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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. ONE TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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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.)
2700 Via Fortuna, Suite 400, Austin, Texas 78746
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 306-8222
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered each class is to be registered
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Common Stock, $.001 par value American Stock Exchange
per share
Securities to be registered pursuant to Section 12(g) of the Act: None
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ITEM 1. BUSINESS.
GENERAL
Westech Capital Corp., a New York corporation (the "Company"), is a holding
company whose wholly owned subsidiary, Tejas Securities Group Holding Company
("Tejas Holding") owns approximately 85% of the Company's primary operating
subsidiary, Tejas Securities Group, Inc. ("Tejas Securities"). Both Tejas
Holding and Tejas Securities are Texas corporations. Tejas Securities is engaged
in the business of providing brokerage and related financial services to
institutional and retail customers nationwide.
The Company was incorporated as a shell corporation in New York on July 18,
1990, and made an initial public offering in November 1991. The Company was
acquired by Tejas Securities in a reverse merger effected on August 27, 1999.
See "-Change in Control." During the first quarter of 2000, the Company
anticipates submitting to its shareholders a proposal to change the Company's
state of incorporation from New York to Delaware. The Company does not expect
the reincorporation to have any material effects on it or its subsidiaries.
Tejas Securities' business is conducted out of its primary office in Austin,
Texas and a branch office in Atlanta, Georgia. Tejas Securities anticipates
expanding its operations by March 2000 with branches in Dallas, Texas and
Houston, Texas. See "-Growth Strategy."
Tejas Securities is a registered broker-dealer and investment advisor offering:
(i) brokerage services to retail and institutional customers; (ii) high quality
investment research to institutional and retail customers; (iii) market-making
activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services.
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During the first quarter of 2000, the Company intends to assume the management
of a private investment company (commonly referred to as a "hedge fund"). Tejas
Securities will purchase, at cost, the equity of TSG Capital, LLC, a Texas
limited liability company, which serves as the general partner of TSG Internet
Fund I, Ltd. (the "Fund"), a Texas limited partnership. Thereafter, Tejas
Securities will manage the Fund for a one-time placement fee of 5%, a quarterly
management fee of .375% of the average monthly asset balance, and an annual
performance fee of 20% of the Fund's net gain. See Item 7 - Certain
Relationships and Certain Transactions. If the Company is successful in
integrating and managing the Fund, it may offer additional hedge funds in the
future. Based on the experience of the Fund, such activities are not likely to
require a significant capital commitment by Tejas Securities or Westech.
CHANGE IN CONTROL
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and among the
Company, Tejas Securities, Tejas Holding, and Westech Merger Sub, Inc., a
Delaware corporation ("Merger Sub"), Tejas Securities acquired the Company
through a reverse merger (the "Merger") of Tejas Holding and Merger Sub. Tejas
Holding and Merger Sub were established for the sole purpose of effecting this
transaction. As a result of the Merger, Tejas Holding became a wholly owned
subsidiary of Westech. Upon the effectiveness of the Merger, the Company's board
of directors resigned and John J. Gorman, Jay W. Van Ert and Joseph F. Moran
were appointed as directors of the Company.
Under the terms of the Merger, the shareholders of Tejas Holding exchanged their
shares for shares of the Company at a ratio 2.4825 to one. The former
shareholders of Tejas Holding currently own 95.21% of the issued and outstanding
common stock of the Company, $ .001 par value per share (the "Common Stock").
EARLY OPERATIONS
Tejas Securities' initial focus was to provide institutional money managers and
mutual funds high quality investment research covering large nationally based
companies which were believed to be overly leveraged or which were in default on
their liabilities or in bankruptcy. Historically, these companies were not
followed closely by a large number of analysts. Tejas Securities used this
opportunity to establish itself as a source of high quality research products
and trading support. Tejas Securities took advantage of its initial research
success and expanded its research coverage to special situation equities and
began underwriting initial public offerings of equity securities for a select
group of companies. These underwritings coupled with a demand for Tejas
Securities' research by individuals led Tejas Securities to expand its client
base to include retail accounts.
BROKERAGE SERVICES
Tejas Securities provides brokerage services to approximately 6,000 retail
customers and 500 institutional customers. Tejas Securities offers a menu of
services and products to customers, which includes the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. Tejas Securities' marketing strategy
has been to emphasize its high level of service and its unique knowledge of the
companies covered by its research department.
In recent years, the general public has become more comfortable dealing with
financial matters through electronic means, more specifically over the Internet.
Several brokerage firms have positioned themselves to take advantage of this
opportunity by offering online trading and account information. Tejas Securities
intends to capitalize on this trend by expanding into online trading, while
continuing to provide the level of service and research products that its
customers have come to expect.
Currently, Tejas Securities provides its customers with the ability to receive
stock quotes and access research on the Internet through its website
(www.tejassec.com). Tejas Securities anticipates that its customers will have
the ability to make trades over the Internet prior to the end of the first half
of 2000. Tejas Securities believes Internet trading is in high demand by its
customers and will continue to devote a substantial portion of its resources to
its Internet strategy.
Tejas Securities generated $3,648,255, $4,810,520 and $7,932,780 in commission
revenues for the years ended 1996, 1997 and 1998, respectively, or 86%, 74% and
77% of total revenue, respectively. During the nine months ended September 30,
1999, Tejas Securities generated $20,327,944 in commission revenue, or 80% of
total revenue.
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RESEARCH
The cornerstone of Tejas Securities' business model is to create proprietary
products for its clients that focus on its research and trading capabilities.
Tejas Securities distributes these products through traditional as well as new
channels of distribution, including the Internet. Tejas Securities believes that
brokerage companies that are able to utilize technological changes to improve
methods of delivering information to their clients will accomplish significant
gains in market share and profitability.
Tejas Securities anticipates that it will continue to devote a substantial
portion of its assets to support its research department. Currently, the
research department consists of five experienced analysts with proven expertise
in special situation equity research and in distressed securities. The analyst
group has the background to analyze many industries, but has a primary focus on
telecommunications and the Internet. Tejas Securities believes that the rapid
changes in each of these industries provide excellent investment opportunities.
Tejas Securities believes there will be increased demand in these areas and
anticipates adding three analysts to the research department in the near future.
The additional analysts will allow Tejas Securities to expand its research
coverage of telecommunications and Internet companies that have traditionally
lacked research coverage by the New York-based brokerage community.
Tejas Securities believes that the number of high quality technology companies
being formed in the Austin area is significant and will continue to grow. Tejas
Securities believes that its research department is well suited to cover these
companies and will focus a large percentage of its research resources to
providing research coverage of these companies. The research department will
cover both public companies as well as private companies that are candidates for
becoming publicly traded companies.
MARKET MAKING
In August 1999, the NASD approved Tejas Securities to make markets in Nasdaq
securities. Making markets in securities facilitates the execution of security
transactions for Tejas Securities' customers. Tejas Securities acts as a market
maker for approximately 25 public corporations whose stocks are traded on the
Nasdaq National Market System.
Generally, Tejas Securities does not maintain inventories of securities for sale
to its customers. However, Tejas Securities does engage in certain principal
transactions where, in response to a customer order, Tejas Securities will go at
risk to the marketplace to attempt to capture the spread between the bid and
offer. Most of Tejas Securities' larger competitors are engaged in similar
market making activities through subsidiaries or receive order flow payments
from companies engaged in such market making activities. Tejas Securities
believes it can maintain better control and be assured of proper executions of
customer trades by providing these market making services directly to its
customers.
INVESTMENT BANKING
Tejas Securities raises capital through public offerings of securities for
corporations that are engaged in a variety of businesses. Tejas Securities
participates in underwritings of corporate securities as managing underwriter
and as a syndicate member. Management of an underwriting account is generally
more profitable than participation as a member of an underwriting syndicate.
Historically, Tejas Securities underwrote public offerings of securities in the
range of $5 to $10 million on a "best efforts" basis. As an underwriter, Tejas
Securities is also subject to potential liability under federal and state
securities laws and other laws if the registration statement or prospectus
contains a material misstatement or omission. Tejas Securities' potential
liability as an underwriter is uninsured.
Tejas Securities' participation in or initiation of underwritings may be limited
by the financial requirements of the SEC and NASD. See "- Net Capital
Requirements."
Between September 30, 1997, and December 31, 1998, Tejas Securities acted as the
managing underwriter or co-managing underwriter for initial public offerings of
four common stock offerings and one preferred stock offering, which raised
approximately $40 million for corporate finance clients. Tejas Securities
typically received 2 to 3 percent of the aggregate amount of money raised in an
offering to cover nonaccountable expenses and between 7 and 9 percent as
compensation to underwriters, selling group members and registered
representatives. Tejas Securities generated $752,554 and $2,584,770 in
investment banking revenues for the years ended 1997 and 1998, respectively, or
12% and 25% of total revenue, respectively. There were no fees generated from
investment banking activities in 1996.
At the end of 1998, Tejas Securities decided to reduce its focus on underwriting
small public offerings and refocus on underwritings of larger, more established
companies and advisory assignments and financial advisory assignments. In
December, 1999, Tejas Securities employed Mike McAllister to serve as Executive
Vice President and Managing Director. Mr. McAllister will oversee all investment
banking operations for Tejas Securities. See Item 5-Directors and Executive
Officers. There were no significant investment banking transactions during 1999
and the Company expects no significant activity until the second half of 2000.
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CUSTOMERS
Historically, Tejas Securities' customer base has been comprised of
predominately large nationally known institutional customers. These customers
demand high quality research and sophisticated trading capabilities. Tejas
Securities believes that it has served the needs of this segment of its customer
base well, resulting in increased trading volume. Tejas Securities believes that
the increase in the scope of its research services should further customer
satisfaction and increase its revenues from institutional customers.
Currently, the fastest growing segment of Tejas Securities' business is its
retail division. Tejas Securities believes its strategy of providing
institutional quality research and customer service to retail customers has been
well received. The retail division has grown from 3,000 customers in 1997 into
6,000 customers at September 30, 1999. Tejas Securities will continue to expand
this division by adding additional sales personnel focused exclusively on this
market and continuing the rollout of products such as market making and money
management that appeal to this market.
EMPLOYEES
On December 15, 1999, Tejas Securities had approximately 80 employees. Of these
employees, 40 work in sales, 8 in trading, 5 in research positions and the
remaining employees perform management and administrative functions. Employees
will continue to be added in several areas of the firm. However, it is Tejas
Securities' goal to use the sales support functions that are currently in place
to support additional sales staff. Tejas Securities believes that taking
advantage of the infrastructure currently in place will allow an increase in
productivity in the sales area with minimal additional support cost.
COMPETITION
All aspects of Tejas Securities' business are highly competitive. In its general
brokerage activities, Tejas Securities competes directly with numerous other
broker-dealers, many of which are large well-known firms with substantially
greater financial and personnel resources. Many of Tejas Securities' competitors
employ extensive advertising and actively solicit potential clients in order to
increase business. In addition, brokerage firms compete by furnishing investment
research publications to existing clients, the quality and breadth of which are
considered important in the development of new business and the retention of
existing clients. Tejas Securities also competes with a number of smaller
regional brokerage firms in Texas and the Southwest.
Some commercial banks and thrift institutions offer securities brokerage
services. Many commercial banks offer a variety of investment banking services.
Competition among financial services firms also exists for investment
representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive since Tejas Securities was founded, as numerous securities firms
have either ceased operations or have been acquired by or merged into other
firms. In addition, companies not engaged primarily in the securities business,
but with substantial financial resources, have acquired leading securities
firms. These developments have increased competition from firms with greater
capital resources than those of Tejas Securities.
Various legislative and regulatory developments have also tended to increase
competition within the industry or reduced profits for the industry. On November
12, 1999, President Clinton signed into law legislation that allows bank holding
companies to engage in a wider range of nonbanking activities, including greater
authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve
Board, in consultation with the Secretary of the Treasury, determines by
regulation or order is (1) financial in nature, (2) identical to any such
financial activity, or (3) complementary to any such financial activity and does
not pose a substantial risk to the safety or soundness of depositary
institutions or the financial system generally. The Act effects significant
changes to United States banking law, primarily by repealing restrictive
provisions of the 1933 Glass-Steagall Act. The Act also provides for certain
activities which are financial in nature, including, among others, lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; and providing financial, investment or economic advisory services,
underwriting, dealing in or making a market in, securities. The Company
anticipates that these changes will result in an increase in the number, size
and financial strength of potential competitors.
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The securities industry has experienced substantial commission discounting by
broker-dealers competing for brokerage business. In addition, an increasing
number of specialized firms now offer "discount" services to individual
customers. These firms generally effect transactions for their customers on an
"execution only" basis without offering other services such as portfolio
valuation, investment recommendations and research. A growing number of discount
brokerage firms offer their services over the Internet, further decreasing
offered commission rates and increasing ease of use for customers. The
continuation of such discounting and an increase in the number of new and
existing firms offering discounts could adversely affect Tejas Securities. In
addition, rapid growth in the mutual fund industry is presenting potential
customers of Tejas Securities with an increasing number of alternatives to
traditional stock brokerage accounts.
In its investment banking activities, Tejas Securities competes with other
brokerage firms, venture capital firms, banks and all other sources of capital
for small, growing companies. In addition, large national and regional
investment banking firms occasionally manage offerings of a size that is
competitive with Tejas Securities, typically for fees and compensation
comparable to that charged by Tejas Securities. When the market for initial
public offerings is active, many small regional firms that do not typically
engage in investment banking activities also begin to compete with Tejas
Securities.
GROWTH STRATEGY
Tejas Securities anticipates increasing its market penetration in Texas and the
Southwest United States. Tejas Securities believes this growth strategy will be
accomplished through acquisitions of other brokerage companies, investment
banking companies, groups of brokers, or individual brokers using cash, stock or
a combination of cash and stock and by opening offices in new markets and
subsequently recruiting brokers. Tejas Securities believes that increased
penetration in these markets will enhance revenue balance and provide greater
leverage of its fixed costs. Tejas Securities anticipates it will achieve a
market presence in both Houston and Dallas by March 2000. Tejas Securities
anticipates taking advantage of other strategic market opportunities as they
arise.
FEES ON MARGIN LOANS
Tejas Securities derives a portion of its income from fees generated on margin
loans made to Tejas Securities' customers and financed through our clearing
agent, Schroder & Co. A margin account allows the customer to deposit less than
the full cost of the securities purchased while Tejas Securities lends the
balance of the purchase price to the customer, secured by the purchased
securities. Customers are charged interest on the amount borrowed to finance
their margin transactions ranging from 0.25% below to 2.75% above the broker
call rate, which is the rate at which brokers can generally obtain financing
using margined and firm owned securities as collateral. Tejas Securities earns a
fee equal to 50% of the interest charged on customer margin loans. As of
December 15, 1999, the total of all customer securities pledges on debit
balances and held in active margin accounts was approximately $20,000,000.
SECURITIES INDUSTRY PRACTICES
Tejas Securities is registered as a broker-dealer with the SEC and the NASD.
Tejas Securities is registered as a securities broker-dealer in 39 states and
the District of Columbia. Tejas Securities is also a member of the Securities
Investors Protection Corporation, which provides Tejas Securities' customers
with insurance protection for amounts of up to $500,000 each, with a limitation
of $100,000 on claims for cash balances. Tejas Securities has also acquired an
additional $10,000,000 in insurance coverage through Seabury & Smith, as added
protection for individual customers' securities, covering all clients of Tejas
Securities' institutional and retail customers.
Tejas Securities is subject to extensive regulation by federal and state laws.
The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules,
subject to approval by the SEC, which govern the industry and conduct periodic
reviews of member broker-dealers. Securities firms are also subject to
regulation by state securities commissions in the states in which they do
business. The SEC, self-regulatory organizations, and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, suspension, or expulsion of a broker-dealer, its officers or employees.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than protection of
creditors and shareholders of broker-dealers. See "Forward-Looking Statements
and Risk Factors" below.
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NET CAPITAL REQUIREMENTS
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a broker-dealer's position in securities. A deduction is made
against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with the Rule could require intensive
use of capital and could limit Tejas Securities' ability to pay dividends to the
Company, which in turn could limit the Company's ability to pay dividends to its
shareholders. Failure to comply with the Rule could require the Company to
infuse additional capital into Tejas Securities, could limit the ability of
Tejas Securities to pay its debts and/or interest obligations, and may subject
Tejas Securities to certain restrictions which may be imposed by the SEC, the
NASD, and other regulatory bodies. Moreover, in the event that the Company could
not or elected not to infuse the additional capital or otherwise bring Tejas
Securities into compliance, Tejas Securities would ultimately be forced to cease
operations. See "Forward-Looking Statements and Risk Factors" below.
