<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 33-37534-NY 13-3577716
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1250 Capital of Texas Highway, Suite 500, 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 September 30, 1999, the
Registrant had the following number of shares of common stock, $0.001 par value
per share, outstanding: 12,537,218.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 3,784,689 210,841
Receivable from clearing brokers, partially restricted 7,721,748 1,468,424
Securities owned, at market value 12,435,365 1,539,424
Furniture and equipment, net 340,471 209,431
Deferred tax assets -- 182,320
Other assets 747,575 345,136
------------ ------------
Total assets $ 25,029,848 3,955,576
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 3,121,350 579,316
Securities sold, not yet purchased 339,118 --
Payable to clearing organization 13,292,305 1,459,678
Deferred tax liability 1,387,450 --
Subordinated debt 1,000,000 500,000
------------ ------------
Total liabilities 19,140,223 2,538,994
------------ ------------
Minority interests in consolidated subsidiaries 1,025,102 --
Stockholders' equity:
Common stock, $.001 par value
50,000,000 shares authorized; 12,537,218 issued at
September 30, 1999 and 12,537,218 shares
issued at December 31, 1998 12,537 12,537
Capital in excess of par value 1,574,858 1,472,303
Subscriptions receivable -- (96,263)
Retained earnings 3,277,128 28,005
------------ ------------
Total stockholders' equity 4,864,523 1,416,582
------------ ------------
Total liabilities and stockholders' equity $ 25,029,848 3,955,576
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 4,862,593 2,076,245 20,327,944 5,358,043
Underwriting and investment banking income 55,000 656,141 220,766 2,309,601
Net dealer inventory and investment income 1,112,461 (133,916) 4,629,052 (452,356)
Other income 132,806 26,358 219,871 38,304
------------ ------------ ------------ ------------
Total revenue 6,162,860 2,624,828 25,397,633 7,253,592
------------ ------------ ------------ ------------
Expenses:
Commissions, employee compensation and benefits 3,064,339 1,741,811 15,492,833 4,850,291
Clearing and floor brokerage 108,978 115,404 341,381 304,734
Underwriting expenses -- 254,600 -- 423,125
Communications and occupancy 329,726 249,293 881,410 542,316
Professional fees 666,430 123,527 855,775 402,177
Interest 157,673 19,966 397,656 43,730
Other 527,350 399,662 1,381,040 958,002
------------ ------------ ------------ ------------
Total expenses 4,854,496 2,904,263 19,350,095 7,524,375
------------ ------------ ------------ ------------
Income (loss) before income tax expense (benefit)
and minority interest 1,308,364 (279,435) 6,047,538 (270,783)
Income tax expense (benefit) 556,900 (80,799) 2,422,324 (54,961)
Minority interest in net income (loss) 376,091 -- 376,091 --
------------ ------------ ------------ ------------
Net income (loss) $ 375,373 (198,636) 3,249,123 (215,822)
============ ============ ============ ============
Basic earnings (loss) per share:
Net income (loss) $ 0.03 (0.02) 0.29 (0.02)
============ ============ ============ ============
Weighted average shares outstanding 12,527,602 10,223,851 11,350,153 9,172,622
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,249,123 (215,822)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred tax expense (benefit) 1,569,770 (78,664)
Depreciation expense 50,763 25,319
Minority interest in consolidated net income (loss) 376,091 --
Increase in receivable from clearing brokers (6,253,324) (2,095,953)
Increase in securities owned (10,556,823) (35,467)
Increase in other assets (402,439) (177,959)
Increase in accounts payable, accrued
expenses and other liabilities 2,542,034 774,061
Increase in payable to clearing organization 11,832,627 919,327
------------ ------------
Net cash provided (used) by operating activities 2,407,822 (885,158)
------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (181,803) (146,002)
------------ ------------
Net cash used by investing activities (181,803) (146,002)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable
and subordinated debt 500,000 500,000
Subscriptions collected 96,263 --
Capital contributions 751,566 576,500
------------ ------------
Net cash provided by financing activities 1,347,829 1,076,500
------------ ------------
Net increase in cash and cash equivalents 3,573,848 45,340
Cash and cash equivalents at beginning of period 210,841 170,474
------------ ------------
Cash and cash equivalents at end of period $ 3,784,689 215,814
============ ============
Supplemental disclosures:
Interest paid $ 397,656 43,730
Taxes paid $ 856,369 23,737
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Westech Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
(1) General
On August 27, 1999, pursuant to an Agreement and Plan of Merger, by and among
Westech Capital Corp., Tejas Securities Group Holding Company, a Texas
Corporation ("Tejas Holding"), Tejas Securities Group, Inc. ("Tejas
Securities"), 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 affecting 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 83% of the outstanding common
stock issued by the Tejas Securities. Westech Capital Corp. was previously a
"shell public company" 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 the acquired enterprise (Westech
Capital Corp.) are included in the financial statements of the combined
enterprise only from the date of acquisition. Westech Capital Corp. had no
significant operations from the date of acquisition through September 30, 1999.
