporate
debt ratings and bankruptcy filings. The increase in corporate bankruptcy
filings provided the Company with additional opportunities in the distressed
sector, particularly among telecommunication companies. In addition, as the
Federal Reserve continued to lower interest rates, many institutions sought new
mortgage-backed securities as their inventories experienced significant
prepayments.
Underwriting and investment banking revenues experienced a slight increase
during 2002 as a result of one advisory engagement. The Company did not direct
any additional resources to investment banking activities in 2002 from 2001.
Underwriting and investment banking revenues decreased during 2001, primarily
due to overall market conditions.
15
Net dealer inventory and investment income increased during 2002 due to
increased trading activity in distressed corporate debt securities. While many
of the Company's customers reduced their investment exposure, the Company's
trading desk was able to generate positive returns from the markets volatility.
Net dealer inventory and investment loss decreased during 2001 as the Company
increased its holdings in mortgage-backed securities and reduced its exposure to
riskier distressed debt securities. Many of the companies that the Company
followed through research are involved in the telecommunications industry, which
experienced substantial valuation declines.
Other income increased during 2002 due to interest receipts on certificate of
deposit held in other investments (See Liquidity and Capital Resources - Cash
Flows From Financing Activities, above, and Note 6 to the consolidated financial
statements) and the service agreement with Firstmark Corp (See Item 13 -
"Certain Relationships and Related Transactions"). Other income decreased during
2001due to the dissolution of TSG Internet Fund I, Ltd. (See Item 13 - "Certain
Relationships and Related Transactions").
Commissions, employee compensation and benefits decreased during 2002 as a
function of decreased revenues and profitability of the Company. The Company's
commission expense ratio was higher in 2002 due to incentives paid to new
institutional brokers during the year. Additionally, the Company incurred higher
bonus expense as a percentage of revenues during 2002 as the Company paid
retention bonuses to key management and research personnel. Commissions,
employee compensation and benefits increased during 2001 as a function of
increased commissions and profitability of the Company. The Company's commission
expense ratio was consistent with prior years, however, the Company increased
its bonus payments and year-end bonus accrual to reward employees and management
for the Company's improved financial performance.
Clearing and floor brokerage costs for 2002 were consistent with 2001 amounts
despite the decrease in revenues. The Company increased market making activities
during the fourth quarter of 2002, and generated insignificant amounts of
revenues from those activities. Clearing and floor brokerage costs decreased
during 2001 as the Company reduced its market making activities and
institutional equity presence. In addition, the Company began receiving order
flow rebates from its remaining market making activities.
Communications and occupancy charges decreased slightly during 2002 as the
Company realized a full year of sublease receipts versus the prior year.
Communications and occupancy charges decreased during 2001 as the Company
subleased a substantial portion of its office space in Austin and Houston. In
addition, the Company continued to reduce redundant services to support its
brokers.
Professional fees decreased during 2002 due to a reduction in legal fees
associated with a reduction in claims and legal actions against the Company.
Professional fees decreased during 2001 due to a reduction in legal and
accounting fees associated with the registration of the Company's common stock.
In addition, the Company was not involved in any significant legal proceedings
that resulted in adverse settlements.
The increase in other expenses during 2002 was due to an increase in insurance
and regulatory costs. The decrease in other expenses during 2001 is due to cost
reductions implemented during 2000 that began to yield significant savings in
overhead costs.
Income tax expense decreased in 2002 due a reduction in pre-tax earnings from
2001 amounts. The Company's effective tax rate was 51% for 2002. Income tax
expense increased in 2001 due to pre-tax earnings of $1.3 million. The Company's
effective tax rate was 38% for 2001.
16
Effects Of Inflation
The effects of inflation have been minimal on the results of operations and the
financial condition of the Company in recent years. However, the rising cost of
labor and competitive market for brokers could affect general and administrative
costs in the near term.
Recently Issued Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
consolidated financial statements.
ITEM 7A. 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.
17
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 $5,985,305 in long positions and $985,210
in short positions at December 31, 2002. These trading securities may be
exchange listed, Nasdaq, other over-the-counter securities, or securities in
which there is limited market activity on both long and short positions. The
potential loss in fair value, using a hypothetical 10% decline in prices, is
estimated to be $697,000 as of December 31, 2002. A 10% hypothetical decline was
used to represent a significant and plausible market change.
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 the recommendations of the Company's research analysts versus current
market performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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 42 Director, Chairman and Chief Executive Officer
Charles H. Mayer 55 Director, President and Chief Operating Officer
Kurt J. Rechner 42 Chief Financial Officer, Secretary and Treasurer
A. Reed Durant 48 Director of Compliance
John F. Garber 33 Director of Finance
Barry A. Williamson 44 Director
Clark N. Wilson 45 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 since July 1997. Mr. Gorman has over 18 years of
experience in the brokerage industry. Mr. Gorman became a principal of Tejas on
April 18, 1995. From 1988 until joining Tejas, 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.
18
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, 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.
KURT J. RECHNER, CPA, CFA. Mr. Rechner became our Chief Financial Officer in
January 2000, our Treasurer in September 2000 and our Secretary in September
2002. Mr. Rechner has spent the past 21 years in the financial services
industry. Prior to joining Tejas, 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.
A. REED DURANT. Mr. Durant became our Director of Compliance in August 1999. Mr.
Durant joined Tejas in November 1998 as the Compliance Director. From January
1996 until joining Tejas, 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 21 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.
JOHN F. GARBER, CPA. Mr. Garber became our Director of Finance in August 1999.
Mr. Garber joined Tejas in October 1998 as Director of Finance. From April 1999
until joining Tejas, 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.
19
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.
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:
- - 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;
- - 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;
- - engaging any professional advisors as it deems appropriate; and
- - 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:
- - reviewing, with our independent auditors, the Company's consolidated
financial statements and internal accounting controls and the plans and
results of the audit engagement;
- - reviewing the independence of the Company's independent auditors;
- - reviewing the adequacy of the Company's internal accounting controls;
- - preparing an annual report on executive compensation for inclusion in
the Company's proxy statement for the annual meeting of shareholders;
and
- - fulfilling such other powers and duties as determined and delegated by
the board of directors from time to time.
The Company's board of directors has determined that the Company does not have
an audit committee financial expert. Our board of directors currently consists
of four members, two of whom are independent. We believe our board is comprised
of qualified individuals with the business experience necessary to guide the
Company. We will continue to seek additional qualified individuals for our board
of directors, including potential candidates that will qualify as audit
committee financial experts.
All of the members of both the Compensation Committee and the Audit Committee
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 or those described in Item 13 - Certain Relationships and
Related Transactions.