At December 31, 1998, and 1997 Tejas Securities elected to use the alternative
method permitted by the Rule, which requires it to maintain minimum net capital,
as defined, equal to the greater of $100,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At December 31, 1998, Tejas
Securities had net capital of $842,544, which was $742,544 in excess of the
minimum amount required. At December 31, 1997, Tejas Securities had net capital
of $703,302, which was $603,302 in excess of the minimum amount required. At
September 30, 1999, Tejas Securities had net capital of $2,681,665, which was
$2,387,170 in excess of the minimum amount required.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
We are including the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us. The factors identified in this
cautionary statement are important factors (but not necessarily all of the
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by us. Where any
forward-looking statement includes a statement of the assumptions underlying the
forward-looking statement, we caution you that while we believe the assumptions
to be reasonable and make them in good faith, assumed facts almost always vary
from actual results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances. Where, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there is no assurance that the statement of
expectation or belief will result or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by us, or on our behalf. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, the trading price of our
stock could decline, and you may lose all or part of your investment.
The dates on which we believe our Year 2000 efforts will be completed are based
on our best estimates, which were derived using numerous assumptions of future
events, including the continued availability of certain resources, third-party
modification plans and other factors. However, there is no guarantee that these
estimates will be achieved or that there will not be a delay in, or increased
costs associated with, the implementation of the Year 2000 efforts described
above. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer codes, timely responses to and corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties, we cannot ensure our
ability to timely and cost-effectively resolve problems associated with the Year
2000 issue that may affect our operations and business, or expose us to
third-party liability.
FAILURE TO EFFECTIVELY MANAGE A CHANGING BUSINESS COULD RESULT IN OUTDATED
SERVICES.
Our business and operations have changed substantially since we began offering
brokerage services, and we expect the pace of change in the brokerage business
to continue. This rapid change places significant demands on our administrative,
operational, financial and other resources. Failure to properly manage these
changes could result in our services becoming outdated, which would have a
material adverse effect on our business, financial condition and operating
results.
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FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR
BUSINESS.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, service providers and market makers. While we have
selected these third-party vendors carefully, we do not control their actions.
Any problems caused by these third parties could have a material adverse effect
on our business, financial condition and operating results.
OUR BUSINESS STRATEGY INCORPORATES THE INTERNET WHICH IS STILL IN THE EARLY
STAGE OF DEVELOPMENT.
The market for electronic brokerage services, particularly over the Internet, is
at an early stage of development and is rapidly evolving. Consequently, demand
and market acceptance for recently introduced services and products are subject
to a high level of uncertainty. Much of our growth will depend on consumers
adopting the Internet as a method of doing business. The Internet could lose its
viability due to slow development or adoption of standards and protocols to
handle increased activity, or due to increased governmental regulation.
Moreover, several key issues including security, reliability, cost, ease of use,
accessibility and quality of service continue to be concerns and may negatively
affect the growth of Internet use or commerce on the Internet. While we are not
dependent upon Internet based trading, we anticipate investing substantial
resources in the development of Internet based activities.
WE ARE SUBJECT TO MARKET FORCES BEYOND OUR CONTROL WHICH COULD IMPACT US MORE
SEVERELY THAN OUR COMPETITORS.
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets could adversely
affect our operating results. In October 1987 and October 1998, the stock market
suffered major declines, as a result of which many firms in the industry
suffered financial losses. Additionally, the level of individual investor
trading activity decreased after these events. Reduced trading volume and prices
have historically resulted in reduced transaction revenues. When trading volume
is low, our profitability may be adversely affected because our overhead remains
relatively fixed. Severe market fluctuations in the future could have a material
adverse effect on our business, financial condition and operating results. Some
of our competitors with more diverse product and service offerings might
withstand such a downturn in the securities industry better than we would.
OUR CUSTOMERS MAY DEFAULT ON THEIR MARGIN ACCOUNTS, EFFECTIVELY PASSING THEIR
LOSSES ON TO US.
We sometimes allow customers to purchase securities on margin, therefore we are
subject to risks inherent in extending credit. This risk is especially great
when the market is rapidly declining. In such a decline, the value of the
collateral we hold could fall below the amount of a customer's indebtedness.
Specific regulatory guidelines mandate the amount that can be loaned against
various security types. We rigorously adhere to these guidelines and a number of
instances exceed those requirements. Also, independent of our review, our
corresponding clearing company independently maintains a credit review of our
customer's accounts. If customers fail to honor their commitments, we would sell
the securities held as collateral. If the value of the collateral is not
sufficient to repay the loan, a loss would occur. Any such losses could have a
material adverse effect on our business, financial condition and operating
results.
IF WE DO NOT CONTINUE TO INTRODUCE NEW SERVICES AND PRODUCTS WE MAY LOSE OUR
CUSTOMERS.
Our future success depends in part on our ability to develop and enhance our
services and products. There are significant risks in the development of new
services and products or enhanced versions of existing services and products,
particularly in our electronic brokerage business. We may also experience
difficulties that could delay or prevent the development, introduction or
marketing of these services and products. Additionally, these new services and
products may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we are unable to develop and introduce enhanced or new
services and products quickly enough to respond to market or customer
requirements, or if they do not achieve market acceptance, our business,
financial condition and operating results will be materially adversely affected.
MANY OF OUR COMPETITORS ARE LARGER AND BETTER KNOWN THAN WE ARE.
The market for brokerage services is rapidly evolving and intensely competitive.
We face direct competition from firms offering discount and electronic brokerage
services such as Charles Schwab & Co., Inc., Fidelity Brokerage Services, Inc.,
Waterhouse Securities, Inc., Ameritrade, Inc. (a subsidiary of Ameritrade
Holding Corporation), and E*TRADE Group, Inc. We also encounter
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competition from established full commission brokerage firms such as PaineWebber
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Solomon
Smith Barney, Inc., among others. In addition, we compete with financial
institutions, mutual fund sponsors and other organizations. Further, Tejas
Securities has seen a substantial increase in the number of companies providing
electronic brokerage services in recent years, and this trend is expected to
continue.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors have greater name recognition and larger
customer bases that could be leveraged, thereby gaining market share from us.
Our competitors may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can be no assurance
that we will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on our
business, financial condition and operating results.
WE MAY NOT SUCCESSFULLY ASSIMILATE ACQUIRED COMPANIES.
We may acquire other companies in the future, and we regularly evaluate such
opportunities. Acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention from other business concerns, amortization of acquired intangible
assets and potential loss of key employees of acquired companies. We have
limited experience in assimilating acquired organizations into our operations.
We may not successfully integrate any operations, personnel, services or
products that might be acquired in the future. Failure to successfully
assimilate acquired organizations could have a material adverse effect on our
business, financial condition and operating results.
WE ARE SUBJECT TO STRICT GOVERNMENT REGULATION AND THE FAILURE TO COMPLY COULD
RESULT IN DISCIPLINARY ACTIONS.
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. See "- Securities Industry Practices" above.
Broker-dealers are subject to regulations covering all aspects of the securities
business.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our business, financial
condition and operating results.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
We have initiated a marketing campaign designed to bring brand name recognition
to Tejas Securities. The NASD regulates all marketing activities by Tejas
Securities. The NASD can impose certain penalties for violations of its
advertising regulations, including censures or fines, suspension of all
advertising, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees. Tejas
Securities' compliance officers review all marketing materials prior to release
to ensure compliance with NASD regulations.
There can be no assurance that other federal, state or foreign agencies will not
attempt to regulate our business. If such regulations are enacted, our business
or operations would be rendered more costly or burdensome, less efficient or
even impossible or otherwise have a material adverse effect on our business,
financial condition and operating results.
WE MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS WHICH COULD SLOW OUR EXPANSION
PLANS OR PREVENT PAYMENTS OF DIVIDENDS.
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from Tejas Securities could be
restricted, which in turn could limit our ability to pay dividends, repay debt
and redeem or purchase shares of our outstanding stock. A large operating loss
or charge against net capital could adversely affect our
8
<PAGE> 10
ability to expand or even maintain our present levels of business, which could
have a material adverse effect on our business, financial condition and
operating results.
OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephone. Thus, we depend heavily on the integrity of
the electronic systems supporting this type of trading. Heavy stress placed on
our systems during peak trading times could cause our systems to operate too
slowly or fail. If our systems or any other systems in the trading process slow
down significantly or fail even for a short time, our customers would suffer
delays in trading, potentially causing substantial losses and possibly
subjecting us to claims for such losses or to litigation claiming fraud or
negligence. During a systems failure, we may be able to take orders by
telephone; however, only associates with securities broker's licenses can accept
telephone orders, and an adequate number of associates may not be available to
take customer calls in the event of a systems failure. In addition, a hardware
or software failure, power or telecommunications interruption or natural
disaster could cause a system failure. Any systems failure that interrupts our
operations could have a material adverse effect on our business, financial
condition and operating results.
ADVANCES IN ENCRYPTION TECHNOLOGY MAY NOT OCCUR QUICKLY ENOUGH AND OUR CUSTOMERS
MAY STOP TRADING WITH US.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We will rely on encryption and
authentication technology to provide secure transmission of confidential
information. Despite our best efforts, advances in computer and cryptography
capabilities or other developments may result in a compromise of the algorithms
we use to protect customer transaction data. If a compromise of our security
were to occur, it is likely that our customers would stop trading with us.
NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND NONE MAY DEVELOP.
A public market for our common stock does not currently exist. We cannot predict
the extent to which investor interest in us will lead to the development of a
trading market or how liquid that market might become. The trading price of our
common stock could be subject to wide fluctuations in response to factors
unrelated to our operating results such as:
o announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments by
us or our competitors;
o new products or services offered by us or our competitors;
o changes in financial estimates by securities analysts;
o additions or departures of key personnel; and
o sales of our common stock.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of listed companies. Some of these fluctuations may be due
to speculative trading by individual investors, including investors commonly
referred to as "day traders." The trading prices of many companies' stocks are
at or near historical highs and these trading prices and multiples are
substantially above historical levels. These trading prices and
9
<PAGE> 11
multiples may not be sustained. These broad market factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance.
OUR EFFORTS TO DEVELOP WIDESPREAD BRAND RECOGNITION ARE LIKELY TO BE EXPENSIVE
AND MAY FAIL.
The development of the Tejas Securities brand is important to our future
success. If we fail to develop sufficient brand recognition, our ability to
attract customers may be impaired, and our revenue will suffer. In order to
build our brand awareness we must succeed in our brand marketing efforts and
deliver products and services that are in demand by our customers. These efforts
have required, and will continue to require, significant expenses. If we expend
additional resources to build the Tejas Securities brand and do not generate a
corresponding increase in revenue as a result of our branding efforts, or if we
otherwise fail to promote our brand successfully our business could be harmed.
We cannot assure that we will be successful in developing our brand.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our online trading and research distribution. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition, our new
enhancements must meet the requirements of our current and prospective customers
and must achieve significant market acceptance. We could also incur substantial
costs if we need to modify our service or infrastructures to adapt to these
changes.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
We recently hired and anticipate continuing to hire additional sales, research,
and investment banking personnel. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives, and we may experience
constraints that will adversely affect our ability to expand our customer base.
We have at times experienced, and continue to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel is an intensely
competitive and time-consuming process.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL.
Sales of a large number of shares of our common stock in the public market or
the perception that such sales could occur could cause the market price of our
common stock to drop. As of August 27, 1999, we had 12,536,737 shares of common
stock outstanding, of which 600,000 shares will be freely transferable without
restriction or registration under the Securities Act of 1933, unless such shares
are held by our affiliates, as that term is defined in Rule 144 under the
Securities Act. Sales of common stock by existing shareholders in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
In addition, as soon as practicable after the date of this prospectus, we intend
to file a registration statement on Form S-8 with the SEC covering the 3,000,000
shares of common stock reserved for issuance under our stock option plan and for
options issued outside such plan. On the date 180 days after the effective date
of this filing, approximately 758,561 shares will be subject to immediately
exercisable options (based on options outstanding on October 18, 1999). Sales of
a large number of shares could have an adverse effect on the market price for
our common stock.
10
<PAGE> 12
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following summary statement of operations data and the summary statement of
financial condition data as of and for each of the years in the five year period
ended December 31, 1998 have been derived from the audited financial statements
of Tejas Securities. The selected statement of operations data and statement of
financial condition data should be read in conjunction with the audited
financial statements as of December 31, 1997 and 1998 and for the years ended
December 31, 1996, 1997 and 1998 as included elsewhere herein. The unaudited
statement of operations data and statement of financial condition data as of and
for the nine months ended September 30, 1998 and 1999 have been prepared by
Tejas Securities and have been filed with the National Association of Securities
Dealers as required on a quarterly basis. This data includes all adjustments and
estimates that management considers necessary for the fair presentation of such
financial data for the periods then ended. The financial results for the
nine-month periods ended September 30, 1998 and 1999 are not necessarily
indicative of results for a full year of operations. Historical financial
results may not be indicative of future performance of the Company or its
affiliates.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31
1994 1995 1996 1997 1998
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commissions $ 0 3,674,261 3,648,255 4,810,520 7,932,780
Investment banking 0 0 0 752,554 2,584,770
Trading income 0 44,486 567,537 924,587 (299,166)
Other 0 62,500 41,720 9,248 23,530
Total revenue 0 3,781,247 4,257,512 6,496,909 10,241,914
Employee compensation 0 2,808,053 3,448,700 4,459,420 8,007,363
Other expenses 3,943 398,010 1,015,567 1,544,446 2,795,773
Total expenses 3,943 3,206,063 4,464,267 6,003,866 10,803,136
Income (loss) before income taxes (3,943) 575,184 (206,755) 493,043 (561,222)
Income tax expense (benefit) 0 25,057 0 19,008 (163,900)
Net income (loss) $(3,943) 550,127 (206,755) 474,035 (397,322)
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents $ 9,331 133,569 275,165 170,474 201,312
Receivable from broker-dealers 0 335,181 451,357 825,707 1,468,424
Securities owned 0 0 952,092 634,419 1,539,424
Other assets 2,726 283,828 267,229 343,978 733,067
Total assets $12,057 752,578 1,945,843 1,974,578 3,942,227
Liabilities $ 0 44,863 38,480 141,330 577,736
Securities sold, not yet purchased 0 0 0 0 0
Payable to broker-dealers 0 0 1,007,514 608,848 1,459,678
Subordinated debt 0 0 0 0 500,000
Total liabilities 0 44,863 1,045,994 750,178 2,537,414
Preferred stock 0 0 0 0 0
Common stock 16,000 549,760 865,011 946,878 1,473,071
Subscriptions receivable 0 0 0 (100,000) (96,263)
Treasury stock 0 (133,240) 0 (47,805) 0
Retained earnings (3,943) 291,195 34,838 425,327 28,005
Total shareholders' equity 12,057 707,715 899,849 1,224,400 1,404,813
Total liabilities and
shareholders' equity $12,057 752,578 1,945,843 1,974,578 3,942,227
------- ------- --------- --------- ---------
</TABLE>
11
<PAGE> 13
- --------------------------------------------------------------------------------
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1999
--------- ----------
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C>
Commissions 5,358,043 20,327,944
Investment banking 2,309,601 220,766
Trading income (452,356) 4,629,052
Other 38,304 219,862
Total revenue 7,253,592 25,397,624
Employee compensation 4,850,291 15,492,833
Other expenses 2,674,084 3,706,762
Total expenses 7,524,375 19,199,595
Income (loss) before income taxes (270,783) 6,198,029
Income tax expense (benefit) (54,961) 2,478,324
Net income (loss) (215,822) 3,719,705
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents 215,813 3,784,689
Receivable from broker-dealers 2,921,660 7,721,748
Securities owned 1,534,886 12,435,365
Other assets 728,771 1,088,046
Total assets 5,401,130 25,029,848
Liabilities 922,878 4,417,425
Securities sold, not yet purchased 865,000 339,118
Payable to broker-dealers 1,528,175 13,292,305
Subordinated debt 500,000 1,000,000
Total liabilities 3,816,053 19,048,848
Preferred stock 0 0
Common stock 1,473,072 2,370,674
Subscriptions receivable (97,499) (135,047)
Treasury stock 0 (2,333)
Retained earnings 209,504 3,747,706
Total shareholders' equity 1,585,077 5,981,000
Total liabilities and
shareholders' equity 5,401,130 25,029,848
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Tejas Holding completed a reverse merger acquisition with the Company on August
27, 1999. The Company anticipates that the availability of public resources
through additional issuance of common stock or debt securities will provide
funding for future expansion in the securities industry. In the event the
Company issues additional equity to provide funding for expansion, current
shareholders may experience dilution in ownership percentage or book value.