The equity of Tejas Securities is presented as the equity of the combined
enterprise; however, the capital 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 capital stock account of Tejas
Securities and the capital stock account of Westech Capital Corp. (presented as
the capital stock account of the combined enterprise) has been recorded as an
adjustment to capital in excess of par value 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 number of equivalent shares received by Tejas
Securities.
The accompanying unaudited consolidated financial statements of Westech Capital
Corp., and subsidiaries (collectively referred to as the "Company"), including
its principal operating subsidiary, Tejas Securities, have been prepared in
accordance with the instructions for Form 10Q and, therefore, do not include all
the disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments (consisting of only normal recurring
adjustments) that are necessary in the opinion of management for a fair
presentation of the interim financial statements have been included.
The interim financial information should be read in conjunction with the
Company's Form 8-K filed September 8, 1999 (as amended on October 22, 1999 and
November 8, 1999) and Form 10 filed October 29, 1999, relating to the Company's
reverse merger. The results of operations for the nine months ended September
30, 1999 are not necessary indicative of the results of the year ending December
31, 1999.
(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. As of
September 30, 1999, Tejas Securities' net capital of $2,681,665 was $2,387,170
in excess of the minimum required.
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Westech Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
(3) 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.
The following calculations of basic earnings (loss) per share are based upon the
weighted average shares outstanding for the three month and nine month periods
ended September 30, 1999 and 1998, respectively, giving effect to the Merger on
August 27, 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
BASIC EARNINGS (LOSS) PER SHARE
<S> <C> <C> <C> <C>
Net income (loss) $ 375,373 $ (198,636) $ 3,249,123 $ (215,822)
Weighted average shares outstanding 12,527,602 10,223,851 11,350,153 9,172,622
Basic earnings (loss) per share $ 0.03 $ (0.02) $ 0.29 $ (0.02)
</TABLE>
There were no contingently issuable shares outstanding for the three months and
nine months ended September 30, 1999 and 1998 that would be included in the
computation of diluted earnings (loss) per share. Therefore, the computation of
diluted earnings (loss) per share is not included in the above calculation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
All statements past and future, written or oral, made by the Company or its
officers, directors, stockholders, agents, representatives or employees,
including without limitation, those statements contained in this Report on Form
10-Q, that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements may appear in this document or other documents,
reports, press releases, and written or oral presentations made by officers of
the Company to stockholders, analysts, news organizations or others. Readers
should not place undue reliance on forward-looking statements. All
forward-looking statements are based on information available to the Company and
the declarant at the time the forward-looking statement is made, and the Company
assumes no obligation to update any such forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those described in such forward-looking statements. In addition to any risks and
uncertainties specifically identified in connection with such forward-looking
statements, the reader should consult the Company's filings under the Securities
Exchange Act of 1934, for factors that could cause actual results to differ
materially from those presented.
Forward-looking statements are necessarily based on various assumptions and
estimates and are inherently subject to various risks and uncertainties,
including risks and uncertainties relating to the possible invalidity of the
underlying assumptions and estimates and possible changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners and competitors and
legislative, judicial and other governmental authorities and officials.
Assumptions relating to the foregoing involve judgements with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Any such
assumptions could be inaccurate and, therefore, there can be no assurance that
any forward-looking statements by the Company or its officers, directors,
stockholders, agents, representatives or employees, including those
forward-looking statements contained in this Report on Form 10-Q, will prove to
be accurate.
Results of Operations
The revenues and operating expenses of the Company's operating subsidiary, Tejas
Securities, are influenced by fluctuations in the equity 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 $18,144,041 or 250% to $25,397,633 for
the nine months ended September 30, 1999. Total revenues increased $3,538,032 or
135% to $6,162,860 for the three months ended September 30, 1999. The reasons
for the increases are set forth below.
