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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
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WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
NEW YORK 13-3577716
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(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
2700 Via Fortuna, Suite 400, Austin, Texas 78746
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 306-8222
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was undeterminable as of December 31, 1999 as there was no known
market for the securities.
Number of shares of common stock issued and outstanding as of December 31, 1999:
12,537,218.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
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PART I
ITEM 1. BUSINESS
GENERAL
Westech Capital Corp., a New York corporation, is a holding company whose
primary operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas Securities"). Tejas Securities is engaged in the business of
providing brokerage and related financial services to institutional and retail
customers nationwide. References to the Company within the Form 10-K are to
Westech Capital Corp. and its subsidiaries.
Westech Capital Corp. was incorporated as a shell corporation in New York on
July 18, 1990, and made an initial public offering in November 1991. Westech
Capital Corp. was acquired by Tejas Securities in a reverse merger effected on
August 27, 1999. See "-Change in Control." During the second quarter of 2000,
Westech Capital Corp. anticipates submitting to its shareholders a proposal to
change its state of incorporation from New York to Delaware. Westech Capital
Corp. does not expect the reincorporation to have any material effects on it or
its subsidiaries.
Tejas Securities' business is conducted out of its primary office in Austin,
Texas and a branch office in Atlanta, Georgia. Tejas Securities anticipates
expanding its operations in the year 2000 with branches in Dallas, Texas and
Houston, Texas. Tejas Securities moved its primary office in the first quarter
of 2000 to 2700 Via Fortuna, Suite 400, Austin, Texas 78746. See "-Growth
Strategy."
Tejas Securities is a registered broker-dealer and investment advisor offering:
(i) brokerage services to retail and institutional customers; (ii) high quality
investment research to institutional and retail customers; (iii) market-making
activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services.
During 1999, Tejas Securities assumed the management of a private investment
company (commonly referred to as a "hedge fund"). Tejas Securities purchased the
equity of TSG Capital, LLC, a Texas limited liability company, which serves as
the general partner of TSG Internet Fund I, Ltd. (the "Fund"), a Texas limited
partnership. Tejas Securities will manage the Fund for a one-time placement fee
of 5% of each new dollar invested in the fund, an annual management fee of 1.5%
of the average monthly asset balance, and an annual performance fee of 20% of
the Fund's net gain. See Item 13 - "Certain Relationships and Related
Transactions." If Tejas Securities is successful in managing the Fund, it may
offer additional hedge funds in the future. Based on the size of the Fund, such
activities are not likely to require a significant capital infusion by Tejas
Securities or Westech Capital Corp.
CHANGE IN CONTROL
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and among
Westech Capital Corp., Tejas Securities, Tejas Securities Group Holding Company,
a Texas corporation ("Tejas Holding"), and Westech Merger Sub, Inc., a Delaware
corporation ("Merger Sub"), Tejas Securities acquired Westech Capital Corp.
through a reverse merger (the "Merger") of Tejas Holding and Merger Sub. Tejas
Holding and Merger Sub were established for the sole purpose of effecting this
transaction. As a result of the Merger, Tejas Holding became a wholly owned
subsidiary of Westech Capital Corp. Tejas Holding is the holder of approximately
81% of the outstanding common stock issued by Tejas Securities. Under the terms
of the Merger, the shareholders of Tejas Holding exchanged their shares for
shares of Westech Capital Corp. at a ratio 2.4825 to one. The former
shareholders of Tejas Holding currently own 95.21% of the issued and outstanding
common stock of Westech Capital Corp., $.001 par value per share.
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EARLY OPERATIONS
Tejas Securities' initial focus was to provide institutional money managers and
mutual funds high quality investment research covering large U.S. based
companies which were believed to be overly leveraged or which were in default on
their liabilities or in bankruptcy. Historically, these companies were not
followed closely by a large number of research analysts. Tejas Securities used
this opportunity to establish itself as a source of high quality research
products and trading support. Tejas Securities took advantage of its initial
research success and expanded its research coverage to special situation
equities and began underwriting initial public offerings of equity securities
for a select group of companies in 1997. These underwritings coupled with a
demand for Tejas Securities' research by individuals led us to expand our client
base to include retail accounts.
BROKERAGE SERVICES
Tejas Securities provides brokerage services to approximately 6,000 retail
customers and 500 institutional customers. Tejas Securities offers a menu of
services and products to customers, which includes the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. Tejas Securities' marketing strategy
has been to emphasize its high level of service and its unique knowledge of the
companies covered by its research department.
In recent years, the general public has become more comfortable dealing with
financial matters through electronic means, more specifically over the Internet.
Several brokerage firms have positioned themselves to take advantage of this
opportunity by offering online trading and account information. Tejas Securities
intends to capitalize on this trend by expanding into online trading, while
continuing to provide the high level of service and proprietary research
products that its customers have come to expect.
Currently, Tejas Securities provides its customers with the ability to receive
stock quotes and access research on the Internet through its website
(www.Tejassec.com). Tejas Securities anticipates that its clients will have the
ability to make trades over the Internet prior to the end of the year 2000.
Tejas Securities believes Internet trading is in high demand by its customers
and will continue to devote a substantial portion of its resources to its
Internet strategy.
Tejas Securities generated $25,291,212, $7,932,780 and $4,810,520 in commission
revenues for the years ended 1999, 1998 and 1997, respectively, or 83%, 77% and
75% of total revenue, respectively.
RESEARCH
The cornerstone of Tejas Securities' business model is to create proprietary
products for its clients that focus on its research and trading capabilities.
Tejas Securities distributes these products through traditional as well as new
channels of distribution. Tejas Securities believes that brokerage companies
that are able to utilize technological changes to improve methods of delivering
information to their clients will accomplish significant gains in market share
and profitability.
Tejas Securities anticipates that it will continue to devote a substantial
portion of its resources to support its research department. Currently, the
research department consists of seven analysts with proven expertise in special
situation equity research and in distressed securities. The analyst group has
the background to analyze many industries, but has a primary focus on
telecommunications and technology. Tejas Securities believes that the rapid
changes in each of these industries provide excellent investment opportunities.
The additional analysts will allow Tejas Securities to expand its research
coverage of Austin-based telecommunications and technology companies that have
limited research coverage by the New York-based brokerage community.
Tejas Securities believes that the number of high quality technology companies
being formed in the Austin area is significant and will continue to grow. Tejas
Securities believes that its research department is well suited to cover these
companies and will focus a large percentage of its research resources to
providing
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research coverage of these companies. The research department will cover both
public companies as well as identify private companies that are candidates for
becoming publicly traded companies.
MARKET MAKING
In August 1999, the NASD approved Tejas Securities to make markets in Nasdaq
securities. Making markets in securities facilitates the execution of security
transactions for Tejas Securities' customers. Tejas Securities acts as a market
maker for approximately 50 public corporations whose stocks are traded on the
Nasdaq National Market System.
Generally, Tejas Securities does not maintain inventories of securities for sale
to its customers. However, Tejas Securities does engage in certain principal
transactions where, in response to a customer order, Tejas Securities will go at
risk to the marketplace to attempt to capture the spread between the bid and
offer. Most of Tejas Securities' larger competitors are engaged in similar
market making activities through subsidiaries or receive order flow payments
from companies engaged in such market making activities. Tejas Securities
believes it can maintain better control and be assured of proper executions of
customer trades by providing these market making services directly to its
customers.
INVESTMENT BANKING
Tejas Securities raises capital through public and private offerings of
securities for corporations that are engaged in a variety of businesses. Tejas
Securities participates in underwritings of corporate securities as managing
underwriter and as a syndicate member. Management of an underwriting transaction
is generally more profitable than participation as a member of an underwriting
syndicate.
As an underwriter, Tejas Securities is also subject to potential liability under
federal and state securities laws and other laws if the registration statement
or prospectus contains a material misstatement or omission. Tejas Securities'
potential liability as an underwriter is uninsured.
Tejas Securities' participation in or initiation of underwritings may be limited
by the financial requirements of the SEC and NASD. See "- Net Capital
Requirements."
Between September 30, 1997, and December 31,1998, Tejas Securities acted as the
managing underwriter or co-managing underwriter for initial public offerings of
four common stock offerings and one preferred stock offering, raising
approximately $40 million for corporate finance clients. Tejas Securities
typically received two to three percent of the aggregate amount of money raised
for these offerings to cover nonaccountable expenses and between seven and nine
percent as compensation to underwriters, selling group members and registered
representatives, although these percentages may be lower for larger
transactions. Tejas Securities generated $925,616, $2,584,770 and $752,554 in
investment banking revenues for the years ended 1999, 1998 and 1997,
respectively, or 3%, 25% and 12% of total revenue, respectively.
At the end of 1998, Tejas Securities decided to reduce its focus on underwriting
small public offerings and refocus on the underwriting of larger, more
established companies and financial advisory assignments. To accomplish this, in
the first half of 1999, Tejas began a search for a senior investment banker with
a suitable business background. During the fourth quarter of 1999, Tejas
Securities employed an Executive Vice President and Managing Director and to
oversee all investment banking operations. See Item 10 - "Directors and
Executive Officers of the Registrant."
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CUSTOMERS
Historically, Tejas Securities' customer base has been comprised of
predominately large nationally known institutional customers. These customers
demand high quality research and sophisticated trading capabilities. Tejas
Securities believes that it has served the needs of this segment of its customer
base well, resulting in increased trading volume. Tejas Securities believes that
the increase in the scope of its research services should increase customer
satisfaction and increase its revenues from institutional customers.
Currently, the fastest growing segment of Tejas Securities' business is its
retail division. Tejas Securities believes its strategy of providing
institutional quality research and high customer service to retail customers has
been well received. The retail division has grown from 3,000 customers in 1997
into 6,000 customers at December 31, 1999. Tejas Securities will continue to
expand this division by adding additional sales personnel focused exclusively on
this market and continuing the rollout of products such as market making and
money management that appeal to this market.
EMPLOYEES
On December 31, 1999, Tejas Securities had approximately 80 employees. Of these
employees, 50 work in sales, 6 in trading, 8 in research and investment banking
and the remaining employees perform management and administrative functions.
Employees will continue to be added in several areas of the firm. However, it is
Tejas Securities' goal to use the sales support functions that are currently in
place to support additional sales staff. Tejas Securities believes that taking
advantage of the infrastructure currently in place will allow an increase in
productivity in the sales area with minimal additional support cost.
COMPETITION
All aspects of Tejas Securities' business are highly competitive. In its general
brokerage activities, Tejas Securities competes directly with numerous other
broker-dealers, many of which are large well-known firms with substantially
greater financial and personnel resources. Many of Tejas Securities' competitors
employ extensive advertising and actively solicit potential clients in order to
increase business. In addition, brokerage firms compete by furnishing investment
research publications to existing clients, the quality and breadth of which are
considered important in the development of new business and the retention of
existing clients. Tejas Securities also competes with a number of smaller
regional brokerage firms in Texas and the Southwest.
Some commercial banks and thrift institutions offer securities brokerage
services. Many commercial banks offer a variety of investment banking services.
Competition among financial services firms also exists for investment
representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive since Tejas Securities was founded, as numerous securities firms
have either ceased operations or have been acquired by or merged into other
firms. In addition, companies not engaged primarily in the securities business,
but with substantial financial resources, have acquired leading securities
firms. These developments have increased competition from firms with greater
capital resources than those of Tejas Securities.
Various legislative and regulatory developments have also tended to increase
competition within the industry or reduced profits for the industry. In
particular, on November 12, 1999, President Clinton signed into law legislation
that allows bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a financial holding company may engage in any activity
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines by regulation or order is (1) financial in nature, (2)
identical to any such financial activity, or (3) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depositary institutions or the financial system generally. The Act
effects significant changes to United States banking law, primarily by repealing
restrictive provisions of the 1933 Glass-
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Steagall Act. The Act also provides for certain activities which are financial
in nature, including, among others, lending, exchanging, transferring, investing
for others, or safeguarding money or securities; and providing financial,
investment or economic advisory services, underwriting, dealing in or making a
market in, securities. The Company anticipates that these changes will result in
an increase in the number, size and financial strength of potential competitors.
The securities industry has experienced substantial commission discounting by
broker-dealers competing for brokerage business. In addition, an increasing
number of specialized firms now offer "discount" services to individual
customers. These firms generally effect transactions for their customers on an
"execution only" basis without offering other services such as portfolio
valuation, investment recommendations and research. A growing number of discount
brokerage firms offer their services over the Internet, further decreasing
offered commission rates and increasing ease of use for customers. The
continuation of such discounting and an increase in the number of new and
existing firms offering discounts could adversely affect Tejas Securities. In
addition, rapid growth in the mutual fund industry is presenting potential
customers of Tejas Securities with an increasing number of alternatives to
traditional stock brokerage accounts.
In its investment banking activities, Tejas Securities competes with other
brokerage firms, venture capital firms, banks and all other sources of capital
for small, growing companies. Large national and regional investment banking
firms routinely manage offerings of a size that is competitive with Tejas
Securities. When the market for initial public offerings is active, many small
regional firms that do not typically engage in investment banking activities
also begin to compete with Tejas Securities.
GROWTH STRATEGY
Tejas Securities anticipates increasing its market penetration in Texas and the
southwestern United States. Tejas Securities believes this growth strategy will
be accomplished through acquisitions of other brokerage companies, investment
banking companies, groups of brokers, or individual brokers using cash, stock or
a combination of cash and stock and by opening offices in new markets and
subsequently recruiting brokers. Tejas Securities believes that increased
penetration in these markets will enhance revenue balance and provide greater
leverage of its fixed costs. Tejas Securities anticipates it will achieve a
market presence in both Houston and Dallas in the year 2000. Tejas Securities
anticipates taking advantage of other strategic market opportunities as they
arise.
FEES ON MARGIN LOANS
Tejas Securities derives a portion of its income from fees generated on margin
loans made to Tejas Securities' customers and financed through our clearing
agent, Schroder & Co. A margin account allows the customer to deposit less than
the full cost of the securities purchased while Schroder & Co. lends the balance
of the purchase price to the customer, secured by the purchased securities.
Customers are charged interest on the amount borrowed to finance their margin
transactions ranging from 0.25% below to 2.75% above the broker call rate, which
is the rate at which brokers can generally obtain financing using margined and
firm owned securities as collateral. Tejas Securities earns a fee equal to 50%
of the interest charged on customer margin loans. As of December 31, 1999, the
total of all customer securities pledges on debit balances and held in active
margin accounts was approximately $20,000,000.
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SECURITIES INDUSTRY PRACTICES
Tejas Securities is registered as a broker-dealer with the SEC and the NASD.