Additionally, such equity may contain preferences and rights not available to
the current equity holders. The Company cannot give any assurance that it will
not need to issue additional equity or debt in the future in order to respond to
industry trends, potential business opportunities or unforeseen events.
As a broker-dealer, Tejas Securities is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors effecting
Tejas Securities' liquidity include the value of securities held in trading
accounts, the value of non-current assets, the amount of unsecured receivables,
and the amount of general business liabilities, excluding amounts payable to its
clearing broker and NASD approved subordinated debt.
Tejas Securities' inventory balance fluctuates daily based on the current market
value and types of securities held. Tejas Securities typically invests in
securities in which it provides research coverage. The types of securities may
include publicly traded debt, equity, options and private security issuances. As
a market maker, Tejas Securities provides bid and ask quotes on certain equity
securities on the NASDAQ market. Tejas Securities' ability to generate revenues
from market making activities may depend upon the level and value of securities
held in inventory.
Market values for some of the securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, Tejas Securities' liquidity
may be affected depending on the value of the securities involved. During times
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<PAGE> 14
of general market declines, Tejas Securities may experience market value losses,
which ultimately affects the liquidity of Tejas Securities through its
broker-dealer net capital requirements. In addition, Tejas Securities may decide
not to liquidate its security holdings to increase cash availability if
management believes a market turnaround is likely in the near term or if
management believes the securities are undervalued in the current market.
Since Tejas Securities' inception in March of 1994, management has raised
capital from two primary sources: the issuance of common stock and subordinated
debt. Tejas Securities generally has issued stock to either raise capital for
expansion or as an incentive to members of management. In April 1999, Tejas
Securities issued 1,006,975 shares of the common stock for $704,833 in cash. The
April 1999 stock issuance to Tejas Securities employees and management members
was a means of recognizing each individual's contribution to Tejas Securities
and to expand the shareholder base. Proceeds from the stock issuance were
partially used to finance the reverse merger and the expansion of Tejas
Securities' infrastructure.
In September 1998, Tejas Securities issued subordinated debt in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
subordinated debt was a short-term loan agreement used to increase equity
capital required for Tejas Securities underwriting activities. In November 1998,
Tejas Securities extended the repayment terms of the loan agreement so that the
loan became due and payable in November 2001. The loan accrues interest at 11.5%
per annum and is considered equity capital for NASD purposes. As a condition of
the loan agreement, Tejas Securities issued warrants to the lender to purchase
112,500 shares of common stock of Tejas Securities, exercisable at a price of
$2.65 per share.
In June 1999, Tejas Securities completed the second issuance of subordinated
debt in exchange for $500,000 from Clark Wilson. The proceeds from the loan
agreement were used to finance the expansion activities of Tejas Securities, as
well as contribute to operating activities. The loan accrues interest at 11.5%
per annum and is also considered equity capital for NASD purposes. As a
condition of the loan agreement, Tejas Securities issued additional warrants to
the lender to purchase 112,500 shares of common stock of Tejas Securities,
exercisable at a price of $2.65 per share of common stock. The warrants expire
in November 2003.
As of September 30, 1999, none of the 225,000 total warrants issued in
conjunction with the loan agreements had been exercised.
In addition to the sources of capital described above, Tejas Securities utilizes
the receivable balance from its clearing broker, Schroder & Co., to fund
operating and investing activities. The receivable balance represents the
residual equity due to Tejas Securities from Schroder & Co. if Tejas Securities
liquidated all of its investment security holdings. The receivable balance from
the clearing broker is also used to secure temporary financing from Schroder &
Co. for the purchase of investments in Tejas Securities' trading accounts. The
receivable balance held at Schroder & Co. may fluctuate depending on factors
such as the market valuation of securities held in Tejas Securities' trading
accounts, realized trading profits, commission revenue, cash withdrawals and
clearing costs charged to Tejas Securities for conducting its trading
activities.
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 monthly
basis, and are eliminated through Tejas Securities' monthly financial statement
consolidation process.
LIQUIDITY AT DECEMBER 31, 1996, 1997 AND 1998
Tejas Securities' cash position increased to $201,312 in 1998, from a balance of
$170,474 in 1997. These balances are comparable with the December 31, 1996
balance of $275,165. The fluctuations during these periods reflect changes in
the operating and financing activities of Tejas Securities from 1996 through
1998.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used by operating activities was $858,413, $18,542 and $174,816 in
1998, 1997 and 1996, respectively. The net cash used by operating activities is
impacted primarily by the brokerage operating activities and changes in the
brokerage-related assets and liabilities.
In 1998, the most significant use of cash was represented by the $642,717
increase in the receivable from the clearing broker. The increased receivable
was indirectly the result of Tejas Securities' use of proceeds from the $500,000
subordinated debt agreement.
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<PAGE> 15
Proceeds from the debt were used for operations thereby allowing Tejas
Securities to retain a larger receivable balance with the clearing broker. In
addition, Tejas Securities' overall investment in securities increased by
$905,005 from 1997 to 1998. This increase corresponds to the $850,830 increase
in payable to the clearing organization, taking into account market value
appreciation of the securities. The net cash effect of these transactions is the
use of $696,892, with the remaining $161,521 being net operating income plus
changes in other asset and liability accounts.
In 1997, the most significant changes in cash were represented by changes in the
receivable from the clearing broker and changes in the investment balances.
Tejas Securities' positive earnings were captured through increased commissions,
and were retained in the receivable from clearing broker, resulting in an
increase of $374,350. Investments in securities decreased by $317,673 in 1997,
which corresponds to the decrease of $398,666 in the payable to the clearing
organization, taking into account market value depreciation of the securities.
The net cash effect of these transactions is the use of $455,343, with the
remaining cash provided of $436,801 being net operating income plus changes in
other asset and liability accounts.
In 1996, the most significant change in cash was for the purchase of $952,092 in
investment securities. This use of cash was offset by the $1,007,514 increase in
the payable to the clearing organization. The net cash effect of these
transactions is $55,422 of cash provided, with the remaining $230,238 of cash
used being net operating income and changes in other assets and liabilities.
The Company anticipates that a portion of the cash provided from future
operating activities of Tejas Securities might be used to facilitate additional
investing activities, specifically the expansion of current office space in
Austin and Atlanta or the expansion of future offices. Future proceeds from cash
provided from operating activities may also be used to finance acquisition
activities.
Results of future operating activities of Tejas Securities will impact the
deferred tax asset or liabilities recorded by the Company. The value of the
deferred tax assets or liabilities may require the use of cash to satisfy
federal and state tax liabilities.
CASH FLOWS USED IN INVESTING ACTIVITIES
Net cash provided (used) by investing activities was $(188,484), $63,335 and
$(82,477) in 1998, 1997 and 1996, respectively. The cash uses in 1998 are
directly the result of capital expenditures for office expansion in Austin,
Atlanta, and New York. During 1998, Tejas Securities opened an additional office
in New York as part of its expansion into the investment banking and retail
brokerage segments of the industry.
In 1997, Tejas Securities entered into a sale-leaseback transaction with a
related party, as discussed in Item 7. Tejas Securities sold furniture and
fixtures for the book value of approximately $204,000, which generated cash of
$204,267.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided (used) by financing activities was $1,077,735, $(149,484) and
$398,889 in 1998, 1997 and 1996, respectively. Financing activities provided
$1,000,000 in cash during 1998 through the issuance of subordinated debt as
noted in Item 7. Of the $1,000,000 of debt issued in 1998, $500,000 was repaid
to the lender. In addition, Tejas Securities received $475,405 in proceeds from
common stock issuance to management, as well as $98,593 on the sale of treasury
stock to members of management.
In 1997, Tejas Securities received $250,000 from Joseph F. Moran for the
temporary financing of operating activities. Mr. Moran elected to have the
outstanding balance of the note payable converted into equity of Tejas
Securities. In addition, Tejas Securities sold treasury stock and received
$117,228 in proceeds from the sale. This was the final year that shareholder
distributions were paid as Tejas Securities elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code effective January
1, 1998. Tejas Securities paid $83,546 in shareholder distributions during 1997.
During 1996, Tejas Securities obtained $171,424, $154,576 and $122,491 through
the issuance of common stock, the sale of treasury stock, and contributions
received from shareholders, respectively. Tejas Securities also paid $49,602 to
shareholders in year-end distributions.
The Company may issue additional equity or debt securities in the future to
assist in the acquisition of additional businesses or expansion of current
offices.
14
<PAGE> 16
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
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. Research coverage and
investment in CAI Wireless Systems Inc., CS Wireless Systems Inc., American
Telecasting Inc. and Wireless One Inc. provided a significant portion of this
revenue during a two-month period in early 1999. Commission revenues from agency
transactions increased $1,564,107 or 338% to $2,026,245 for the nine months
ended September 30, 1999. Tejas Securities' realized an increase of 8,595 agency
trades for the nine months ended September 30, 1999. 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 trades executed during the nine months
ended September 30, 1999. In addition, Tejas Securities generated increased
commissions due to the appreciation of investments in the trading accounts for
the nine 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.
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. The increase in inventory and investment income resulted from favorable
investment performance of companies in the telecommunications and Internet
industries during the nine months ended September 30, 1999.
For the nine months ended September 30, 1999, other income increased $181,567 or
474% to $219,871. The increase for the nine months ended September 30, 1999 is
due to an increase in customer margin fee revenue.
Total expenses increased by $11,825,720 or 157% to $19,350,095 for the nine
months ended September 30, 1999. Net income for the nine months increased by
$3,464,945 to $3,249,123. 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.
Clearing and floor brokerage costs increased $36,647 or 12% to $341,381 for the
nine months ended September 30, 1999. 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.
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.
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.
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 ended
September 30, 1999 related to consulting and accounting fees incurred during the
normal course of business.
15
<PAGE> 17
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. 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. The overall increase in other expenses during the nine
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. The overall increase in income tax expense for the nine
months ended September 30, 1999 is due to the increase in gross profit during
the period. The Company's effective tax rate was 39% for the nine 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.
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
During 1998, Tejas Securities' total revenue increased 58% to $10.2 million from
$6.5 million for 1997. Of the total increase in revenues, underwriting and
investment banking activity provided the largest increase of 243% over the prior
year. Commission revenue for 1998 increased 65% over the previous year. The
growth in underwriting and investment banking revenue and commission revenue is
attributed to the expansion of Tejas Securities into the New York City, and
Atlanta markets. These new markets allowed Tejas Securities the opportunity to
complete three initial public offerings and one preferred stock offering during
1998. A byproduct to the investment banking activity was the increase in
securities inventory owned at year-end, including positions in the companies
underwritten. As the overall stock market declined during the fourth quarter, so
did the value of the securities inventory owned, thus resulting in a trading
loss of $299,166 at year-end.
Revenues increased 54% to $6.5 million in 1997 from $4.2 million in 1996,
primarily from the commencement of investment banking activities by Tejas
Securities. During 1997, Tejas Securities generated approximately $750,000 in
management and underwriting fees associated with initial public offerings. In
addition, Tejas Securities commission revenue increased from $3.6 million in
1996 to $4.8 million in 1997, primarily from the additional trading activity
associated with the initial public offerings.
The cost of expansion into new markets and the new products offered during 1998
had a significant impact on expenses as well. Commission expense increased 87%
from 1997 to 1998, and 76% from 1996 to 1997, while clearing costs increased
nearly 300% from 1997 to 1998, and 288% from 1996 to 1997. The increase in
commissions and clearing costs are attributed to the increased trading activity
and investment banking activity during 1998 and 1997. As a percentage of
commission revenue, commission expense during 1998 was 75% versus 66% in 1997
and 50% in 1996. Clearing costs remained consistent as a percentage of
commission revenues at 4% in 1998 and 3% in 1997, versus 1% in 1996.
In addition to the increased cost of conducting broker-dealer activities, Tejas
Securities realized an increase in other general and administrative costs during
1998. Employee compensation increased 54% from 1997 to 1998, and 5% from 1996 to
1997. The increase in employee compensation during 1998 resulted from the
addition of general administrative and management personnel needed to oversee
operations in the New York, Atlanta and Dallas offices. The number of general
administrative and management personnel employed by Tejas Securities during 1998
consisted of approximately twenty-two full time employees versus fourteen full
time employees during 1997. The number of general administrative and management
personnel grew between 1996 and 1997 from ten to fourteen full time employees.
Communications and occupancy costs, which include rent, telephone services and
market quotes and data, increased by 185% from approximately $440,000 in 1997 to
$817,000 in 1998, and 31% from approximately $337,000 in 1996 to the 1997
amount. These costs are variable expenses that increase with the number of
personnel employed and the number of offices in existence.
Overall, expenses before taxes for 1998 and 1997 increased by 80% and 35%,
respectively, to approximately $10,803,000, $6,004,000 and $4,464,000 for 1998,
1997 and 1996. Net income (loss) for the years 1998, 1997 and 1996 was
$(397,322), $474,035 and $(206,755), respectively.
Effective January 1, 1998, Tejas Securities elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code. For the year
ended December 31, 1998, income taxes were accounted for under the asset and
liability method, with adjustments to the
16
<PAGE> 18
asset or liability impacting the statement of operations as a benefit or
expense. For the year ended December 31, 1998, Tejas Securities recorded an
expected tax benefit of $163,900. The Company, prior to the merger, had a net
operating loss carryforward of $59,133 as of December 31, 1998. As of June 30,
1999, the Company's net operating loss carryforward was $63,966. The Company
will use the net operating loss carryforward to offset a portion of the tax
liability incurred by Tejas Securities as allowed by federal tax provisions.
Future tax benefits or expenses will be recorded based upon the enacted federal
and state income tax rates applicable to the Company.
EFFECTS OF INFLATION
The effects of inflation have been minimal on the results of operations and the
financial condition of Tejas Securities in recent years. However, the rising
cost of labor and competitive market for brokers could effect general and
administrative costs in the near term.
YEAR 2000 COMPLIANCE
Tejas Securities initiated its Year 2000 compliance project in early 1998. The
project was initiated in response to amended Rule 17a-5 of the Securities
Exchange Act of 1934, which required all broker-dealers to file a series of Year
2000 readiness reports with the SEC and its designated examining authority.
Tejas Securities' project included the assessment of both hardware and software
systems used internally or relied upon externally. In addition, the project
encompassed the Year 2000 readiness of service providers and vendors of Tejas
Securities.
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. 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.
17
<PAGE> 19
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company is required to implement this standard effective with
its 2000 fiscal year. SFAS 133 addresses the accounting for derivative
instruments, including certain instruments embedded in other contracts, and for
hedging activities. Under this Statement, the Company will be required to
recognize all derivative instruments as either assets or liabilities in the
statement of financial position and measure those at fair value. If certain
conditions are met a derivative may be specifically designated as a hedge, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-dominated forecasted transaction. The Company does not believe
that this Statement will have a material effect on its financial position or
results of operations.
Tejas Securities may invest in derivative transactions during the normal course
of business, primarily to satisfy the needs of its clients. Derivative
transactions entered into are recorded at the market value with realized or
unrealized gains and losses recognized in the Statement of Operations. Market
value is generally determined by quoted market prices for exchange-traded
options. Tejas Securities held 175,140 warrants with a market value of $350,280
as of September 30, 1999.
QUALITATIVE AND QUANTITATIVE 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
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.
18
<PAGE> 20
ITEM 3. PROPERTIES.