Commission revenues from principal transactions increased $13,369,298 or 273% to
$18,268,923 for the nine months ended September 30, 1999. Commission revenues
from agency transactions increased $1,564,107 or 338% to $2,026,245 for the nine
months ended September 30, 1999. For the three months ended September 30, 1999,
commission revenues from principal transactions increased $2,327,278 or 127% to
$4,159,086. For the three months ended September 30, 1999, commission revenue
from agency transactions increased $373,561 or 151% to $621,558. Tejas
Securities' realized an increase of 8,595 agency trades and 3,279 agency trades
for the nine months and three months ended September 30, 1999, respectively. The
increase in agency commissions and trades relates to the increase in the number
of retail brokers employed by Tejas Securities during 1999, and its continued
focus on expanding its products and services to individuals. Commissions from
principal trades increased due to an additional 1,412 and 406 trades executed
during the nine months and three months ended September 30, 1999. In addition,
Tejas
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<PAGE> 8
Securities generated increased commissions due to the appreciation of
investments in the trading accounts for both the nine months and three months
ended September 30, 1999.
Investment banking revenues were $220,766 for the nine months ended September
30, 1999 versus $2,309,601 for the corresponding period in 1998. The decrease is
the result of the discontinuation of underwriting activities in October 1998.
For the nine months ended September 30, 1998, Tejas Securities underwrote two
initial public offerings and one preferred stock placement. For the
corresponding period in 1999, Tejas Securities was involved in one private
placement, which generated 62% of the investment banking revenue. The remaining
fees in 1999 were for advisory services and syndicate participation. For the
three months ended September 30, 1999, investment banking revenues were $55,000
compared to $656,141 for the corresponding period in 1998. Fees generated for
the three months ended September 30, 1999 were derived from advisory services.
For the three-month period in 1998, Tejas Securities underwrote one public
offering.
Net dealer inventory and investment income increased by $5,081,408 to $4,629,052
for the nine months ended September 30, 1999 compared to the same period in
1998. For the three months ended September 30, 1999, net dealer inventory and
investment income increased $1,246,377 to $1,112,461 from the corresponding
period in the prior year. The increase in inventory and investment income
resulted from favorable investment performance of companies in the
telecommunications and Internet industries during the three months and nine
months ended September 30, 1999.
For the nine months ended September 30, 1999, other income increased $181,567 or
474% to $219,871. For the three months ended September 30, 1999, other income
increased $106,448 or 403% to $132,806. The increase for the nine months and
three months ended September 30, 1999 is due to an increase in customer margin
interest revenue.
Total expenses increased by $11,825,720 or 157% to $19,350,095 for the nine
months ended September 30, 1999. For the three months ended September 30, 1999,
total expenses increased by $1,950,233 or 67% to $4,854,496. Net income for the
nine months increased by $3,151,031 to $2,935,209. For the three-month period,
net income increased by $793,175 to $594,539. The explanations for the increases
are set forth below.
Commissions, employee compensation and benefits increased $10,642,542 or 219% to
$15,492,833 for the nine months ended September 30, 1999. Commission expense
increased $8,346,226 or 241% to $11,787,942 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. Commissions, employee compensation and benefits increased
$1,322,528 or 76% to $3,064,339 for the three months ended September 30, 1999.
Commission expense increased $602,687 or 50% to $1,803,878 primarily due to
increases in commission revenue. General and administrative salaries increased
as a result of year-end bonus accruals based on higher profits.
Clearing and floor brokerage costs increased $36,647 or 12% to $341,381 for the
nine months ended September 30, 1999. For the three months ended September 30,
1999, clearing and floor brokerage costs decreased $6,426 or 5% to $108,978. The
overall increase in clearing and floor brokerage costs for the nine months ended
September 30, 1999 results from 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. For the three months ended
September 30, 1999, Tejas Securities realized a slight decrease in clearing and
floor brokerage costs as Tejas Securities generated a significant portion of its
revenues from private equity securities not executed through its clearing
broker.
No underwriting expenses were incurred during the nine months ended September
30, 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. The only expenses associated with the private placement
were legal fees and commission expense, which were not material to the overall
financial results.
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Communications and occupancy charges increased $339,094 or 62% to $881,410 for
the nine months ended September 30, 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 the nine months ended September 30, 1998 versus the full cost during
the nine months in 1999. In addition, Tejas Securities has 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. For the three months ended
September 30, 1999, communications and occupancy charges increased $80,433 or
32% to $329,726. The factors affecting the nine-month period are attributed to
the overall increase during the quarter ended September 30, 1999 as well.
