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UNITED STATES
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, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number
33-37534-NY
WESTECH CAPITAL CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3577716
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
2700 VIA FORTUNA, SUITE 400, AUSTIN, TEXAS 78746
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(512) 306-8222
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark X whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 31, 2003, the
Registrant had the following number of shares of common stock, $0.001 par value
per share, outstanding: 1,512,024.
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
--------- ------------
ASSETS
Cash and cash equivalents $ 185,352 750,746
Receivable from clearing organization 2,490,595 -
Receivables from employees and stockholders 201,642 263,866
Federal income taxes receivable 101,326 202,070
Securities owned, at market value 4,655,866 5,985,305
Other investments 1,155,000 1,250,000
Property and equipment, net 334,896 333,800
Deferred tax asset, net 126,507 74,990
Goodwill 138,215 138,215
Prepaid expenses and other assets 183,737 275,946
---------- ---------
Total assets $9,573,136 9,274,938
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $3,053,639 2,380,552
Securities sold, not yet purchased 1,510,902 985,210
Payable to clearing organization - 971,651
Notes payable 1,955,100 1,623,450
Note payable to stockholder - 800,000
---------- ---------
Total liabilities 6,519,641 6,760,863
---------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value
10,000,000 shares authorized; 1,512,024
issued and outstanding at June 30, 2003 and
December 31, 2002 1,512 1,512
Additional paid in capital 2,222,281 2,222,281
Retained earnings 829,702 290,282
---------- ---------
Total stockholders' equity 3,053,495 2,514,075
---------- ---------
Total liabilities and stockholders' equity $9,573,136 9,274,938
========== =========
See accompanying notes to consolidated financial statements.
2
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2003 2002 2003 2002
----------- --------- ---------- ----------
Revenues:
Commissions $ 7,333,857 5,497,046 16,738,547 10,132,510
Underwriting and investment banking income 10,000 305,000 30,000 310,063
Net dealer inventory and investment income (loss),
net of trading interest expense of $28,749, $(830),
$55,799 and $17,372 for the three and six months
ended June 30, 2003 and 2002, respectively (1,697,690) (43,952) (1,728,416) 1,405,200
Other income (loss) 11,131 50,314 (8,712) 71,370
----------- --------- ---------- ----------
Total revenues 5,657,298 5,808,408 15,031,419 11,919,143
----------- --------- ---------- ----------
Expenses:
Commissions, employee compensation
and benefits 3,993,300 4,230,768 11,038,329 8,733,286
Clearing and floor brokerage 136,916 108,969 258,143 202,851
Communications and occupancy 571,401 425,778 1,071,999 801,710
Professional fees 305,171 171,657 583,963 393,616
Interest, including $12,319, $28,672, $32,232 and
$57,028 for the three and six months ended
June 30, 2003 and 2002, respectively, to related
parties 32,163 64,361 74,959 99,324
Other 513,873 455,605 1,081,071 1,002,686
----------- --------- ---------- ----------
Total expenses 5,552,824 5,457,138 14,108,464 11,233,473
----------- --------- ---------- ----------
Income before income tax expense 104,474 351,270 922,955 685,670
Income tax expense 50,683 156,509 383,535 305,693
----------- --------- ---------- ----------
Net income $ 53,791 194,761 539,420 379,977
=========== ========= ========== ==========
Earnings per share:
Basic $ 0.04 0.13 0.36 0.25
=========== ========= ========== ==========
Diluted $ 0.04 0.13 0.36 0.25
=========== ========= ========== ==========
Weighted average shares outstanding:
Basic 1,512,024 1,512,024 1,512,024 1,512,024
=========== ========= ========== ==========
Diluted 1,512,024 1,512,024 1,512,024 1,539,383
=========== ========= ========== ==========
See accompanying notes to consolidated financial statements.