20
The Company engaged Barry Williamson to act as a consultant for the Company on a
month to month basis beginning in October 1999. Under the terms of the original
agreement, the Company compensated Mr. Williamson for professional services
rendered at a rate of $12,500 per month, plus out of pocket expenses. In 2000,
the Company modified the agreement so that Mr. Williamson 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. No fees were paid to Mr. Williamson subsequent to 2000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on a review of reports filed by the Company's directors, executive
officers and beneficial holders of 10% or more of the Company's common stock we
believe that all SEC stock ownership reports required to be filed by those
reporting persons during 2002 were timely made.
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, 2002, the "named
executive officers."
NAME AND PRINCIPAL
POSITION YEAR SALARY (1) BONUS FORGIVEN DEBT COMMISSIONS
- --------------------- ---- --------- ---------- ------------- -----------
John J. Gorman 2002 $ 0 $1,180,000 $ 0 $2,049,982
Chairman and Chief 2001 0 250,000 0 3,348,259
Executive Officer 2000 0 0 0 1,983,699
Charles H. Mayer (2) 2002 225,000 671,000 50,000 0
President and Chief 2001 225,000 15,000 50,000 0
Operating Officer 2000 153,000 200,000 0 0
Robert Gillette (3) 2002 0 0 0 305,090
2001 16,000 0 1,667 242,287
2000 80,000 0 5,000 244,771
Kurt J. Rechner (3) 2002 150,000 135,000 0 0
Chief Financial Officer, 2001 150,000 65,000 0 0
Treasurer and Secretary 2000 146,731 46,000 0 0
John F. Garber 2002 89,583 55,000 0 0
Director of Finance 2001 86,250 11,000 0 0
2000 80,000 5,000 0 0
A. Reed Durant 2002 85,000 50,000 0 0
Director of Compliance 2001 85,000 10,000 0 2,230
2000 85,000 0 0 0
(1) Does not include certain prerequisites and other personal benefits that
are standard in the industry and have a total value of less than the
lesser of $50,000 or 10% of the total annual salary, and bonus reported
for the named executive officer.
(2) Mr. Mayer became the President on December 14, 2000.
(3) Mr. Gillette acted as the Treasurer from January 2000 to September 20,
2000, at which point Mr. Rechner was appointed Treasurer. Additionally,
Mr. Gillette acted as the Secretary from January 2000 until his
resignation from the Company on September 18, 2002, at which point Mr.
Rechner was appointed Secretary.
21
OPTION GRANTS AND EXERCISES
The Company made no grants of options to purchase our common stock during the
fiscal year ended December 31, 2002. No stock appreciation rights were granted
during 2002.
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, 2002 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, 2002 OPTIONS AT DECEMBER 31, 2002(1)
-------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- ------------- ----------- -------------
John J. Gorman 100,000 -- $ -- $ --
Charles H. Mayer 112,063 -- $ -- $ --
Kurt R. Rechner 10,000 -- $ -- $ --
John F. Garber -- -- $ -- $ --
A.Reed Durant -- -- $ -- $ --
Robert E. Gillette -- -- $ -- $ --
(1) The amount set forth represents the difference between the fair market
value of the underlying stock on December 31, 2002 and the exercise
price of the option. The fair market value was determined by the
closing price of $1.25 per share on December 31, 2002.
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 10,000 shares of common
stock. The options were exercisable at $20.00 per share, would have expired on
October 15, 2004 and would have vested in three equal installments beginning on
October 15, 1999. On April 1, 2002, Mr. Wilson and Mr. Williamson rescinded
their claims to the options granted. Currently no other directors receive any
form of cash or non-cash compensation for fulfilling their roles on the Board of
Directors.
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 400,000
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.
22
The Company did not grant any options under the Stock Option Plan during 2002.
The Company had 200,000 options outstanding under the Stock Option Plan as of
December 31, 2002. For the year ended December 31, 2001, the Company granted
options under the Stock Option Plan to acquire 160,000 shares of common stock,
none of which had been exercised, forfeited or canceled during 2001 or 2002. The
Company had 365,000 options outstanding under the Stock Option Plan as of
December 31, 2001. For the year ended December 31, 2000, the Company granted
options under the Stock Option Plan to acquire 151,500 shares of common stock,
none of which had been exercised during 2000, 2001 or 2002. Of the options
granted, 39,000, 35,000 and 70,000 options were canceled or forfeited during
2000, 2001 and 2002, respectively, due to employee rescission or terminations.
The Company had 240,000 options outstanding as of December 31, 2000.
Additionally, employees rescinded options to purchase 95,000 shares of common
stock issued prior to 2000.
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).
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 300,000 to 400,000 shares.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information with respect to ownership of the
Company's common stock at March 1, 2003 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
March 1, 2003, are included as shares beneficially owned. For purposes of
calculating percent ownership as of March 1, 2003, 1,512,024 shares were issued
and outstanding and for any individual who beneficially owns shares represented
by options exercisable on or before March 1, 2003, 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) 826,334 51.26%
Charles H. Mayer (1)(3) 155,291 9.56%
Kurt J. Rechner (1)(4) 10,010 *
Joseph F. Moran (1) 248,262 16.42%
John R. Ohmstede (5) 78,944 5.22%
All officers and directors as a group (7 1,004,047 57.90%
total)
- ----------------------
* Less than 1%.
(1) The address for Messrs. Gorman, Mayer, Rechner and Moran is 2700 Via
Fortuna, Suite 400, Austin, Texas 78746.
(2) Includes 100,000 shares of common stock issuable pursuant to options
granted under the 1999 Plan, which are immediately exercisable as of
March 1, 2003.
(3) Includes 50,000 shares of common stock issuable pursuant to options
granted under the 1999 Plan, which are immediately exercisable as of
March 1, 2003. Includes 62,063 shares of common stock issuable pursuant
to an option granted outside the 1999 Plan, which are immediately
exercisable as of March 1, 2003.
(4) Includes 10,000 shares of common stock issuable pursuant to options
granted under the 1999 Plan, which are immediately exercisable as of
March 1, 2003.
(5) The address for Mr. Ohmstede is 5905 Overlook Drive, Austin, Texas
78731.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTES PAYABLE
The Company received a $500,000 term loan from its bank in October 2002. In
exchange for the loan, John Gorman, Chairman and Chief Executive Officer,
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."
The Company issued a promissory note in August 2002 in exchange for $1,000,000
from John Gorman, Chairman and Chief Executive Officer. The transaction is
described in Item 7 - "Liquidity and Capital Resources."
FIRSTMARK CORP.