Professional fees for the nine months ended September 30, 1999 increased
$453,598 or 112% to $855,775. The increase in costs is due primarily to the
increased legal fees during the quarter ended September 30, 1999. Of the total
increase for the nine-month period, $344,020 was accrued legal expenses relating
to the merger of the Company and Tejas Securities; legal fees for the settlement
of private equity securities transactions with its customers; and fees for
general legal counsel. The remaining costs during the nine months and three
months ended September 30, 1999 related to consulting and accounting fees
incurred during the normal course of business.
Tejas Securities increased its leverage on its receivable from clearing broker
balance during 1999, which resulted in an increase in interest expense of
$353,926 or 809% to $397,656 for the nine months ended September 30, 1999. As of
September 30, 1999, securities owned approximated 161% of the receivable from
clearing broker balance. As of September 30, 1998, securities owned approximated
105% of the receivable from clearing broker balance. Margin interest paid on
these leveraged balances accounted for $320,429 of the overall increase. For the
three months ended September 30, 1999, interest expense increased $137,707 or
689% to $157,673. Margin interest on the leveraged balances accounted for
$117,053 of the overall increase. The remaining increase in interest expense
relates to the addition of subordinated debt in October 1998 and June 1999.
Other expenses increased $423,038 or 44% to $1,381,040 for the nine months ended
September 30, 1999. For the three months ended September 30, 1999, other
expenses increased $127,688 or 31% to $527,350. The overall increase in other
expenses during the nine months and three months ended September 30, 1999 is the
result of increases in personnel and general and administrative services needed
to support those personnel.
Income tax expense increased $2,477,285 to $2,422,324 for the nine months ended
September 30, 1999. For the three months ended September 30, 1999, income tax
expense increased $637,699 to $556,900. The overall increase in income tax
expense for the nine months and three months ended September 30, 1999 is due to
the increase in gross profit during the respective periods. The Company's
effective tax rate was 39% for the nine months and three months ended September
30, 1999.
Minority interest in net income results from the allocation of net income of
Tejas Securities subsequent to the Merger on August 27, 1999.
Liquidity and Capital Resources
In August 1999, Tejas Securities established a wholly-owned subsidiary, Tejas
Securities Group - East, L.L.C., a Georgia limited liability company ("Tejas -
East"), for the purpose of increasing the accountability of its primary branch
office and also for minimizing general business liability associated with
contracts and employment issues. Under an agreement between Tejas - East and
Tejas Securities, Tejas Securities provides a revolving line of credit in the
amount of $200,000, bearing interest at the prime rate plus 2%. Operating costs
for Tejas - East are funded through the excess of commission and trading
revenues over commission expense and clearing costs. As these amounts are not
completely known by management until the month end reporting process is
complete, Tejas Securities provides temporary funding through intercompany cash
transfers. Excess cash flows or deficiencies are carried forward on a
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<PAGE> 10
monthly basis, and are eliminated through Tejas Securities' monthly financial
statement consolidation process.
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. The overall growth in the receivable from
clearing broker balance resulted from the increase in commission revenue and
investment income during the nine months ended September 30, 1999.
Cash and cash equivalents increased for the quarter ended September 1999 as
Tejas Securities settled private equity securities transactions with its
customers, which generated approximately $3,000,000 in commission and trading
revenues during the period.
Market Making Activities
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 25 public corporations whose stocks are traded on the
NASDAQ National Market System. Tejas Securities anticipates increasing the
number of securities it makes markets in to approximately 50 by the end of 1999.
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.
Year 2000 Compliance
Tejas Securities has a long-standing and continuing commitment to meeting the
needs of its customers, including addressing Year 2000 compliance issues. Tejas
Securities initiated its Year 2000 compliance project in early 1998. The project
was initiated in response to requirements by the SEC under amended Rule 17a-5 of
the Securities Exchange Act of 1934, whereby all broker-dealers file a series of
Year 2000 readiness reports with the SEC and its designated examining authority.