Tejas Securities is registered as a securities broker-dealer in 39 states and
the District of Columbia. Tejas Securities is also a member of the Securities
Investors Protection Corporation, which provides Tejas Securities' customers
with insurance protection for amounts of up to $500,000 each, with a limitation
of $100,000 on claims for cash balances. Tejas Securities has also acquired an
additional $10,000,000 in insurance coverage through Seabury & Smith, as added
protection for individual customers' securities, covering all clients of Tejas
Securities' institutional and retail customers.
Tejas Securities is subject to extensive regulation by federal and state laws.
The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules,
subject to approval by the SEC, which govern the industry and conduct periodic
reviews of member broker-dealers. Securities firms are also subject to
regulation by state securities commissions in the states in which they do
business. The SEC, self-regulatory organizations, and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, suspension, or expulsion of a broker-dealer, its officers or employees.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than protection of
creditors and shareholders of broker-dealers. See "Forward-Looking Statements
and Risk Factors" below.
NET CAPITAL REQUIREMENTS
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a broker-dealer's position in securities. A deduction is made
against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with the Rule could require intensive
use of capital and could limit Tejas Securities' ability to pay dividends to the
Company, which in turn could limit the Company's ability to pay dividends to its
shareholders. Failure to comply with the Rule could require the Company to
infuse additional capital into Tejas Securities, could limit the ability of
Tejas Securities to pay its debts and/or interest obligations, and may subject
Tejas Securities to certain restrictions which may be imposed by the SEC, the
NASD, and other regulatory bodies. Moreover, in the event that the Company could
not or elected not to infuse the additional capital or otherwise bring Tejas
Securities into compliance, Tejas Securities would ultimately be forced to cease
operations. See "Forward-Looking Statements and Risk Factors" below.
At December 31, 1999 and 1998 Tejas Securities elected to use the alternative
method permitted by the Rule, which requires it to maintain minimum net capital,
as defined, equal to the greater of $250,000 in 1999 and $100,000 in 1998 or 2%
of aggregate debit balances arising from customer transactions, as defined. At
December 31, 1999, Tejas Securities had net capital of $2,813,049, which was
$2,563,049 in excess of the minimum amount required. At December 31, 1998, Tejas
Securities had net capital of $842,544, which was $742,544 in excess of the
minimum amount required.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
We are including the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us. The factors identified in this
cautionary statement are important factors (but not necessarily all of the
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by us. Where any
forward-looking statement includes a statement of the assumptions underlying the
forward-looking statement, we caution you that while we believe the assumptions
to be reasonable and make them in good faith, assumed facts almost always vary
from actual results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances. Where, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there is no assurance that the statement of
expectation or belief will result or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by us, or on our behalf. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, the trading price of our
stock could decline, and you may lose all or part of your investment.
FAILURE TO EFFECTIVELY MANAGE A CHANGING BUSINESS COULD RESULT IN OUTDATED
SERVICES.
Our business and operations have changed substantially since we began offering
brokerage services, and we expect the pace of change in the brokerage business
to continue. This rapid change places significant demands on our administrative,
operational, financial and other resources. Failure to properly manage these
changes could result in our services becoming outdated, which would have a
material adverse effect on our business, financial condition and operating
results.
FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR
BUSINESS.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, service providers and market makers. While we have
selected these third-party vendors carefully, we do not control their actions.
Any problems caused by these third parties could have a material adverse effect
on our business, financial condition and operating results.
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OUR BUSINESS STRATEGY INCORPORATES THE INTERNET, WHICH IS STILL IN THE EARLY
STAGE OF DEVELOPMENT.
The market for electronic brokerage services, particularly over the Internet, is
at an early stage of development and is rapidly evolving. Consequently, demand
and market acceptance for recently introduced services and products are subject
to a high level of uncertainty. Our growth will depend in part on consumers
adopting the Internet as a method of doing business. Moreover, several key
issues including security, reliability, cost, ease of use, accessibility and
quality of service continue to be concerns and may negatively affect the growth
of Internet use or commerce on the Internet. While we are not dependent upon
Internet based trading, we anticipate investing substantial resources in the
development of Internet based activities.
WE ARE SUBJECT TO MARKET FORCES BEYOND OUR CONTROL WHICH COULD IMPACT US MORE
SEVERELY THAN OUR COMPETITORS.
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets could adversely
affect our operating results. In October 1987 and October 1998, the stock market
suffered major declines, as a result of which many firms in the industry
suffered financial losses. Additionally, the level of individual investor
trading activity decreased after these events. Reduced trading volume and prices
have historically resulted in reduced transaction revenues. When trading volume
is low, our profitability may be adversely affected because our overhead remains
relatively fixed. 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
broker, 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 company independently maintains a credit
review of our customer accounts. If customers fail to honor their commitments,
the clearing broker would sell the securities held as collateral. If the value
of the collateral is not sufficient to repay the loan, a loss would occur. Any
such losses could have a material adverse effect on our business, financial
condition and operating results.
IF WE DO NOT CONTINUE TO INTRODUCE NEW SERVICES AND PRODUCTS WE MAY LOSE OUR
CUSTOMERS.
Our future success depends in part on our ability to develop and enhance our
services and products. There are significant risks in the development of new
services and products or enhanced versions of existing services and products,
particularly in our electronic brokerage business. We may also experience
difficulties that could delay or prevent the development, introduction or
marketing of these services and products. Additionally, these new services and
products may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we are unable to develop and introduce enhanced or new
services and products quickly enough to respond to market or customer
requirements, or if they do not achieve market acceptance, our business,
financial condition and operating results could be materially adversely
affected.
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MANY OF OUR COMPETITORS ARE LARGER AND BETTER KNOWN THAN WE ARE.
The market for brokerage services is rapidly evolving and intensely competitive.
We face direct competition from firms offering discount and electronic brokerage
services such as Charles Schwab & Co., Inc., Fidelity Brokerage Services, Inc.,
Waterhouse Securities, Inc., Ameritrade, Inc. (a subsidiary of Ameritrade
Holding Corporation), and E*TRADE Group, Inc. We also encounter competition from
established full commission brokerage firms such as Morgan Stanley Dean Witter,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Solomon Smith Barney,
Inc., among others. In addition, we compete with financial institutions, mutual
fund sponsors and other organizations. Further, we have seen a substantial
increase in the number of companies providing electronic brokerage services in
recent years, and this trend is expected to continue.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors have greater name recognition and larger
customer bases that could be leveraged, thereby gaining market share from us.
Our competitors may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can be no assurance
that we will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on our
business, financial condition and operating results.
WE MAY NOT SUCCESSFULLY ASSIMILATE ACQUIRED COMPANIES.
We may acquire other companies in the future, and we regularly evaluate such
opportunities. Acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention from other business concerns, amortization of acquired intangible
assets and potential loss of key employees of acquired companies. We have
limited experience in assimilating acquired organizations into our operations.
We may not successfully integrate any operations, personnel, services or
products that might be acquired in the future. Failure to successfully
assimilate acquired organizations could have a material adverse effect on our
business, financial condition and operating results.
WE ARE SUBJECT TO STRICT GOVERNMENT REGULATION AND THE FAILURE TO COMPLY COULD
RESULT IN DISCIPLINARY ACTIONS.
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. See "- Securities Industry Practices" above.
Broker-dealers are subject to regulations covering all aspects of the securities
business.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our business, financial
condition and operating results.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
We have initiated a marketing campaign designed to bring brand name recognition
to Tejas Securities. The NASD regulates all marketing activities by Tejas
Securities. The NASD can impose certain penalties for violations of its
advertising regulations, including censures or fines, suspension of all
advertising, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers
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or employees. Tejas Securities' compliance officer reviews all marketing
materials prior to release to ensure compliance with NASD regulations.
There can be no assurance that other federal, state or foreign agencies will not
attempt to regulate our business. If such regulations are enacted, our business
or operations would be rendered more costly or burdensome, less efficient or
even impossible or otherwise have a material adverse effect on our business,
financial condition and operating results.
WE MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS THAT COULD SLOW OUR EXPANSION
PLANS OR PREVENT PAYMENTS OF DIVIDENDS.
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from Tejas Securities could be
restricted, which in turn could limit our ability to pay dividends, repay debt
and redeem or purchase shares of our outstanding stock. A large operating loss
or charge against net capital could adversely affect our ability to expand or
even maintain our present levels of business, which could have a material
adverse effect on our business, financial condition and operating results.
OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephone. Thus, we depend heavily on the integrity of
the electronic systems supporting this type of trading. Heavy stress placed on
our systems during peak trading times could cause our systems to operate too
slowly or fail. If our systems or any other systems in the trading process slow
down significantly or fail even for a short time, our customers would suffer
delays in trading, potentially causing substantial losses and possibly
subjecting us to claims for such losses or to litigation claiming fraud or
negligence. During a systems failure, we may be able to take orders by
telephone; however, only associates with securities broker's licenses can accept
telephone orders, and an adequate number of associates may not be available to
take customer calls in the event of a systems failure. In addition, a hardware
or software failure, power or telecommunications interruption or natural
disaster could cause a system failure. Any systems failure that interrupts our
operations could have a material adverse effect on our business, financial
condition and operating results.
ADVANCES IN ENCRYPTION TECHNOLOGY MAY NOT OCCUR QUICKLY ENOUGH AND OUR CUSTOMERS
MAY STOP TRADING WITH US.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We will rely on encryption and
authentication technology to provide secure transmission of confidential
information. Despite our best efforts, advances in computer and cryptography
capabilities or other developments may result in a compromise of the algorithms
we use to protect customer transaction data. If a compromise of our security
were to occur, it is likely that our customers would stop trading with us.
11
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NO ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND NONE MAY
DEVELOP.
An active public market for our common stock does not currently exist. We cannot
predict the extent to which investor interest in us will lead to the development
of a trading market or how liquid that market might become. The trading price of
our common stock could be subject to wide fluctuations in response to factors
unrelated to our operating results such as:
o announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments by
us or our competitors;
o new products or services offered by us or our competitors;
o changes in financial estimates by securities analysts;
o additions or departures of key personnel; and
o sales of our common stock by our stockholders.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of listed companies. Some of these fluctuations may be due
to speculative trading by individual investors, including investors commonly
referred to as "day traders." The trading prices of many companies' stocks are
at or near historical highs and these trading prices and multiples are
substantially above historical levels. These trading prices and multiples may
not be sustained. These broad market factors may materially adversely affect the
market price of our common stock, regardless of our actual operating
performance.
OUR EFFORTS TO DEVELOP WIDESPREAD BRAND RECOGNITION ARE LIKELY TO BE EXPENSIVE
AND MAY FAIL.
The development of Tejas Securities brand is important to our future success. If
we fail to develop sufficient brand recognition, our ability to attract
customers may be impaired, and our revenue will suffer. In order to build our
brand awareness we must succeed in our brand marketing efforts and deliver
products and services that are in demand by our customers. These efforts have
required, and will continue to require, significant expenses. If we expend
additional resources to build Tejas Securities brand and do not generate a
corresponding increase in revenue as a result of our branding efforts, or if we
otherwise fail to promote our brand successfully our business could be harmed.
We cannot assure that we will be successful in developing our brand.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our online trading and research distribution. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition, our new
enhancements must meet the requirements of our current and prospective customers
and must achieve significant market acceptance. We could also incur substantial
costs if we need to modify our service or infrastructures to adapt to these
changes.
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IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
We recently hired and anticipate continuing to hire additional sales, research,
and investment banking personnel. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives, and we may experience
constraints that will adversely affect our ability to expand our customer base.
We have at times experienced, and continue to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel is an intensely
competitive and time-consuming process.
ITEM 2. PROPERTIES
The Company leases space for its offices in Austin, Texas and Atlanta, Georgia.
Future commitments associated with the leases are included in the footnotes to
the financial statements. These leases are for terms of eight years and five
years, respectively, and contain renewal options. The Company's headquarters are
located at 2700 Via Fortuna, Suite 400, Austin, Texas, and consists of
approximately 24,700 square feet. The Company's Atlanta office is located at
12725 Morris Road, Suite 100, Alpharetta, Georgia, and consists of approximately
2,500 square feet.
ITEM 3. LEGAL PROCEEDINGS
In June 1999, Starlight Entertainment, Inc. (the "Claimant") submitted an
arbitration claim against Tejas Securities and its former employee Robert A.
Shuey, III before the National Association of Securities Dealers. The Claimant
alleges that Tejas Securities and its former employee failed to act diligently
in bringing to market the Claimant's planned 1998 initial public offering. The
Claimant is seeking approximately $225,000 in out-of-pocket expenses incurred in
preparing the offering, as well as the anticipated $6,800,000 proceeds of the
offering.
Tejas Securities believes that the Letter of Intent did not obligate Tejas
Securities to underwrite the Claimant's offering, and that an underwriting
agreement was never executed by the parties. Tejas Securities believes the
complaint to be completely without merit and intends to defend this matter
vigorously. Management believes that arbitration proceedings will begin in July
of 2000.
There are no other liabilities arising from claims or legal actions that
management believes would have a significant adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was cleared for trading on the NASDAQ electronic
bulletin board on March 10, 2000. There are no high and low bid quotations
available on the Company for the most recent fiscal year.
The Company has not paid cash or stock dividends and has no present plan to pay
any such dividends. Currently, the Company intends to reinvest its earnings in
order to facilitate expansion. The likelihood 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.