In November 2001, John Gorman and Charles Mayer were named to the board of
directors of Firstmark Corp. Additionally, Kurt Rechner was appointed the Chief
Financial Officer of Firstmark Corp. As of December 31, 2001, John Gorman owned
and controlled common stock in Firstmark Corp. with a value in excess of
$220,000. In addition, John Gorman was deemed to control stock in Firstmark
Corp. worth approximately $390,000, which was owned directly by the Company as
of December 31, 2001. In November 2001, the Company entered into a Service
Agreement with Firstmark Corp. to provide management support services for $5,000
per month for an initial term of one year (See Note 21 in the accompanying Notes
to Consolidated Financial Statements). In May 2002, the Company effectively
liquidated its holdings in Firstmark Corp. and John Gorman and Charles Mayer
resigned their positions on the board of directors. In August 2002, the Company
severed its relationship with Firstmark Corp. Currently, John Gorman owns and
controls common stock in Firstmark Corp. with a value in excess of $680,000.
ITEM 14. 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
annual 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 IV
ITEM 15. 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
None.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ CHARLES H. MAYER
----------------------------
Charles H. Mayer, President
Date: March 27, 2003
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, March 27, 2003
John J. Gorman Chairman of the Board
/s/ CHARLES H. MAYER
- -------------------------- President, Chief Operating
Charles H. Mayer Officer and Director March 27, 2003
/s/ KURT J. RECHNER
- -------------------------- Chief Financial Officer,
Kurt J. Rechner Treasurer and Secretary March 27, 2003
/s/ JOHN F. GARBER
- -------------------------- Director of Finance (Principal
John F. Garber Accounting Officer) March 27, 2003
/s/ BARRY A. WILLIAMSON
- -------------------------- Director
Barry A. Williamson March 27, 2003
/s/ CLARK N. WILSON
- -------------------------- Director
Clark N. Wilson March 27, 2003
26
CERTIFICATIONS
I, John J. Gorman, certify that:
1. I have reviewed this annual report on Form 10-K of Westech
Capital Corp.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit tostate 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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
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 annual 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 annual 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 functions):
(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 annual report whether 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: March 27, 2003 /s/ JOHN J. GORMAN
John J. Gorman
Chief Executive Officer
27
I, Kurt J. Rechner, certify that:
1. I have reviewed this annual report on Form 10-K 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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
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 annual 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 annual 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 functions):
(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 annual report whether 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: March 27, 2003 /s/ KURT J. RECHNER
Kurt J. Rechner
Chief Financial Officer
28
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(With Independent Auditors' Report Thereon)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
INDEX
PAGE
Independent Auditors' Report 1
FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition as of December 31, 2002 and 2001 2
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001
and 2000 4
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 5
Notes to Consolidated Financial Statements 7
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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Austin, Texas
March 15, 2003
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2002 and 2001
ASSETS 2002 2001
------------ ---------
Cash and cash equivalents $ 750,746 547,761
Deposit with clearing organization, restricted - 260,471
Receivable from clearing organization - 1,905,338
Receivables from employees and stockholders 263,866 494,106
Federal income taxes receivable 202,070 973
Securities owned, at market value 5,985,305 3,011,667
Other investments 1,250,000 -
Property and equipment, net 333,800 478,086
Deferred tax asset, net 74,990 84,915
Goodwill 138,215 138,215
Prepaid expenses and other assets 275,946 318,976
------------ ---------
Total assets $ 9,274,938 7,240,508
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 2,380,552 3,183,904
Securities sold, not yet purchased 985,210 332,581
Payable to clearing organization 971,651 -
Notes payable 1,623,450 500,000
Note payable to stockholder 800,000 -
Subordinated debt - related party - 1,000,000
------------ ---------
Total liabilities 6,760,863 5,016,485
------------ ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value
10,000,000 and 50,000,000 shares authorized in 2002
and 2001, respectively; 1,512,024 issued and outstanding
in 2002 and 2001 1,512 1,512
Additional paid in capital 2,222,281 2,222,281
Retained earnings 290,282 230
------------ ---------
Total stockholders' equity 2,514,075 2,224,023
------------ ---------
Total liabilities and stockholders' equity $ 9,274,938 7,240,508
============ =========
See accompanying notes to consolidated financial statements.
2
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ---------- ----------
Revenue:
Commissions $ 19,467,276 25,615,989 16,818,686
Underwriting and investment banking income 335,663 316,927 1,831,326
Net dealer inventory and investment income
(loss), net of trading interest expense of
$51,484, $120,976 and $151,946,
respectively 1,296,933 (630,687) (4,076,629)
Other income 135,055 25,920 135,902
------------ ---------- ----------
Total revenue 21,234,927 25,328,149 14,709,285
------------ ---------- ----------
Expenses:
Commissions, employee compensation
and benefits 15,667,467 18,666,284 13,954,116
Clearing and floor brokerage 412,657 412,819 965,889
Communications and occupancy 1,631,136 1,645,693 2,033,463
Professional fees 704,718 1,169,474 1,868,244
Interest, including $106,461, $143,266 and
$125,466, respectively, to related parties 212,484 229,226 194,503
Other 2,018,213 1,894,971 2,556,732
------------ ---------- ----------
Total expenses 20,646,675 24,018,467 21,572,947
------------ ---------- ----------
Income (loss) before income tax expense
(benefit) and minority interest 588,252 1,309,682 (6,863,662)
Income tax expense (benefit) 298,200 495,474 (2,214,012)
------------ ---------- ----------
Income (loss) before minority interest 290,052 814,208 (4,649,650)
Minority interest -- (18,814) (650,510)
------------ ---------- ----------
Net income (loss) $ 290,052 833,022 (3,999,140)
============ ========== ==========
Earnings (loss) per share:
Basic $ 0.19 0.62 (3.17)
============ ========== ==========
Diluted $ 0.19 0.53 (3.17)
============ ========== ==========
Weighted average shares outstanding:
Basic 1,512,024 1,348,097 1,261,721
============ ========== ==========
Diluted 1,525,703 1,546,112 1,261,721
============ ========== ==========
See accompanying notes to consolidated financial statements.
3
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
ADDITIONAL
COMMON PAID IN RETAINED EARNINGS
SHARES STOCK CAPITAL (ACCUMULATED DEFICIT) TOTAL
--------- ------------ ---------- --------------------- ----------
Balance at December 31, 1999 1,253,721 $ 1,254 1,680,756 3,166,348 (4,848,358
Stock issuances 12,413 12 49,988 - 50,000
Net loss - - - (3,999,140) (3,999,140)
--------- ------------ --------- ---------- ----------
Balance at December 31, 2000 1,266,134 1,266 1,730,744 (832,792) 899,218
Acquisition of minority interest 245,890 246 491,537 - 491,783
Net income - - - 833,022 833,022
--------- ------------ --------- ---------- ----------
Balance at December 31, 2001 1,512,024 1,512 2,222,281 230 2,224,023
Net income - - - 290,052 290,052
--------- ------------ --------- ---------- ----------
Balance at December 31, 2002 1,512,024 $ 1,512 2,222,281 290,282 2,514,075
========= ============ ========= ========== ==========
See accompanying notes to consolidated financial statements.