Tejas Securities leases space for its offices in Austin, Texas, Atlanta, Georgia
and New York, New York. Future commitments associated with the leases are
included in the footnotes to the financial statements. These leases are for
terms of four years, five years, and five years, respectively, and contain
renewal options. Tejas Securities' headquarters are located at 1250 Capital of
Texas Highway South, Austin, Texas, and consists of approximately 7,800 square
feet. Tejas Securities' Atlanta office is located at 12725 Morris Road, Suite
100, Alpharetta, Georgia, and consists of approximately 2,500 square feet. The
New York office is located at 1 World Trade Center, New York, New York, and
consists of approximately 6,000 square feet. Tejas Securities has entered into a
lease for 24,700 square feet in Austin, Texas and will relocate its corporate
headquarters to that space in December 1999. Tejas Securities will attempt to
sublease its current Austin, Texas office space.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides information at November 30, 1999 with respect to
ownership of the Common Stock, by each beneficial owner of five percent or more
of the Common Stock, each director of the Company, each of the named executive
officers and all directors and officers as a group. Except as indicated on the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
---------------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER NUMBER PERCENT
--------------------------------- --------- -------
<S> <C> <C>
John J. Gorman (1) 5,781,936 46.12%
Jay W. Van Ert (1) 1,145,495 9.14%
Joseph F. Moran (1) 2,482,621 19.80%
Michael L. McAllister -- --
John R. Ohmstede (2) 789,435 6.30%
Gregory D. Woodby (1) 248,250 1.98%
A. Reed Durant (1) -- --
John F. Garber (1) -- --
Charles H. Mayer (1) -- --
Neil Ragin (3) 37,808 *
All officers and directors as a
group (9 total) 9,658,302 77.04%
</TABLE>
- -------------------------------------------------------------------------------
* Less than 1%.
(1) The address for Messrs. Gorman, Van Ert, Moran, Woodby, Durant, Garber and
Mayer is 2700 Via Fortuna, Suite 400, Austin, Texas 78746.
(2) The address for Mr. Ohmstede is 5905 Overlook Drive, Austin, Texas 78731.
(3) The address for Mr. Ragin is 134 West 72nd Street, New York, New York,
10023. Mr. Ragin resigned as President, Treasurer and Director of the
Company effective August 26, 1999.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following information sets forth certain information with respect to the
executive officers and directors of the Company. Each of the Directors of the
Company is elected to serve until the next election of directors at a meeting of
the Stockholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------- ----- ------------------------------------------
<S> <C> <C>
John J. Gorman 39 Director, Chairman and Chief Executive
Officer
Jay W. Van Ert 38 Director and President
Joseph F. Moran 38 Director, Vice Chairman, Managing
Director
Charles H. Mayer 52 Director and Chief Operating Officer
Michael McAllister 45 Executive Vice President, Managing
Director
Gregory D. Woodby 38 Secretary and Treasurer
A. Reed Durant 44 Director of Compliance
John F. Garber 29 Director of Finance
Barry A. Williamson 42 Director
Clark N. Wilson 42 Director
</TABLE>
19
<PAGE> 21
JOHN J. GORMAN. Mr. Gorman became Chairman of the Board of Directors and Chief
Executive Officer of the Company in August 1999. He has been the Chairman and
Chief Executive Officer of Tejas Securities since July 1997. Mr. Gorman has over
16 years of experience in the brokerage industry. Mr. Gorman became a principal
of Tejas Securities on April 18, 1995. From 1988 until joining Tejas Securities,
Mr. Gorman worked at APS Financial Inc., most recently as a Senior Vice
President. Mr. Gorman served primarily in a broker capacity at APS Financial
Inc, broker-dealer in Austin, Texas. Mr. Gorman has held positions at APS
Financial Inc., Landmark Group, Shearson Lehman and Dean Witter. In addition,
Mr. Gorman serves on the Board of Directors of Lincoln Heritage Corporation, a
publicly traded company. Mr. Gorman is the nephew of Charles H. Mayer through
marriage. Mr. Gorman received his B.B.A. from Southern Methodist University in
1983.
JAY W. VAN ERT. Mr. Van Ert became the President and a Director of the Company
in August 1999. Mr. Van Ert joined Tejas Securities in 1995 as Director of
Research, was elected to the Board of Directors in 1997, and was named President
in May 1998. Mr. Van Ert has spent in excess of fifteen years in the investment
industry. Prior to joining Tejas Securities, Mr. Van Ert was employed from 1989
to 1995 as a Vice President with T. Rowe Price Associates Inc. where he served
as an Analyst, Portfolio Manager and Director of High Yield Research. Mr. Van
Ert earned a B.B.A. in Finance from the University of Texas in 1983 and an
M.B.A. from Southern Methodist University in 1984.
JOSEPH F. MORAN. Mr. Moran became the Vice Chairman of the Board of Directors
and Managing Director of the Company in August 1999. Mr. Moran joined Tejas
Securities in January 1996 as Senior Vice President of Fixed Income Sales. He
was elected to the Board of Directors of Tejas Securities in 1997 as Managing
Director and recently was named Vice Chairman of the Board. From 1991 until
joining Tejas Securities, Mr. Moran worked at APS Financial Inc. most recently
as a Senior Vice President. Mr. Moran served primarily in a broker capacity at
APS Financial Inc. Mr. Moran received his B.B.A. from Baylor University in 1984.
CHARLES H. MAYER. Mr. Mayer joined the Company in September 1999 as the Chief
Operating Officer and a Director. From 1995 until he joined Tejas Securities,
Mr. Mayer was an investor in a number of companies not related to the securities
industry. From 1990 to 1995, Mr. Mayer was the Managing Director and Chief
Information Officer with CS First Boston. Other experience includes 21 years in
senior positions with Morgan Stanley, Tech Partners, Salomon Brothers, Lehman
Brothers and the Federal Reserve Bank of New York. Mr. Mayer earned a BBA and
MBA from Seton Hall University.
MICHAEL L. MCALLISTER, Executive Vice President and Managing Director. Mr.
McAllister has over 19 years experience as an investment banker. Mr. McAllister
became Executive Vice President and Managing Director of Tejas in November 1999.
Mr. McAllister is the head of investment banking and is also responsible for
building the equity capital markets business. Previously, Mr. McAllister was
Senior Vice President and Managing Director of Corporate Finance at Southwest
Securities, Inc. from February 1998. From January 1995 to February 1998, Mr.
McAllister was Managing Director of Corporate Finance at Southcoast Capital
Corporation. Previous to this, Mr. McAllister was Managing Director from August
1992 to August 1994 at Kemper Securities, Inc. Prior to that, Mr. McAllister
served in the corporate finance departments of Lehman Brothers and The First
Boston Corporation.
GREGORY D. WOODBY. Mr. Woodby became the Secretary and Treasurer of the Company
in August 1999. Mr. Woodby joined Tejas Securities in January 1996 as Director
of Fixed Income Trading and was elected to the Board of Directors of Tejas
Securities in 1997 as Secretary. From 1989 until joining Tejas Securities, Mr.
Woodby worked at APS Financial Inc., most recently as a Fixed Income Trader for
APS Financial Inc. Mr. Woodby graduated from Baylor University earning a B.B.A.
in Management in 1983.
A. REED DURANT. Mr. Durant became the Director of Compliance for the Company in
August 1999. Mr. Durant joined Tejas Securities in November 1998 as the
Compliance Director. From January 1996 until joining Tejas Securities, Mr.
Durant worked as Senior Compliance Examiner for the NASD in the Regulation and
Enforcement area. Prior to joining NASD, Mr. Durant worked at Principal
Financial Securities since 1988. Mr. Durant brings over 20 years experience in
the securities industry to the Company, including 8 years as Compliance Director
of a 400-broker, 30-branch NYSE member firm. Mr. Durant graduated from Texas
Tech University with a BA in economics.
JOHN F. GARBER. Mr. Garber became the Director of Finance for the Company in
August 1999. Mr. Garber joined Tejas Securities in October 1998 as Director of
Finance. From April 1999 until joining Tejas Securities, Mr. Garber was employed
as the Controller for Loewenbaum & Co. Inc., an Austin based broker-dealer.
Prior to joining Loewenbaum & Co., Inc. in April 1998, he was employed by KPMG
LLP from 1995 to 1998 as a supervising auditor in the financial assurance
department. In addition, Mr. Garber serves as the Financial and Operations
Principal of Tejas Securities for regulatory reporting purposes. Mr. Garber
graduated from the University of Florida in 1992 with a B.S.B.A. in Finance. He
is a Certified Public Accountant and a member of the Texas Society of Certified
Public Accountants.
BARRY A. WILLIAMSON. Mr. Williamson became a Director of the Company in October
1999. Mr. Williamson was elected in 1992 as the 38th Texas Railroad Commissioner
and served from January 1993 to January 1999. He served as the Commission's
20
<PAGE> 22
Chairman in 1995. During the late 1980's and early 1990's, Mr. Williamson served
under the Bush administration at the U.S. Department of Interior as the Director
of Minerals Management Service. Under President Bush, he managed mineral leases
on the nation's 1.4 billion-acre continental shelf and oversaw an annual budget
of almost $200 million. During the 1980's, Mr. Williamson served under the
Reagan administration as a principle advisor to the U.S. Secretary of Energy in
the creation and formation of a national energy policy. Mr. Williamson began his
career with the firm of Turpin, Smith, Dyer & Saxe, and in 1985 established the
Law Offices of Barry Williamson and founded an independent oil and gas company.
Mr. Williamson graduated from the University of Arkansas with a B.A. in
Political Science in 1979, and received his J.D. degree from the University of
Arkansas Law School in 1982.
CLARK N. WILSON. Mr. Wilson became a Director of the Company in October 1999.
Mr. Wilson is the President and Chief Executive Officer of Clark Wilson Homes,
Inc., a subsidiary of Capital Pacific Holdings. Previously, Mr. Wilson was the
President of Doyle Wilson Homebuilder, Inc., serving in that position in 1992.
Mr. Wilson served as Vice President of Doyle Wilson homebuilder, Inc. from 1986
to 1992. Mr. Wilson took Doyle Wilson Homebuilder, Inc. through a turbulent
market and formed Clark Wilson Acceptance Corporation in 1989 as a finance
corporation, personally financing over $35,000,000 of construction loans for
Doyle Wilson Homebuilder, Inc. Mr. Wilson has won numerous MAX awards between
1994 and 1998, including the MAX Award for Grand Builder of the Year and best
Quality Project in 1994. Mr. Wilson is a Life Member of the National Association
of Homebuilders Spike Club. Mr. Wilson attended Amarillo College and the
University of Texas at Austin, and has nearly twenty-five years of experience in
the homebuilding industry.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company served as a member of the compensation or
similar committee or Board of Directors of any other entity, other than the
Company's subsidiaries, of which an executive officer served on the Compensation
Committee or Board of Directors of the Company.
ITEM 6. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICER COMPENSATION
The following executive officers of the Company received cash compensation in
the form of salary, bonus or commissions in excess of $100,000 during 1998, 1997
and 1996. None of the executive officers received any stock awards during the
years ended December 31, 1998, 1997 or 1996.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
NAME AND PRINCIPAL
POSITION YEAR SALARY BONUS FORGIVEN DEBT COMMISSIONS
--------------------- ------ --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
John J. Gorman 1998 $ 125,000 $ 0 $ 135,114 $ 709,309
Chairman and Chief 1997 0 261,000 0 643,688
Executive Officer 1996 0 0 0 790,272
----------------- ---- --------- --------- --------- ----------
Jay W. Van Ert 1998 183,333 0 0 47,255
Director and President 1997 120,000 75,000 0 44,010
1996 172,500 0 0 53,090
---- --------- --------- --------- ----------
Gregory D. Woodby 1998 100,000 500 0 76,748
Secretary and Treasurer 1997 85,000 40,000 0 59,481
1996 75,000 35,000 0 42,395
---- --------- --------- --------- ----------
Joseph F. Moran 1998 0 0 0 1,023,280
Managing Director 1997 0 0 0 977,890
and Vice Chairman 1996 330,000 0 0 659,303
----------------- ---- --------- --------- --------- ----------
</TABLE>
DIRECTOR COMPENSATION
Prior to the Merger, the directors of the Company did not receive compensation
for their service on the Board of Directors. Following the Merger, the initial
directors of the Company requested that Mr. Wilson and Mr. Williamson serve as
directors. As part of their incentive to join the Board, Mr. Wilson and Mr.
Williamson were each provided with options to purchase 100,000 shares of Common
Stock. The options are exercisable at $2.00 per share and expire on August 27,
2004. The options vest over a three-year period, commencing on August 27, 1999.
Currently no other directors of the Company receive any form of cash or non-cash
compensation for fulfilling their roles on the Board of Directors of the
Company.
21
<PAGE> 23
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SALE LEASEBACK
In September 1997, Tejas Securities entered into a sale-leaseback transaction
with Sandy Hook Management, a company owned by Charles H. Mayer, a member of the
Board of Directors. Sandy Hook Management purchased the assets for $204,267 from
Tejas Securities. Tejas Securities purchased the assets from June 1995 through
September 1997 for a total cost of $272,072. The book value of the assets as of
the date of the transaction was determined in accordance with generally accepted
accounting principles, including depreciation calculated by the straight-line
method. The previous Chief Financial Officer of Tejas Securities made the
determination of the book value. Under the terms of this transaction, Tejas
Securities agreed to lease the furniture and fixtures commencing in October 1998
through September 2000. Tejas Securities makes monthly lease payments of $6,372
to Sandy Hook Management and has an option to purchase the furniture and
fixtures at a discounted price in September 2000.
SUBORDINATED DEBT
Tejas Securities issued subordinated debt in September 1998 in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
transaction is described in Item 2. Financial Information - "Liquidity and
Capital Resources."
Tejas Securities completed the second issuance of subordinated debt in June 1999
in exchange for $500,000 from Clark Wilson. The transaction is described in Item
2. Financial Information - "Liquidity and Capital Resources."
TSG INTERNET FUND I, LTD.
In April 1999, John J. Gorman, Jay W. Van Ert, Joseph F. Moran, Clark N. Wilson
and Gregory D. Woodby, along with three other owners of less than 5% of Tejas
Securities, established TSG Capital, LLC (the "General Partner"), a Texas
limited liability company, for the purpose of acting as general partner of TSG
Internet Fund I, LTD. (the "Fund"), a Texas limited partnership. In addition to
the investment in the General Partner, Messrs. Gorman, Van Ert, Moran and Wilson
invested as limited partners in the Fund. Their contributions were as follows:
Mr. Gorman $200,000; Mr. Van Ert $120,520; Mr. Moran $200,000; and Mr. Wilson
$100,000. John Ohmstede, a beneficial owner of more than 5% of Tejas Securities,
also invested $200,000 in the Fund as a limited partner through a Trust. The
total capital contribution by the General Partner was less than $50,000.
TSG Capital, LLC acts as the general partner of the Fund and has no other
operations. The managers and principal executive officers include Jay W. Van Ert
and A. Reed Durant who are also officers of the Company, Tejas Holding and Tejas
Securities. The General Partner receives a management fee equal to .375% of the
average monthly net asset value of the Fund after the end of each fiscal
quarter. In addition, the General Partner receives a performance fee equal to
20% of the annual net profits of the Fund after the end of each fiscal year.
Tejas Securities receives a monthly management fee in exchange for providing
services to the General Partner for investment management, compliance and
accounting and reporting. In order to facilitate the closing of the Fund, Tejas
Securities advanced to the General Partner $357,099, of which $286,719 was
repaid to Tejas Securities, as investor funds became available. The remaining
balance of $70,380 is included as a receivable from an affiliate on the
statement of financial condition of Tejas Securities.
The Fund engaged Tejas Securities to solicit subscriptions for the initial
$2,500,000 private placement of limited partnership interests in the Fund. In
exchange for acting as the placement agent, Tejas Securities received a
placement agent fee equal to 5% of the total initial capital contributions to
the Fund. The total placement agent fee equaled $136,025 and was paid in May
1999.
During the fourth quarter of 1999, the Fund was reopened and approximately $3.5
million in additional funds were invested bring the total under management to
approximately $10 million. During the first quarter of 2000, Tejas anticipate
it will purchase the interests of Messrs. Gorman, Van Ert, Moran, Woodby and
the other owners of equity in TSG Capital, LLC at cost. Tejas will then assume
operation of the Fund.
EMPLOYEE CASH ADVANCES
Tejas Securities makes cash advances to certain employees from time to time,
which are typically secured and repaid from commissions. During 1998, Tejas
Securities forgave approximately $135,000 in advances receivable from John J.
Gorman as described in Note 8 to the accompanying 1998 Financial Statements.