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ITEM 6. SELECTED FINANCIAL DATA
The summary statement of operations data and the summary statement of financial
condition data as of and for each of the years in the five-year period ended
December 31, 1999 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,
1999 1998 1997 1996 1995
STATEMENT OF OPERATIONS DATA:
Commissions $25,291,212 7,932,780 4,810,520 3,648,255 3,674,261
Investment banking 925,616 2,584,770 752,554 0 0
Trading income (loss) 3,475,539 (272,811) 833,227 567,537 44,486
Other 740,342 23,530 9,248 41,720 62,500
Total revenue 30,432,709 10,268,269 6,405,549 4,257,512 3,781,247
Employee compensation 19,992,928 7,397,860 4,459,420 3,448,700 2,808,053
Other expenses 4,802,555 3,431,631 1,453,086 1,015,567 398,010
Total expenses 24,795,483 10,829,491 5,912,506 4,464,267 3,206,063
Income (loss) before income taxes 5,637,226 (561,222) 493,043 (206,755) 575,184
and minority interest
Income tax expense (benefit) 2,201,598 (163,900) 19,008 0 25,057
Minority interest 297,285 0 0 0 0
Net income (loss) $ 3,138,343 (397,322) 474,035 (206,755) 550,127
STATEMENT OF FINANCIAL CONDITION
DATA:
Cash and cash equivalents $ 2,732,175 201,312 170,474 275,165 133,569
Receivable from clearing broker 4,640,052 1,505,648 825,707 451,357 335,181
Securities owned 6,207,748 1,539,424 634,419 952,092 0
Other assets 2,534,127 695,843 343,978 267,229 283,828
Total assets $16,114,102 3,942,227 1,974,578 1,945,843 752,578
Liabilities $ 2,905,020 577,736 141,330 38,480 44,863
Securities sold, not yet purchased 187,940 0 0 0 0
Payable to clearing organization 6,196,059 1,459,678 608,848 1,007,514 0
Subordinated debt 1,000,000 500,000 0 0 0
Total liabilities 10,289,019 2,537,414 750,178 1,045,994 44,863
Minority interest 976,725 0 0 0 0
Common stock 12,537 11,615 9,580 9,926 5,140
Additional paid in capital 1,669,473 1,461,456 937,298 855,085 544,620
Subscription receivable 0 (96,263) (100,000) 0 0
Treasury stock 0 0 (47,805) 0 (133,240)
Retained earnings 3,166,348 28,005 425,327 34,838 291,195
Total stockholders' equity 4,848,358 1,404,813 1,224,400 899,849 707,715
Total liabilities and
stockholders' equity $16,114,102 3,942,227 1,974,578 1,945,843 752,578
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the availability of public resources through
additional issuance of common stock or debt securities will provide funding for
future expansion in the securities industry. In the event the Company issues
additional equity to provide funding for expansion, current shareholders may
experience dilution in ownership percentage or book value. Additionally, such
equity may contain preferences and rights not available to the current equity
holders. The Company cannot give any assurance that it will not need to issue
additional equity or debt in the future in order to respond to industry trends,
potential business opportunities or unforeseen events.
As a broker-dealer, Tejas Securities is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors affecting
Tejas Securities' liquidity include the value of securities held in trading
accounts, the value of non-current assets, the amount of unsecured receivables,
and the amount of general business liabilities, excluding amounts payable to its
clearing broker and NASD approved subordinated debt.
Tejas Securities' inventory balance fluctuates daily based on the current market
value and types of securities held. Tejas Securities typically invests in
securities in which it provides research coverage. The types of securities may
include publicly traded debt, equity, options and private security issuances. As
a market maker, Tejas Securities provides bid and ask quotes on certain equity
securities on the NASDAQ market. Tejas Securities' ability to generate revenues
from market making activities may depend upon the level and value of securities
held in inventory.
Market values for some of the securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, Tejas Securities' liquidity
may be affected depending on the value of the securities involved. During times
of general market declines, Tejas Securities may experience market value losses,
which ultimately affects the liquidity of Tejas Securities through its
broker-dealer net capital requirements. In addition, Tejas Securities may decide
not to liquidate its security holdings to increase cash availability if
management believes a market turnaround is likely in the near term or if
management believes the securities are undervalued in the current market.
Since Tejas Securities' inception in March of 1994, management has raised
capital from two primary sources: the issuance of common stock and subordinated
debt. Tejas Securities generally has issued stock to either raise capital for
expansion or as an incentive to members of management. In April 1999, the
Company issued 2,499,815 shares of the common stock (1,006,975 shares of Tejas
Securities common stock before the exchange ratio) for $704,833 in cash. The
April 1999 stock issuance to the Company's employees and management members was
a means of recognizing each individual's contribution to the Company and to
expand the stockholder base. Proceeds from the stock issuance were partially
used to finance the reverse merger and the expansion of Tejas Securities'
infrastructure.
In September 1998, Tejas Securities issued subordinated debt in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
subordinated debt was a short-term loan agreement used to increase equity
capital required for Tejas Securities' underwriting activities. In November
1998, Tejas Securities extended the repayment terms of the loan agreement so
that the loan became due and payable in November 2001. The loan accrues interest
at 11.5% per annum and is considered equity capital for NASD purposes. As a
condition of the loan agreement, Tejas Securities issued warrants to the lender
to purchase 112,500 shares of common stock of Tejas Securities (279,281 shares
of the Company's common stock giving effect to the Merger), exercisable at a
price of $2.65 per share ($1.07 per share giving effect to the Merger).
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16
In June 1999, Tejas Securities completed the second issuance of subordinated
debt in exchange for $500,000 from Clark Wilson. The proceeds from the loan
agreement were used to finance the expansion activities of Tejas Securities, as
well as contribute to operating activities. The loan accrues interest at 11.5%
per annum and is also considered equity capital for NASD purposes. As a
condition of the loan agreement, Tejas Securities issued additional warrants to
the lender to purchase 112,500 shares of common stock of Tejas Securities
(279,281 shares of the Company's common stock giving effect to the Merger)
exercisable at a price of $2.65 per share ($1.07 per share giving effect to the
Merger) of common stock. The warrants associated with the September 1998 and
June 1999 subordinated debt were cancelled in 1999 in an agreement with Clark
Wilson. On January 1, 2000, the Company issued options to purchase 558,563
shares of the Company's common stock to Clark Wilson. The purchase price of the
shares is $1.07 per share and expires four years from the date of the grant. The
options were intended to constitute non-qualified stock options.
In addition to the sources of capital described above, Tejas Securities utilizes
the receivable balance from its clearing broker, Schroder & Co., to fund
operating and investing activities. The receivable balance represents the
residual equity due to Tejas Securities from Schroder & Co. if Tejas Securities
liquidated all of its investment security holdings. The receivable balance from
the clearing broker is also used to secure temporary financing from Schroder &
Co. for the purchase of investments in Tejas Securities' trading accounts. The
receivable balance held at Schroder & Co. may fluctuate depending on factors
such as the market valuation of securities held in Tejas Securities' trading
accounts, realized trading profits, commission revenue, cash withdrawals and
clearing costs charged to Tejas Securities for conducting its trading
activities.
Liquidity At December 31, 1997, 1998 and 1999
The Company's cash position increased to $2,732,175 in 1999, from a balance of
$201,312 in 1998 and $170,474 in 1997. The fluctuations during these periods
reflect changes in the operating and financing activities of Tejas Securities
from 1997 through 1999.
Cash Flows From Operating Activities
Net cash provided (used) by operating activities was $1,481,301, $(858,413) and
$(18,542) in 1999, 1998 and 1997, respectively. The net cash provided (used) by
operating activities is impacted primarily by the brokerage operating activities
and changes in the brokerage-related assets and liabilities.
In 1999, the most significant sources of cash were from the increase in the
payable to the clearing broker and the increase in accrued liabilities. The
$4,736,381 increased payable to the clearing broker corresponds to the overall
increase in securities owned of $4,668,324, taking into account market value
adjustments. The $2,327,284 increase in accounts payable, accrued expenses and
other liabilities relates to the remaining 1999 estimated income tax liability
for the Company and employee compensation accruals. The primary uses of cash
include the increase in securities owned and the increase in the receivable from
clearing broker of $3,134,404. The increase in the receivable from clearing
broker is due to the increased level of commission and trading activity during
1999, and the retention of a portion of the proceeds. Other significant uses of
cash include the conversion of the $700,088 performance fee earned by the
manager of the Fund into equity of the Fund, and the $500,955 increase in
employee and shareholder receivables. The net cash effect of these transactions
is the use of $1,940,106 in cash, with the remaining $3,421,407 addition
consisting of net income plus changes in other asset and liability accounts.
In 1998, the most significant use of cash was represented by the $679,941
increase in the receivable from the clearing broker. The increased receivable
was indirectly the result of Tejas Securities' use of proceeds from the $500,000
subordinated debt agreement. Proceeds from the debt were used for operations
thereby allowing Tejas Securities to retain a larger receivable balance with the
clearing broker. In addition, Tejas Securities' overall investment in securities
increased by $905,005 from 1997 to 1998. This increase corresponds to the
$850,830 increase in payable to the clearing organization, taking into account
market value appreciation of the securities. The net cash effect of these
transactions is the use of $734,116, with the remaining $124,297 being net
income plus changes in other asset and liability accounts.
16
17
In 1997, the most significant changes in cash were represented by changes in the
receivable from the clearing broker and changes in the investment balances.
Tejas Securities' positive earnings were captured through increased commissions,
and were retained in the receivable from clearing broker, resulting in an
increase of $374,350. Investments in securities decreased by $317,673 in 1997,
which corresponds to the decrease of $398,666 in the payable to the clearing
organization, taking into account market value depreciation of the securities.
The net cash effect of these transactions is the use of $455,343, with the
remaining cash provided of $436,801 being net income plus changes in other asset
and liability accounts.
The Company anticipates that a portion of the cash provided from future
operating activities of Tejas Securities might be used to facilitate additional
investing activities, specifically the expansion of current office space in
Austin and Atlanta or the expansion of future offices. Future proceeds from cash
provided from operating activities may also be used to finance acquisition
activities.
Cash Flows Used In Investing Activities
Net cash provided (used) by investing activities was $(318,918), $(188,484) and
$63,335 in 1999, 1998 and 1997, respectively. In 1999, Tejas Securities advanced
$116,004 to TSG Capital, LLC in conjunction with the organizing of the Fund. The
remaining cash uses in 1999 and 1998 are directly the result of capital
expenditures for office expansion in Austin, Atlanta and New York. During 1998,
Tejas Securities opened an additional office in New York as part of its
expansion into the investment banking and retail brokerage segments of the
industry. The New York office was subsequently closed during 1999.
In 1997, Tejas Securities entered into a sale-leaseback transaction with a
related party, as discussed in Item 13. Tejas Securities sold furniture and
fixtures for the book value of approximately $204,000, which generated cash of
$204,268.
Cash Flows From Financing Activities
Net cash provided (used) by financing activities was $1,368,480, $1,077,735 and
$(149,484) in 1999, 1998 and 1997, respectively.
During 1999, Tejas Securities issued $500,000 of subordinated debt to Clark
Wilson as described above. In addition, the Company issued 2,698,415 shares of
stock (1,086,975 shares of Tejas Securities common stock before the exchange
ratio) with a value of $775,884 through a subscription program. In 1999,
$750,164 of the current and prior year subscriptions were collected.
Financing activities provided $1,000,000 in cash during 1998 through the
issuance of subordinated debt as noted above. Of the $1,000,000 of debt issued
in 1998, $500,000 was repaid to the lender. In addition, Tejas Securities
received $475,405 in proceeds from common stock issuance to management, as well
as $98,593 on the sale of treasury stock to members of management.
In 1997, Tejas Securities received $250,000 from Joseph F. Moran for the
temporary financing of operating activities. Mr. Moran elected to have the
outstanding balance of the note payable converted into equity of Tejas
Securities. In addition, Tejas Securities sold treasury stock and received
$117,228 in proceeds from the sale. This was the final year that shareholder
distributions were paid as Tejas Securities elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code effective January
1, 1998. Tejas Securities paid $83,546 in stockholder distributions during 1997.
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Results Of Operations
The following table presents additional information regarding the results of
operations as presented in Item 6.
Year Ended December 31,
1999 1998 1997
---- ---- ----
(000's) % Change (000's) % Change (000's)
--------- --------- --------- --------- ---------
Revenues:
Commissions $ 25,291 219 7,933 65 4,810
Underwriting and
investment 926 (64) 2,585 243 753
banking
Net dealer inventory and
investment income 3,476 -- (273) (133) 833
Other income 740 2,983 24 166 9
--------- --------- --------- --------- ---------
$ 30,413 196 10,269 60 6,406
Expenses:
Commissions, employee
compensation and benefits $ 19,993 170 7,398 66 4,459
Clearing and floor 615 40 439 199 147
brokerage
Underwriting -- (100) 590 23 479
Communications and
occupancy 1,242 52 817 85 441
Professional 971 121 440 41 312
Other 1,974 72 1,145 1,445 74
--------- --------- --------- --------- ---------
$ 24,795 129 10,829 83 5,912
The increase in commission revenues during 1999 and 1998 is due to increased
activity in agency and principal transactions during the periods. Tejas
Securities continued to expand its presence in Texas and Georgia through the
addition of established brokers and through additional product and securities
offerings.
Underwriting and investment banking revenues declined in 1999 as a result of the
discontinuation of underwriting activities in October 1998. The growth in
underwriting and investment banking revenue in 1998 from 1997 is attributed to
the expansion of Tejas Securities into the New York City, and Atlanta markets.
These new markets allowed Tejas Securities the opportunity to complete three
initial public offerings and one preferred stock offering during 1998. During
1999, Tejas Securities was involved in the private placement of TSG Internet
Fund I. The remaining fees in 1999 were for advisory services and syndicate
participation.
Net dealer inventory and investment income increased during 1999 primarily from
favorable investment performance of companies in the telecommunications and
Internet industries. Much of this increase was due to merger and acquisition
activity within those sectors, and consequently the appreciation in the
underlying securities, both debt and equity. A byproduct to the investment
banking activity in 1998 was the increase in securities owned at year-end,
including positions in the companies underwritten. As the overall stock market
declined during the fourth quarter, so did the value of the securities owned,
thus resulting in the trading losses at year-end.
Other income increased in 1999 from the addition of the year-end performance fee
received from the Fund. Tejas Securities earns 20% of the increase in market
value of the Fund on an annual basis. Otherwise, other revenues were consistent
between 1999, 1998 and 1997.
Commissions, employee compensation and benefits increased in 1999 primarily as a
result of the increase in commission revenue. General and administrative
salaries and other employee benefits increased due to overall salary increases
and additional hires. Incentive compensation and year-end bonus accruals
increased as a result of higher profits. The increase in employee compensation
during 1998 resulted from the addition of general administrative and management
personnel needed to oversee operations in the New York, Atlanta and Dallas
offices. The New York office was shut down in 1999.
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Clearing and floor brokerage costs increased in 1999 and 1998 as a result of
greater trading activity in the over-the-counter equity markets and on the
national exchanges. Tejas Securities' percentage of revenues derived from equity
securities increased during 1999 in comparison to the volume of fixed income
securities being traded.
No underwriting expenses were incurred during 1999 as Tejas Securities did not
actively engage in underwriting or investment banking activities, other than the
private placement during the second quarter of 1999 and syndicate
participations. The only expenses associated with the private placement were
legal fees and commission expense, which were not material to the overall
financial results. The increase in underwriting expenses in 1998 corresponded to
the increase in initial public offerings and the preferred stock offering.
Communications and occupancy charges increased significantly in 1999. The
increase is attributed to two factors. In June 1998, Tejas Securities began its
expansion into the New York market. The additional cost of rent and
telecommunications was incurred for a portion of 1998 versus the full cost
during 1999. In addition, Tejas Securities increased the availability of quote
and news services to its brokers and traders in the Austin and Atlanta offices.