3
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
----------- ----------
Cash flows from operating activities:
Net income $ 539,420 379,977
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes (51,517) 9,910
Depreciation and amortization expense 59,158 59,865
Non-cash compensation expense 99,836 50,000
Loss on disposition of property and equipment 36,463 -
Decrease in deposit with clearing organization - 260,471
(Decrease) increase in payable to clearing organization, net of
receivable from clearing organization (3,462,246) 2,741,480
(Increase) decrease in receivables from employees and stockholders (37,612) 159,281
Decrease (increase) in Federal income taxes receivable 100,744 (58,964)
Decrease (increase) in securities owned 1,329,439 (3,047,532)
Decrease (increase) in other investments 95,000 (2,250,000)
Decrease in prepaid expenses and other assets 92,209 66,893
Increase (decrease) in accounts payable, accrued expenses
and other liabilities 673,087 (740,195)
Increase in securities sold, not yet purchased 525,692 1,189,144
----------- ----------
Net cash used in operating activities (327) (1,179,670)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (96,717) -
----------- ----------
Net cash used in investing activities (96,717) -
----------- ----------
Cash flows from financing activities:
Proceeds from note payable 805,050 2,500,050
Repayment of note payable (473,400) (500,000)
Repayment of note payable to stockholder (800,000) -
----------- ----------
Net cash provided by (used in) financing activities (468,350) 2,000,050
----------- ----------
Net (decrease) increase in cash and cash equivalents (565,394) 820,380
Cash and cash equivalents at beginning of period 750,746 547,761
----------- ----------
Cash and cash equivalents at end of period $ 185,352 1,368,141
=========== ==========
Supplemental disclosures:
Interest paid $ 74,959 83,260
Taxes paid $ 332,858 309,600
Summary of non-cash transactions:
In both March 2003 and 2002, the Company forgave $50,000, respectively, of an
officer's note receivable which has been recorded as compensation expense.
In March 2003, the Company forgave a $49,836 receivable from an officer, which
has been recorded as compensation expense.
See accompanying notes to consolidated financial statements.
4
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) General
Westech Capital Corp., a Delaware corporation ("Westech"), is a holding company
whose only operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas"). Tejas is engaged in the business of providing brokerage
and related financial services to institutional and retail customers nationwide.
References to the Company within the Form 10-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. On August 27, 1999,
Westech was acquired by Tejas in a reverse merger. On August 29, 2001, Westech
acquired all of the outstanding minority interest in Tejas.
Our business is conducted from our headquarters at 2700 Via Fortuna, Suite 400,
Austin, Texas, with branch offices in Houston, Texas and Tinton Falls, New
Jersey. Tejas is a registered broker-dealer and investment advisor offering: (i)
brokerage services to retail and institutional customers; (ii) high quality
investment research to institutional and retail customers; (iii) market-making
activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services.
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 2002 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, 2003 are not necessarily indicative of the results
of the year ending December 31, 2003.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148
("SFAS 148"), Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123. SFAS 148 amends Financial
Accounting Standards Board Statement No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirement
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the fair value based method of accounting for
stock-based employee compensation for those companies that have elected to
continue to apply Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees. The Company has elected to continue to
apply the provisions of APB 25 to its fixed-plan stock options. The adoption of
SFAS 148 did not have an impact on the Company's consolidated financial position
or results of operations.
5
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma disclosures below use the fair value method of SFAS No. 123 to
measure compensation expense for stock-based employee compensation plans. There
were no stock based employee compensation costs included in the determination of
net income as reported for the three and six months ended June 30, 2003 and
2002, respectively.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income as reported for basic $53,791 194,761 539,420 379,977
Deduct stock-based
compensation expense
determined under the fair value
based method (3,354) (12,733) (6,126) (25,466)
------- ------- ------- -------
Pro forma net income for basic $50,437 182,028 533,294 354,511
======= ======= ======= =======
Net income as reported for
diluted $53,791 194,761 539,420 379,977
Deduct stock-based
compensation expense
determined under the fair value
based method (3,354) (12,733) (6,126) (25,466)
------- ------- ------- -------
Pro forma net income for diluted $50,437 182,028 533,294 354,511
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.04 0.13 0.36 0.25
Basic - pro forma $ 0.03 0.12 0.35 0.23
Diluted - as reported $ 0.04 0.13 0.36 0.25
Diluted - pro forma $ 0.03 0.12 0.35 0.23
The fair value of stock options granted was estimated at the date of grant using
Black-Scholes option-pricing model. This model was developed for use in
estimating fair value of publicly traded options that have no vesting
restrictions and are fully transferable. Additionally, the model requires the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of publicly
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
Black-Scholes option-pricing model does not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
6
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(2) Net Capital
Tejas is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or
Dealers (the "Rule"), which establishes minimum net capital requirements for
broker-dealers. The Rule is designed to measure financial integrity and
liquidity in order to assure the broker-dealer's financial stability within the
securities market. The net capital required under the Rule depends in part upon
the activities engaged in by the broker-dealer.
