WESTECH CAPITAL CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________

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WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)

DELAWARE 33-37534-NY 13-3577716
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)

2700 Via Fortuna, Suite 400, Austin, Texas 78746
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(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (512) 306-8222

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 31, 2002, the
Registrant had the following number of shares of common stock, $0.001 par value
per share, outstanding: 1,512,024.

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WESTECH CAPITAL CORP. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

See accompanying notes to consolidated financial statements.

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WESTECH CAPITAL CORP. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

See accompanying notes to consolidated financial statements.

2

WESTECH CAPITAL CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

In both March 2002 and 2001, the Company forgave $50,000 of an officer's note
receivable which has been recorded as compensation expense.

See accompanying notes to consolidated financial statements.

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(1) General

Westech Capital Corp. ("Westech"), a Delaware corporation, is a holding company
whose only significant operating subsidiary is Tejas Securities Group, Inc., a
Texas corporation ("Tejas Securities"). Tejas Securities is engaged in the
business of providing brokerage and related financial services to institutional
and retail customers nationwide. References to the Company within the Form 10-Q
are to Westech and its subsidiaries.

Westech was incorporated as a shell corporation in New York on July 18, 1990,
and made an initial public offering in November 1991. Westech was acquired by
Tejas Securities in a reverse merger effected on August 27, 1999. Pursuant to an
Agreement and Plan of Merger, Tejas Securities Group Holding Company ("Tejas
Holding"), a Texas corporation, holding approximately 81% of Tejas Securities,
became a wholly-owned subsidiary of Westech.

On August 29, 2001, the minority interest shareholders of Tejas Securities
exchanged their shares of Tejas Securities common stock for restricted stock of
Westech. As a result, Westech owns, directly or through Tejas Holding, 100% of
Tejas Securities as of June 30, 2002.

Effective June 29, 2001, Westech completed a 10-for-1 reverse stock split. As a
result of this stock split, earnings (loss) per share amounts and all share
amounts for prior periods have been restated to reflect the shares outstanding
as though the stock split had taken effect in the earliest period presented.

Effective June 20, 2002, Westech amended its certificate of incorporation to
decrease the number of shares of common stock that it has the authority to issue
from 50,000,000 to 10,000,000.

Tejas Securities' business is conducted from its headquarters at 2700 Via
Fortuna, Suite 400, Austin, Texas with branch offices in Atlanta, Georgia and
Houston, Texas. Tejas Securities is a registered broker-dealer and investment
advisor offering: (i) brokerage services to retail and institutional customers;
(ii) 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.

The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions for Form 10-Q and, therefore
should be read in conjunction with the Company's 2001 Form 10-K. All adjustments
(consisting of only normal recurring adjustments) that are necessary in the
opinion of management for a fair presentation of the interim consolidated
financial statements have been included. The results of operations for the three
and six months ended June 30, 2002 are not necessarily indicative of the results
of the year ending December 31, 2002.

(2) Net Capital

Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.

Tejas Securities elects to use the basic method of the Rule, which requires it
to maintain minimum net capital equal to the greater of $250,000 or 6-2/3% of
aggregate indebtedness. As of June 30, 2002, Tejas Securities' net capital of
$1,193,202 was $943,202 in excess of the minimum required. Tejas Securities'
ratio of aggregate indebtedness to net capital was 2.25 to 1 at June 30, 2002.

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(3) Earnings Per Share

Basic earnings per share is based on the weighted average shares outstanding
without any dilutive effects considered. Diluted earnings per share reflects
dilution from all contingently issuable shares, including options issued during
the three and six month periods ended June 30, 2002 and 2001. Contingently
issuable shares are not included in the weighted average number of shares when
the inclusion would increase net income per share or decrease the net loss per
share.

Earnings per share is calculated as follows.