This increase in services provided was needed to support the increase in
commission generating employees.
Professional fees for 1999 increased significantly due primarily to the
increased legal fees during the third quarter of 1999. Of the total increase for
the year, $344,020 was accrued legal expenses relating to the merger of the
Company; legal fees for the settlement of private equity securities transactions
with its customers; and fees for general legal counsel. The remaining costs
during 1999 related to consulting and accounting fees incurred during the normal
course of business.
Other expenses increased in both 1999 and 1998. The overall increase in other
expenses is the result of increases in personnel and general and administrative
services needed to support those personnel.
Income tax expense increased during 1999 as a result of the increase in taxable
income during the year. The Company's effective tax rate was 39% for 1999.
Income tax expense was minimal in 1998 due to the pre-tax loss experienced by
the Company, and the lack of operations for the Company prior to the Merger.
Prior to 1998, Tejas Securities was an S Corporation for Federal tax purposes,
and was not subject to Federal income taxes.
Minority interest in net income resulted from the minority stockholders of Tejas
Securities subsequent to the Merger on August 27, 1999.
Effects Of Inflation
The effects of inflation have been minimal on the results of operations and the
financial condition of Tejas Securities in recent years. However, the rising
cost of labor and competitive market for brokers could effect general and
administrative costs in the near term.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Tejas Securities' principal business activities are, by their nature, risky and
volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect Tejas Securities' business. Managing risk
is critical to Tejas Securities' profitability and to reducing the likelihood of
earnings volatility. Tejas Securities' risk management policies and procedures
have been established to continually identify, monitor and manage risk. The
major types of risk that Tejas Securities faces include credit risk, operating
risk and market risk.
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Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. Tejas Securities clears its securities
transactions through a clearing broker. Under the terms of the clearing
agreement, the clearing broker has the right to charge Tejas Securities for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, Tejas Securities' policy is to monitor
the credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of Tejas Securities' assets are
held at its clearing broker, Schroder & Co. Therefore, Tejas Securities could
incur substantial losses if its clearing broker were to become insolvent or
otherwise unable to meet its financial obligations. Schroder & Co. has in excess
of $250 million in capital and has historically met all of its obligations to
Tejas Securities.
Operating risk arises from the daily conduct of Tejas Securities' business and
relates to the potential for deficiencies in control processes and systems,
mismanagement of Company activities or mismanagement of customer accounts by its
employees. Tejas Securities relies heavily on computer and communication systems
in order to conduct its brokerage activities. Third party vendors, such as the
clearing broker and news and quote providers, provide many of the systems
critical to Tejas Securities' business. Tejas Securities' business could be
adversely impacted if any of these systems were disrupted. Tejas Securities
mitigates the risk associated with systems by hiring experienced personnel, and
providing employees with alternate means of acquiring or processing information.
In order to mitigate the risk associated with mismanagement of Company
activities or customer accounts, Tejas Securities utilizes compliance and
operations personnel to review the activities of administrative and sales
personnel and has an annual audit performed by an independent licensed CPA firm
that is national in scope. In addition, the activities of management are
actively reviewed by other members of management on a regular basis and by the
Board of Directors.
Tejas Securities' primary market risk exposure is to market price changes and
the resulting risk of loss that may occur from the potential change in the value
of a financial instrument as a result of price volatility or changes in
liquidity for which Tejas Securities has no control. Securities owned by Tejas
Securities are either related to daily trading activity or Tejas Securities'
principal investing activities. Market price risk related to trading securities
is managed primarily through the daily monitoring of funds committed to the
various types of securities owned by Tejas Securities and by limiting exposure
to any one investment or type of investment.
Tejas Securities' trading securities were $6,207,748 in long positions and
$187,940 in short positions at December 31, 1999. These trading securities may
be exchange listed, Nasdaq or other over-the-counter securities on both long and
short positions. The potential loss in fair value, using a hypothetical 10%
decline in prices, is estimated to be $640,000 as of December 31, 1999. A 10%
hypothetical decline was used to represent a significant and plausible market
change.
Tejas Securities' investment securities are typically those reported on by Tejas
Securities' research analysts. These positions often consist of high-yield debt
securities and the related equity securities. Tejas Securities monitors this
risk by maintaining current operating and financial data on the companies
involved, and projecting future valuations based upon the occurrence of critical
future events. Any transactions involving the investment securities are
typically based upon the recommendations of Tejas Securities' research analysts
versus current market performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information sets forth certain information with respect to our
executive officers and directors. Each of the directors is elected to serve
until the next election of directors at a meeting of the stockholders. Their
respective backgrounds are described below.
NAME AGE POSITION
------------------- --- ----------------------------------------------
John J. Gorman 39 Director, Chairman and Chief Executive Officer
Jay W. Van Ert 38 Director and President
Joseph F. Moran 39 Director, Vice Chairman, Managing Director
Charles H. Mayer 52 Director and Chief Operating Officer
Michael L. McAllister 45 Executive Vice President, Managing Director
Gregory D. Woodby 38 Managing Director
Robert E. Gillette 34 Secretary and Treasurer
A. Reed Durant 45 Director of Compliance
Kurt J. Rechner 39 Chief Financial officer
John F. Garber 30 Director of Finance
Barry A. Williamson 42 Director
Clark N. Wilson 43 Director
JOHN J. GORMAN. Mr. Gorman became our Chairman of the Board of Directors and
Chief Executive Officer in August 1999. He has been the Chairman and Chief
Executive Officer of Tejas Securities since July 1997. Mr. Gorman has over 16
years of experience in the brokerage industry. Mr. Gorman became a principal of
Tejas Securities on April 18, 1995. From 1988 until joining Tejas Securities,
Mr. Gorman worked at APS Financial Inc., most recently as a Senior Vice
President. Mr. Gorman served primarily in a broker capacity at APS Financial
Inc., a broker-dealer in Austin, Texas. Mr. Gorman has held positions at APS
Financial Inc., Landmark Group, Shearson Lehman and Dean Witter. In addition,
Mr. Gorman serves on the Board of Directors of Lincoln Heritage Corporation, a
publicly traded company. Mr. Gorman is the nephew of Charles H. Mayer through
marriage. Mr. Gorman received his B.B.A. from Southern Methodist University in
1983.
JAY W. VAN ERT. Mr. Van Ert became our President and a Director in August 1999.
Mr. Van Ert joined Tejas Securities in 1995 as Director of Research, was elected
to the Board of Directors in 1997, and was named President in May 1998. Mr. Van
Ert has spent in excess of fifteen years in the investment industry. Prior to
joining Tejas Securities, Mr. Van Ert was employed from 1989 to 1995 as a Vice
President with T. Rowe Price Associates Inc., where he served as an Analyst,
Portfolio Manager and Director of High Yield Research. Mr. Van Ert earned a
B.B.A. in Finance from the University of Texas in 1983 and an M.B.A. from
Southern Methodist University in 1984.
JOSEPH F. MORAN. Mr. Moran became our Vice Chairman of the Board of Directors
and Managing Director in August 1999. Mr. Moran joined Tejas Securities in
January 1996 as Senior Vice President of Fixed Income Sales. He was elected to
the Board of Directors of Tejas Securities in 1997 as Managing Director and
recently was named Vice Chairman of the Board. From 1991 until joining Tejas
Securities, Mr. Moran worked at APS Financial Inc. most recently as a Senior
Vice President. Mr. Moran served primarily in a broker capacity at APS Financial
Inc. Mr. Moran received his B.B.A. from Baylor University in 1984.
CHARLES H. MAYER. Mr. Mayer joined us in September 1999 as the Chief Operating
Officer and a Director. From 1995 until he joined Tejas Securities, Mr. Mayer
was self-employed and managed personal investments in a number of companies not
related to the securities industry. From 1990 to 1995, Mr. Mayer was the
Managing Director and Chief Information Officer with CS First Boston. Other
experience includes 21 years in senior positions with Morgan Stanley, Tech
Partners, Salomon Brothers, Lehman Brothers and the Federal Reserve Bank of New
York. Mr. Mayer earned a B.B.A. and M.B.A. from Seton Hall University.
MICHAEL L. MCALLISTER. Mr. McAllister joined us in November 1999 as Executive
Vice President and a Managing Director. Mr. McAllister has over 19 years
experience as an investment banker. Mr. McAllister is the head of investment
banking and is also responsible for building our equity capital
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markets business. From February 1998 until joining us, Mr. McAllister was Senior
Vice President and Managing Director of Corporate Finance at Southwest
Securities, Inc. From January 1995 to February 1998, Mr. McAllister was Managing
Director of Corporate Finance at Southcoast Capital Corporation. Previous to
this, Mr. McAllister was Managing Director of Corporate Finance from August 1992
to August 1994 at Kemper Securities, Inc. Prior to that, Mr. McAllister served
in the corporate finance departments of Lehman Brothers and The First Boston
Corporation.
GREGORY D. WOODBY. Mr. Woodby acted as our Secretary and Treasurer from August
1999 until December 1999. Mr. Woodby joined Tejas Securities in January 1996 as
Director of Fixed Income Trading and was elected to the Board of Directors of
Tejas Securities in 1997 as Secretary. From 1989 until joining Tejas Securities,
Mr. Woodby worked at APS Financial Inc., most recently as a Fixed Income Trader.
Mr. Woodby graduated from Baylor University earning a B.B.A. in Management in
1983.
ROBERT E. GILLETTE. Mr. Gillette became Secretary and Treasurer in January 2000.
Mr. Gillette joined Tejas Securities in March 1998 as Senior Vice President and
manager of the Atlanta branch office. Prior to joining Tejas Securities, Mr.
Gillette was a Vice President at Marion Bass Securities from April 1996 to
December 1997, a Vice President at Addison Securities from November 1994 to
April 1996, a Vice President at the GMS Group from July 1994 to November 1994
and a Vice President at APS Financial Inc. from December 1993 to July 1994. Mr.
Gillette graduated from the University of Georgia with a B.A. in Political
Science in 1988 and received his J.D. degree with honors from the Atlanta Law
School in 1993.
A. REED DURANT. Mr. Durant became our Director of Compliance in August 1999. Mr.
Durant joined Tejas Securities in November 1998 as the Compliance Director. From
January 1996 until joining Tejas Securities, Mr. Durant worked as Senior
Compliance Examiner for the NASD in the Regulation and Enforcement area. From
1988 until joining the NASD, Mr. Durant worked at Principal Financial
Securities. Mr. Durant brings over 20 years experience in the securities
industry, including 8 years as Compliance Director of a 400-broker, 30-branch
NYSE member firm. Mr. Durant graduated from Texas Tech University with a B.A. in
economics.
KURT J. RECHNER, CPA, CFA. Mr. Rechner became our Chief Financial Officer in
January 2000. Mr. Rechner has spent the past eighteen years in the financial
services industry. Prior to joining Tejas Securities, Mr. Rechner was employed
from 1997 through 1999 as an Executive Vice President, Finance & Operations, CFO
for Xerox Federal Credit Union. From May 1995 to 1997 Mr. Rechner was the Chief
Executive Officer for Prism Capital Management, LLC, which managed a global
fixed income hedge fund. From 1990 through May 1995, Mr. Rechner was the Senior
Vice President of Accounting and Finance for Security Service Federal Credit
Union. Mr. Rechner earned a B.S. in Business Administration from the University
of Illinois in 1984 and an M.B.A. from Trinity University in 1985. Mr. Rechner
also holds the professional designations of Certified Public Accountant and
Chartered Financial Analyst.
JOHN F. GARBER, CPA. Mr. Garber became our Director of Finance in August 1999.
Mr. Garber joined Tejas Securities in October 1998 as Director of Finance. From
April 1999 until joining Tejas Securities, Mr. Garber was employed as the
Controller for Loewenbaum & Co. Inc., an Austin based broker-dealer. Prior to
joining Loewenbaum & Co., Inc. in April 1998, he was employed by KPMG LLP from
1995 to 1998 as a supervising auditor in the financial assurance department. Mr.
Garber graduated from the University of Florida in 1992 with a B.S.B.A. in
Finance. Mr. Garber holds the professional designation of Certified Public
Accountant.
BARRY A. WILLIAMSON. Mr. Williamson became a Director in October 1999. Mr.
Williamson was elected in 1992 as the 38th Texas Railroad Commissioner and
served from January 1993 to January 1999. He served as the Commission's Chairman
in 1995. During the late 1980's and early 1990's, Mr. Williamson served under
the Bush administration at the U.S. Department of Interior as the Director of
Minerals Management Service. Under President Bush, he managed mineral leases on
the nation's 1.4 billion-acre continental shelf and oversaw an annual budget of
almost $200 million. During the 1980's, Mr. Williamson served under the Reagan
administration as a principle advisor to the U.S. Secretary of Energy in the
creation and formation of a national energy policy. Mr. Williamson began his
career with the firm of Turpin, Smith, Dyer & Saxe, and in 1985 established the
Law Offices of Barry Williamson and founded an
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independent oil and gas company. Mr. Williamson graduated from the University of
Arkansas with a B.A. in Political Science in 1979, and received his J.D. degree
from the University of Arkansas Law School in 1982.
CLARK N. WILSON. Mr. Wilson became a Director in October 1999. Mr. Wilson is the
President and Chief Executive Officer of Clark Wilson Homes, Inc., a subsidiary
of Capital Pacific Holdings. Previously, Mr. Wilson was the President of Doyle
Wilson Homebuilder, Inc., serving in that position in 1992. Mr. Wilson served as
Vice President of Doyle Wilson homebuilder, Inc. from 1986 to 1992. Mr. Wilson
took Doyle Wilson Homebuilder, Inc. through a turbulent market and formed Clark
Wilson Acceptance Corporation in 1989 as a finance corporation, personally
financing over $35,000,000 of construction loans for Doyle Wilson Homebuilder,
Inc. Mr. Wilson has won numerous MAX awards between 1994 and 1998, including the
MAX Award for Grand Builder of the Year and best Quality Project in 1994. Mr.
Wilson is a Life Member of the National Association of Homebuilders Spike Club.
Mr. Wilson attended Amarillo College and the University of Texas at Austin, and
has nearly twenty-five years of experience in the homebuilding industry.
BOARD COMMITTEES
The Stock Option Committee consists of Barry A. Williamson and Clark N. Wilson.
The Stock Option Committee administers the Westech Capital Corp. Stock Option
Plan. See "-Westech Capital Corp. 1999 Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company served as a member of the compensation or
similar committee or Board of Directors of any other entity, other than the
Company's subsidiaries, of which an executive officer served on the Company's
Compensation Committee or Board of Directors.