Tejas 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. Minimum net capital requirements may be as great as $1,000,000
depending upon the number and value of securities in which Tejas makes markets.
As of June 30, 2003, Tejas' net capital of $1,208,039 was $958,039 in excess of
the minimum required. Tejas' ratio of aggregate indebtedness to net capital was
2.76 to 1 at June 30, 2003.
(3) Notes Payable and Notes Payable to Stockholder
In March 2002, the Company entered into a term loan agreement with a bank to
borrow $2,500,000 for operating purposes. The loan was originally due and
payable on demand or by March 15, 2003 if no demand was made. The loan accrues
interest at 5.5% per annum. On March 15, 2003, the Company extended the maturity
date of the loan to March 15, 2004. The balance of the loan was $1,150,050 as of
June 30, 2003.
On August 8, 2002, the Company entered into an unsecured promissory note
agreement with John Gorman, Chairman and Chief Executive Officer, to borrow
$1,000,000. Under the terms of the promissory note, the Company was scheduled to
make twenty monthly installment payments of $50,000, plus accrued interest,
commencing on September 8, 2002. The promissory note accrued interest at 11.5%
per annum. In June 2003, the Company retired the remaining balance of $500,000
through the proceeds of a bank loan as described below.
On October 30, 2002, the Company entered into an agreement with a bank to borrow
$500,000 for operating purposes at Tejas. The loan was due on demand or by May
1, 2004 if no demand was made. The loan accrued interest at prime plus 1.5% and
was to be paid in equal monthly payments commencing on December 1, 2002. In June
2003, the Company retired the remaining balance of approximately $305,000
through the proceeds of a bank loan as described below.
On June 3, 2003, the Company entered into an agreement with a bank to borrow
$805,000 for refinancing purposes. The loan is due on demand or by December 1,
2004 if no demand is made. The loan accrues interest at prime plus 1.5% and is
to be paid in monthly installments of $50,000 plus accrued interest.
7
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(4) Earnings Per Share
Basic earnings per share are 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, 2003 and 2002. 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 are calculated as follows.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------------------------
2003 2002 2003 2002
---------- --------- --------- ---------
BASIC EARNINGS PER SHARE:
Net income $ 53,791 194,761 539,420 379,977
Weighted average shares outstanding 1,512,024 1,512,024 1,512,024 1,512,024
Basic earnings per share $ 0.04 0.13 0.36 0.25
DILUTED EARNINGS PER SHARE:
Net income $ 53,791 194,761 539,420 379,977
Weighted average shares outstanding 1,512,024 1,512,024 1,512,024 1,512,024
Effect of dilutive securities:
Options - - - 27,359
Weighted average shares outstanding 1,512,024 1,512,024 1,512,024 1,539,383
Diluted earnings per share $ 0.04 0.13 0.36 0.25
Options to purchase 322,063 shares of the Company's common stock for the six
months ended June 30, 2003 were not included in the computation of diluted
earnings per share because the options were antidilutive. 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 as calculated under the Treasury
Stock Method. Options to purchase 322,063 and 262,063 shares of the Company's
common stock for the three months ended June 30, 2003 and 2002, respectively,
were not included in the computation of diluted earnings per share because the
options were antidilutive.
(5) Industry Segment Data
Westech has two reportable segments: brokerage services and investment banking.
The primary operating segment, brokerage services, includes sales, trading and
market-making activities of Westech and encompasses both retail and
institutional customer accounts. These segments require the commitment of
significant human capital and financial resources, as well as industry specific
skills. The investment-banking segment participates in underwriting of corporate
securities as a managing underwriter and a syndicate member, and provides
advisory services to companies.
8
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents segment revenues, income before income tax expense,
and assets for the six months ended June 30, 2003.
Investment
Brokerage Banking Total
------------ ---------- ----------
Revenues from external
customers $14,368,314 30,000 14,398,314
Interest revenue 688,904 - 688,904
Interest expense 130,758 - 130,758
Depreciation and amortization 99,836 - 99,836
Income before income tax expense 892,955 30,000 922,955
Segment assets 9,573,136 - 9,573,136
Capital expenditures 96,717 - 96,717
The following table presents segment revenues, income before income tax expense,
and assets for the six months ended June 30, 2002.