The Company has included the dilutive effect of 222,063 options to purchase
shares of the Company's common stock for the six months ended June 30, 2002 in
the computation of diluted earnings per share. Of the 222,063 options issued by
the Company, 27,359 shares are included as dilutive securities on a weighted
average basis for the six months ended June 30, 2002. For the three and six
months ended June 30, 2001, the Company has included the dilutive effect of
62,063 and 117,919 options, respectively, to purchase shares of the Company's
common stock in the computation of diluted earnings per share. Of the 62,063 and
117,919 options issued by the Company, 7,183 and 21,484 shares are included as
dilutive securities on a weighted average basis for the three and six months
ended June 30, 2001, respectively. Options to purchase 262,063 and 285,856
shares of the Company's common stock at June 30, 2002 and 2001, respectively,
were not included in the computation of diluted earnings per share because the
options were antidilutive.

The Company has included the dilutive effect of Tejas Securities' subscriptions
receivable based on the treasury stock method for the six months ended June 30,
2001. The Company recognized the incremental effect on its shares outstanding
assuming the subscriptions receivable were fully paid for and exchanged for the
Company's common stock versus the Company repurchasing those shares using a
weighted average market price for the period. There were no Tejas Securities
subscriptions receivable outstanding during the six months ended June 30, 2002.

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(4) 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 a managing underwriter and a syndicate member, and provides
advisory services to companies.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes.

The following table presents segment revenues, profits from operations before
income taxes, and assets for the six months ended June 30, 2002.

The following table presents segment revenues, profits from operations before
income taxes and minority interest, and assets for the six months ended June 30,
2001.

(5) New Accounting Pronouncements

In June 2001, FASB issued Statement No. 142 ("Statement 142"), Goodwill and
Other Intangible Assets. Statement 142 requires that goodwill no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement 144 upon its adoption (See Below).

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The Company adopted certain provisions of Statement 142 effective July 1, 2001
as required for goodwill resulting from business combinations consummated after
June 30, 2001. The Company recorded goodwill in connection with the acquisition
of the minority interest of Tejas Securities in August 2001. The remaining
provisions of Statement 142 were adopted effective January 1, 2002. Goodwill
acquired after June 30, 2001, but before Statement 142 was adopted in full was
not amortized during 2001, but was evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature, which includes FASB
Statement No. 121 ("Statement 121"), Accounting for the Impairment of Long-Lived
Assets and for Long Lived-Assets to be Disposed Of. Financial Accounting
Standards Board's Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets ("Statement 144") supercedes Statement 121 and was adopted
by the Company on January 1, 2002. The adoption of Statement 144 as of January
1, 2002 had no impact on the Company's consolidated financial statements.

The Company adopted the remaining provisions of Statement 142 as of January 1,
2002. In connection with the transitional goodwill impairment evaluation
required by Statement 142, the Company performed an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. This
transitional goodwill impairment evaluation was completed prior to June 30, 2002
and resulted in no indication that goodwill was impaired as of January 1, 2002.
As of January 1, 2002, the Company had unamortized goodwill in the amount of
$138,215, all of which was subject to the transition provisions of Statement
142. As of January 1, 2002 and June 30, 2002, the Company had no other
intangible assets.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward Looking Statements and Risk Factors

This Form 10-Q includes statements which predict or forecast future events,
depend on future events for their accuracy or embody assumptions which may prove
to have been inaccurate. The Company cautions that these forward-looking
statements, and the Company's business and prospects, are subject to a number of
factors which could cause actual results to differ materially, including:
effectively managing changes in its business and operations, the ability of
third-party vendors to provide critical services, changes in economic and
political trends in business and finance and changes in volumes and price levels
of securities transactions, defaults by the Company's customers on their margin
accounts, failing to comply with strict governmental regulations, failure to
maintain the net capital requirements imposed by the SEC, the NASD and various
other regulatory agencies, failure of its trading systems and the resultant
negative impact on the Company's sales and revenues. Certain factors which may
materially affect the Company's business, prospects and results are described in
the Company's Form 10-K for fiscal year 2001, and in subsequent quarterly and
current reports filed on Forms 10-Q and 8-K, each available from the Securities
and Exchange Commission.

Results of Operations

The revenues and operating expenses of the Company's significant operating
subsidiary, Tejas Securities, are influenced by fluctuations in the equity and
debt markets, general economic and market conditions, as well as Tejas
Securities' ability to identify investment opportunities for its trading
accounts and its customer accounts. Currently, Tejas Securities revenue is
derived primarily from principal debt and equity transactions, which generate
both commission revenue and investment income.