On November 1, 1999, the Company and Barry Williamson entered into a consulting
agreement. The agreement calls for Mr. Williamson to provide the Company with
consulting services on a month to month basis at the rate of $12,500 per month.
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, 1999, the "named
executive officers."
NAME AND PRINCIPAL
POSITION YEAR SALARY (1) BONUS FORGIVEN DEBT COMMISSIONS (2)
- --------------------- -------- ---------- ---------- ------------- ---------------
John J. Gorman (3) 1999 $ 0 $ 0 $ 0 $5,858,050
Chairman and Chief 1998 125,000 0 135,114 709,309
Executive Officer 1997 0 261,000 0 643,688
---- ---------- ---------- ---------- -----------
Jay W. Van Ert 1999 250,000 156,386 0 285,256
Director and President 1998 183,333 0 0 47,255
1997 120,000 75,000 0 44,000
---- ---------- ---------- ---------- -----------
Gregory D. Woodby (4) 1999 130,000 100,000 0 199,150
Managing Director 1998 100,000 500 0 76,748
1997 85,000 40,000 0 59,481
---- ---------- ---------- ---------- -----------
Robert Gillette (4) 1999 72,000 0 0 504,659
Secretary and Treasurer 1998 0 1,000 0 87,175
1997 0 0 0 0
---- ---------- ---------- ---------- -----------
Joseph F. Moran 1999 0 0 0 1,016,538
Managing Director 1998 0 0 0 1,023,280
and Vice Chairman 1997 0 0 0 977,890
---- ---------- ---------- ---------- -----------
(1) Does not include certain prerequisites and other personal benefits that are
standard in the industry and have a total value of less than 10% of the
total annual salary, bonus and commissions reported for the named executive
officer.
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(2) In association with its underwriting activities, Tejas Securities was given
warrants to purchase stock as partial consideration. All of the warrants
had a strike price that was greater than the initial public offering price
of the underlying stock. Tejas Securities distributed these warrants to
certain members of the working group on these public offerings. None of the
executive officers listed received warrants that are currently exercisable
for more than the current trading price of the underlying stock.
Consequently, no value is included in the commissions for these warrants.
(3) Neil Ragin acted as the President, Secretary and a Director until his
resignation effective August 26, 1999. Mr. Ragin did not receive a salary,
bonus or any other compensation for this work.
(4) Mr. Woodby acted as the Secretary and Treasurer from August 1999 to
December 31, 1999. Mr. Gillette became the Secretary and Treasurer on
January 1, 2000.
OPTION GRANTS AND EXERCISES
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1999 to
the named executive officers. No stock appreciation rights were granted during
1999.
Potential Realizable Value
Individual Grants At Assumed Annual
Rates of Stock Price
Appreciation for Option
Term(3)
--------------------------------------------------- ------------------------------------------
Number of
Securities % of Total Options
Underlying Granted
Options To Employees for Exercise Price Expiration
Name Granted Fiscal Year(2) ($/share) Date 5% 10%
------------------- ------------ ------------------ -------------- ----------------- --------- ---------
John J. Gorman 250,000 20.41% $2.00 October 15, 2004 $ 138,141 $ 305,255
150,000 12.24% $2.20 October 15, 2004 $ 91,173 $ 201,468
Jay W. Van Ert 325,000 26.53% $2.00 October 15, 2004 $ 179,583 $ 396,832
Joseph F. Moran 100,000 8.16% $2.20 October 15, 2004 $ 60,782 $ 134,312
Gregory D. Woodby -- -- -- -- -- --
Robert E. Gillette -- -- -- -- -- --
- ------------------------------------
(1) One-third of the options become exercisable on each of October 15, 1999,
2000 and 2001.
(2) In 1999, we granted employees options to purchase an aggregate of 1,225,000
shares of common stock.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are based on the assumption that the exercise price was the fair market
value of the shares on the date of the grant. There is no assurance
provided to any executive officer or any other holder of our securities
that the actual price appreciation over the 5 year option term will be at
the assumed 5% and 10% levels or at any other defined level.
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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, 1999 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, 1999 OPTIONS AT DECEMBER 31, 1999(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ------------- --------------- ------------- ---------------
John J. Gorman 133,333 266,667 $ -- $ --
Jay W. Van Ert 108,333 216,667 $ -- --
Joseph F. Moran 33,333 66,667 $ -- --
Gregory D. Woodby -- -- $ -- --
Robert E. Gillette -- -- $ -- --
(1) The amount set forth represents the difference between the fair market
value of the underlying stock on December 31, 1999 ($2.00 per share) and
the exercise price of the option. The fair market value was determined by
our Board of Directors.
DIRECTOR COMPENSATION
As part of their incentive to join the Board of Directors, Mr. Wilson and Mr.
Williamson were each provided with options to purchase 100,000 shares of common
stock. The options are exercisable at $2.00 per share and expire on October 15,
2004. The options vest in three equal installments beginning on October 15,
1999. Currently no other directors receive any form of cash or non-cash
compensation for fulfilling their roles on the Board of Directors.
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 Stock Option 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 3,000,000
shares of the Company's common stock. That number will be adjusted automatically
if the outstanding shares of common stock are increased or decreased or changed
into or exchanged for a different number of shares or kind of shares or other
securities of the Company or of another corporation, by reason of
reorganization, split, combination of shares, or a dividend payable in common
stock. Equitable adjustments to the number of shares subject to each award and
to the payment required to obtain such shares will also be made so that the same
proportion of shares will be subject to the award and the aggregate
consideration to acquire all shares subject to the award will remain as it was
prior to the recapitalization.
As of December 31, 1999, the Company had granted options under the Stock Option
Plan to acquire 1,425,000 shares of common stock, none of which had been
exercised or cancelled and all of which remained outstanding.
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ELIGIBILITY
All of the Company's and its subsidiaries' employees, directors and consultants
are eligible to receive awards under the Stock Option Plan. For tax reasons, the
availability of incentive stock options is restricted to employees, with
nonqualified stock options available to employees, directors and consultants.
The Stock Option 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 Stock
Option 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information with respect to ownership of the
Company's common stock at February 29, 2000 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
April 29, 2000, are included as shares beneficially owned. For purposes
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of calculating percent ownership as of February 29, 2000, 12,537,218 shares were
issued and outstanding and for any individual who beneficially owns shares
represented by options exercisable on or before April 29, 2000, 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) 5,915,269 46.69%
Jay W. Van Ert (1)(3) 1,253,828 9.92%
Joseph F. Moran (1)(4) 2,515,954 20.01%
John R. Ohmstede (5) 789,435 6.30%
Gregory D. Woodby (1) 248,250 1.98%
Charles H. Mayer (1)(6) 703,958 5.32%
Barry A Williamson(4) 33,333 *
Clark N. Wilson(4)(7) 591,896 4.51%
Neil Ragin (8) 37,808 *
All officers and directors as a
group (12 total) 11,262,488 79.64%
- -----------------------------
* Less than 1%.
(1) The address for Messrs. Gorman, Van Ert, Moran, Woodby and Mayer is 2700
Via Fortuna, Suite 400, Austin, Texas 78746.
(2) Includes 133,333 shares of common stock issuable pursuant to an option
granted under the 1999 Plan, which is immediately exercisable as of
February 29, 2000.
(3) Includes 108,333 shares of common stock issuable pursuant to an option
granted under the 1999 Plan, which is immediately exercisable as of
February 29, 2000.
(4) Includes 33,333 shares of common stock issuable pursuant to an option
granted under the 1999 Plan, which is immediately exercisable as of
February 29, 2000.
(5) The address for Mr. Ohmstede is 5905 Overlook Drive, Austin, Texas 78731.
(6) Includes 83,333 shares of common stock issuable pursuant to an option
granted under the 1999 Plan, which is immediately exercisable as of
February 29, 2000. Includes 620,625 shares of common stock issuable
pursuant to an option granted outside the 1999 Plan, which is immediately
exercisable as of February 29, 2000.
(7) Includes 558,563 shares of common stock issuable pursuant to an option
granted outside the 1999 Plan, which is immediately exercisable as of
February 29, 2000.
(8) The address for Mr. Ragin is 134 West 72nd Street, New York, New York,
10023. Mr. Ragin resigned as President, Treasurer and Director of the
Company effective August 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALE LEASEBACK
In September 1997, Tejas Securities entered into a sale-leaseback transaction
with Sandy Hook Management, a company owned by Charles H. Mayer, a member of the
Board of Directors. Sandy Hook Management purchased the assets for $204,268 from
Tejas Securities. Tejas Securities purchased the assets from June 1995 through
September 1997 for a total cost of $272,072. The book value of the assets as of
the date of the transaction was determined in accordance with generally accepted
accounting principles, including depreciation calculated by the straight-line
method. The previous Chief Financial Officer of Tejas Securities made the
determination of the book value. Under the terms of this transaction, Tejas
Securities agreed to lease the furniture and fixtures commencing in October 1998
through September 2000. Tejas Securities makes monthly lease payments of $6,373
to Sandy Hook Management and has an option to purchase the furniture and
fixtures at a discounted price in September 2000.
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SUBORDINATED DEBT
Tejas Securities issued subordinated debt in September 1998 in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
transaction is described in Item 7 - "Liquidity and Capital Resources."
Tejas Securities completed the second issuance of subordinated debt in June 1999
in exchange for $500,000 from Clark Wilson. The transaction is described in Item
7 - "Liquidity and Capital Resources."
TSG INTERNET FUND I, LTD.
In April 1999, John J. Gorman, Jay W. Van Ert, Joseph F. Moran and Clark N.
Wilson, along with three other owners of less than 5% of the Company,
established TSG Capital, LLC (the "General Partner"), a Texas limited liability
company, for the purpose of acting as general partner of the Fund. In addition
to the investment in the General Partner, Messrs. Gorman, Van Ert, Moran and
Wilson invested as limited partners in the Fund. Their contributions were as
follows: Mr. Gorman $200,000; Mr. Van Ert $120,520; Mr. Moran $200,000; and Mr.
Wilson $100,000. John Ohmstede, a beneficial owner of more than 5% of the
Company, also invested $200,000 in the Fund as a limited partner through a
Trust. The total capital contribution by the General Partner was less than
$50,000.
TSG Capital, LLC acts as the general partner of the Fund and has no other
operations. The managers and principal executive officers include Jay W. Van Ert
and A. Reed Durant who are also officers of the Company. The General Partner
receives a management fee equal to .375% of the average monthly net asset value
of the Fund after the end of a fiscal quarter. In addition, the General Partner
receives a performance fee equal to 20% of the annual net profits of the Fund
after the end of each fiscal year. These fees are in turn paid to Tejas
Securities through an agreement in exchange for providing services to the
General Partner for investment management, compliance and accounting and
reporting. In 1999, Tejas Securities purchased TSG Capital, LLC for $50,000
through the conversion of liabilities owed to Tejas Securities by TSG Capital,
LLC. TSG Capital, LLC distributed the equity interests of the former owners of
TSG Capital, LLC totaling $50,000. In addition, Tejas Securities received a
capital contribution from the former owners of TSG Capital, LLC in the amount of
$116,161 in conjunction with the purchase.
TSG Capital, LLC's ownership interest in the Fund was approximately 15% of the
total equity of the Fund. Tejas Securities recognized approximately $734,000 of
income during 1999 from the Fund consisting of management fees of $34,066 and a
performance fee of $700,088. Tejas Securities converted the performance fee to
an additional equity ownership in the Fund as of December 31, 1999.
The Fund engaged Tejas Securities to solicit subscriptions for the initial
$2,500,000 private placement of limited partnership interests in the Fund. In
exchange for acting as the placement agent, Tejas Securities received a
placement agent fee equal to 5% of the total initial capital contributions to
the Fund. The total placement agent fee equaled $136,025 and was paid in May
1999.
OFFICER AND DIRECTOR RECEIVABLES
During 1999, Tejas Securities received a $200,000 note from Charles H. Mayer in
conjunction with his employment agreement. The note bears no interest and is due
on demand if Mr. Mayer resigns as an employee of the Company prior to December
31, 2000.
Tejas Securities makes cash advances to certain employees from time to time,
which are typically secured and repaid from commissions. During 1998, Tejas
Securities forgave approximately $135,000 in advances receivable from John J.
Gorman as described in Note 3 to the accompanying Financial Statements.
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SALE OF STOCK TO EMPLOYEES
In April 1999, the Company issued 2,499,315 shares of its common stock
(1,006,975 shares of Tejas Securities common stock before the exchange ratio)
with a value of $704,833 to employees and management of the Company. Of the
shares issued, 893,700 shares (360,000 shares of Tejas Securities) were issued
to directors or executive officers of the Company. An additional 50,000 shares
of Tejas Securities common stock were issued to executive officers of the
Company, however have not yet been converted to Company shares of common stock.
The transaction was recorded as a stock subscription receivable, and was
collected in full by August 1999. The following reflects the April 1999 issuance
of common stock to directors or executive officers of the Company:
DIRECTOR/EXECUTIVE TEJAS SECURITIES COMPANY SHARES
OFFICER SHARES SUBSCRIBED CONVERTED SUBSCRIPTION PRICE
------------------- ----------------- --------- ------------------
John J. Gorman 100,000 248,250 $70,000
Jay W. Van Ert 100,000 248,250 $70,000
Joseph F. Moran 100,000 248,250 $70,000
Gregory D. Woodby 60,000 148,950 $42,000
A. Reed Durant 25,000 * $17,500
John F. Garber 25,000 * $17,500
John J. Gorman was named to the Board of Directors of Lincoln Heritage
Corporation in August 1999. Currently, Mr. Gorman owns common stock and stock
purchase warrants with a combined value in excess of $60,000. Tejas Securities
acted as managing underwriter in Lincoln Heritage's IPO and currently owns less
than 5% of the common equity of Lincoln Heritage.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
See Financial Statements attached hereto.
2. Exhibits
Incorporated by reference to the Exhibit Index at the end of
this report.
(B) Reports on Form 8-K
On October 22, 1999 and November 8, 1999, the Company filed
amendments to the Form 8-K filed on September 8, 1999.