4
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 290,052 833,022 (3,999,140)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred tax expense (benefit) 9,925 386,637 (417,466)
Depreciation and amortization expense 132,067 139,652 141,660
Non-cash compensation expense 50,000 86,500 75,000
Loss on disposition of property and equipment 22,388 - -
Minority interest - (18,814) (650,510)
Decrease (increase) in deposit with clearing organization 260,471 (10,471) (150,000)
Net change in receivable from/payable to clearing
organization 2,876,989 (1,626,382) (1,934,963)
Decrease (increase) in receivable from employees
and stockholders 180,240 (246,406) 268,254
(Increase) decrease in Federal income taxes receivable (201,097) 1,807,241 (1,808,214)
(Increase) decrease in securities owned (2,973,638) (578,645) 3,774,726
Decrease (increase) in prepaid expenses and other assets 43,030 (75,460) 353,537
(Increase) decrease in other investments (1,250,000) - 932,253
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (803,352) 1,314,083 (171,378)
Increase (decrease) in securities sold, not yet purchased 652,629 (113,497) 258,138
Decrease in Federal income taxes payable - - (863,821)
------------ ---------- ----------
Net cash provided by (used in) operating activities (710,296) 1,897,460 (4,191,924)
------------ ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property and equipment - - 63,684
Purchase of property and equipment (10,169) (77,261) (422,540)
------------ ---------- ----------
Net cash used in investing activities (10,169) (77,261) (358,856)
------------ ---------- ----------
Cash flows from financing activities:
(Repayment of) proceeds from notes payable 1,123,450 (1,000,000) 1,500,000
(Repayment of) proceeds from notes payable to stockholders 800,000 (750,000) 750,000
Repayment of subordinated debt - related party (1,000,000) - -
Subscription collected - - 1,167
Purchase of minority interest shares - (5,000) -
Proceeds from stock issuances - - 50,000
------------ ---------- ----------
Net cash provided by (used in) financing activities 923,450 (1,755,000) 2,301,167
------------ ---------- ----------
(Continued)
5
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
Net increase (decrease) in cash and cash
equivalents $ 202,985 65,199 (2,249,613)
Cash and cash equivalents at beginning of year 547,761 482,562 2,732,175
------------ ------- ----------
Cash and cash equivalents at end of year $ 750,746 547,761 482,562
============ ======= ==========
Supplemental disclosures:
Interest paid $ 212,484 360,352 336,299
Taxes paid $ 480,500 127,500 1,003,749
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 and Tejas Securities became an indirect wholly
owned subsidiary. In addition, the Company recognized $138,215 in goodwill.
In March 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. (Note 9)
During 2002, 2001 and 2000, the Company forgave $50,000, $86,500 and $25,000,
respectively, of receivables from employees and stockholders, which has been
recorded as compensation expense. During 2000, the Company forgave $50,000 of
common stock subscription receivable related to shares issued by Tejas
Securities in 1999. The subscription receivable was from a former employee
and has been recorded as compensation expense. (Note 4)
See accompanying notes to consolidated financial statements.
6
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) ORGANIZATION AND BASIS OF PRESENTATION
Westech Capital Corp., 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.
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 ("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 Capital
Corp. In April 2001, Westech Capital Corp. reincorporated from New York
to Delaware. On August 29, 2001, the minority interest shareholders of
Tejas Securities exchanged their shares of Tejas Securities common
stock for restricted stock of Westech Capital Corp. As a result,
Westech Capital Corp. owns, directly or through Tejas Holding, 100% of
Tejas Securities as of December 31, 2002 and 2001.
Effective June 29, 2001, Westech Capital Corp. 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 year presented.
Effective June 20, 2002, Westech Captial Corp. 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 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 Correspondent
Services Corporation. Tejas Securities' headquarters are located in
Austin, Texas. 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 formed in 1999 to be the general
partner in TSG Internet Fund I, Ltd (the "Fund"), an investment hedge
fund managed by Tejas Securities. TSG Capital, LLC elected to liquidate
the Fund effective December 15, 2000 and TSG Capital, LLC ceased to be
an operating entity as of December 31, 2000.
References to the Company within the accompanying notes to the
consolidated financial statements are to Westech Capital Corp. and
subsidiaries.
(2) 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 Holding and Tejas Securities. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(Continued)
7
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(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.
The Company routinely executes securities transactions on
behalf of its employees and officers, and management considers
those transactions to be executed at arms' length.
(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 a maturity at date of purchase of ninety days
or less.
A certificate of deposit was pledged by the Company as
security on an irrevocable letter of credit issued in
conjunction with the Atlanta office lease in the amount of
approximately $92,000 as of December 31, 2001. The irrevocable
letter of credit was cancelled in 2002, and the certificate of
deposit was released to the Company.
(e) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Long and short positions in securities are reported at fair
value. Securities with readily determinable market values are
based on quoted market prices. Securities with limited market
activity for which quoted market values are not readily
determinable are based on management's best estimate which may
include dealer price quotations and price quotations for
similar instruments traded. The difference between cost and
fair value 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) PROPERTY AND EQUIPMENT
Property 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
for equipment approximate those used for Federal income tax
purposes and range from 3 to 7 years. Leasehold improvements
are amortized using the straight-line method over the shorter
of the estimated useful lives of the improvements or the terms
of the related leases.
(Continued)
8
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, on January 1,
2002. The adoption of SFAS No. 144 did not affect the
Company's consolidated financial statements. In accordance
with SFAS No. 144, long-lived assets, such as property and
equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented
in the statements of financial condition and reported at the
lower of the carrying amount or fair value less costs to sell,
and would be no longer depreciated.
(g) GOODWILL
Goodwill represents the excess of costs over fair value of
assets of businesses acquired and was recorded in connection
with the Company's acquisition of the minority interest of
Tejas Securities in August, 2001. The Company adopted certain
provisions of SFAS No. 142 ("SFAS no. 142"), Goodwill and
Other Intangible Assets, as of July 1, 2001 and the remaining
provisions of SFAS No. 142 as of January 1, 2002. Goodwill and
other intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life
are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142.
(h) 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,
2002 or 2001.
(i) 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.
(j) 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.
(Continued)
9
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(K) STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS
148 amends Financial Accounting Standards Board Statement No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirement of SFAS 123 to
require prominent disclosures in both annual and interim financial
statements about the fair value based method of accounting for
stock-based employee compensation for those companies that have elected
to continue to apply Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees. The Company has elected
to continue to apply the provision of APB 25 to its fixed-plan stock
options. The adoption of SFAS 148 did not have an impact on the
Company's consolidated financial statements.