SALE OF STOCK TO EMPLOYEES
In April 1999, Tejas Securities issued an additional 1,006,975 shares of its
common stock with a value of $704,833 to employees and management of Tejas
Securities. Of the shares issued, 410,000 shares were issued to directors or
executive officers of Tejas Securities
22
<PAGE> 24
at a purchase price of $0.70 per share. The transaction was recorded as a stock
subscription receivable, and was collected in full by August 1999. The following
reflects the April 1999 issuance of common stock to directors or executive
officers of Tejas Securities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
DIRECTOR/EXECUTIVE
OFFICER SHARES SUBSCRIBED SUBSCRIPTION PRICE
------------------ ----------------- ----------------------
<S> <C> <C>
John J. Gorman 100,000 $ 70,000
Jay W. Van Ert 100,000 $ 70,000
Joseph F. Moran 100,000 $ 70,000
Gregory D. Woodby 60,000 $ 42,000
A. Reed Durant 25,000 $ 17,500
John F. Garber 25,000 $ 17,500
-------------- ------- ---------
</TABLE>
John J. Gorman was named to the Board of Directors of Lincoln Heritage
Corporation in August 1999. Currently, Mr. Gorman owns common stock and stock
purchase warrants with a combined value in excess of $60,000. Tejas Securities
acted as managing underwriter in Lincoln Heritage's IPO and currently owns less
than 5% of the common equity of Lincoln Heritage.
ITEM 8. LEGAL PROCEEDINGS.
In June 1999, Starlight Entertainment, Inc., has submitted a claim in an
arbitration proceeding for damages in the amount of $6,800,000 for the failed
underwriting of a public offering of Starlight's common stock. The amount of
Starlight's claim is based upon the gross receipts that were expected from the
proposed public offering less the underwriting commission plus attorney's fees.
The Company's counsel has reviewed the complaint and is preparing an answer with
respect to the arbitration. Management does not believe this matter will produce
any material adverse consequences to the Company.
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 Tejas Securities.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
THE RELATED SHAREHOLDER MATTERS.
The Company's stock has not traded on an exchange or bulletin board since its
inception. The Company is in the process of registering its securities and
receiving approval to trade on the American Stock Exchange. There are no high
and low bid quotations available on the Company for the most recent fiscal year.
The Company has not paid cash or stock dividends and has no present plan to pay
any such dividends. Currently, the Company intends to reinvest its earnings in
order to facilitate expansion. The likelihood of future dividends will be
decided by the Board of Directors and will be based upon the Company's future
earnings, financial condition and capital requirements. Tejas Securities paid
$83,546 and $49,602 in shareholder distributions for the years ending December
31, 1997 and 1996, respectively, at which time it was an S corporation.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Certain securities sold by the registrant during the last three years have not
been registered under the Securities Act. The holders of the securities referred
to below agreed to take their securities for investment and not with a view to
the distribution thereof. The certificates representing the securities contained
legends identifying certain restrictions on the transferability thereof. The
following information gives effect to the 2.4825 for one stock exchange
effective as of August 27, 1999.
COMMON STOCK
The following sets forth information pertaining to sales of Common Stock by the
registrant during the last three years. There were no underwriting discounts or
commissions on the sale of the Common Stock. Exemption from registration of the
shares of Common Stock listed below is claimed under Section 4(2) of the
Securities Act.
<TABLE>
<CAPTION>
PURCHASER DATE SHARES CONSIDERATION
---------------- ------------ ---------- --------------------------
<S> <C> <C> <C>
John J. Gorman August, 1999 5,781,936 2,329,078 shares of Tejas
Holding common stock
Joseph F. Moran August, 1999 2,482,621 1,000,049 shares of Tejas
Holding common stock
Jay W. Van Ert August, 1999 1,145,495 461,428 shares of Tejas
Holding common stock
John R. Ohmstede August, 1999 789,435 318,000 shares of Tejas
Holding common stock
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
PURCHASER DATE SHARES CONSIDERATION
---------------- ------------ ---------- --------------------------
<S> <C> <C> <C>
John J. Glade August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Michael Hidalgo August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Jon S. McDonald August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Britt Rodgers August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Bob Sternberg August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Mike Wolf August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Gregory D. Woodby August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Lawrence Kaplan December, 1998 91,507 $10,000 cash
Lawrence Kaplan March, 1998 91,507 $10,000 cash
Lawrence Kaplan July, 1997 91,507 $10,000 cash
</TABLE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company's authorized capital stock consists of 50,000,000 shares of common
stock, $.001 par value per share.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share held of record in
the election of members of the Company's Board of Directors and for all other
matters submitted to a vote of shareholders.
Shareholders are entitled to receive, when and if declared by the Board of
Directors, dividends and other distributions in cash, stock or property from the
Company's assets or funds legally available for those purposes. The Common Stock
does not have any sinking fund provisions, redemption provisions, or preemptive
rights. All outstanding shares of Common Stock are fully paid and
non-assessable. In the event of the Company's liquidation, dissolution or
winding up, holders of Common Stock are entitled to share ratably in the assets
available for distribution.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer at 370 17th Street, Denver, Colorado.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The general corporate law of New York, the jurisdiction in which the Company
is incorporated, provides, under certain circumstances, for indemnification of
the directors or officers of a New York corporation for expenses incurred in
connection with the defense of any action, suit or proceeding, in relation to
certain matters brought against them as such directors and officers. Article 5
of the Company's Bylaws provide indemnification of directors and officers under
certain circumstances. In addition, the Company maintains insurance policies
which insure its officers and directors against certain liabilities.
Those provisions may be sufficiently broad to indemnify officers and
directors for liabilities under the securities laws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are itemized under Item 15. Financial
Statements and Exhibits.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE> 26
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER DESCRIPTION OF EXHIBITS
------ ------ ---------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 NASD Subordinated Loan Agreement, Form
SL-1, dated October 13, 1998, between
Clark N. Wilson and the Company
4.2 NASD Subordinated Loan Agreement, Form
SL-1, dated June 4, 1999, between Clark
N. Wilson and the Company
4.3* Shareholder Agreement, dated November
23, 1999, between John Ohmstede, John
Glade, Michael Hidalgo, Jon McDonald,
Britt Rodgers, Bob Sternberg, Mike
Wolf, Greg Woodby and the Company
4.4 Certificate of Incorporation
incorporated herein by reference
4.5 Bylaws incorporated herein by reference
10.1 Agreement, dated June 5, 1997, with
Schroder Wertheim & Co. Incorporated
10.2 Westech Capital Corp. 1999 Stock Option
Plan
10.3 Form of Incentive Stock Option
Agreement
10.4 Form of Nonqualified Stock Option
Agreement
10.5* Lease Agreement, effective as of
September 30, 1999, by and between
The Company and Desta Two Partnership,
Ltd.
21.1 Registrant's Subsidiaries
27.1* Financial Data Schedule
99.1 Articles of Incorporation of Tejas
Securities Group, Inc.
99.2 Bylaws of Tejas Securities Group, Inc.
99.3 Articles of Incorporation of Tejas
Securities Group Holding Company
99.4 Bylaws of Tejas Securities Group
Holding Company
</TABLE>
* Filed herewith
25
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
TEJAS SECURITIES GROUP, INC.
FINANCIAL STATEMENTS:
Independent Auditors' Report....................................................... F-1
Statements of Financial Condition.................................................. F-2
Statements of Operations........................................................... F-3
Statements of Stockholders' Equity................................................. F-4
Statements of Cash Flows........................................................... F-5
Notes to Financial Statements...................................................... F-6
WESTECH CAPITAL CORP.
INTERIM FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition as of
September 30, 1999 and December 31, 1999 (Unaudited)........................... F-14
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)........................................ F-15
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)........................................ F-16
Notes to Consolidated Financial Statements......................................... F-17
PRO FORMA FINANCIAL STATEMENTS:
Unaudited Pro Forma Combined Financial Information................................. F-20
Pro Forma Combined Statement of Financial Condition as of December
31, 1998 (unaudited)........................................................... F-21
Pro Forma Combined Statement of Operations for the Year Ended December 31, 1998
(unaudited).................................................................... F-22
Pro Forma Combined Statement of Financial Condition as of June 30, 1999
(unaudited).................................................................... F-23
Pro Forma Combined Statement of Operations for the Six Months Ended
June 30, 1999 (unaudited)...................................................... F-24
Notes to Unaudited Pro Forma Combined Financial Information........................ F-25
</TABLE>
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tejas Securities Group, Inc:
We have audited the accompanying statements of financial condition of Tejas
Securities Group, Inc. (the "Corporation") as of December 31, 1998 and 1997, and
the related statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tejas Securities Group, Inc. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Austin, Texas
February 12, 1999
F-1
<PAGE> 29
TEJAS SECURITIES GROUP, INC.
Statements of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 201,312 170,474
Receivable from clearing brokers, partially restricted 1,468,424 825,707
Securities owned 1,539,424 634,419
Furniture and equipment, net 209,431 59,057
Deferred tax assets 178,500 --
Other assets 345,136 284,921
------------ ------------
Total assets $ 3,942,227 1,974,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 577,736 141,330
Subordinated debt 500,000 --
Payable to clearing organization 1,459,678 608,848
------------ ------------
Total liabilities 2,537,414 750,178
------------ ------------
Stockholders' equity:
Preferred stock, no par value, convertible
1,000,000 shares authorized in 1998; none issued
and outstanding -- --
Common stock, no par value
10,000,000 shares authorized; 4,679,152 and
3,858,887 shares issued and outstanding in 1998
and 1997, respectively 1,473,071 946,878
Subscriptions receivable (96,263) (100,000)
Treasury stock, at cost, 141,113 shares in 1997 -- (47,805)
Retained earnings 28,005 425,327
------------ ------------
Total stockholders' equity 1,404,813 1,224,400
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 3,942,227 1,974,578
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 30
TEJAS SECURITIES GROUP, INC.
Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Commissions $ 7,932,780 4,810,520 3,648,255
Underwriting and investment banking income 2,584,770 752,554 --
Net dealer inventory and investment income (299,166) 924,587 567,537
Other income 23,530 9,248 41,720
------------ ------------ ------------
Total revenue 10,241,914 6,496,909 4,257,512
------------ ------------ ------------
Expenses:
Commissions 5,921,426 3,165,701 1,797,637
Other employee compensation and benefits 2,085,937 1,293,719 1,651,063
General and administrative 2,795,773 1,544,446 1,015,567
------------ ------------ ------------
Total expenses 10,803,136 6,003,866 4,464,267
------------ ------------ ------------
Income (loss) before income tax expense (benefit) (561,222) 493,043 (206,755)
Income tax expense (benefit):
Federal:
Current -- -- --
Deferred (178,500) -- --
State 14,600 19,008 --
------------ ------------ ------------
(163,900) 19,008 --
------------ ------------ ------------
Net income (loss) $ (397,322) 474,035 (206,755)
============ ============ ============
Pro forma earnings (loss) per share (note 11):
Basic earnings (loss) per share:
Net income (loss) $ (0.04) 0.04 (0.03)
============ ============ ============
Weighted average shares outstanding 9,435,429 8,416,728 5,189,072
============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) $ (0.04) 0.04 (0.03)
============ ============ ============
Weighted average shares outstanding 9,435,429 8,416,728 5,189,072
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 31
TEJAS SECURITIES GROUP, INC.
Statements of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COMMON SUBSCRIPTIONS TREASURY RETAINED
SHARES STOCK RECEIVABLE STOCK EARNINGS TOTAL
---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,987,096 $ 549,760 -- (133,240) 291,195 707,715
Stock issuances 1,103,467 171,424 -- -- -- 171,424
Treasury stock sales 909,437 21,336 -- 133,240 -- 154,576
Stockholder contributions -- 122,491 -- -- -- 122,491
Stockholder distributions -- -- -- -- (49,602) (49,602)
Net loss -- -- -- -- (206,755) (206,755)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 4,000,000 865,011 -- -- 34,838 899,849
Treasury stock purchases (540,686) -- -- (183,166) -- (183,166)
Treasury stock sales 399,573 81,867 (100,000) 135,361 -- 117,228
Stockholder distributions -- -- -- -- (83,546) (83,546)
Net income -- -- -- -- 474,035 474,035
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 3,858,887 946,878 (100,000) (47,805) 425,327 1,224,400
Stock issuances 679,152 475,405 -- -- -- 475,405
Treasury stock sales 141,113 50,788 -- 47,805 -- 98,593
Subscription collected -- -- 3,737 -- -- 3,737
Net loss -- -- -- -- (397,322) (397,322)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 4,679,152 $1,473,071 (96,263) -- 28,005 1,404,813
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 32
TEJAS SECURITIES GROUP, INC.
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (397,322) 474,035 (206,755)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Deferred tax benefit (178,500) -- --
Depreciation expense 38,110 39,834 30,783
Increase in receivable from clearing brokers (642,717) (374,350) (116,176)
Decrease (increase) in other assets (126,324) (2,980) 3,803
Decrease (increase) in receivables from employees
and shareholders 135,949 (262,448) 150,000
Decrease (increase) in other receivables (69,840) 85,510 (85,510)
Decrease (increase) in trading account securities (905,005) 317,673 (952,092)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 436,406 102,850 (6,383)
Increase (decrease) in payable to clearing organization 850,830 (398,666) 1,007,514
------------ ------------ ------------
Net cash used by operating activities (858,413) (18,542) (174,816)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of furniture and equipment -- 204,268 --
Purchase of furniture and equipment (188,484) (140,933) (82,477)
------------ ------------ ------------
Net cash provided (used) by investing activities (188,484) 63,335 (82,477)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable
and subordinated debt 1,000,000 250,000 --
Principal payments on notes payable (500,000) (433,166) --
Sale of treasury stock 98,593 117,228 154,576
Stockholder distributions paid -- (83,546) (49,602)
Stockholder contributions -- -- 122,491
Subscription collected 3,737 -- --
Proceeds from stock issuances 475,405 -- 171,424
------------ ------------ ------------
Net cash provided (used) by financing activities 1,077,735 (149,484) 398,889
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 30,838 (104,691) 141,596
Cash and cash equivalents at beginning of year 170,474 275,165 133,569
------------ ------------ ------------
Cash and cash equivalents at end of year $ 201,312 170,474 275,165
============ ============ ============
Supplemental disclosures:
Interest paid $ 65,427 97,219 12,946
Taxes paid $ 23,738 22,829 1,518
</TABLE>
In 1997, the Corporation assumed $183,166 of stockholder obligations in return
for 540,686 shares of its common stock.
In 1997, the Corporation issued 100,000 shares of common stock in exchange for a
$100,000 note receivable.
See accompanying notes to financial statements.
F-5
<PAGE> 33
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) ORGANIZATION AND BASIS OF PRESENTATION
Tejas Securities Group, Inc. (the Corporation) was incorporated on March
2, 1994 under the laws of the State of Texas. The Corporation is
registered as a broker and dealer in securities with the National
Association of Securities Dealers, Inc. and clears its transactions on a
fully disclosed basis through Schroder & Co., Inc. The Corporation
maintains offices in Austin, Texas; New York, New York and Atlanta,
Georgia.
Effective May 1, 1998 the Corporation increased authorized shares of
common stock to 10,000,000 shares and authorized 1,000,000 shares of
convertible preferred stock. Also, effective May 1, 1998, the Corporation
declared a stock split. Owners of the 21,543 shares issued and
outstanding as of May 1, 1998 received new shares equal to their current
ownership percentages, resulting in 4,000,000 shares of common stock
issued as a result of the stock split. The effects of the stock split
have been given retroactive effect in the accompanying financial
statements.
The 1,000,000 convertible preferred shares may be issued from time to
time and will have the designations, preferences, voting powers,
relative, participating, optional or other special rights and privileges
and the qualifications, limitations, and restrictions as determined by
the Board.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS
Securities transactions and the related commission revenue and expense
are recorded on a trade date basis.
The Corporation does not carry or clear customer accounts, and all
customer transactions are executed and cleared with other brokers on a
fully disclosed basis. These brokers have agreed to maintain such records
of the transaction effected and cleared in the customers' accounts as are
customarily made and kept by a clearing broker pursuant to the
requirements of Rules 17a-3 and 17a-4 of the Securities and Exchange
Commission, and to perform all services customarily incident thereto.
INVESTMENT BANKING
Investment banking revenues include gains, losses, and fees, net of
syndicate expenses, arising from securities offerings in which the
Corporation acts as an underwriter or agent. Investment banking revenues
also include fees earned from providing merger-and-acquisition and
advisory services. Investment banking management fees are recorded on
offering date, sales concessions on settlement date, and underwriting
fees at the time the underwriting is completed and the income is
reasonably determinable.
SECURITIES OWNED
Long and short positions in securities are reported at market value. The
difference between cost and market has been included in net dealer
inventory and investment income. These investments are subject to the
risk of failure of the issuer and the risk of changes in market value
based on the ability to trade such securities on the open market.
F-6
<PAGE> 34
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets.