29
30
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
31
WESTECH CAPITAL CORP. AND SUBSIDIARIES
INDEX
PAGE
Independent Auditors' Report 1
FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition as of December 31, 1999 and 1998 2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998
and 1997 4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
32
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 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Austin, Texas
March 22, 2000
33
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
ASSETS 1999 1998
----------- -----------
Cash and cash equivalents $ 2,732,175 201,312
Receivable from clearing broker, partially restricted 4,640,052 1,505,648
Receivables from employees and stockholders 627,454 126,499
Securities owned, at market value 6,207,748 1,539,424
Other investments 932,253 --
Furniture and equipment, net 323,281 208,883
Deferred tax asset, net 54,086 178,500
Prepaid expenses and other assets 597,053 181,961
----------- -----------
Total assets $16,114,102 3,942,227
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 2,905,020 577,736
Securities sold, not yet purchased 187,940 --
Payable to clearing broker 6,196,059 1,459,678
Subordinated debt 1,000,000 500,000
----------- -----------
Total liabilities 10,289,019 2,537,414
----------- -----------
Minority interest in subsidiary 976,725 --
Stockholders' equity:
Common stock, $0.001 par value
50,000,000 shares authorized; 12,537,218 and
11,615,994 issued at December 31, 1999 and
1998, respectively 12,537 11,615
Additional paid in capital 1,669,473 1,461,456
Subscriptions receivable -- (96,263)
Retained earnings 3,166,348 28,005
----------- -----------
Total stockholders' equity 4,848,358 1,404,813
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity $16,114,102 3,942,227
=========== ===========
See accompanying notes to consolidated financial statements.
2
34
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Revenue:
Commissions $ 25,291,212 7,932,780 4,810,520
Underwriting and investment banking income 925,616 2,584,770 752,554
Net dealer inventory and investment income, net of
trading interest expense of $516,975, $39,072 and
$91,360, respectively 3,475,539 (272,811) 833,227
Other income 740,342 23,530 9,248
------------ ------------ ------------
Total revenue 30,432,709 10,268,269 6,405,549
------------ ------------ ------------
Expenses:
Commissions, employee compensation and benefits 19,992,928 7,397,860 4,459,420
Clearing and floor brokerage 615,273 438,944 146,834
Underwriting expenses -- 590,202 479,025
Communications and occupancy 1,242,370 817,382 440,930
Professional fees 971,250 439,835 312,175
Interest 97,029 26,355 5,859
Other 1,876,633 1,118,913 68,263
------------ ------------ ------------
Total expenses 24,795,483 10,829,491 5,912,506
------------ ------------ ------------
Income (loss) before income tax expense (benefit)
and minority interest 5,637,226 (561,222) 493,043
Income tax expense (benefit) 2,201,598 (163,900) 19,008
------------ ------------ ------------
Income (loss) before minority interest 3,435,628 (397,322) 474,035
Minority interest 297,285 -- --
------------ ------------ ------------
Net income (loss) $ 3,138,343 (397,322) 474,035
============ ============ ============
Earnings (loss) per share:
Basic $ 0.25 (0.04) 0.03
============ ============ ============
Diluted $ 0.23 (0.04) 0.03
============ ============ ============
Weighted average shares outstanding:
Basic 12,501,191 10,664,369 9,432,783
============ ============ ============
Diluted 15,148,747 10,664,369 9,432,783
============ ============ ============
See accompanying notes to consolidated financial statements.
3
35
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
ADDITIONAL
COMMON PAID IN SUBSCRIPTIONS RETAINED TREASURY
SHARES STOCK CAPITAL RECEIVABLE EARNINGS STOCK TOTAL
----------- ----------- ----------- ------------- ----------- ----------- -----------
Balance at December 31, 1996 9,930,657 $ 9,930 855,081 -- 34,838 -- 899,849
Stockholder distributions -- -- -- -- (83,546) -- (83,546)
Treasury stock purchases (1,342,253) (1,342) -- -- -- (181,824) (183,166)
Treasury stock sales 991,940 992 82,217 (100,000) -- 134,019 117,228
Net income -- -- -- -- 474,035 -- 474,035
----------- ----------- ----------- ------------- ----------- ----------- -----------
Balance at December 31, 1997 9,580,344 9,580 937,298 (100,000) 425,327 (47,805) 1,224,400
Stock issuances 1,685,337 1,685 473,720 -- -- -- 475,405
Treasury stock sales 350,313 350 50,438 -- -- 47,805 98,593
Subscription collected -- -- -- 3,737 -- -- 3,737
Net loss -- -- -- -- (397,322) -- (397,322)
----------- ----------- ----------- ------------- ----------- ----------- -----------
Balance at December 31, 1998 11,615,994 11,615 1,461,456 (96,263) 28,005 -- 1,404,813
Stock issuances 2,796,295 2,796 825,973 (775,884) -- -- 52,885
Contributed capital -- -- 94,613 -- -- -- 94,613
Treasury stock purchases (708,339) (708) -- -- -- (173,739) (174,447)
Treasury stock sales 700,065 700 -- -- -- 171,414 172,114
Subscription collected -- -- -- 750,164 -- -- 750,164
Subscription cancelled (4,138) (4) (31,162) 31,166 -- -- --
Effect of reverse merger (Note 1) (1,862,659) (1,862) (681,407) 90,817 -- 2,325 (590,127)
Net income -- -- -- -- 3,138,343 -- 3,138,343
----------- ----------- ----------- ------------- ----------- ----------- -----------
Balance at December 31, 1999 12,537,218 $ 12,537 1,669,473 -- 3,166,348 -- 4,848,358
=========== =========== =========== ============= =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
36
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,138,343 (397,322) 474,035
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred tax expense (benefit) 124,414 (178,500) --
Depreciation and amortization expense 74,506 38,110 39,834
Loss on disposition of furniture and equipment 14,011 -- --
Performance fee converted to equity interest (700,088) -- --
Minority interest 297,285 -- --
Increase (decrease) in payable to clearing broker, net of
receivable from clearing broker 1,601,977 208,113 (773,016)
Decrease (increase) in receivable from employees and stockholders (500,955) 135,949 (262,448)
Decrease (increase) in securities owned (4,668,324) (905,005) 317,673
Decrease (increase) in prepaid expenses other assets (415,092) (196,164) 82,530
Increase in accounts payable, accrued
expenses and other liabilities 2,327,284 436,406 102,850
Increase in securities sold, not yet purchased 187,940 -- --
------------ ------------ ------------
Net cash provided (used) by operating activities 1,481,301 (858,413) (18,542)
------------ ------------ ------------
Cash flows from investing activities:
Advances to limited partnership (116,004) -- --
Proceeds from sale of furniture and equipment -- -- 204,268
Purchase of furniture and equipment (202,914) (188,484) (140,933)
------------ ------------ ------------
Net cash provided (used) by investing activities (318,918) (188,484) 63,335
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable
and subordinated debt 500,000 1,000,000 250,000
Principal payments on notes payable -- (500,000) (433,166)
Sale of treasury stock 172,114 98,593 117,228
Purchase of treasury stock (174,447) -- --
Stockholder distributions paid -- -- (83,546)
Subscription collected 750,164 3,737 --
Capital contribution from acquired enterprise 3,115 -- --
Capital contribution from minority interest 64,649 -- --
Proceeds from stock issuances 52,885 475,405 --
------------ ------------ ------------
Net cash provided (used) by financing activities 1,368,480 1,077,735 (149,484)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,530,863 30,838 (104,691)
Cash and cash equivalents at beginning of year 201,312 170,474 275,165
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,732,175 201,312 170,474
============ ============ ============
Supplemental disclosures:
Interest paid $ 614,004 65,427 97,219
Taxes paid $ 1,110,407 23,738 22,829
Summary of non-cash transactions:
TSG Capital, LLC (General Partner), a wholly-owned subsidiary, acts as the
general partner of TSG Internet Fund I, Ltd. (the Fund). The Company recognized
$700,088 of income during 1999 related to a performance fee paid by the Fund.
The Company converted the full amount of the performance fee to an equity
ownership of the Fund as of December 31, 1999. (Note 5)
The Company also received a non-cash contribution totaling $116,161,
representing their general partner interests from the former owners of the
general partnership interest of TSG Capital, LLC. These individuals also have an
ownership interest in the Company. Of this amount, $21,548 has been allocated to
minority interest.
The Company received a non-cash capital contribution totaling $590,127 in
association with the Merger (Note 1). Of this amount, $90,817 and $2,325 of
subscriptions receivable and treasury stock, respectively, which existed as of
the date of the Merger, have been allocated to minority interest since these
rights were not converted at the time of the Merger.
See accompanying notes to consolidated financial statements.
5
37
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION
Westech Capital Corp., a New York corporation, is a holding company whose
primary operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas Securities"). Westech Capital Corp. was incorporated
as a shell corporation in New York on July 18, 1990, and made an initial
public offering in November 1991. Westech Capital Corp. was acquired by
Tejas Securities in a reverse merger effected on August 27, 1999.
Tejas Securities is primarily engaged in securities brokerage, investment
banking and trading activities. Tejas Securities is registered as a
broker and dealer in securities with the National Association of
Securities Dealers, Inc. and clears its transactions on a fully disclosed
basis through Schroder & Co., Inc. Tejas Securities headquarters are
located in Austin, Texas and have been since incorporation on March 2,
1994. Tejas Securities' wholly-owned operating subsidiary, Tejas
Securities Group - East, LLC ("Tejas - East"), a Georgia limited
liability company, is a branch office located in Atlanta, Georgia. TSG
Capital, LLC, a wholly-owned subsidiary of Tejas Securities was acquired
in 1999. It is the general partner in TSG Internet Fund I, Ltd., an
investment hedge fund managed by Tejas Securities.
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and
among Westech Capital Corp., Tejas Securities, newly-formed Tejas
Securities Group Holding Company, a Texas corporation ("Tejas Holding"),
and newly-formed Westech Merger Sub, Inc., a Delaware corporation
("Merger Sub"), Tejas Securities acquired Westech Capital Corp. through a
reverse merger (the "Merger") of Tejas Holding and Merger Sub. Tejas
Holding and Merger Sub were established for the sole purpose of effecting
this transaction. As a result of the Merger, Tejas Holding became a
wholly owned subsidiary of Westech Capital Corp. Tejas Holding is the
holder of approximately 81% of the outstanding common stock of its
subsidiary, Tejas Securities. Under the terms of the Merger, the
stockholders of Tejas Holding exchanged their shares for shares of
Westech Capital Corp. at a ratio 2.4825 to one. The former stockholders
of Tejas Holding currently own 95.21% of the issued and outstanding
common stock of Westech Capital Corp., $.001 par value per share.
On August 27, 1999, the assets and liabilities of Westech Capital Corp.
consisted of $4,466 in cash and $1,351 in accrued expenses. These assets
and liabilities were recorded at fair value as required by the purchase
method of accounting and the tangible net assets were credited to
additional paid in capital.
Prior to the effective date of the Merger, the Board of Directors of
Westech Capital Corp. approved a stock split in the form of a stock
dividend by issuing 2.28767 shares of common stock for each one share of
common stock outstanding to stockholders of record on August 13, 1999.
The stock split occurred on August 27, 1999 in conjunction with the
Merger and has been reflected in the accompanying consolidated financial
statements.
Westech Capital Corp. was previously a shell corporation and had no
substantial operations. Tejas Securities is the operating enterprise and
is the acquiring enterprise for financial reporting purposes. The
historical financial statements of Tejas Securities (accounting acquirer)
are presented as the historical financial statements of the combined
enterprise. The results of operations of Westech Capital Corp. (the
acquired enterprise) are included in the financial statements of the
combined enterprise only from the date of acquisition.
6
38
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The equity of Tejas Securities is presented as the equity of the combined
enterprise giving effect to the minority interest in Tejas Securities at
August 27, 1999, however, the common stock account of Tejas Securities
has been adjusted to reflect the par value of the outstanding stock of
Westech Capital Corp. after giving effect to the number of shares used in
the business combination. The difference between the common stock account
of Tejas Securities and the common stock account of Westech Capital Corp.
(presented as the common stock account of the combined enterprise) has
been recorded as an adjustment to additional paid in capital of the
combined enterprise. For periods prior to August 27, 1999, the equity of
the combined enterprise is the historical equity of Tejas Securities
prior to the merger retroactively restated to reflect the number of
shares received in the business combination. Earnings (loss) per share
for periods prior to the business combination have been restated to
reflect the post merger number of shares outstanding.
References to the Company within the accompanying notes to the
consolidated financial statements are to Westech Capital Corp. and
subsidiaries, which are the historical amounts for Tejas Securities prior
to the reverse merger.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the
consolidated accounts of the Company and its first and second tier
subsidiaries, Tejas Securities Group Holding Company, Tejas Securities
Group, Inc., Tejas Securities Group - East, LLC and TSG Capital, LLC. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
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.
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.
7
39
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits,
certificates of deposit and money market accounts.
As of December 31, 1999, a certificate of deposit in the amount of
approximately $82,000 was pledged by the Company as security on an
irrevocable letter of credit issued in conjunction with the Atlanta
office lease.
SECURITIES OWNED
Long and short positions in securities are reported at market value. The
difference between cost and market has been included in net dealer
inventory and investment income. 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.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets. Estimated useful lives approximate those used for
Federal income tax purposes and range from 3 to 7 years.
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, 1999 or 1998.
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.
Prior to January 1, 1998, Tejas Securities elected to be taxed as an S
Corporation under the provisions of Subchapter S of the Internal Revenue
Code. As a result, all Federal income tax expense and liability was paid
by the shareholders of Tejas Securities for the year ended December 31,
1997. The amounts included as income tax expense in the accompanying
statements of operations for the year ended December 31, 1997 are a
result of the income component of the Texas franchise tax which is
computed at approximately 4.5% of income before income tax expense.
8
40
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company is required to implement
this standard effective with its 2001 fiscal year (after deferral by SFAS
No. 137). SFAS No. 133 addresses the accounting for derivative
instruments, including certain instruments embedded in other contracts,
and for hedging activities. Under this Statement, the Company will be
required to recognize all derivative instruments as either assets or
liabilities in the statement of financial condition and measure those at
fair value. If certain conditions are met a derivative may be
specifically designated as a hedge, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-dominated forecasted
transaction. The Company does not believe that this Statement will have a
material effect on its financial position or results of operations.
The Company may invest in derivative transactions during the normal
course of business, primarily to satisfy the needs of its clients.
Derivative transactions entered into are recorded at the market value
with realized or unrealized gains and losses recognized in the statements
of operations. Market value is generally determined by quoted market
prices for exchange-traded options. The Company held a short position in
17,000 warrants with a market value of $61,265 as of December 31, 1999.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, but applies Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for its stock
option plan.
MARKETABLE SECURITIES
The Company's investments in debt and equity securities are classified as
trading securities. The Company accounts for trading securities at fair
value with unrealized gains and losses included in earnings.
(3) 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, 1999 and 1998, $251,000 and $126,499, respectively, had been advanced
to employees under this agreement. These receivables are to be repaid
through reductions of future commissions.