(Continued)
10
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The following table illustrates the effect on net income (loss) if the
fair-value-based method had been applied to all outstanding and
unvested awards in each period.
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------- -------- ----------
Net income (loss) as reported
for basic $ 290,052 833,022 (3,999,140)
Deduct or add stock-based
compensation expense
determined under the fair
value based method (50,930) (178,775) (140,600)
--------------- -------- ----------
Pro forma net income (loss)
for basic $ 239,122 654,247 (4,139,740)
=============== ======== ==========
Net income (loss) as reported
for diluted (Note 15) $ 290,052 814,208 (3,999,140)
Deduct or add stock-based
compensation expense
determined under the fair
value based method (50,930) (178,775) (140,600)
--------------- -------- ----------
Pro forma net income (loss)
for diluted $ 239,122 635,433 (4,139,740)
=============== ======== ==========
Earnings (loss) per share as reported:
Basic $ 0.19 0.62 (3.17)
Diluted $ 0.19 0.53 (3.17)
Pro forma earnings (loss) per share:
Basic $ 0.16 0.49 (3.28)
Diluted $ 0.16 0.41 (3.28)
(Continued)
11
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(3) RECEIVABLES FROM AND PAYABLES TO CLEARING ORGANIZATION
At December 31, 2002 and 2001, the Company had net receivables from and
payables to its clearing organization consisting of the following:
2002 2001
---------------- ---------
Receivable:
Receivable from clearing organization $ - 1,232,038
Fees and commissions receivable - 673,300
---------------- ---------
$ - 1,905,338
================ =========
Payable:
Payable to clearing organization $ 971,651 -
================ =========
(4) 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, 2002 and 2001, approximately $63,000 and $320,000, respectively,
had been advanced to employees and officers under this agreement. These
receivables are to be repaid through reductions of future commissions
or bonuses. During 2002, the Company forgave approximately $17,000 in
receivables from employees. During 2001, the Company forgave
approximately $4,000 in receivables from employees and stockholders.
The amounts forgiven are included in compensation expense in the
accompanying consolidated statements of operations.
During 1999 the Company received a $200,000 note from an officer of the
Company. The note bears no interest and was due on demand if the
officer resigned 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, as long as the
officer remains an employee of the Company. Forgiven amounts are
included in compensation expense in the accompanying consolidated
statements of operations. The balance of the note was $100,000 as of
December 31, 2002.
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, 2002. The maturity date of the note was
extended for one year in August 2002. During 2001, the Company forgave
$25,000 of the note, which is included in compensation expense in the
accompanying consolidated statements of operations. The note is secured
by a stock pledge agreement for the employee's shares issued by the
Company. The balance of the note was approximately $23,000 as of
December 31, 2002.
During 1999, the Company received a $50,000 note from an employee for
50,000 shares of Tejas Securities common stock (12,413 shares of the
Company's common stock giving effect to the Merger). The note accrued
no interest and was due and payable on June 1, 2000. In June 2000, the
Company forgave the $50,000 note and included the amount in
compensation expense in the accompanying consolidated statements of
operations.
(Continued)
12
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
During 1999, the Company received a $100,000 note from an employee for
100,000 shares of Tejas Securities common stock (24,825 shares of the
Company's common stock giving effect to the Merger). The note accrued
no interest and was 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
remaining balance of the note was secured by a stock pledge agreement
for the shares issued by the Company as of December 31, 2000. In 2001,
the former employee relinquished his right to the 100,000 shares of
Tejas Securities common stock. As a result, Tejas Securities received
25,000 shares of treasury stock and canceled the remaining 75,000
shares of Tejas Securities common stock and the note.
The Company had notes receivable, and related interest accrued, from
other employees and related parties of the Company totaling $7,500 as
of December 31, 2000. The notes had terms which either required
settlement by pre-determined dates or which allowed the notes to be
forgiven based on pre-determined conditions, which were based on
employee compensation arrangements. The remaining balance of $7,500 was
forgiven during 2001.
In April 2002, the Company received a $25,000 note from an employee.
The note accrues no interest and is due and payable on April 12, 2003.
If the note is not paid on April 12, 2003, it will begin to accrue
interest at the lesser of 5.55% per annum or the maximum rate allowed
by law, until paid.
Notes receivable and related party receivables are included in
receivables from employees and stockholders in the accompanying
statements of financial condition.
(5) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
At December 31, 2002 and 2001, securities owned and sold, not yet
purchased consisted of the following:
2002 2001
-------------------------------------- -----------------------------
SOLD, SOLD,
NOT YET NOT YET
OWNED PURCHASED OWNED PURCHASED
----------------- --------- --------- ---------
State and municipal
obligations $ 1,511,086 20,844 86,200 -
US Government bonds 275,550 608,864 395,784 -
Corporate bonds and notes 2,890,959 177,940 1,462,566 93,240
Equity securities 1,307,710 177,562 1,067,117 239,341
----------------- ------- --------- -------
$ 5,985,305 985,210 3,011,667 332,581
================= ======= ========= =======
(Continued)
13
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(6) OTHER INVESTMENTS
In 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 TSG Internet Fund I, Ltd. (the "Fund"), a
Texas Limited Partnership. TSG Capital, LLC (the "General Partner")
received a quarterly management fee based on the average monthly net
asset value of the Fund and a performance fee based on the annual net
profits of the Fund. 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. For the year ended
December 31, 2000, the Company recognized approximately $79,000 in
management fees, which is included in other income in the accompanying
consolidated statements of operations, and did not earn a performance
fee. Additionally, the Company received placement fees relating to a
secondary private placement of limited partnership interests 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. During 2000, the
Company elected to withdraw its investment holdings in the Fund and, as
a result, recorded a loss of $310,726 during 2000 related to its
investment in the Fund. On December 1, 2000, the General Partner
elected to dissolve and liquidate the Fund effective December 15, 2000.
In March 2002, the Company entered into a term loan agreement with a
bank to borrow $2,500,000 for operating purposes of Tejas Securities.
The loan was originally due and payable on demand or by March 15, 2003
if no demand was made. The loan accrues interest at a rate of 5.50% per
annum, and is to be paid on a monthly basis. The Company paid
approximately $85,000 in interest related to this for the year ended
December 31, 2002. Tejas Securities purchased a certificate of deposit
in a like amount as collateral for the loan, of which the balance as of
December 31, 2002 of $1,250,000 is included in other investments.