The Company's total revenues increased by $291,591 or 3% to $11,919,143 for the
six months ended June 30, 2002 compared to the prior year period. The Company's
total revenues increased by $389,132 or 7% to $5,808,408 for the three months
ended June 30, 2002 compared to the prior year period. The reasons for the
increases are set forth below.

Commission revenues from principal and equity transactions decreased $1,985,319
or 16% to $10,132,510 for the six months ended June 30, 2002. Commission
revenues from principal and equity transactions decreased $888,486 or 14% to
$5,497,046 for the three months ended June 30, 2002. The decrease is the result
of a decrease in distressed securities commissions from the same period in 2001.

Investment banking revenues increased $25,951 or 9% to $310,063 and $108,475 or
55% to $305,000 for the six months and three months ended June 30, 2002. The
increase in investment banking revenues is due to an increase in advisory fees
over the past year.

Net dealer inventory and investment income (loss) increased by $2,192,862 to
$1,405,200 and $1,125,998 to $(43,952) for the six months and three months ended
June 30, 2002. The increase in net dealer inventory and investment income (loss)
resulted from trading activity in distressed corporate debt securities. Net
unrealized trading losses for the six months ended June 30, 2002 and 2001 were
$(313,397) and $(2,174,511), respectively.

For the six and three months ended June 30, 2002, other income increased $58,097
or 438% to $71,370 and $43,145 or 602% to $50,314, respectively. The increase
for the six and three months ended June 30, 2002 resulted from the increase in
miscellaneous receipts and interest income on notes receivable and deposit
accounts.

Total expenses decreased by $100,773 or 1% to $11,233,473 for the six months
ended June 30, 2002. For the three months ended June 30, 2002, total expenses
increased by $108,891 or 2% to $5,457,138. Net income for the six and three
months ended June 30, 2002 increased by $283,651 or 294% to $379,977 and
$174,780 or 875% to $194,761. The explanations for the changes are set forth
below.

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Commissions, employee compensation and benefits decreased $30,586 or less than
1% to $8,733,286 for the six months ended June 30, 2002. For the three months
ended June 30, 2002, commissions, employee compensation and benefits increased
$55,047 or 1% to $4,230,768. Commission expense for the six months and three
months ended June 30, 2002 decreased $953,843 or 16% to $5,092,056 and $378,611
or 12% to $2,873,318 primarily as a result of the decrease in commission
revenue. General and administrative salaries and other employee benefits
increased as a result of quarterly bonuses based upon increases in net dealer
inventory and investment income (loss).

Clearing and floor brokerage costs increased $19,649 or 11% to $202,851 and
$5,332 or 5% to $108,969 for the six and three months ended June 30, 2002,
respectively. The overall increase in clearing and floor brokerage costs for the
six and three months ended June 30, 2002 resulted from increased trading
activity in corporate debt and equity securities transactions.

Communications and occupancy charges decreased $73,453 or 8% to $801,710 and
increased $339 or less than 1% to $425,778 for the six and three months ended
June 30, 2002, respectively. The decrease for the six month period is due to
reductions and restructurings in telecommunications services agreements.

Professional fees for the six and three months ended June 30, 2002 decreased
$114,598 or 23% to $393,616 and $29,849 or 15% to $171,657, respectively. The
decrease corresponds to reductions in legal fees and consulting fees from the
prior year.

Interest expense for the six and three months ended June 30, 2002 decreased
$47,420 or 32% to $99,324 and $1,527 or 2% to $64,361, respectively. The
decrease is due to the repayment of $750,000 of notes payable to officers during
May and June 2001, along with a $500,000 reduction in other notes payable during
the six month period ended June 30, 2002.

Other expenses increased $145,635 or 17% to $1,002,686 and $79,549 or 21% to
$455,605 for the six and three months ended June 30, 2002, respectively. The
overall increase in other expenses during the six and three months ended June
30, 2002 is the result of increases in general and administrative services
needed to support the Company's brokers.