9
41
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During 1999, the Company forgave approximately $70,000 in advances
receivable from employees. In 1998, the Company forgave approximately
$135,000 in advances receivable from its Chairman of the Board and
approximately $163,000 in advances receivable from employees. The amounts
forgiven are included in commission expense in the accompanying financial
statements.
During 1999, the Company received a $200,000 note from an officer of the
Company. The note bears no interest and is due on demand if the officer
resigns as an employee of the Company prior to December 31, 2000. Under
the terms of the note, matured unpaid principal and interest shall bear
interest at the lesser of 5.55% per annum or the maximum rate allowed by
law from the earlier of December 31, 2000 or the officer's voluntary
termination.
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 is due and
payable on August 27, 2000. The note is secured by a stock pledge
agreement for the employee's shares issued by the Company.
The Company has notes receivable, and related interest accrued, from
other employees and related parties of the Company totaling $126,454 as
of December 31, 1999. The notes have terms which either require
settlement by pre-determined dates or which allow the notes to be
forgiven based on pre-determined conditions, which are based on employee
compensation arrangements.
In April 1999, the Company issued 1,006,975 shares of Tejas Securities
common stock (2,499,815 shares of the Company's common stock giving
effect to the Merger) for $704,833 in cash and subscriptions receivable
to employees of the Company. Subsequent to this issuance, the Company
issued another 30,000 shares of Tejas Securities common stock (74,475
shares of the Company's common stock giving effect to the Merger) to an
employee under the terms of the April 1999 offering for $27,000. Of the
1,036,975 shares of Tejas Securities issued under the April 1999 common
stock offering, the Company collected $723,550 in cash. The Company
cancelled 1,667 shares of Tejas Securities common stock (4,138 shares of
the Company's common stock giving effect to the Merger) valued at $1,166
upon the termination of employment by an employee.
In 1997, the Company received a $100,000 note from an employee in
consideration for the issuance of common stock for $1 per share. The note
was not interest bearing and was originally due and payable on December
31, 1999. This amount was recorded as a stock subscription receivable.
During 1998, the Company collected $3,737 of the subscription receivable,
resulting in a balance of $96,263 in subscription receivable as of
December 31, 1998. In April 1999, the terms of the note were restructured
so that the employee could purchase the original 100,000 shares of Tejas
Securities common stock (248,250 shares of the Company's common stock
giving effect to the Merger) at the April 1999 offering price of $0.70
per share. This restructuring resulted in the reduction of the
subscription receivable and common stock balances by $30,000. The
remaining balance was collected in 1999.
10
42
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Subsequent to the April 1999 stock offering to employees, the Company
received a $50,000 and $100,000 note from two employees for 50,000 shares
and 100,000 shares of Tejas Securities common stock, respectively
(124,125 and 248,250 shares of the Company's common stock giving effect
to the Merger). The $50,000 note bears no interest and is due and payable
on June 1, 2000. The $100,000 note bears no interest and is due in two
installments, beginning with a $25,000 payment on October 1, 1999 and the
remaining $75,000 on August 23, 2001. The first installment of $25,000
was collected in 1999. The balance of $125,000 for the two notes is
included in minority interest in the accompanying consolidated financial
statements. Both notes are secured by stock pledge agreements for the
shares issued by Tejas Securities. Furthermore, the Company has
recognized additional subscriptions receivable on Tejas Securities common
stock in the amount of $1,168 related to an additional individual, which
is included in minority interest in accompanying consolidated financial
statements.
(4) MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED
At December 31, 1999 and 1998, marketable securities owned and sold, not
yet purchased consisted of the following:
1999 1998
---- ----
Sold, not Sold, not
yet yet
Owned purchased Owned purchased
----------- --------- ---------- ---------
State and municipal
obligations $ 28,761 18,475 0 0
Corporate bonds 3,582,228 30,480 1,238,167 0
Equity securities 2,596,759 77,720 301,257 0
Options and warrants 0 61,265 0 0
$ 6,207,748 187,940 1,539,424 0
(5) OTHER INVESTMENTS
Other investments may include marketable equity securities and
non-marketable securities, including those of private companies,
investment partnerships and other venture capital interests. Other
investments recorded under the equity method of accounting are based on
the degree of control and percentage ownership interest, whereby the
carrying amount of the investment is adjusted to recognize the Company's
share of the earnings or losses. Other investments at December 31, 1999
represent the Company's investment in TSG Capital, LLC (the "General
Partner") in the amount of $700,088, net advances of $116,004 and
contributed capital of $116,161.
In April 1999, certain owners and directors of the Company, established
TSG Capital, LLC, a Texas limited liability company, for the purpose of
acting as general partner of TSG Internet Fund I, LTD. (the "Fund"), a
Texas limited partnership. In addition to their investment in the General
Partner, five stockholders and/or directors invested as limited partners
in the Fund. Their combined contributions were $820,520.
11
43
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
TSG Capital, LLC acts as the general partner of the Fund and has no other
operations. Its managers and principal executive officers include two
officers of the Company. The General Partner receives a management fee
equal to .375% of the average monthly net asset value of the Fund after
the end of a fiscal quarter. In addition, the General Partner receives a
performance fee equal to 20% of the annual net profits of the Fund after
the end of each fiscal year. These fees are in turn paid to the Company
in exchange for providing services to the General Partner for investment
management, compliance, accounting and reporting. On December 28, 1999,
the Company purchased TSG Capital, LLC for $50,000 through the conversion
of liabilities owed to the Company by TSG Capital, LLC. TSG Capital, LLC
distributed the equity interests of the former owners of TSG Capital, LLC
totaling $50,000. In addition, the Company received a capital
contribution from the former owners of TSG Capital, LLC in the amount of
$116,161 in conjunction with the purchase. Of this amount, $94,613 in
included as contributed capital in the consolidated financial statements,
with the remaining $21,549 included in the minority interest in the
consolidated financial statements.
TSG Capital, LLC's ownership interest in the Fund was approximately 15%
of the total equity of the Fund. Due to the degree of control of the Fund
exercised by the General Partner, the Company accounts for its ownership
using the equity method. The Company recognized $734,154 of income during
1999 from the Fund comprised of management fees of $34,066 and a
performance fee of $700,088, which is included in other income in the
consolidated statements of operations. The Company converted the $700,088
performance fee to an additional general partner equity ownership in the
Fund as of December 31, 1999 as disclosed in the summary of non-cash
transactions in the consolidated statements of cash flows.
The Fund engaged the Company to solicit subscriptions for the initial
$2,500,000 private placement of limited partnership interests in the
Fund. In exchange for acting as the placement agent, the Company received
a placement agent fee equal to 5% of the total initial capital
contributions to the Fund. The total placement agent fee equaled $136,025
and was paid in May 1999.
Summary condensed financial information for the Fund as of and for the
period ended December 31, 1999 follows:
Total assets $ 8,819,000
============
Total liabilities $ 2,465,000
============
Partners' capital $ 6,354,000
============
Total revenue $ 3,697,000
============
Net income $ 2,800,000
============
12
44
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
1999 1998
----------- -----------
Furniture and equipment $ 374,463 191,939
Leasehold improvements 66,663 63,456
----------- -----------
441,126 255,395
Accumulated depreciation (117,845) (46,512)
$ 323,281 208,883
(7) SUBORDINATED DEBT
The Company had $1,000,000 and $500,000 in debt subordinated to claims of
general creditors as of December 31, 1999 and 1998, respectively. The
subordinated debt is due November 1, 2001 and bears interest at 11.5% and
is owed to a director of the Company. Interest is paid monthly. As of
December 31, 1999 and 1998, the Company paid $90,582 and $26,355,
respectively, in interest. As a condition of the loan agreements, Tejas
Securities issued to the lender warrants to purchase 112,500 shares of
common stock of Tejas Securities (279,281 shares of the Company's common
stock giving effect to the Merger) in 1998 and additional 112,500 shares
(279,281 shares of the Company's common stock giving effect to the
Merger) in 1999. The warrants were exercisable at a price of $2.65 per
share of common stock ($1.07 giving effect to the merger) and expired on
November 12, 2003. As of December 31, 1999, the Company and the lender
cancelled the warrants in agreement with the lender.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are
carried at market value or at amounts which, because of their short-term
nature or because they carry market rates of interest, approximate
current fair value. The Company's short-term borrowings and subordinated
debt, if recalculated based on current interest rates, would not
significantly differ from the amounts recorded at December 31, 1999 and
1998.
(9) INCOME TAXES
The Company files a consolidated tax return. Income tax expense (benefit)
consists of the following:
Year Ended December 31,
1999 1998
---- ----
Federal
Current $ 1,941,198 0
Deferred 124,414 (178,500)
State 135,986 14,600
$ 2,201,598 (163,900)
13
45
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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:
Year Ended December 31,
1999 1998
---- ----
Expected federal income
expense (benefit) $ 1,916,657 (190,815)
Meals and entertainment 84,634 34,325
State income tax 135,986 14,600
Other, net 64,321 (22,010)
$ 2,201,598 (163,900)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999
and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 0 145,700
Accrued expenses 15,364 0
Other 44,879 32,800
Gross deferred tax assets 60,243 178,500
Valuation allowance 0 0
Net deferred tax asset 60,243 178,500
Deferred tax liabilities:
Property and equipment (291) 0
Other (5,866) 0
Total gross deferred tax liability (6,157) 0
Net deferred tax asset $ 54,086 178,500
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
14
46
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
more likely than not the Company will realize the benefits of these
deductible differences net of the existing valuation allowances at
December 31, 1999 and 1998.
(10) PROFIT SHARING AND STOCK OPTION PLANS
PROFIT SHARING PLAN
In January 1997, Tejas Securities instituted a profit sharing plan under
section 401(k) of the Internal Revenue Code. The plan allows all
employees who are over 21 years old to defer a predetermined portion of
their compensation for federal income tax purposes. Contributions by
Tejas Securities are discretionary. For the years ended December 31, 1998
and 1997, Tejas Securities made approximately $84,000 and $7,000,
respectively, of contributions to the plan. No contributions were made
for 1999.
STOCK OPTION PLANS
Tejas Securities had a stock option plan for employees, which was
rescinded on October 26, 1999. Under the plan, Tejas Securities had
agreed to sell stock to employees at specified prices. As provided by
SFAS No. 123, Tejas Securities elected to continue to apply APB Opinion
No. 25 and related interpretations in accounting for its stock option
plans.
During 1995, options for up to 2 percent of total shares issued and
outstanding of Tejas Securities were granted for employees who met
certain requirements for two years. In addition, employees who met
certain other requirements for two years could purchase up to 5 percent
of the total shares issued and outstanding. One employee exercised the
options in 1997, and purchased 80,000 shares of Tejas Securities common
stock (198,600 shares of the Company's common stock giving effect to the
Merger). No compensation cost was recognized for the options granted.
During 1996, two employees were granted options, vesting in 1997, to
purchase up to 2 percent and 1 percent of total shares issued and
outstanding of Tejas Securities. The option for 1 percent was exercised
in 1997 and resulted in the purchase of 40,000 shares of Tejas Securities
common stock (99,300 shares of the Company's common stock giving effect
to the Merger). The other option was revoked by the employee upon
delivery of stock by a stockholder. No compensation cost was recognized
for the options granted.
During 1997, three employees were granted options, vesting in 1997, to
purchase up to 5 percent, 2.5 percent and 1 percent, respectively, of the
total shares issued and outstanding of Tejas Securities on the grant
date. Two of the options were fully exercised during 1997, resulting in
the purchase of 140,000 shares of Tejas Securities common stock (347,550
shares of the Company's common stock giving effect to the Merger). For
the remaining option, one-half of the 5 percent option (or 2.5 percent)
was exercised resulting in the purchase of 100,000 shares of Tejas
Securities common stock (248,250 shares of the Company's common stock
giving effect to the Merger). The remaining options totaled 100,000
shares of Tejas Securities common stock (248,250 shares of the Company's
common stock giving effect to the Merger) and expired in September 1999.
An additional option to purchase 119,946 shares of Tejas Securities
common stock (297,766 shares of the Company's common stock giving effect
to the Merger) was issued to an employee and forfeited during 1997. No
compensation cost was recognized for the options granted. During 1998, no
options were exercised, and no new options were granted.
15
47
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During 1999, options totaling 300,000 shares of Tejas Securities common
stock (744,750 shares of the Company's common stock giving effect to the
Merger) were granted to employees. The purchase price was an agreed upon
purchase price of $1 per share ($0.40 giving effect to the Merger). The
options were not exercised in 1999 and were cancelled upon termination of
the stock option plan.
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 may grant up to 3,000,000 shares of the Company's common stock
through incentive stock options or nonqualified stock options. 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.
During 1999, options totaling 1,425,000 shares were granted to employees.
The options vest ratably over two years, and expire five years from the
date of the grant. The purchase price of the common stock ranges from
$2.00 to $2.20 per share. As there was no market for the Company's stock,
fair value was determined by the Board of Directors. No options were
exercised in 1999.
16
48
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The Company has adopted the disclosure-only provisions of SFAS No. 123,
but applies APB Opinion No. 25, in accounting for its stock option plans.
No cost from stock-based compensation awards was recognized in 1999, 1998
and 1997. If the Company had elected to recognize compensation cost of
options granted based on the fair value at the grant dates, consistent
with SFAS No. 123, net income (loss) and earnings (loss) per share would
have changed to the pro forma amounts indicated below:
Year Ended December 31,
1999 1998 1997
----------- ---------- ----------
Net income (loss) as reported $ 3,138,343 (397,322) 316,035
(Pro forma for 1997 for
income tax effect)
Pro forma net income (loss) 3,350,874 (397,322) 308,035
Earnings (loss) per share as reported:
Basic $ 0.25 (0.04) 0.03
Diluted $ 0.23 (0.04) 0.03
Pro forma earnings (loss) per share:
Basic $ 0.25 (0.04) 0.03
Diluted $ 0.22 (0.04) 0.03
The fair value of the options used to compute the pro forma amounts is
estimated using the Black Scholes option-pricing model with the following
assumptions:
1999 1998 1997
------- ------- -------
Risk-free interest rate 5.75% 5.75% 7.25%
Expected holding period 3 years 3 years 3 years
Expected volatility .001 .001 .001
Expected dividend yield 0.00% 0.00% 8.00%
SFAS No. 123 calls for a prospective application of compensation relating
to the grant of stock options and, consequently pro-forma financial
information may not be indicative of future amounts until the new rules
are applied to all outstanding non-vested awards.
17
49
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
A summary of the Company's stock option activity and warrant activity,
and related information for the years ended December 31, follows. Stock
option and warrant activity associated with the subordinated debt prior
to August 27, 1999 has been adjusted giving effect to the Merger.