During 2002, the Company repaid $1,100,000 of the loan from the bank
through its own financing arrangements. The bank in turn released from
collateralization $1,100,000 of the certificate of deposit to Tejas
Securities, of which $1,000,000 was used for operations of the Company,
including repayment of $500,000 of the Company's subordinated debt
(Note 11). The remaining $100,000 was not redeemed and is included in
other investments at December 31, 2002. In addition, the Company repaid
$250,000 of a loan from the bank through the redemption of $250,000 of
the certificate of deposit during 2002. As of December 31, 2002, the
term loan agreement balance is $1,150,000, which is collateralized in a
like amount with the certificate of deposit. On March 15, 2003, the
Company extended the maturity date of the loan to March 15, 2004.
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------------------------------
2002 2001
--------------- ---------
Furniture and equipment $ 394,559 423,812
Leasehold improvements 346,244 353,088
--------------- ---------
740,803 776,900
Accumulated depreciation and amortization (407,003) (298,814)
--------------- ---------
$ 333,800 478,086
=============== =========
(Continued)
14
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(8) ACCRUED COMMISSIONS AND BONUSES
Accrued commissions and bonuses are included in accounts payable,
accrued expenses and other liabilities in the accompanying consolidated
statements of financial condition.
As of December 31, 2002 and 2001, the Company has accrued $1,243,197
and $1,280,128, respectively, in commissions and related payroll taxes
payable.
The Company pays bonuses to its employees and officers at interim
periods and year-end. Accrued bonuses as of December 31, 2002 and 2001
were $300,000 and $1,000,000, respectively. During 2002 and 2001, an
officer of the Company received approximately $80,000 and $200,000,
respectively, as part of his contractual compensation which was based
on the Company's operating performance. Management of the Company
reviews both contractual and discretionary amounts, with discretionary
amounts approved by the Compensation Committee of the Company.
(9) NOTES PAYABLE
The Company had a $1,500,000 line of credit with a bank at December 31,
2000. On March 6, 2001, the Company restructured its line of credit. 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 term loan was 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.
Additionally, there were no financial covenants governing the term
loan. The balance of this note was $500,000 at December 31, 2001. The
modified note matured April 1, 2002 and required 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 became due and payable. On April 1, 2002, the Company
extended the maturity date of the note through November 1, 2002. There
were no changes in the security or covenants of the restructured term
loan. Under the restructured terms, the Company continued to make
monthly payments of $50,000 plus accrued interest. The note was paid in
full on August 15, 2002. The Company incurred approximately $13,000,
$86,000 and $69,000 in interest related to this debt for the years
ended December 31, 2002, 2001 and 2000, respectively.
In March 2002, the Company entered into a term loan agreement with a
bank to borrow $2,500,000 for operating purposes at Tejas Securities
(Note 6).
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 loan was secured by the
common stock of the Company's primary operating subsidiary, Tejas
Securities. The loan plus accrued interest of approximately $1,000 was
paid in full on August 15, 2002.
On October 30, 2002, the Company entered into a loan 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. The loan is 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. The Company paid interest of approximately $6,000 during 2002
in relation to this debt. The balance on the loan agreement was
$473,450 as of December 31, 2002.
(Continued)
15
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 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 incurred
approximately $6,700 and $3,400, respectively, in interest related to
these debts 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 bore interest at 9% per annum, with payment due
upon maturity. The $500,000 note was paid in full in May 2001,
including accrued interest. The $250,000 note was paid in full in June
2001, including accrued interest. The Company incurred approximately
$19,000 and $10,000, respectively, in interest related to these debts
for the year ended December 31, 2001.
On August 8, 2002, the Company entered into an unsecured promissory
note agreement with an officer of the Company 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. The Company paid interest of approximately $41,000
during 2002 in relation to this debt. The balance on the promissory
note agreement was $800,000 as of December 31, 2002.
(11) SUBORDINATED DEBT - RELATED PARTY
The Company had $1,000,000 in debt subordinated to claims of general
creditors as of December 31, 2001. The subordinated debt was originally
due November 1, 2001, accrued interest at 11.5 percent and was owed to
a director of the Company. Interest was 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. In November 2001, the
Company exercised its option to extend the maturity of the subordinated
debt through November 1, 2002. On July 1, 2002, the Company repaid
$500,000 of the subordinated debt, and repaid the remaining $500,000 on
August 20, 2002. The Company incurred $65,219, $115,000 and $115,315 in
interest related to this debt for the years ended December 31, 2002,
2001 and 2000, 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 notes payable, if
recalculated based on current interest rates, would not significantly
differ from the amounts recorded at December 31, 2002 and 2001.
(Continued)
16
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(13) INCOME TAXES
The Company files a consolidated tax return. Income tax expense
(benefit) consists of the following:
2002 2001 2000
--------------- ------- ----------
Federal
Current $ 248,903 72,780 (1,767,531)
Deferred 13,473 361,204 (394,270)
State
Current 39,372 36,057 (29,015)
Deferred (3,548) 25,433 (23,196)
--------------- ------- ----------
$ 298,200 495,474 (2,214,012)
=============== ======= ==========
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:
2002 2001 2000
--------------- ------- ----------
Expected federal income expense (benefit) $ 200,006 445,292 (2,333,645)
Meals and entertainment 46,094 19,486 27,578
State income tax 23,644 40,583 (34,459
Change in valuation allowance - - 48,902
Other, net 28,456 (9,887) 77,612
--------------- ------- ----------
$ 298,200 495,474 (2,214,012)
=============== ======= ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2002 and 2001 are
as follows:
2002 2001
--------------- -------
Deferred tax assets:
Capital loss carryforward $ 51,078 50,644
Accrued expenses 37,649 32,037
Other 35,165 51,136
--------------- -------
Gross deferred tax assets 123,892 133,817
Valuation allowance (48,902) (48,902)
--------------- -------
Net deferred tax asset $ 74,990 84,915
=============== =======
(Continued)
17
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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, 2001 and 2000. For the year ended
December 31, 2002, the Company did not recognize change in valuation
allowance for capital loss carryforwards. At December 31, 2002, the
Company had a capital loss carryforward of approximately $144,000,
which expires in 2005.
(14) PROFIT SHARING AND STOCK OPTION PLANS
PROFIT SHARING PLAN
In 1997, the Company 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 the
Company are discretionary. During 2002, the Company contributed
approximately $173,000 to the employee profit sharing plan. No
contributions were made for 2001 or 2000.
STOCK OPTION PLANS
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 authorized to grant up to 300,000 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 400,000 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.
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.