Income tax expense increased $190,776 or 166% to $305,693 for the six months
ended June 30, 2002. For the three months ended June 30, 2002, income tax
expense increased $128,807 or 465% to $156,509. The overall increase in income
tax expense for the six and three months ended June 30, 2002 is due to the
increase in taxable income during the respective period. The Company's effective
tax rate was 45% for the six months ended June 30, 2002.

Minority interest in net income resulted from the minority interest stockholders
of Tejas Securities subsequent to the Merger on August 27, 1999. There are no
longer minority stockholders as of August 29, 2001.

Liquidity and Capital Resources

As a broker-dealer, the Company is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors affecting
the Company's liquidity include the value of securities held in trading
accounts, the value of non-current assets, the amount of unsecured receivables,
and the amount of general business liabilities, excluding amounts payable to its
clearing broker and NASD approved subordinated debt.

The Company's inventory balance fluctuates daily based on the current market
value and types of securities held. The Company typically invests in securities
in which it provides research coverage. The types of securities may include
publicly traded debt, equity, options and private security issuances. As a
market maker, the Company provides bid and ask quotes on certain equity
securities on the NASDAQ market. The Company's ability to generate revenues from
market making activities may depend upon the level and value of securities held
in inventory.

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Market values for some of the securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, the Company's liquidity may
be affected depending on the value of the securities involved. During times of
general market declines, the Company may experience market value losses, which
ultimately affects the liquidity of the Company through its broker-dealer net
capital requirements. In addition, the Company may decide not to liquidate its
security holdings to increase cash availability if management believes a market
turnaround is likely in the near term or if management believes the securities
are undervalued in the current market.

The Company utilizes the receivable balance at its clearing organization to fund
operating activities. The receivable balance at the clearing organization is
also used to secure temporary financing for the purchase of investments in the
Company's trading accounts. The receivable balance held at the clearing
organization may fluctuate depending on factors such as the market valuation of
securities held in the Company's trading accounts, realized trading profits,
commission revenue, cash withdrawals and clearing costs charged to the Company
for conducting its trading activities.

In December 2001, the Company entered into an agreement with Correspondent
Services Corporation ("CSC") to provide clearing services for the Company and
its customers. In February 2002, the Company began the process of transitioning
its business and its accounts to CSC. The process was completed in March 2002
and did not have any adverse effects on the Company's liquidity.

On April 1, 2002, the Company extended the maturity date of a note payable to a
bank. Originally, the remaining balance of $350,000 was due and payable to the
bank on April 1, 2002. Under the restructured note payable, the Company will
continue to make monthly payments of $50,000 plus accrued interest through
November 1, 2002.

In March 2002, the Company entered into an agreement with a bank to borrow
$2,500,050 for operating purposes at Tejas Securities. The loan is due and
payable on demand or by March 15, 2003 if no demand is made. The loan accrues
interest at a rate of 5.50% per annum and is to be paid on a monthly basis.
Tejas Securities has provided a certificate of deposit in a like amount as
collateral for the loan (included in other investments). In April 2002, the
Company repaid $250,000 of the loan to the bank.

On July 1, 2002, the Company repaid $500,000 of the $1,000,000 in subordinated
loans payable to Clark Wilson, a Company director. The remaining loan is
scheduled to mature in November 2002.

On July 31, 2002, the Company entered into an agreement with a bank to borrow
$250,000 for short-term operating purposes at Tejas Securities. The loan is due
and payable in a single payment on October 1, 2002, and accrues interest at 7%
per annum.

On August 8, 2002, the Company entered into a promissory note agreement with
John J. Gorman, Chairman and Chief Executive Officer, to borrow $1,000,000.
Under the terms of the promissory note, the Company will make twenty monthly
installment payments of $50,000, plus accrued interest, beginning on September
8, 2002. The promissory note accrues interest at 11.5% per annum. Proceeds from
the promissory note may be used for retiring existing debt or for operating
purposes of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's principal business activities are, by their nature, risky and
volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect the Company's business. Managing risk is
critical to the Company's profitability and to reducing the likelihood of
earnings volatility. The Company's risk management policies and procedures have
been established to continually identify, monitor and manage risk. The major
types of risk that the Company faces include credit risk, operating risk and
market risk.