REPURCHASE AND RESALE AGREEMENTS
Repurchase and resale agreements are treated as financing transactions
and are carried at the amounts at which the securities will be
subsequently reacquired or resold as specified in the respective
agreements. There were no repurchase or resale agreements outstanding at
December 31, 1998, 1997 and 1996.
FEDERAL INCOME TAXES
Effective January 1, 1998, the Corporation elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code.
For the year ended December 31, 1998, income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date. There were no significant deferred tax asset
or deferred tax liabilities as of January 1, 1998.
Prior to January 1, 1998, the Corporation elected to be taxed as an S
corporation under the provisions of Subchapter S of the Internal Revenue
Code. As a result, all Federal income tax expense and liability was paid
by the shareholders of the Corporation for the years ended December 31,
1997 and 1996, respectively. The amounts included as income tax expense
in the accompanying statement of operations for the year ended December
31, 1997 is a result of the income component of the Texas franchise tax
which is computed at approximately 4.5% of income before income taxes.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
STOCK-BASED COMPENSATION
The Corporation measures compensation expense for options granted using
the intrinsic value method. The Corporation provides pro forma
disclosures of net income (loss) and earnings (loss) per share as if the
fair value method had been applied.
F-7
<PAGE> 35
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(3) NET CAPITAL REQUIREMENTS
The Corporation, as a registered fully licensed broker and dealer in
securities, is subject to the Securities and Exchange Commission Uniform
Net Capital Rule (Rule 15c3-1). Under this rule, the Corporation is
required to maintain a minimum "net capital" to satisfy rule 15c3-1. The
minimum "net capital" requirement for the Corporation was $100,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. "Net
capital" at December 31, 1998 aggregated $842,544. "Net capital" at
December 31, 1997 aggregated $703,302. "Net capital" at December 31, 1996
aggregated $385,677.
(4) LEASE COMMITMENTS
The Corporation leases its office facilities and certain office equipment
under operating leases. The future minimum payments due under these
operating leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 743,970
2000 581,851
2001 398,763
2002 366,354
2003 256,347
Thereafter 132,523
-----------
$ 2,479,808
===========
</TABLE>
Rent expense amounted to approximately $515,000, $265,000 and $92,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
On September 30, 1997, the Corporation entered into a sale-leaseback
transaction with a related party, whereby the Corporation sold furniture
and fixtures for their book value of approximately $204,000. As part of
this transaction, the Corporation agreed to lease the furniture and
fixtures commencing on October 1, 1998 through September 30, 2000.
Payments of $6,373 per month are due under the lease agreement and are
included in the above schedule.
(5) PROFIT SHARING AND STOCK OPTION PLANS
PROFIT SHARING PLAN
In January 1997, the Corporation instituted a profit sharing plan under
section 401(k) of the Internal Revenue Code. The plan allows all
employees who are over 21 years old to defer a predetermined portion of
their compensation for federal income tax purposes. Contributions by the
Corporation are discretionary. For the years ended December 31, 1998 and
1997, the Corporation made approximately $84,000 and $7,000,
respectively, of contributions to the plan.
STOCK OPTIONS
The Corporation grants options to employees for its common stock. As
provided by Financial Accounting Standards Board Statement No. 123, the
Corporation elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plans.
F-8
<PAGE> 36
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
During 1995, options for up to 2 percent of total shares issued and
outstanding were granted for employees who met certain requirements for
two years. In addition, employees who met certain other requirements for
two years could purchase up to 5 percent of the total shares issued and
outstanding. One employee exercised the options in 1997, and purchased 3
percent of the total shares issued and outstanding. No compensation cost
was recognized for the options granted.
During 1996, two employees were granted options, vesting in 1997, to
purchase up to 2 percent and 1 percent of total shares issued and
outstanding. The option for 1 percent was exercised in 1997 and resulted
in the purchase of 40,000 shares. The other option was revoked by the
employee upon delivery of stock by a shareholder. No compensation cost
was recognized for the options granted.
During 1997, three employees were granted options, vesting in 1997, to
purchase up to 5 percent, 2.5 percent and 1 percent, respectively, of the
total shares issued and outstanding on the grant date. Two of the options
were fully exercised during 1997, resulting in the purchase of 140,000
shares. For the remaining option, one-half of the 5 percent option (or
2.5 percent) was exercised resulting in the purchase of 100,000 shares.
The remaining options total 100,000 shares at a price of $0.50 per share
and expires in September 1999. No compensation cost was recognized for
the options granted. During 1998, no options were exercised, and no new
options were granted.
Had the Corporation recorded compensation expense related to these
options under the fair value method, compensation expense would have
increased by approximately $8,000 and $4,000 for the years ended December
31, 1997 and 1996, respectively. Compensation expense was estimated in
accordance with the provisions of Financial Accounting Standards Board
Statement No. 123, using a 7.25 percent risk-free rate and an expected
dividend of 8 percent per year. The compensation expense for each option
grant was individually calculated.
A summary of the Corporation's stock option and warrant activity, and
related information for the years ended December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 100,000 $0.50 120,000 $0.10 120,000 $0.10
Granted 0 $0.00 459,946 $0.56 0 $0.00
Exercised 0 $0.00 (360,000) $0.49 0 $0.00
Forfeited 0 $0.00 (119,946) $0.36 0 $0.00
Outstanding - end of year 100,000 $0.50 100,000 $0.50 120,000 $0.10
Exercisable - end of year 100,000 $0.50 100,000 $0.50 120,000 $0.10
</TABLE>
F-9
<PAGE> 37
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 0 $0.00 0 $0.00 0 $0.00
Granted 112,500 $2.65 0 $0.00 0 $0.00
Outstanding - end of year 112,500 $2.65 0 $0.00 0 $0.00
Exercisable - end of year 112,500 $2.65 0 $0.00 0 $0.00
</TABLE>
F-10
<PAGE> 38
(6) OFF STATEMENT of FINANCIAL CONDITION RISK
The Corporation is responsible to its clearing broker for payment of all
transactions executed both on its behalf and on behalf of its customers.
Therefore, the Corporation is exposed to off statement of financial
condition risk in the event a customer cannot fulfill its commitment and
the clearing broker must purchase or sell a financial instrument at
prevailing market prices. The Corporation and its clearing broker seek to
control risk associated with customer transactions through daily
monitoring to assure margin collateral is maintained under regulatory and
internal guidelines.
The Corporation's due from clearing brokers represents amounts on deposit
with Schroder & Co., Inc. The Corporation is exposed should Schroder &
Co., Inc. be unable to fulfill its obligations for securities
transactions. Schroder & Co., Inc. requires the Corporation to maintain
$100,000 in its account at all times.
The Corporation deposits its cash with financial institutions.
Periodically such balances exceed applicable FDIC insurance limits.
The Corporation had revenues from two accounts which exceeded 10% of
total revenue during 1996. The Corporation had revenues from three
accounts which exceeded 10% percent of total revenue during 1997. No
individual account exceeded 10% percent of total revenue in 1998.
F-11
<PAGE> 39
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(7) SUBORDINATED DEBT
The Corporation has $500,000 in debt subordinated to claims of general
creditors as of December 31, 1998. The subordinated debt is due November
1, 2001 and bears interest at 11.5 percent. Interest is paid monthly. As
a condition of the loan agreement, the Corporation issued to the lender
warrants to purchase 112,500 shares of common capital stock of the
Corporation, exercisable at a price of $2.65 per share of common stock.
The warrants expire on November 12, 2003. As of December 31, 1998, none
of the warrants had been exercised.
The subordinated borrowings are available in computing net capital under
the SEC's uniform net capital rule. To the extent that such borrowings
are required for the Corporation's continued compliance with minimum net
capital requirements, they may not be repaid. It is the Corporation's
intention not to renew the secured demand note collateralizing agreements
due on November 1, 2001.
(8) RECEIVABLE FROM EMPLOYEE AND STOCKHOLDER
A $300,000 advance was made during 1995 as an incentive for an employee
accepting a position with the Corporation. Under the terms of the
agreement, the advance was forgiven if the employee was still employed
with the Corporation on certain trigger dates. During 1995, $150,000 of
the note receivable was forgiven and included in other employee
compensation and benefits in the accompanying statements of operations.
The remainder of the receivable was forgiven and expensed during 1996.
The Corporation makes advances to certain employees in months when their
commission payout does not meet a predetermined amount. As of December
31, 1998, approximately $126,500 had been advanced to employees under
this agreement. As of December 31, 1997 approximately $44,000 had been
advanced to employees and $219,000 to the Corporation's Chairman of the
Board under this agreement. These receivables are to be repaid through
reductions of future commissions.
During 1998, the Corporation forgave approximately $135,000 in advances
receivable from its Chairman of the Board and approximately $163,000 in
advances receivable from employees. The amounts forgiven are included in
commission expense in the accompanying financial statements.
The Corporation received a $100,000 note from an employee in
consideration for the issuance of common stock. The note bears no
interest and is due and payable on December 31, 1999. This amount has
been recorded as stock subscriptions receivable in the accompanying
financial statements. During 1998, the Corporation collected $3,737 of
the subscriptions receivable, resulting in a balance of $96,263 in
subscriptions receivable as of December 31, 1998.
(9) INCOME TAX
Income tax benefit for the year ended December 31, 1998 differs from the
amount computed by applying the U.S. Federal income tax rate of 34
percent to pretax loss as a result of the following:
<TABLE>
<S> <C>
Computed "expected" benefit $ 190,815
Meals and entertainment (34,325)
State Franchise tax (14,600)
Other 22,010
---------
$ 163,900
=========
</TABLE>
F-12
<PAGE> 40
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 145,700
Other 32,800
---------
Gross deferred tax assets 178,500
Valuation allowance --
---------
Net deferred tax asset $ 178,500
=========
</TABLE>
There were no significant deferred tax liabilities at December 31, 1998.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not the Corporation will realize the benefits of these
deductible differences net of the existing valuation allowances at
December 31, 1998.
At December 31, 1998, the Corporation has net operating loss
carryforwards for Federal income tax purposes of approximately $381,000
which are available to offset future Federal taxable income, if any,
through 2018. Additionally, the Corporation has state net operating loss
carryforwards available.
(10) CONTINGENCIES AND COMMITMENTS
The Corporation is involved in various claims and legal actions that have
arisen in the ordinary course of business. It is management's opinion
that liabilities, if any, arising from these actions would not have a
significant adverse effect on the financial condition and results of
operations of the Corporation.
(11) INDUSTRY SEGMENT DATA
The Corporation has two reportable segments: brokerage services and
investment banking. The primary operating segment, brokerage services,
includes both sales and trading activities of the broker-dealer and
encompasses both retail and institutional customer accounts. These
segments require the commitment of significant human capital and
financial resources, as well as industry specific skills. The investment
banking segment participates in underwriting of corporate securities as
managing underwriter and as a syndicate member.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Corporation
evaluates performance based on profit or loss from operations before
income taxes.
The following table presents segment revenues, profits and assets for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
------------------------- ---------------- ---------------- -----------
Investment
Brokerage Banking Total
------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues from external
customers $ 6,957,349 $ 2,584,770 $ 9,542,119
------------------------- ---------------- ---------------- -----------
Interest revenue 699,795 0 699,795
------------------------- ---------------- ---------------- -----------
Interest expense 65,427 0 65,427
------------------------- ---------------- ---------------- ------------
Depreciation and
amortization 37,995 115 38,110
------------------------- ---------------- ---------------- ------------
Segment profit (loss) (1,892,566) 1,331,344 (561,222)
------------------------- ---------------- ---------------- ------------
------------------------- ---------------- ---------------- ------------
Segment assets 3,940,960 1,267 3,942,227
------------------------- ---------------- ---------------- ------------
Expenditures for
segment assets 187,102 1,382 188,484
------------------------- ---------------- ---------------- ------------
</TABLE>
The following table presents segment revenues, profits and assets for the year
ended December 31, 1997.
<TABLE>
<CAPTION>
------------------------- ---------------- ---------------- -----------
Investment
Brokerage Banking Total
------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues from external
customers $ 5,558,810 $ 752,554 $ 6,311,364
------------------------- ---------------- ---------------- -----------
Interest revenue 185,545 0 185,545
------------------------- ---------------- ---------------- -----------
Interest expense 97,219 0 97,219
------------------------- ---------------- ---------------- -----------
Depreciation and
amortization 39,834 0 39,834
------------------------- ---------------- ---------------- -----------
Segment profit 225,381 267,662 493,043
------------------------- ---------------- ---------------- -----------
------------------------- ---------------- ---------------- -----------
Segment assets 1,974,578 0 1,974,578
------------------------- ---------------- ---------------- -----------
Expenditures for
segment assets 140,933 0 140,933
------------------------- ---------------- ---------------- -----------
</TABLE>
The following table presents segment revenues, profits and assets for the year
ended December 31, 1996.
<TABLE>
<CAPTION>
------------------------- ---------------- ---------------- -----------
Investment
Brokerage Banking Total
------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues from external
customers $ 4,217,825 $ 0 $ 4,217,825
------------------------- ---------------- ---------------- -----------
Interest revenue 39,687 0 39,687
------------------------- ---------------- ---------------- -----------
Interest expense 12,946 0 12,946
------------------------- ---------------- ---------------- -----------
Depreciation and
amortization 30,783 0 30,783
------------------------- ---------------- ---------------- -----------
Segment profit (loss) (206,755) 0 (206,755)
------------------------- ---------------- ---------------- -----------
------------------------- ---------------- ---------------- -----------
Segment assets 1,945,843 0 1,945,843
------------------------- ---------------- ---------------- -----------
Expenditures for
segment assets 82,477 0 82,477
------------------------- ---------------- ---------------- -----------
</TABLE>
(12) EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
On August 27, 1999, pursuant to an Agreement and Plan of Merger, by and
among the Corporation, Tejas Securities Group Holding Company, a Texas
Corporation ("Tejas Holding"), Westech Capital Corp., a New York
corporation ("Westech"), and Westech Merger Sub, Inc., a Delaware
corporation ("Merger Sub"), the Corporation acquired Westech 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. Tejas Holding is the holder of
approximately 83% of the outstanding common stock issued by the
Corporation.
After the completion of the Merger, Westech had 12,536,737 shares of
common stock issued and outstanding. Earnings (loss) per share
information is based on pro forma calculations as if the Corporation had
completed the transaction in 1996, reflecting the additional shares
issued as part of the Merger. The historical share amounts prior to the
merger date have been adjusted on a pro forma basis to reflect the
merger transaction utilizing the same exchange ratio (2.4825 to one)
effected by the merger.
Effective January 1, 1998 the Corporation elected to be taxed as a C
corporation under the provisions of the Internal Revenue Code. In prior
years the Corporation had elected S corporation status for Federal
Income Tax purposes. Accordingly, net income (loss) and earnings (loss)
per share information for 1997 and 1996 are based on pro forma
calculations as if the Corporation had been a C corporation for those
years.
Pro forma basic earnings (loss) per share of common stock are computed
by dividing net earnings by the pro forma weighted average number of
common shares outstanding.
Pro forma diluted earnings (loss) per share reflects dilution from
contingently issuable shares, which include options and warrants.
Contingently issuable shares are not included in the pro forma weighted
average number of shares when the inclusion would increase net income
per share or decrease the loss per share.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" is effective for financial statements with fiscal years and
interim periods ending after December 15, 1997 with retroactive statement
for prior periods. SFAS 128 provides for the calculation of Basic and
Dilutive earnings per share. Basic earnings per share includes no
dilution and is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect
potential dilutions of securities that could share in the earnings (loss)
of the Corporation, such as stock options, warrants or convertible
debentures.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
1998 1997 1996
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER
SHARE
Net income (loss) $ (397,322) $ 316,035 $ (140,755)
Shares 9,435,429 8,416,728 5,189,072
Basic earnings (loss) per share $ (0.04) $ 0.04 $ (0.03)
DILUTED EARNINGS (LOSS) PER
SHARE
Net income (loss) $ (397,322) $ 316,035 $ (140,755)
Effect of dilutive securities:
Warrants 0 0 0
Options 0 0 0
Diluted earnings (loss) per share $ (0.04) $ 0.04 $ (0.03)
</TABLE>
Options to purchase 100,000, 100,000 and 120,000 shares of common stock
at December 31, 1998, 1997 and 1996 were not included in the computation
of diluted earnings (loss) per share because the options' exercise price
was greater than the estimated market value per share during the period.
Warrants to purchase 112,500 shares of common stock as of December 31,
1998 were not included in the computation of diluted earnings (loss) per
share because the warrants' exercise price was greater than the estimated
market value per share of common stock for the period. In addition,
Management does not consider these to be "nominal value" contingently
issuable shares and therefore has not considered the amounts in
disclosing pro forma earnings (loss) per share amounts.