(Continued)
18
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Tejas Securities' board of directors cancelled options to purchase
300,000 shares of Tejas Securities common stock (74,475 shares of the
Company's common stock giving effect to the Merger) and warrants to
purchase 225,000 shares of Tejas Securities' common stock (55,856
shares of the Company's common stock giving effect to the Merger) as of
December 31, 1999. Effective January 1, 2000, the Company issued
options to purchase 130,331 shares of the Company's common stock
outside of the Company's 1999 Plan. The options to purchase 130,331
shares of the Company's common stock were issued with substantially the
same terms as those originally issued by Tejas Securities and were
accounted for as a non-substantive exchange. The purchase price of the
common stock ranges from $4.00 to $10.67 per share. In May 2000, an
employee of the Company exercised non-qualified stock options to
purchase 12,412 shares of the Company's common stock at $4.00 per
share.
During 2000, options totaling 151,500 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 $20.00 to $50.00 per share. The options were
granted at or above the market value of the Company's common stock.
During 2001, options totaling 160,000 shares were granted to employees
under the 1999 Plan. The options vest immediately, and expire five
years from the date of the grant. The purchase price of the common
stock is $2.50 per share. The options were granted at or above the
market value of the Company's common stock.
A summary of the Company's stock option and warrant activity, and
related information for the years ended December 31, follows.
2002 2001 2000
------------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- -------- -------- -------- --------
Outstanding -
beginning of year 482,919 $ 11.45 357,919 $ 12.80 142,500 $ 20.04
Granted - - 160,000 $ 2.50 281,831 $ 15.20
Exercised - - - $ 0.00 (12,412) $ 4.00
Forfeited (220,856) $ 18.47 (30,000) $ 22.50 (500) $ 20.00
Canceled - - (5,000) $ 50.00 (53,500) $ 20.00
Outstanding - end of
year 262,063 $ 5.53 482,919 $ 11.45 357,919 $ 16.90
========= ======== ======== ======== ======== ========
Exercisable - end of
year 262,063 $ 5.53 431,252 $ 10.22 202,919 $ 12.80
========= ======== ======== ======== ======== ========
(Continued)
19
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The weighted average fair value of Company stock options, calculated
using the Black Scholes option pricing model, granted during the years
ended December 31, 2002, 2001, and 2000 were $0.76, $1.36 and $2.10 per
option, respectively.
The fair value of the options used to compute the pro forma amounts
(Note 2k) is estimated using the Black Scholes option-pricing model
with the following assumptions:
2002 2001 2000
------- ------- -------
Risk-free interest rate 4.25% 4.54% 5.51%
Expected holding period 3 years 3 years 3 years
Expected volatility .001 .001 .001
Expected dividend yield 0.00% 0.00% 0.00%
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 2002:
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
---------------------------------------------- ----------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- -------------- ------- ----------- -------------- --------- ---------------
$ 2.50 160,000 3.4 years $ 2.50 160,000 $ 2.50
$ 4.00 62,063 2.0 years $ 4.00 62,063 $ 4.00
$20.00 40,000 1.8 years $20.00 40,000 $20.00
------- ----------- -------------- --------- ---------------
262,063 262,063
======= =========
(Continued)
20
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(15) EARNINGS (LOSS) PER SHARE
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 2002, 2001 and 2000.
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 is calculated as follows.
2002 2001 2000
------------ --------- ----------
Basic earnings (loss) per share:
Net income (loss) $ 290,052 833,022 (3,999,140)
Weighted average shares outstanding 1,512,024 1,348,097 1,261,721
Basic earnings (loss) per share $ 0.19 0.62 (3.17)
============ ========= ==========
Diluted earnings (loss) per share:
Net income (loss) $ 290,052 833,022 (3,999,140)
Impact of assumed conversion of subsidiary
stock and recognition of minority interest - (18,814) -
------------ --------- ----------
Income (loss) available to common stockholders
after assumed conversions $ 290,052 814,208 (3,999,140)
============ ========= ==========
Weighted average shares outstanding 1,512,024 1,348,097 1,261,721
Effect of dilutive securities:
Options 13,679 21,489 -
Assumed conversion of subsidiary stock - 167,641 -
Application of treasury stock method to
subscriptions receivable - 8,885 -
------------ --------- ----------
Weighted average shares outstanding 1,525,703 1,546,112 1,261,721
============ ========= ==========
Diluted earnings (loss) per share $ 0.19 0.53 (3.17)
============ ========= ==========
(Continued)
21
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The Company has included the dilutive effect of 222,063 and 160,000
shares of the Company's common stock for the years ended December 31,
2002 and 2001, respectively, in the computation of diluted earnings
(loss) per share. Of the 222,063 and 160,000 options issued by the
Company, 13,679 and 21,489 shares are included as dilutive securities
on a weighted average basis for the years ended December 31, 2002 and
2001, respectively. Options to purchase 40,000, 322,919 and 357,919
shares of the Company's common stock for the years ended December 31,
2002, 2001 and 2000, respectively, were not included in the computation
of diluted earnings (loss) per share because the options were
antidilutive.
The Company has included the dilutive effects of shares of Tejas
Securities' common stock for the year ended December 31, 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 .24825 to one (245,890 shares). For the
year ended December 31, 2000, the Company did not include the dilutive
effect of shares of Tejas Securities' common stock that were
convertible into the Company's common stock because they were
antidilutive. The Company has included the dilutive effect of Tejas
Securities' subscriptions receivable based on the treasury stock method
for the year ended December 31, 2001. The Company has not included the
dilutive effect of Tejas Securities' subscriptions receivable for the
year ended December 31, 2000 because they are antidilutive.
(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 is exposed should Correspondent Services Corporation, the
Company's clearing organization, be unable to fulfill its obligations
for securities transactions.
The Company deposits its cash with financial institutions. Periodically
such balances exceed applicable FDIC insurance limits.
(Continued)
22
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(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, and
provides advisory services to companies. Income associated with other
investments accounted for under the equity method is included in other
segment activity in 2000.
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 from operations
before income taxes, and assets for the year ended December 31, 2002.
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
-------------- ---------- ----- ----------
Revenues from external customers $ 20,894,690 335,663 - 21,230,353
Interest revenue 56,058 - - 56,058
Interest expense 263,968 - - 263,968
Depreciation and amortization 132,067 - - 132,067
Segment profit 428,375 159,877 - 588,252
Segment assets 9,274,938 - - 9,274,938
Capital expenditures 10,169 - - 10,169
The following table presents segment revenues, profits (losses) from
operations before income taxes and minority interest, and assets for
the year ended December 31, 2001.
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
-------------- ---------- ----- ----------
Revenues from external customers $ 25,070,061 316,927 - 25,386,988
Interest revenue 62,137 - - 62,137
Interest expense 350,202 - - 350,202
Depreciation and amortization 139,652 - - 139,652
Segment profit (loss) 1,373,072 (63,390) - 1,309,682
Segment assets 7,240,508 - - 7,240,508
Capital expenditures 77,261 - - 77,261
(Continued)
23
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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 7,299,159 - - 7,299,159
Capital expenditures 422,540 - - 422,540
(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, 2002 are as follows:
2003 $ 1,544,000
2004 1,115,000
2005 773,000
2006 735,000
2007 184,000
---------------
$ 4,351,000
===============
Rent expense amounted to approximately $1,452,000, $1,421,000 and
$1,765,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Rent expense is reported net of sublease revenue which is
disclosed below.