Investment
Brokerage Banking Total
----------- ---------- ----------
Revenues from external
customers $11,193,674 310,063 11,503,737
Interest revenue 432,778 - 432,778
Interest expense 116,696 - 116,696
Depreciation and amortization 59,865 - 59,865
Income before income tax expense 534,176 151,494 685,670
Segment assets 10,905,626 - 10,905,626
(6) Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN
46 requires that if an entity has a controlling financial interest in a variable
interest entity, the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. The Company does not believe that the adoption of FIN 46 will
have a material impact on its results of operations or financial position.
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The Company does not believe that
the adoption of SFAS 149 will have a material impact on its results of
operations or financial position.
9
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The Company does not believe that the adoption of SFAS 150 will have a material
impact on the Company's results of operations or financial position.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements and Risk Factors
From time to time, we make statements (including some contained in this report)
which predict or forecast future events or results, which depend on future
events for their accuracy, which embody projections or that otherwise contain
"forward-looking information." These statements may relate to anticipated
revenues or earnings per share, the adequacy of our capital and liquidity or the
adequacy of our reserves for contingencies, including litigation.
We caution you that any forward-looking information provided by us or on our
behalf is not a guarantee of future performance. Actual results may differ
materially as a result of various factors, many of which are outside of our
control, including the rapidly changing business environment and our limited
administrative, operational, financial and other resources; our dependence on
third party vendors to provide critical services; unanticipated changes in
economic or political trends impacting business and finance, particularly those
resulting in downward changes in volumes and price levels of securities
transactions; customer defaults on indebtedness to us; our potential failure to
comply with various regulatory requirements or to maintain net capital levels;
and other factors discussed under the heading "Quantitative and Qualitative
Disclosure About Market Risk," and those discussed in our annual report on Form
10-K and other periodic reports filed with and available from the Securities and
Exchange Commission.
All forward-looking statements speak only as of the date on which they are made
and we undertake no obligation to update them to reflect events of circumstances
occurring after the date on which they were made or to reflect the occurrence of
unanticipated events.
Critical Accounting Policies
The Company's critical accounting policies are described in the Company's 2002
Form-10K.
Results of Operations
The revenues and operating expenses of the Company's operating subsidiary,
Tejas, are influenced by fluctuations in the equity and debt markets, general
economic and market conditions, as well as Tejas' ability to identify investment
opportunities for its trading accounts and its customer accounts. Currently,
Tejas 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 $3,112,276 or 26% to $15,031,419 for
the six months ended June 30, 2003, compared to the prior year period. The
Company's total revenues decreased by $151,110 or 3% to $5,657,298 for the three
months ended June 30, 2003 compared to the prior year period. The reasons for
the increases are set forth below.
Commission revenues from principal and agency transactions increased $6,606,037
or 65% to $16,738,547 for the six months ended June 30, 2003. Commission
revenues from principal and agency transactions increased $1,836,811 or 33% to
$7,333,857 for the three months ended June 30, 2003. The increase is the result
of an increase in commissions from distressed debt securities and government
securities from the same periods in the prior year.
Underwriting and investment banking income decreased $280,063 or 90% to $30,000
and $295,000 or 97% to $10,000 for the six and three months ended June 30, 2003,
respectively. The decrease in investment banking revenues for the six and three
months ended June 30, 2003 is due to a decrease in advisory fees earned.
Net dealer inventory and investment income (loss) decreased by $(3,133,616) or
223% to $(1,728,416) and $(1,653,738) or 3,763% to $(1,697,690) for the six and
three months ended June 30, 2003, respectively. The decrease in inventory and
investment income for the six and three months ended June 30, 2003 resulted from
trading activity in distressed corporate debt securities and equity securities.
Net unrealized trading gains for the six months ended June 30, 2003 were
$990,707. Net realized trading losses for the six months ended June 30, 2003
were $(3,402,344).
11
For the six and three months ended June 30, 2003, other income (loss) decreased
by $(80,082) or 112% to $(8,712) and $(39,183) or 78% to $11,131. The decrease
for the six and three months ended June 30, 2003 resulted from a loss on the
disposition of property and equipment.
Total expenses increased by $2,874,991 or 26% to $14,108,464 for the six months
ended June 30, 2003. For the three months ended June 30, 2003, total expenses
increased by $95,686 or 2% to $5,552,824. Net income (loss) for the six and
three months ended June 30, 2003 increased by $159,443 or 42% to $539,420 and
decreased by $(140,970) or 75% to $53,791. The explanations for the changes are
set forth below.