Tejas Securities' project includes the assessment of both hardware and software
systems used internally or relied upon externally. In addition, the project
encompasses the Year 2000 readiness of service providers and vendors of Tejas
Securities. In order to assess Tejas Securities' preparedness for Year 2000,
management completed an inventory of all software and hardware systems utilized
by employees on a daily basis. The products inventoried encompass the primary
business units and support functions of Tejas Securities: sales/trading,
research, finance, compliance and information technology. From this inventory,
management identified those systems that are considered mission critical for the
continuing operations of the broker-dealer.
To determine Year 2000 compliance of mission critical systems, Tejas Securities
requested written documentation from all of the applicable vendors that provide
products or services. All of Tejas Securities' outside vendors have responded
favorably to our requests regarding compliance with Year 2000. For internal
systems, Tejas Securities has conducted testing of software and hardware to
ensure identification of Year 2000 dates. Management believes that the results
of our inquiries and testing procedures will assure a
<PAGE> 11
successful transition into the Year 2000. However, ultimate success is based
upon a number of factors, including the following:
o Tejas Securities' ability to identify and correct potential Year 2000
deficiencies;
o the accuracy of representations by outside vendors;
o the degree of readiness of outside vendors; and
o the degree of compliance by telephone and other utility companies.
In the event of a worst case system failure, customers of Tejas Securities may
not be able to execute securities transactions, thereby exposing their
investments to additional market risk. Tejas Securities may also experience
additional market risk associated with its investment holdings in the event
trades cannot be executed.
Tejas Securities completed the majority of its Year 2000 compliance project by
June 30, 1999, including an inventory of systems, assessment of compliance, and
an impact analysis of non-compliant systems. A key element of the project is the
development of a disaster recovery plan and contingency plan in the event of
system failures. Tejas Securities has developed a contingency plan that
anticipates internal or external system shortfalls that could effect short-term
and long-term operations. In the event of an internal or external system
failure, Tejas Securities has developed alternative processing methods believed
to ensure the continuation of operations.
The cost of assessing Year 2000 compliance has been absorbed by Tejas Securities
through internal payroll. No significant costs have been incurred for the
replacement of equipment or services as all of Tejas Securities' mission
critical systems are maintained by outside vendors that replaced non-compliant
systems or equipment at no cost. The Company estimates that no significant costs
will be incurred to address Year 2000 compliance issues associated with Tejas
Securities.
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. 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 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 broker 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
11
<PAGE> 12
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 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 the Company and by limiting exposure to any one
investment or type of investment.
Tejas Securities trading securities were $5,592,799 in long positions and
$275,250 in short positions at September 30, 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 $531,755 as of September 30, 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. The Company monitors this risk by
maintaining current operating and financial data on the companies involved, and
projecting future valuations based upon the occurrence of critical future
events. Any transactions involving the investment securities are typically based
upon the recommendations of Tejas Securities' research analysts versus current
market performance.
PART II - OTHER INFORMATION
ITEM 1. 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 the complaint to be completely without merit and
intends to defend this matter vigorously. Management believes that an
arbitration panel will be selected in November 1999, with arbitration
proceedings beginning in the first quarter 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 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
27 - Financial Data
b) Current reports on Form 8-K
On September 8, 1999, the Company filed a Form 8-K to reflect the
change in control of the Company through a merger with Tejas Securities
on August 27, 1999, a change in the Company's certifying accountant,
and a change in the Company's fiscal year.
On October 22, 1999 and November 8, 1999, the Company filed amendments
to the Form 8-K filed on September 8, 1999.
12
<PAGE> 13
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.
/s/ JAY VAN ERT
Date: November 15, 1999 ----------------------------------
Jay Van Ert
President
/s/ JOHN GARBER
Date: November 15, 1999 ----------------------------------
John Garber
Director of Finance
13
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Quarterly Report on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,784,689
<RECEIVABLES> 7,721,748
<SECURITIES-RESALE> 12,435,365
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 340,471
<TOTAL-ASSETS> 25,029,848
<SHORT-TERM> 0
<PAYABLES> 13,292,305
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 1,000,000
0
0
<COMMON> 12,537
<OTHER-SE> 1,574,858
<TOTAL-LIABILITY-AND-EQUITY> 25,029,848
<TRADING-REVENUE> 4,629,052
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 20,327,944
<INVESTMENT-BANKING-REVENUES> 220,766
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 0
<COMPENSATION> 15,492,833
<INCOME-PRETAX> 6,047,538
<INCOME-PRE-EXTRAORDINARY> 6,047,538
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,249,123
<EPS-BASIC> 0.29
<EPS-DILUTED> 0
</TABLE>