On December 22, 2000, the Company subleased a portion of its Austin,
Texas headquarters, furniture and equipment effective January 1, 2001.
Under the terms of these sublease agreements, the future minimum
payments to be received are approximately $220,000 during 2003. The
Company received approximately $660,000 and $660,000 during 2002 and
2001, respectively, in relation to these sublease agreements.
On September 30, 2002, the Company subleased a portion of its Atlanta,
Georgia office space. Under the terms of the sublease agreement, the
future minimum payments to be received are approximately $58,000 in
2003 and 2004, respectively, and approximately $43,000 in 2005. The
Company received approximately $10,000 during 2002 in relation to this
sublease agreement.
(Continued)
24
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(19) CONTINGENCIES
The Company is involved in 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.
In October 2001, an officer of the Company purchased a liability of the
Company in the amount of approximately $121,000 originally payable to a
third party. The liability originated from the Merger (Note 1) and is
now payable to the officer upon the Company's successful listing on a
national exchange.
(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, 2002, the minimum "net capital"
requirement for Tejas Securities was $250,000. "Net capital" at
December 31, 2002 aggregated $945,765. Tejas Securities' ratio of
aggregate indebtedness to net capital was 2.71 to 1 at December 31,
2002.
(21) OTHER RELATED PARTY TRANSACTIONS
The Company engaged a director to act as a consultant for the Company
on a month to month basis beginning in 1999. Under the terms of the
original agreement, the Company compensated the consultant for
professional services rendered at a rate of $12,500 per month, plus out
of pocket expenses. 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. No fees were
paid to the consultant subsequent to the year ended December 31, 2000.
In November 2001, the Company entered into a service agreement with
Firstmark Corp. ("Firstmark"), a publicity traded corporation, to
provide management support services for $5,000 per month for an initial
term of one year. The Company owned shares in Firstmark with a fair
value of approximately $458,000 as of December 31, 2001, which are
included in securities owned in the accompanying consolidated
statements of financial condition. Additionally in November 2001, two
officers of the Company were named to the board of directors of
Firstmark, and an additional officer was appointed as an officer of
Firstmark. During May 2002, the Company effectively liquidated its
holdings in Firstmark. In August 2002, the Company severed its service
agreement with Firstmark, and the officers of the Company resigned as
directors and officer of Firstmark. The Company recognized
approximately $50,000 for the year ended December 31, 2002 for services
provided to Firstmark.
(Continued)
25
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(22) QUARTERLY RESULTS (UNAUDITED)
The following tables set forth selected quarterly consolidated
statements of operations information for the years ended December 31,
2002 and 2001.
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
- ---- -------------- -------------- ------------- --------------
Total revenue $ 6,110,735 5,808,408 4,307,702 5,008,082
Income (loss) before income tax expense
(benefit) and minority interest 334,400 351,270 (91,795) (5,623)
Net income (loss) 185,216 194,761 (55,101) (34,824)
Basic earnings (loss) per share:
Net income (loss) 0.12 0.13 (0.04) (0.02)
Diluted earnings (loss) per share:
Net income (loss) 0.12 0.13 (0.04) (0.02)
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER
- ---- -------------- -------------- -------------- ---------------
Total revenue $ 6,208,276 5,419,276 5,868,349 7,832,248
Income before income tax expense
and minority interest 222,277 71,02 503,511 512,865
Net income 76,345 19,981 416,114 320,582
Basic earnings per share
Net income 0.06 0.02 0.31 0.23
Diluted earnings per share:
Net income 0.06 0.02 0.22 0.23
26
INDEX TO EXHIBITS
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 the registrant's
Current Report on Form 8-K filed on June 20, 2002)
4.1+ 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))
4.2 Certificate of Incorporation (Incorporated herein by reference to Exhibits 3.1 and 3.3 above)
4.3 Bylaws (Incorporated herein by reference to Exhibit 3.2 above)
10.1*+ First Amended and Restated Westech Capital Corp. 1999 Stock Option Plan
10.2+ Form of Incentive Stock Option Agreement (Incorporated herein by reference to Exhibit 10.3 to the registrant's
Registration Statement on Form 10-12(g)) (File No. 000-29235)
10.3+ Form of Nonqualified Stock Option Agreement (Incorporated herein by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235)
10.4+ Lease Agreement, effective as of September 30, 1999, by and between Westech Capital Corp. and Desta Two Partnership,
Ltd. (Incorporated herein by reference to Exhibit 10.5 to the registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235)
10.5+ Employment and Confidentiality Agreement, dated as of August 30, 1999, between Tejas Securities Group, Inc. and
Charles Mayer (Incorporated herein by reference to Exhibit 10.6 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 1999)
10.6+ Employment and Confidentiality Agreement, dated as of October 29, 1998, between Tejas Securities Group, Inc. and
Reed Durant (Incorporated herein by reference to Exhibit 10.8 to the registrant's Annual Report on Form 10-K for the
year ended December 31, 1999)
10.7+ Employment and Confidentiality Agreement, dated as of January 10, 2000, between Tejas Securities Group, Inc. and
Kurt Rechner (Incorporated herein by reference to Exhibit 10.9 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 1999)
10.8+ Employment and Confidentiality Agreement, dated as of November 1, 1998, between Tejas Securities Group, Inc. and
John F. Garber (Incorporated herein by reference to Exhibit 10.6 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 1999)
10.9 Modification of employment agreement between Charles H. Mayer and Tejas 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)
10.10 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)
10.11 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)
10.12 Promissory note agreement, dated March 15, 2002, between First United Bank and the Company (Incorporated herein by
reference to Exhibit 10.10 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2001)
10.13 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)
10.14 Promissory note agreement dated July 31, 2002 between First United Bank and the Company (Incorporated herein by
reference to Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)
10.15 Promissory note agreement dated August 8, 2002 between John J. Gorman and the Company (Incorporated herein by
reference to Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30,
2002)
10.16 Promissory note agreement dated October 21, 2002 between First United Bank 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,
2002)
10.17* Promissory note agreement dated March 15, 2003 between First United Bank and the Company (modification to Exhibit
10.10)
21.1* Registrant's Subsidiaries
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))
99.5* Certifications of Chief Executive Officer and Chief Financial Officer.
* Filed herewith.
+ Management Contract or compensatory plan or arrangement.