F-13
<PAGE> 41
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.
F-14
<PAGE> 42
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Commissions 20,327,944 5,358,043
Underwriting and investment banking income 220,766 2,309,601
Net dealer inventory and investment income 4,629,052 (452,356)
Other income 219,871 38,304
------------ ------------
Total revenue 25,397,633 7,253,592
------------ ------------
Expenses:
Commissions, employee compensation and 15,492,833 4,850,291
benefits
Clearing and floor brokerage 341,381 304,734
Underwriting expenses -- 423,125
Communications and occupancy 881,410 542,316
Professional fees 855,775 402,177
Interest 397,656 43,730
Other 1,381,040 958,002
------------ ------------
Total expenses 19,350,095 7,524,375
------------ ------------
Income (loss) before income tax expense (benefit)
and minority interest 6,047,538 (270,783)
Income tax expense (benefit) 2,422,324 (54,961)
Minority interest in net income (loss) 376,091 --
------------ ------------
Net income (loss) 3,249,123 (215,822)
============ ============
Basic earnings (loss) per share:
Net income (loss) 0.29 (0.02)
============ ============
Weighted average shares outstanding 11,350,153 9,172,622
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 43
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 376,091 --
income (loss)
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.
F-16
<PAGE> 44
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 including its principal operating
subsidiary, Tejas Securities are collectively referred to as the "Company".
(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.
F-17
<PAGE> 45
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 nine month periods ended September
30, 1999 and 1998, respectively, giving effect to the Merger on August 27, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
BASIC EARNINGS (LOSS) PER SHARE
<S> <C> <C>
Net income (loss) $ 3,249,123 $ (215,822)
Weighted average shares outstanding 11,350,153 9,172,622
Basic earnings (loss) per share $ 0.29 $ (0.02)
</TABLE>
There were no contingently issuable shares outstanding for the 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.
(4) Industry Segment Data
The Company has three reportable segments: brokerage services, investment
banking and market making. The primary operating segment, brokerage services,
includes both sales and trading activities of the broker-dealer and encompasses
both retail and institutional customer accounts. The other operating segments
are strategic units that provide additional services to customers. These
segments require the commitment of significant human capital and financial
resources, as well as industry specific skills. The investment banking segment
participates in underwriting of corporate securities as managing underwriter and
as a syndicate member. The market making segment is utilized to facilitate the
execution of NASDAQ security transactions for the Company's customers. In August
1999, the NASD approved the Company to make markets in NASDAQ securities. The
Company commenced with market making activities subsequent to September 30,
1999. The Company does not rely on any major customers as a source of revenue.
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.
F-18
<PAGE> 46
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
The following table presents segment revenues, profits and assets for the nine
months ended September 30, 1999.
<TABLE>
<CAPTION>
INVESTMENT MARKET
BROKERAGE BANKING MAKING TOTAL
<S> <C> <C> <C> <C>
Revenues from external
customers $23,867,411 $ 220,766 $ -- $24,088,177
Interest revenue 1,309,456 -- -- 1,309,456
Interest expense 397,656 -- -- 397,656
Depreciation and
amortization 50,763 -- -- 50,763
Segment profit 5,826,772 220,766 -- 6,047,538
Segment assets 25,029,848 -- -- 25,029,848
Expenditures for segment
assets 181,803 -- -- 181,803
</TABLE>
The following table presents segment revenues, profits and assets for the nine
months ended September 30, 1998.
<TABLE>
<CAPTION>
INVESTMENT MARKET
BROKERAGE BANKING MAKING TOTAL
<S> <C> <C> <C> <C>
Revenues from external
customers $ 4,672,833 $2,309,601 $ -- $6,982,434
Interest revenue 271,158 -- -- 271,158
Interest expense 43,730 -- -- 43,730
Depreciation and
amortization 25,319 -- -- 25,319
Segment profit (loss) (1,557,227) 1,286,444 -- (270,783)
Segment assets 5,401,897 1,336 -- 5,403,233
Expenditures for segment
assets 144,620 1,382 -- 146,002
</TABLE>
F-19
<PAGE> 47
PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
ASSETS Securities(1) Westech (2) Adjustments(3) Combined
------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 201,312 9,529 -- $ 210,841
Receivable from clearing brokers, partially restricted 1,468,424 -- -- 1,468,424
Securities owned 1,539,424 -- -- 1,539,424
Furniture and equipment, net 209,431 -- -- 209,431
Deferred tax assets 178,500 -- 3,820 (5) 182,320
Other assets 345,136 -- -- 345,136
----------- ----------- ----------- -----------
$ 3,942,227 9,529 3,820 $ 3,955,576
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 577,736 1,580 -- $ 579,316
Subordinated debt 500,000 -- -- 500,000
Payable to clearing organization 1,459,678 -- -- 1,459,678
----------- ----------- ----------- -----------
Total liabilities 2,537,414 1,580 -- 2,538,994
----------- ----------- ----------- -----------
Minority interests in consolidated subsidiaries -- -- 240,917 (4) 240,917
Stockholders' equity:
Preferred stock -- -- -- (6) --
Common stock 1,473,071 599 (1,461,134)(6) 12,536
Capital in excess of par value -- 7,350 1,128,757 (6) 1,136,107
Subscriptions receivable (96,263) -- 96,263 (6) --
Retained earnings 28,005 -- (983)(6) 27,022
----------- ----------- ----------- -----------
Total stockholders' equity 1,404,813 7,949 (237,097) 1,175,665
----------- ----------- ----------- -----------
$ 3,942,227 9,529 3,820 $ 3,955,576
=========== =========== =========== ===========
</TABLE>
F-20
<PAGE> 48
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
Securities Westech(2) Adjustments(3) Combined
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 7,932,780 -- -- $ 7,932,780
Underwriting and investment banking income 2,584,770 -- -- 2,584,770
Net dealer inventory and investment income (299,166) -- -- (299,166)
Other income 23,530 -- -- 23,530
------------ ------------ ------------ ------------
Total revenue 10,241,914 -- -- 10,241,914
------------ ------------ ------------ ------------
Expenses:
Commissions, employee compensation and benefits 5,921,426 -- -- 5,921,426
Other employee compensation and benefits 2,085,937 -- -- 2,085,937
General and administrative 2,692,236 10,753 -- 2,702,989
------------ ------------ ------------ ------------
Total expenses 10,699,599 10,753 -- 10,710,352
Depreciation and amortization 38,110 -- -- 38,110
------------ ------------ ------------ ------------
Operating income (495,795) (10,753) -- (506,548)
Interest expense 65,427 -- -- 65,427
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (561,222) (10,753) -- (571,975)
Income taxes (163,900) 680 (3,820)(5) (167,040)
Minority interest in loss -- -- (68,141)(4) (68,141)
------------ ------------ ------------ ------------
Net loss $ (397,322) (11,433) 71,961 $ (336,794)
============ ============ ============ ============
Basic earnings per share:
Net loss $ (0.03)
============
Weighted average shares outstanding 12,536,737
============
Diluted earnings per share:
Net loss $ (0.03)
============
Weighted average shares outstanding 12,536,737
============
</TABLE>
F-22
<PAGE> 49
PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
ASSETS Securities Westech(2) Adjustments(3) Combined
------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 334,047 6,498 -- $ 340,545
Receivable from clearing brokers, partially restricted 11,439,542 -- -- 11,439,542
Securities owned 11,545,748 -- -- 11,545,748
Furniture and equipment, net 226,933 -- -- 226,933
Other assets 406,152 -- -- 406,152
------------ ------------ ------------ ------------
$ 23,952,422 6,498 -- $ 23,958,920
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 2,782,845 3,382 -- $ 2,786,227
Securities sold, not yet purchased 1,050,135 -- -- 1,050,135
Payable to clearing organization 13,099,946 -- -- 13,099,946
Subordinated debt 1,000,000 -- -- 1,000,000
Deferred tax liability 1,198,575 -- (1,896)(5) 1,196,679
------------ ------------ ------------ ------------
Total liabilities 19,131,501 3,382 (1,896) 19,132,987
------------ ------------ ------------ ------------
Minority interests in consolidated subsidiaries -- -- 826,760 (4) 826,760
Stockholders' equity:
Preferred stock, no par value, convertible -- -- -- (6) --
Common stock 2,200,841 599 (2,188,904)(6) 12,536
Capital in excess of par value -- 2,517 1,581,103 (6) 1,583,620
Subscriptions receivable (281,675) -- 281,675 (6) --
Retained earnings 2,901,755 -- (498,738)(6) 2,403,017
------------ ------------ ------------ ------------
Total stockholders' equity 4,820,921 3,116 (824,864) 3,999,173
------------ ------------ ------------ ------------
$ 23,952,422 6,498 -- $ 23,958,920
============ ============ ============ ============
</TABLE>
F-23
<PAGE> 50
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
Securities Westech(2) Adjustments(3) Combined
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Commissions $15,465,352 -- -- $15,465,352
Underwriting and investment banking income 165,766 -- -- 165,766
Net dealer inventory and investment income 3,516,592 -- -- 3,516,592
Other income 87,065 -- -- 87,065
----------- ----------- ----------- -----------
Total revenue 19,234,775 -- -- 19,234,775
----------- ----------- ----------- -----------
Expenses:
Commissions 9,948,064 -- -- 9,948,064
Other employee compensation and benefits 2,540,501 -- -- 2,540,501
General and administrative 1,737,909 4,833 -- 1,742,742
----------- ----------- ----------- -----------
Total expenses 14,226,474 4,833 -- 14,231,307
Depreciation and amortization 29,144 -- -- 29,144
----------- ----------- ----------- -----------
Operating income 4,979,157 (4,833) -- 4,974,324
Interest expense 239,983 -- -- 239,983
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest 4,739,174 (4,833) -- 4,734,341
Income taxes 1,865,424 -- (1,896)(5) 1,863,528
Minority interest in income -- -- 492,851 (4) 492,851
----------- ----------- ----------- -----------
Net income (loss) $ 2,873,750 (4,833) (490,955) $ 2,377,962
=========== =========== =========== ===========
Basic earnings per share:
Net income $ 0.19
===========
Weighted average shares outstanding 12,536,737
===========
Diluted earnings per share:
Net income $ 0.19
===========
Weighted average shares outstanding 12,536,737
===========
</TABLE>
F-24
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) Balances were obtained from the 1998 audited financial statements of
Tejas Securities.
(2) Includes the account balances and results of Westech's operations
beginning January 1, 1998 prior to the Company's acquisition.
(3) Includes pro forma adjustments relating to the acquisition of Westech,
including provisions for income taxes on the consolidated entity,
restatement of Westech's equity and adjustments to record the minority
interest in Tejas Securities.
(4) To reflect the minority interest in Tejas Securities resulting from the
merger transaction, which approximates 17% of the outstanding common
stock of Tejas Securities. Of the 5,803,888 shares of common stock issued
and outstanding for Tejas Securities, 995,333 non accredited
stockholders' shares were not exchanged for shares of Tejas Holding.
These remaining 995,333 shares represent the minority interest in Tejas
Securities. See note 6 below.
(5) To record the adjustment for the provision for income taxes on the
combined entity. The pro forma adjustment is based on the income
(loss) before income taxes and minority interest, and the effective tax
rate in effect for the period.
(6) The pro forma acquisition adjustments reflect the exchange of 4,808,555
shares representing 83% of Tejas Securities common stock for Tejas
Holding common stock on a one-for-one basis. Concurrently, shareholders
of Tejas Holding exchanged their 4,808,555 shares of common stock for
11,937,237 shares of Westech common stock with a par value of $.001 per
share. As a result of this transaction, Westech's shareholders' pro forma
equity would be comprised of the following:
<TABLE>
<S> <C>
December 31, 1998:
Common stock $ 12,536
Capital in excess of par value 1,136,107
Retained earnings 27,022
June 30, 1999:
Common stock $ 12,536
Capital in excess of par value 1,583,620
Retained earnings 2,403,017
</TABLE>
F-25
<PAGE> 52
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 5, 2000 WESTECH CAPITAL CORPORATION
By: /s/ JAY W. VAN ERT
Jay W. Van Ert, President
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER DESCRIPTION OF EXHIBITS
------ ------ ---------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 NASD Subordinated Loan Agreement, Form SL-1, dated
October 13, 1998, between Clark N. Wilson and the
Company
4.2 NASD Subordinated Loan Agreement, Form SL-1, dated
June 4, 1999, between Clark N. Wilson and the
Company
4.3* Shareholder Agreement, dated November 23, 1999,
between John Ohmstede, John Glade, Michael Hidalgo,
Jon McDonald, Britt Rodgers, Bob Sternberg, Mike
Wolf, Greg Woodby and the Company
4.4 Certificate of Incorporation incorporated herein by
reference
4.5 Bylaws incorporated herein by reference
10.1 Agreement, dated June 5, 1997, with Schroder
Wertheim & Co. Incorporated
10.2 Westech Capital Corp. 1999 Stock Option Plan
10.3 Form of Incentive Stock Option Agreement
10.4 Form of Nonqualified Stock Option Agreement
10.5* Lease Agreement, effective as of September 30, 1999,
by and between The Company and Desta Two
Partnership, Ltd.
21.1 Registrant's Subsidiaries
27.1* Financial Data Schedule
99.1 Articles of Incorporation of Tejas Securities Group,
Inc.
99.2 Bylaws of Tejas Securities Group, Inc.
99.3 Articles of Incorporation of Tejas Securities Group
Holding Company
99.4 Bylaws of Tejas Securities Group Holding Company
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 4.3
SHAREHOLDER AGREEMENT
This Shareholder Agreement (the "AGREEMENT") dated as of the 23rd day
of November, 1999 (the "EFFECTIVE DATE"), by and between the undersigned holders
of capital stock (collectively the "SHAREHOLDERS" and individually a
"SHAREHOLDER") of Westech Capital Corp, a New York corporation (the "COMPANY"),
their spouses, and the Company.
RECITALS:
A. Each Shareholder, as of the date said Shareholder becomes a party to
this Agreement, is, or simultaneously with the execution of this Agreement will
become, the record and beneficial owner of certain shares of capital stock of
the Company. From time to time, the Shareholders may acquire additional shares
which will be subject to the Agreement.
B. The purpose of this Agreement is to protect the Company and the
Shareholders by regulating the disposition of the Shares (as hereinafter
defined) as further set forth in this Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
SHARE CERTIFICATES
Section 1.1 All shares of the capital stock of the Company not exempted
by Article VI hereof (the "SHARES") shall be held and disposed of by the
Shareholder in accordance with this Agreement. All Shares shall be listed in
column 2 of Exhibit "A" attached hereto and made a part hereof. Column 2 shall
initially reflect all capital stock of the Company owned by the holders (the
"Holders") listed in Exhibit "A" as of the Effective Date. Column 2 shall be
amended as necessary to add additional Holders from time to time and to reflect
any additional capital stock of the Company received by the Holders, except as
provided in Article VI, and to reflect the ownership of record of any
transferees of the capital stock of the Company. Column 2 shall also be amended
as necessary to reflect any reductions in capital stock held by a Holder due to
transfers permitted under this Agreement.
Section 1.2 On execution of this Agreement, each Shareholder shall
surrender to the Company the certificates representing his Shares, so as to have
placed on those Shares the legend set forth in Section 7.1 of this Agreement.
Section 1.3 Each Shareholder covenants that any certificate
representing capital stock of the Company in which the Shareholder has an
interest will not be held in a street name, nor by a nominee.
<PAGE> 2
ARTICLE II
RESTRICTIONS
Section 2.1 Except as provided in Section 2.2, or elsewhere in this
Agreement, no Shareholder shall transfer, encumber or in any way voluntarily
dispose of (collectively, "TRANSFER") his Shares. Any attempt to do so shall be
void. Each Shareholder shall have the right to vote his Shares and receive the
dividends paid on them until the Shares are sold or transferred as provided in
this Agreement.
Section 2.2 Prior to January 1, 2001, no Shares may be Transferred
(except as may otherwise be permitted by this Agreement). During this period,
each Shareholder may subject a maximum number of Shares subject to a lien as
collateral for a bona fide lending transaction (which is not intended to
circumvent the provisions of this Agreement) (the "PLEDGE") of up to one-third
(1/3) of the Shares held of record by said Shareholder as of January 1, 2000.