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Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. The Company clears its securities
transactions through a clearing organization. Under the terms of the clearing
agreement, the clearing organization has the right to charge the Company for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, the Company's policy is to monitor the
credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of the Company's assets are held
at its clearing organization, Correspondent Services Corporation. Therefore, the
Company could incur substantial losses if its clearing organization were to
become insolvent or otherwise unable to meet its financial obligations.
Correspondent Services Corporation has in excess of $200 million in capital and
has historically met all of its obligations to the Company.

Operating risk arises from the daily conduct of the Company's business and
relates to the potential for deficiencies in control processes and systems,
mismanagement of Company activities or mismanagement of customer accounts by its
employees. The Company relies heavily on computer and communication systems in
order to conduct its brokerage activities. Third party vendors, such as the
clearing organization and news and quote providers, provide many of the systems
critical to the Company's business. The Company's business could be adversely
impacted if any of these systems were disrupted. The Company mitigates the risk
associated with systems by hiring experienced personnel, and providing employees
with alternate means of acquiring or processing information. In order to
mitigate the risk associated with mismanagement of Company activities or
customer accounts, the Company utilizes compliance and operations personnel to
review the activities of administrative and sales personnel. In addition, the
activities of management are actively reviewed by other members of management on
a regular basis and by the Board of Directors.

The Company's primary market risk exposure is to market price changes and the
resulting risk of loss that may occur from the potential change in the value of
a financial instrument as a result of price volatility or changes in liquidity
for which the Company has no control. Securities owned by the Company are either
related to daily trading activity or the Company's principal investing
activities. Market price risk related to trading securities is managed primarily
through the daily monitoring of funds committed to the various types of
securities owned by the Company and by limiting exposure to any one investment
or type of investment.

The Company's trading securities were $6,059,199 in long positions and
$1,521,725 in short positions at June 30, 2002. These trading securities may be
exchange listed, Nasdaq or other over-the-counter securities on both long and
short positions. The potential loss in fair value, using a hypothetical 10%
decline in prices, is estimated to be $758,092 as of June 30, 2002. A 10%
hypothetical decline was used to represent a significant and plausible market
change.

The Company's investment securities are typically those reported on by the
Company's research analysts. These positions often consist of high-yield debt
securities and the related equity securities. The Company monitors this risk by
maintaining current operating and financial data on the companies involved, and
projecting future valuations based upon the occurrence of critical future
events. Any transactions involving the investment securities are typically based
upon recommendations of the Company's research analysts versus current market
performance.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes to the claims or legal actions in which the
Company is involved since December 31, 2001. Additionally, there are no other
liabilities arising from claims or legal actions that management believes would
have a significant adverse effect on the consolidated financial condition or
results of operations of the Company.

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ITEM 6. EXHIBITS AND REPORTS ON 8-K

a) Exhibits

Exhibit list

b) Current reports on Form 8-K

On June 20, 2002, the Company filed a Form 8-K to report the approval
of an amendment to the Company's Certificate of Incorporation to
decrease the number of shares of common stock that the Company has the
authority to issue from 50,000,000 to 10,000,000.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, The Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

Westech Capital Corp.

Date: August 14, 2002

/s/ JOHN J. GORMAN
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John J. Gorman
Chief Executive Officer

/s/ KURT J. RECHNER
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Kurt J. Rechner
Chief Financial Officer

/s/ JOHN F. GARBER
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John F. Garber
Director of Finance (Principal
Accounting Officer)

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99.2 Bylaws of Tejas Securities Group, Inc. (Incorporated herein by
reference to Exhibit 99.2 to the registrant's Registration Statement on
Form 10-12(g) (File No. 000-29235))

99.3 Articles of Incorporation of Tejas Securities Group Holding Company
(Incorporated herein by reference to Exhibit 99.3 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))

99.4 Bylaws of Tejas Securities Group Holding Company (Incorporated herein
by reference to Exhibit 99.4 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))

99.5* Certification of John J. Gorman, Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

99.6* Certification of Kurt J. Rechner, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

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* Filed herewith.

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