Westech Capital Corp./Tejas
Securities Tejas Securities Tejas Securities
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------- -------------- ----------- -------------- ----------- --------------
Outstanding - beginning
of year 248,250 $0.20 248,250 $0.20 297,900 $0.04
Granted 2,169,750 $1.48 0 $0.00 1,141,816 $0.23
Exercised 0 $0.00 0 $0.00 (893,700) $0.20
Forfeited (248,250) $0.20 0 $0.00 (297,766) $0.15
Cancelled (744,750) $0.40 0 $0.00 0 $0.00
Outstanding - end of year 1,425,000 $2.04 248,250 $0.20 248,250 $0.20
Exercisable - end of year 475,000 $2.04 248,250 $0.20 248,250 $0.20
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Warrants Exercise Price Warrants Exercise Price Warrants Exercise Price
----------- -------------- ----------- -------------- ----------- --------------
Outstanding - beginning
of year 279,281 $1.07 0 $0.00 0 $0.00
Granted 279,281 $1.07 279,281 $1.07 0 $0.00
Cancelled (558,562) $1.07
Outstanding - end of year 0 $0.00 279,281 $1.07 0 $0.00
Exercisable - end of year 0 $0.00 279,281 $1.07 0 $0.00
The weighted average fair value of Company stock options, calculated
using the Black Scholes option pricing model, granted during the year
ended December 31, 1999 is $0.28 per option.
18
50
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 1999:
Stock Options Outstanding Stock Options Exercisable
------------------------------------------ ----------------------------
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Shares Life Price Shares Price
-------------- ----------- ----------- ------------- ---------- -----------
$2.00 1,175,000 4.8 years $2.00 391,667 $2.00
$2.20 250,000 4.8 years $2.20 83,333 $2.20
Total 1,425,000 475,000
(11) EARNINGS (LOSS) PER SHARE
After the completion of the Merger, the Company had 12,537,218 shares of
common stock issued and outstanding. Prior to the Merger, the Company
completed a stock split in the form of a stock dividend by issuing
2.28767 new shares of the Company's common stock for each one share of
the Company's common stock outstanding to stockholders of record on
August 13, 1999, resulting in 599,981 shares outstanding immediately
following the stock split. Under the terms of the Merger, stockholders of
Tejas Holding exchanged their shares for shares of the Company at a ratio
of 2.4825 to one. The effect of this exchange was to issue an additional
11,937,237 shares of the Company's stock in exchange for 100% of the
outstanding stock of Tejas Holding.
Earnings (loss) per share for the periods prior to the Merger have been
restated to reflect the number of acquired shares received by the
accounting acquirer (Note 1). Earnings per share information for 1997 is
based on a pro forma calculation as if the Company had been a C
Corporation for that year and includes a provision for income taxes for
purposes of earnings 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 1999. Contingently issuable shares are
not included in the weighted average number of shares when the inclusion
would increase net income per share or decrease the loss per share. The
following calculations give effect to the Merger on August 27, 1999.
19
51
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $ 3,138,343 (397,322) 316,035
Weighted average shares outstanding 12,501,191 10,664,369 9,432,783
Basic earnings (loss) per share $ 0.25 (0.04) 0.03
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) $ 3,138,343 (397,322) 316,035
Income impact of assumed conversion of
subsidiary stock and recognition of minority
interest income 297,285 0 0
Income available to common stockholders after
assumed conversions 3,435,628 (397,322) 316,035
Weighted average shares outstanding 12,501,191 10,664,369 9,432,783
Effect of dilutive securities:
Warrants 0 0 0
Options 0 0 0
Assumed conversion of subsidiary stock 2,396,439 0 0
Application of treasury stock method to
subscriptions receivable 251,117 0 0
Weighted average shares outstanding 15,148,747 10,664,369 9,432,783
Diluted earnings (loss) per share $ 0.23 (0.04) 0.03
Options to purchase 1,425,000, 248,250 and 248,250 shares of the
Company's common stock at December 31, 1999, 1998 and 1997 were not
included in the computation of diluted earnings (loss) per share because
the options' exercise price was greater than the estimated market value
per share during the respective period. Warrants to purchase 279,281
shares of the Company's common stock as of December 31, 1998 were not
included in the computation of diluted earnings (loss) per share because
the warrants' exercise price was greater than the estimated market value
per share of common stock for the period. In addition, Management does
not consider these to be "nominal value" contingently issuable shares and
therefore has not considered the amounts in disclosing historical
earnings (loss) per share amounts.
The Company has included the dilutive effect of shares of Tejas
Securities' common stock that are convertible into the Company's common
stock. Tejas Securities has 965,333 shares of its common stock issued and
outstanding at December 31, 1999 that are convertible into common stock
of the Company at the ratio of 2.4825 to one (2,396,439 shares). In
addition, the Company has included the dilutive effect of Tejas
Securities' subscriptions receivable based on the treasury stock method.
The Company recognizes the incremental effect on its shares outstanding
assuming the subscriptions receivable are fully paid for and exchanged
for the Company's common stock versus the Company repurchasing those
shares at an estimated market price of $2.00 per share.
20
52
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(12) OFF STATEMENT OF FINANCIAL CONDITION RISK
The Company is responsible to its clearing broker 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 broker must purchase or sell a financial instrument at
prevailing market prices. The Company and its clearing broker seek to
control risk associated with customer transactions through daily
monitoring to assure margin collateral is maintained under regulatory and
internal guidelines.
The Company's receivable from clearing broker represents amounts on
deposit with Schroder & Co., Inc. The Company is exposed should Schroder
& Co., Inc. be unable to fulfill its obligations for securities
transactions. Schroder & Co., Inc. requires the Company to maintain
$100,000 in its account at all times.
The Company deposits its cash with financial institutions. Periodically
such balances exceed applicable FDIC insurance limits.
(13) INDUSTRY SEGMENT DATA
The Company has two reportable segments: brokerage services and
investment banking. The primary operating segment, brokerage services,
includes sales, trading and market-making activities of the Company and
encompasses both retail and institutional customer accounts. These
segments require the commitment of significant human capital and
financial resources, as well as industry specific skills. The investment
banking segment participates in underwriting of corporate securities as
managing underwriter and as a syndicate member. Income associated with
other investments accounted for under the equity method is included in
other segment activity in 1999.
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 and assets for the
year ended December 31, 1999.
Investment
Brokerage Banking Other Total
------------- ------------- ------------- -------------
Revenues from external customers $ 29,110,979 925,616 734,154 30,770,749
Interest revenue 178,935 0 0 178,935
Interest expense 614,004 0 0 614,004
Depreciation and amortization 74,506 0 0 74,506
Segment profit 4,156,319 765,835 715,072 5,637,226
Segment assets 15,237,849 0 932,253 16,170,102
Capital expenditures 202,914 0 0 202,914
21
53
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following table presents segment revenues, profits and assets for the
year ended December 31, 1998.
Investment
Brokerage Banking Other Total
------------- ------------- ------------- -------------
Revenues from external customers $ 7,022,776 2,584,770 0 9,607,546
Interest revenue 699,795 0 0 699,795
Interest expense 65,427 0 0 65,427
Depreciation and amortization 37,995 115 0 38,110
Segment profit (loss) (1,892,566) 1,331,344 0 (561,222)
Segment assets 3,954,309 1,267 0 3,955,576
Capital expenditures 186,554 1,382 0 187,936
The following table presents segment revenues, profits and assets for the
year ended December 31, 1997.
Investment
Brokerage Banking Other Total
------------- ------------- ------------- -------------
Revenues from external customers $ 5,558,810 752,554 0 6,311,364
Interest revenue 185,545 0 0 185,545
Interest expense 97,219 0 0 97,219
Depreciation and amortization 39,834 0 0 39,834
Segment profit 225,381 267,662 0 493,043
Segment assets 1,975,165 0 0 1,975,165
Capital expenditures 140,933 0 0 140,933
(14) 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, 1999 are as follows:
2000 $ 1,134,000
2001 1,059,000
2002 785,000
2003 601,000
2004 492,000
Thereafter 1,039,000
--------------
$ 5,110,000
==============
22
54
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Rent expense amounted to approximately $885,000, $515,000 and $265,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
(15) CONTINGENCIES
In June 1999, Starlight Entertainment, Inc. (Starlight), submitted a
claim in an arbitration proceeding for damages in the amount of
$6,800,000 for the failed underwriting of a public offering of
Starlight's common stock. The amount of Starlight's claim is based upon
the gross receipts that were expected from the proposed public offering
less the underwriting commission plus attorney's fees. The Company's
counsel has reviewed the complaint and is preparing an answer with
respect to the arbitration. Management does not believe this matter will
have a significant adverse effect on the financial condition or results
of operations of the Company.
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 would not have a
significant adverse effect on the financial condition or results of
operations of the Company.
(16) NET CAPITAL REQUIREMENTS
The Company, 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, the Company is required
to maintain a minimum "net capital" to satisfy rule 15c3-1. At December
31, 1999, the minimum "net capital" requirement for the Company was
$250,000. "Net capital" at December 31, 1999 aggregated $2,813,049.
(17) RELATED PARTY TRANSACTIONS
The Company engaged a director to act as a consultant for the Company on
a month to month basis beginning in October 1999. Under the terms of the
agreement, the Company will compensate the consultant for professional
services rendered at a rate of $12,500 per month, plus out of pocket
expenses. As of December 31, 1999, the total amount paid for services was
$29,435.
On September 30, 1997, the Company entered into a sale-leaseback
transaction with a related party, whereby the Company sold furniture and
fixtures for their book value of approximately $204,000. As part of this
transaction, the Company agreed to lease the furniture and fixtures
commencing on October 1, 1998 through September 30, 2000. Payments of
$6,373 per month are due under the lease agreement and are included in
the above schedule.
Also see Note 7 for related party subordinated debt.
(18) SUBSEQUENT EVENT
On January 1, 2000, the Company issued options to purchase 558,563 shares
of the Company's common stock to the holder of the subordinated debt, who
is also a director of the Company. The purchase price of the shares is
$1.07 per share and expires four years from the date of the grant. The
options were intended to constitute non-qualified stock options, and are
not included under the 1999 Plan.
23
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTECH CAPITAL CORP.
By: /s/ JAY W. VAN ERT
-------------------------------
Jay W. Van Ert, President
Date: March 23, 2000
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 23, 2000
- -------------------------------------------- Chairman of the Board
John J. Gorman
/s/ JAY W. VAN ERT President and Director March 23, 2000
- --------------------------------------------
Jay W. Van Ert
/s/ KURT J. RECHNER Chief Financial Officer March 23, 2000
- --------------------------------------------
Kurt J. Rechner
/s/ JOHN F. GARBER Director of Finance March 23, 2000
- --------------------------------------------
John F. Garber
/s/ JOSEPH F. MORAN Managing Director, Vice March 23, 2000
- -------------------------------------------- Chairman and Director
Joseph F. Moran
/s/ CHARLES H. MAYER Chief Operating Officer March 23, 2000
- -------------------------------------------- and Director
Charles H. Mayer
Director
- --------------------------------------------
Barry H. Williamson
Director
- --------------------------------------------
Clark N. Wilson
56
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
----------- ------------------------------------
2.1 Agreement and Plan of Merger (Incorporated herein by
reference to Exhibit 1.1 to the registrant's Current Report
on Form 8-K/A filed on October 22, 1999)
3.1 Certificate of Incorporation (Incorporated herein by
reference to Exhibit 3.1 to the registrant's Registration
Statement on Form 10-12(g) (File No. 000-29235)
3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to
the registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235)
4.1 NASD Subordinated Loan Agreement, Form SL-1, dated October
13, 1998, between Clark N. Wilson and the Company
(Incorporated herein by reference to Exhibit 4.1 to the
registrant's Registration Statement on Form 10-12(g) (File
No. 000-29235)
4.2 NASD Subordinated Loan Agreement, Form SL-1, dated June 4,
1999, between Clark N. Wilson and the Company (Incorporated
herein by reference to Exhibit 4.2 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235)
4.3 Shareholder Agreement, dated November 23, 1999, between
John Ohmstede, John Glade, Michael Hidalgo, Jon McDonald,
Britt Rodgers, Bob Sternberg, Mike Wolf, Greg Woodby and
the Company (Incorporated herein by reference to Exhibit
4.3 to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235)
4.4 Certificate of Incorporation (Incorporated herein by
reference to Exhibit 3.1 above)
4.5 Bylaws (Incorporated herein by reference to Exhibit 3.2
above)
10.1 Agreement, dated June 5, 1997, with Schroder Wertheim & Co.
Incorporated (Incorporated herein by reference to Exhibit
10.1 to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235)
10.2 Westech Capital Corp. 1999 Stock Option Plan (Incorporated
herein by reference to Exhibit 10.2 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235)
10.3 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)
10.4 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)
10.5 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)
10.6* Employment and Confidentiality Agreement, dated as of
August 30, 1999, between Tejas Securities Group, Inc. and
Charles Mayer
10.7* Employment and Confidentiality Agreement, dated as of
November 16, 1999, between Tejas Securities Group, Inc. and
Michael L. McAllister
10.8* Employment and Confidentiality Agreement, dated as of March
3, 1999, between Tejas Securities Group, Inc. and Robert
Gillette
10.9* Employment and Confidentiality Agreement, dated as of
October 29, 1998, between Tejas Securities Group, Inc. and
Reed Durant
10.10* Employment and Confidentiality Agreement, dated as of
January 10, 2000, between Tejas Securities Group, Inc. and
Kurt Rechner
10.11* Employment and Confidentiality Agreement, dated as of
November 1, 1998, between Tejas Securities Group, Inc. and
John F. Garber
10.12* Letter of Agreement, dated November 1, 1999, between Tejas
Securities Group, Inc. and Barry Williamson regarding
consulting services
21.1* Registrant's Subsidiaries
27.1* Financial Data Schedule
99.1 Articles of Incorporation of Tejas Securities Group, Inc.
(Incorporated herein by reference to Exhibit 99.1 to the
registrant's Registration Statement on Form 10-12(g) (File
No. 000-29235)
99.2 Bylaws of Tejas Securities Group, Inc. (Incorporated herein
by reference to Exhibit 99.2 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235)
99.3 Articles of Incorporation of Tejas Securities Group Holding
Company (Incorporated herein by reference to Exhibit 99.3
to the registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235)
99.4 Bylaws of Tejas Securities Group Holding Company
(Incorporated herein by reference to Exhibit 99.4 to the
registrant's Registration Statement on Form 10-12(g) (File
No. 000-29235)
* Filed herewith.