Commissions, employee compensation and benefits increased $2,305,043 or 26% to
$11,038,329 for the six months ended June 30, 2003. For the three months ended
June 30, 2003, commissions, employee compensation and benefits decreased
$237,468 or 6% to $3,993,300. Commission expense increased $2,929,951 or 58% to
$8,021,007 and $365,437 or 13% to $3,238,755 for the six and three months ended
June 30, 2003, respectively. The increase in commission expense for the period
is due to the increase in commission revenues. General and administrative
salaries and other employee benefits experienced a 19% decrease as a result of
lower bonuses for the six months ended June 30, 2003.
Clearing and floor brokerage costs increased $55,292 or 27% to $258,143 and
$27,947 or 26% to $136,916 for the six and three months ended June 30, 2003,
respectively. The overall increase in clearing and floor brokerage costs for the
six and three months ended June 30, 2003 resulted from greater trading activity
in the over-the-counter equity markets and on the national exchanges. Much of
the cost increase is attributable to an increase in institutional equity trading
activity.
Communications and occupancy charges increased $270,289 or 34% to $1,071,999 and
$145,623 or 34% to $571,401 for the six and three months ended June 30, 2003,
respectively. The increase for the six and three months ended June 30, 2003 is
due to an increase in telecommunications costs associated with the New Jersey
office and additional systems needed for institutional equity trading
activities. Additionally, the Company's sublease agreement for a portion of its
Austin headquarters expired in April 2003.
Professional fees for the six and three months ended June 30, 2003 increased
$190,347 or 48% to $583,963 and $133,514 or 78% to $305,171, respectively. The
increase is due to the accrual of additional legal fees and consulting fees
pertaining to information technology upgrades.
Interest expense, excluding trading interest expense, for the six and three
months ended June 30, 2003 decreased $24,365 or 25% to $74,959 and $32,198 or
50% to $32,163. The decrease is due to the overall reduction of the Company's
debt level from the prior year.
Other expenses increased $78,385 or 8% to $1,081,071 and $58,268 or 13% to
$513,873 for the six and three months ended June 30, 2003, respectively. The
overall increase in other expenses during the six and three months ended June
30, 2003 is the result of increases in general and administrative services
needed to support administrative infrastructure.
Income tax expense increased $77,842 or 25% to $385,535 and decreased $(105,826)
or 68% to $50,683 for the six and three months ended June 30, 2003,
respectively. The overall increase in income tax expense for the six months
ended June 30, 2003 is due to the increase in taxable income during the
respective period. The overall decrease for the three months ended June 30, 2003
is due to a decrease in taxable income during the respective period. The
Company's effective tax rate was 42% for the six months ended June 30, 2003.
12
Liquidity and Capital Resources
As a broker-dealer, the Company is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors affecting
the Company's liquidity include the value of securities held in trading
accounts, the value of non-current assets, the amount of unsecured receivables,
and the amount of general business liabilities, excluding amounts payable to its
clearing organization and NASD approved subordinated debt.
The Company's inventory balance fluctuates daily based on the current market
value and types of securities held. The Company typically invests in securities
in which it provides research coverage. The types of securities may include
publicly traded debt, equity, options and private security issuances. As a
market maker, the Company provides bid and ask quotes on certain equity
securities on the NASDAQ market. The Company's ability to generate revenues from
market making activities may depend upon the level and value of securities held
in inventory.
Market values for some of the securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, the Company's liquidity may
be affected depending on the value of the securities involved. During times of
general market declines, the Company may experience market value losses, which
ultimately affects the liquidity of the Company through its broker-dealer net
capital requirements. In addition, the Company may decide not to liquidate its
security holdings to increase cash availability if management believes a market
turnaround is likely in the near term or if management believes the securities
are undervalued in the current market.
The Company utilizes the receivable balance from its clearing organization to
fund operating activities. The receivable balance at the clearing organization
is also used to secure temporary financing for the purchase of investments in
the Company's trading accounts. The receivable balance held at the clearing
organization may fluctuate depending on factors such as the market valuation of
securities held in the Company's trading accounts, realized trading profits,
commission revenue, cash withdrawals and clearing costs charged to the Company
for conducting its trading activities.
The Company may seek additional debt financing from time to time from either
external or internal sources to provide funds for operating purpose.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal business activities are, by their nature, risky and
volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect the Company's business. Managing risk is
critical to the Company's profitability and to reducing the likelihood of
earnings volatility. The Company's risk management policies and procedures have
been established to continually identify, monitor and manage risk. The major
types of risk that the Company faces include credit risk, operating risk and
market risk.
Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. The Company clears its securities
transactions through a clearing organization. Under the terms of the clearing
agreement, the clearing organization has the right to charge the Company for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, the Company's policy is to monitor the
credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of the Company's assets are held
at its clearing organization, Correspondent Services Corporation. Therefore, the
Company could incur substantial losses if its clearing organization were to
become insolvent or otherwise unable to meet its financial obligations.
Correspondent Services Corporation has in excess of $200 million in capital and
has historically met all of its obligations to the Company.
13
Operating risk arises from the daily conduct of the Company's business and
relates to the potential for deficiencies in control processes and systems,
mismanagement of Company activities or mismanagement of customer accounts by its
employees. The Company relies heavily on computer and communication systems in
order to conduct its brokerage activities. Third party vendors, such as the
clearing organization and news and quote providers, provide many of the systems
critical to the Company's business. The Company's business could be adversely
impacted if any of these systems were disrupted. The Company mitigates the risk
associated with systems by hiring experienced personnel, and providing employees
with alternate means of acquiring or processing information. In order to
mitigate the risk associated with mismanagement of Company activities or
customer accounts, the Company utilizes compliance and operations personnel to
review the activities of administrative and sales personnel. In addition, the
activities of management are actively reviewed by other members of management on
a regular basis and by the Board of Directors.
The Company's primary market risk exposure is to market price changes and the
resulting risk of loss that may occur from the potential change in the value of
a financial instrument as a result of price volatility or changes in liquidity
for which the Company has no control. Securities owned by the Company are either
related to daily trading activity or the Company's principal investing
activities. Market price risk related to trading securities is managed primarily
through the daily monitoring of funds committed to the various types of
securities owned by the Company and by limiting exposure to any one investment
or type of investment.
The Company's trading securities were $4,655,866 in long positions and
$1,510,902 in short positions at June 30, 2003. These trading securities may be
exchange listed, Nasdaq or other over-the-counter securities on both long and
short positions. The potential loss in fair value, using a hypothetical 10%
decline in prices, is estimated to be approximately $617,000 as of June 30,
2003. 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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including our Chief Executive Officer, Chief Financial Officer
and Director of Finance, of the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days before the filing of this
quarterly report. Based on that evaluation, our management, including our Chief
Executive Officer, Chief Financial Officer and Director of Finance, concluded
that our disclosure controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the claims or legal actions in which the
Company is involved since December 31, 2002. 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 position or
results of operations of the Company.
14
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
Exhibit list
b) Current reports on Form 8-K
On June 2, 2003, the Company filed a Form 8-K to include Exhibit
16.1- Letter Regarding Change in Certifying Accountant.
On May 20, 2003, the Company filed a Form 8-K to report the change in
the Company's certifying accountant.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westech Capital Corp.
Date: August 14, 2003
/s/ JOHN J. GORMAN
------------------------------------
John J. Gorman
Chief Executive Officer
/s/ KURT J. RECHNER
------------------------------------
Kurt J. Rechner
Chief Financial Officer
/s/ JOHN F. GARBER
------------------------------------
John F. Garber
Director of Finance (Principal
Accounting Officer)
16
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
3.1 Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235))
3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
3.3 Certificate of Amendment to Certificate of Incorporation (Incorporated
herein by reference to the registrant's Current Report on Form 8-K
filed on June 25, 2001)
3.4 Certificate of Amendment to Certificate of Incorporation (Incorporated
herein by reference to the registrant's Current Report on Form 8-K
filed on June 20, 2002)
4.1+ Shareholder Agreement, dated November 23, 1999, between John Ohmstede,
John Glade, Michael Hidalgo, Jon McDonald, Britt Rodgers, Bob
Sternberg, Mike Wolf, Greg Woodby and the Company (Incorporated herein
by reference to Exhibit 4.3 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
4.2 Certificate of Incorporation (Incorporated herein by reference to
Exhibits 3.1 and 3.3 above)
4.3 Bylaws (Incorporated herein by reference to Exhibit 3.2 above)
(Incorporated herein by reference to Exhibit 10.1 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002)
10.1* Promissory note agreement dated June 3, 2003 between First United Bank
and the Company
31.1* Certifications of Chief Executive Officer and Chief Financial Officer
32.1* Certifications of Chief Executive Officer and Chief Financial Officer
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.
+ Management Contract or compensatory plan or arrangement.