Between January 1, 2001, and January 1, 2002, each Shareholder may Transfer a
number of Shares equal to the number of Shares held of record by said
Shareholder as of January 1, 2001 multiplied by one-third (1/3). During this
period (01/01/01 - 01/01/02), each Shareholder may Pledge no more than
two-thirds of the Shares held of record by said Shareholder as of January 1,
2001, less the number of Shares said Shareholder Transfers between January 1,
2001, and January 1, 2002 pursuant to this Agreement. Between January 1, 2002,
and January 1, 2003, each Shareholder may Transfer any Shares that were not
Transferred the previous year, but were eligible for Transfer, plus a number of
shares equal to the number of Shares held of record by said Shareholder as of
January 1, 2002 multiplied by one-third (1/3). During this period, each
Shareholder may Pledge Shares without further restriction under this Agreement.
As of January 1, 2003, each Shareholder may Transfer Shares without further
restriction under this Agreement.
ARTICLE III
INDEPENDENT COMMITTEE
Section 3.1 The Company shall establish a committee (the "COMMITTEE")
comprised of the independent directors of the Company (i.e. those directors who
are not otherwise employed by the Company). The Committee shall have the
responsibility of administering the provisions of this Agreement, and to resolve
any disputes arising hereunder. The Committee may determine whether or not a
proposed transfer qualifies as a voluntary or involuntary Transfer of Shares.
The Committee may, in its sole discretion, for good cause shown, waive any or
all restrictions provided by this Agreement for any proposed voluntary Transfer
of Shares. All parties hereto agree to be bound by the Committee's final
decision.
-2-
<PAGE> 3
ARTICLE IV
PERMITTED TRANSFERS
Section 4.1 Notwithstanding any provisions in this Agreement to the
contrary, any Shareholder may transfer Shares subject to this Agreement to his
spouse, children, or any inter vivos trust for the benefit of his spouse or
children ("PERMITTED TRANSFEREES"). Such transferee(s) shall hold the Shares
subject to all the provisions of this Agreement, as provided in Article V of
this Agreement.
ARTICLE V
OBLIGATIONS OF TRANSFEREES
Section 5.1 In the event that a permitted transfer is made in
accordance with Section 4.1 of this Agreement, the transferred Shares shall
remain subject to all of the provisions of this Agreement and the Permitted
Transferee, or any transferee, shall make no further transfer except as provided
in this Agreement. In the event that a permitted transfer is made in accordance
with Section 3.1 of this Agreement, the transferred Shares shall no longer be
subject to the provisions of this Agreement.
ARTICLE VI
EXEMPTED SHARES
Section 6.1 This Agreement shall not apply to those shares obtained
either (i) through open market purchases after November 22, 1999, or (ii)
pursuant to a Company-sponsored benefit plan.
ARTICLE VII
LEGENDS ON SHARE CERTIFICATES
Section 7.1 On execution of this Agreement, each Shareholder shall
surrender to the Company the certificates representing his Shares to have
conspicuously endorsed on those certificates the legend set forth in this
Section. Each new certificate issued that represents a Share subject to this
Agreement shall also have endorsed on its face the following legend:
"Sale, transfer, or hypothecation of the Shares represented by
this certificate is restricted by the provisions of a Shareholder
Agreement dated November 22, 1999, among certain of the
Shareholders, their spouses and the Company, a copy of which may
be inspected at the principal office of the Company, and all the
provisions of which are incorporated by reference in this
certificate."
A copy of this Agreement shall be delivered to the secretary of the Company, and
shall be shown by him to any proper person making inquiry about it.
-3-
<PAGE> 4
ARTICLE VIII
TERMINATION OF AGREEMENT
Section 8.1 This Agreement shall terminate on:
(a) The written agreement of all parties;
(b) The dissolution, bankruptcy, or insolvency of the Company; or
(c) January 1, 2003, whichever is soonest.
ARTICLE IX
SPOUSE'S CONSENT
Section 9.1 Spouses of Shareholders acknowledge, by execution of this
Agreement, that they have read the Agreement and that they know and understand
its contents. Spouses of Shareholders hereby approve of the provisions of the
Agreement, and agree that those Shares and their interest in them are subject to
the provisions of the Agreement and that they will take no action at any time to
hinder the operation of the Agreement as it affects those Shares or their
interest in them.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1 Agreement to Perform Necessary Acts. Each party to this
Agreement agrees to perform any further acts and execute and deliver any
documents that may be reasonably necessary to carry out the provisions of this
Agreement.
Section 10.2 Specific Performance. The parties hereto agree that it
would be impossible to measure in money the damages which would accrue to a
party hereto by reason of a failure to perform any of the obligations under this
Agreement. Therefore, if any party hereto is forced to institute any action or
proceeding to enforce the provisions hereof, any person against whom such action
or proceeding is brought hereby waives the claim or defense that the party
instituting such action has an adequate remedy at law and such person shall not
urge in any such action that an adequate remedy at law exists.
Section 10.3 Amendments. The provisions of this Agreement may be
waived, altered, amended or repealed, in whole or in part, only on the written
consent of all parties to this Agreement, or by action of the Committee to
release specific Shares.
Section 10.4 Successors and Assigns. This Agreement shall be binding
on, and shall inure to the benefit of, the parties to it and their respective
heirs, legal representatives, successors and assigns.
Section 10.5 Validity of Agreement. It is intended that each Section of
this Agreement shall be viewed as separate and divisible, and in the event that
any Article, Section, or Paragraph shall be
-4-
<PAGE> 5
held to be invalid, the remaining Articles, Sections or Paragraphs shall
continue to be in full force and effect.
Section 10.6 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if served personally on the party to
whom notice is to be given, if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid, and
properly addressed to the party.
Section 10.7 Governing Law. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of Texas.
Section 10.8 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10.9 Prior Agreements. This Agreement supersedes any and all
prior agreements among the parties relating to the subject matter hereof.
Section 10.10 Addendum Agreement. From time to time, in the Company's
sole discretion, any person who is to obtain capital stock of the Company from
the Company may be required to simultaneously execute an addendum agreement.
Such person and his spouse shall become parties to this Agreement by the
execution of the Addendum Agreement in the form attached hereto as Exhibit "B",
which Addendum Agreement shall bind them to, and grant them the benefits of,
this Agreement as though they were original parties hereto. For this purpose all
the Shareholders hereby appoint the Company as their agent and attorney-in-fact
to execute such Addendum Agreement on their behalf and expressly bind themselves
to the Addendum Agreement by the Company's execution of that Agreement without
further action on their part.
Section 10.11 Interests in Shares. Provisions of this Agreement dealing
with Shares include any interest in or right to Shares.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WESTECH CAPITAL CORP, a New
York Corporation
By:
---------------------------
Name:
----------------------
Title:
---------------------
SPOUSES: SHAREHOLDERS:
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
- ----------------------------- --------------------------------
-6-
<PAGE> 7
EXHIBIT "A"
Shareholders
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
-------- -------- --------
Holder Number of Shares of Company Number of shares of
subject to this Agreement Company not subject
to this Agreement
<S> <C> <C>
John Ohmstede 789,435 0
- --------------------------- -------------------------- --------------------------
John Glade 248,250 0
- --------------------------- -------------------------- --------------------------
Michael Hidalgo 248,250 0
- --------------------------- -------------------------- --------------------------
Jon McDonald 248,250 0
- --------------------------- -------------------------- --------------------------
Britt Rodgers 248,250 0
- --------------------------- -------------------------- --------------------------
Bob Sternberg 248,250 0
- --------------------------- -------------------------- --------------------------
Mike Wolf 248,250 0
- --------------------------- -------------------------- --------------------------
Greg Woodby 248,250 0
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
- --------------------------- -------------------------- --------------------------
</TABLE>
<PAGE> 8
EXHIBIT "B"
Addendum Agreement
Addendum Agreement made this _____ day of _______________, ___, by and
between ______________________________________________________ (the "NEW
SHAREHOLDER") and _________________________________________________________ (the
"NEW SHAREHOLDER'S SPOUSE"), Westech Capital Corp, a New York corporation (the
"COMPANY"), and the other shareholders (the "SHAREHOLDERS") of the Company, who
are parties to that certain Agreement dated November 22, 1999 (the "AGREEMENT"),
between the Company and its Shareholders.
WITNESSETH:
WHEREAS, the Company and the Shareholders and their respective spouses
entered into the Agreement to impose certain restrictions and obligations upon
themselves and the shares of stock (the "SHARES") of the Company;
WHEREAS, the New Shareholder is desirous of becoming a shareholder of
the Company; and
WHEREAS, the Company and the Shareholders have required in the
Agreement that all persons acquiring Shares must enter into an Addendum
Agreement binding the New Shareholder and his spouse to the Agreement to the
same extent as if they were original parties thereto, so as to promote the
mutual interests of the Company, the Shareholders and the New Shareholder by
granting the same benefits and imposing the same restrictions and obligations on
the New Shareholder and the Shares to be acquired by him as were granted to and
imposed upon the Shareholders under the Agreement.
NOW, THEREFORE, in consideration of the mutual promises of the parties
and as a condition of the purchase or other acquisition of Shares in the
Company, the New Shareholder and the New Shareholder's spouse acknowledge that
they have read the Agreement. The New Shareholder and the New Shareholder's
spouse shall be bound by, and shall have the benefit of, all the terms and
conditions set out in the Agreement to the same extent as if they were a
Shareholder and a Shareholder's spouse for purposes of the Agreement. This
Addendum Agreement shall be attached to and become a part of the Agreement.
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Addendum Agreement
as of the date first above written.
----------------------------------------
New Shareholder
----------------------------------------
Spouse of New Shareholder
Agreed to on behalf of the Shareholders and the Company pursuant to
Section 10.10 of the Agreement.
WESTECH CAPITAL CORP,
a New York corporation
By:
------------------------------
Name:
-------------------------
Title:
------------------------
ATTEST:
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
<PAGE> 1
EXHIBIT 10.5
--------------------------------------
LEASE AGREEMENT
BY AND BETWEEN
DESTA TWO PARTNERSHIP, LTD.
AS LANDLORD,
AND
WESTECH CAPITAL CORP.
AS TENANT
--------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - LEASED PREMISES..............................................................................1
Section 1.01 Leased Premises...............................................................1
Section 1.02 Lease Grant...................................................................1
Section 1.03 Building Core and Shell.......................................................2
ARTICLE II - LEASE TERM..................................................................................2
Section 2.01 Lease Term....................................................................2
Section 2.02 Holding Over..................................................................3
ARTICLE III - RENT.......................................................................................3
Section 3.01 Minimum Rent..................................................................3
Section 3.02 Additional Rent...............................................................3
Section 3.03 Rent Payments.................................................................8
ARTICLE IV - UTILITIES AND SERVICES......................................................................8
Section 4.01 Services to be Provided.......................................................8
Section 4.02 Additional Services..........................................................10
Section 4.03 Tenant's Obligations.........................................................10
Section 4.04 Service Interruptions........................................................10
ARTICLE V - USE AND OCCUPANCY...........................................................................11
Section 5.01 Use and Occupancy............................................................11
Section 5.02 Rules and Regulations........................................................13
Section 5.03 Quiet Enjoyment..............................................................13
ARTICLE VI - REPAIRS, MAINTENANCE AND ALTERATIONS.......................................................13
Section 6.01 Repair and Maintenance by Tenant.............................................13
Section 6.02 Alterations and Additions by Tenant..........................................14
Section 6.03 Mechanics' Liens - Tenant's Obligations......................................15
Section 6.04 Maintenance and Repair by Landlord...........................................15
ARTICLE VII - INSURANCE, FIRE AND CASUALTY..............................................................16
Section 7.01 Tenant's Insurance...........................................................16
Section 7.02 Landlord's Insurance.........................................................16
Section 7.03 Fire or Other Casualty.......................................................17
Section 7.04 Waiver of Subrogation........................................................18
ARTICLE VIII - CONDEMNATION.............................................................................18
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IX - INDEMNIFICATIONS AND WAIVER................................................................19
Section 9.01 Limitations on Liability of Landlord: Waiver.................................19
Section 9.02 Tenant's Indemnification of Landlord; Assumption; Employees'Claims...........20
Section 9.03 Landlord's Indemnification of Tenant.........................................21
Section 9.04 No Implied Waiver............................................................21
Section 9.05 Waiver by Tenant.............................................................21
Section 9.06 Hazardous Materials..........................................................22
ARTICLE X - ASSIGNMENT AND SUBLETTING...................................................................23
Section 10.01 No Assignment or Subletting Without Consent.....................................23
ARTICLE XI - DEFAULT....................................................................................24
Section 11.01 Default......................................................................24
Section 11.02 Landlord's Lien..............................................................27
Section 11.03 Mitigation of Damages........................................................28
ARTICLE XII - MISCELLANEOUS PROVISIONS..................................................................29
Section 12.01 Rights Reserved by Landlord..................................................29
Section 12.02 Taxes on Tenant's Property...................................................31
Section 12.03 Attorneys' Fees and Legal Expenses...........................................32
Section 12.04 Subordination................................................................33
Section 12.05 Estoppel Certificates........................................................33
Section 12.06 Financial Statements.........................................................34
Section 12.07 Notices......................................................................34
Section 12.08 Business Purpose.............................................................34
Section 12.09 Severability.................................................................34
Section 12.10 No Merger....................................................................35
Section 12.11 Force Majeure................................................................35
Section 12.12 Gender.......................................................................35
Section 12.13 Joint and Several Liability..................................................35
Section 12.14 No Representations...........................................................35
Section 12.15 Entire Agreement; Amendments.................................................36
Section 12.16 Section Headings.............................................................36
Section 12.17 Binding Effect...............................................................36
Section 12.18 Counterparts.................................................................36
Section 12.19 Rental Tax...................................................................36
Section 12.20 No Personal Liability of Landlord............................................37
Section 12.21 Authority to Sign Lease......................................................37
Section 12.22 Execution and Approval of Lease..............................................37
ARTICLE XIII - ADDITIONAL AGREEMENTS....................................................................37
ARTICLE XIV - EXHIBITS AND ATTACHMENTS..................................................................38
</TABLE>
2
<PAGE> 4
BASIC LEASE PROVISIONS
LANDLORD: Desta Two Partnership, Ltd., a Texas limited
partnership
LANDLORD'S ADDRESS: 6 Desta Drive, Suite 6500
Midland, Texas 79705
Attn: Mr. L. Paul Latham
Telephone No. (915) 6888-3212
Fax No. (915) 688-3247
WITH COPY TO:
Desta Two Partnership, Ltd.
2600 Via Fortuna, Suite 140
Austin, Texas 78746
Attn: Mr. Rod Arend
Telephone No. (512) 306-9093
Fax No. (512) 306-9112
TENANT: Westech Capital Corp., a New York Corporation
TENANT'S ADDRESS: PRIOR TO THE COMMENCEMENT DATE:
1250 Capital of Texas Highway S. #500
Austin, Texas 78746
Telephone No. (512) 306-5225
Fax No. (512) 306-1528
AFTER THE COMMENCEMENT DATE:
2700 Via Fortuna, Suite 400
Austin, Texas 78746
Telephone No. (512)
---------------
Fax No. (512)
----------------
with copy to:
Christian & Smith
2302 Fannin #500
Houston, Texas 77002
Attn: James W. Christian
Telephone No. (713)659-7617
Fax No. (713)659-7641
BUILDING: The land described on Exhibit A attached
hereto, together with all improvements now
or hereafter constructed thereon, including
the office building and related parking
garage locally known or to be known as
Terrace II, 2700 Via Fortuna, Austin, Texas
78746.
1
<PAGE> 5
LEASED PREMISES: Suite 400 on the fourth (4th) floor of the
Building, which is generally depicted on the floor
plan which is attached hereto as Exhibit B. As
more fully set forth in Section 1.01, the Rentable
Area of the Leased Premises includes not only the
useable floor area of the Leased Premises, but
also, an allocation of a portion of the Common
Area of the Building. For the purposes of this
Lease the Leased Premises shall comprise 24,963
square feet of Rentable Area. Tenant shall also
have the use of ancillary areas common for use of
all Tenants of the Building.
TOTAL BUILDING AREA: 114,635 square feet of Rentable Area.
MINIMUM RENT: Beginning on the Commencement Date, Minimum Rent
under this Lease will be payable during the
applicable months of the Lease Term specified in
the "Lease Months" column hereinbelow, at an
annual rate determined by multiplying the
applicable dollar amounts set out in the "Annual
Rate" column hereinbelow by the number of square
feet of Rentable Area in the Leased Premises. The
Minimum Rent will be payable in monthly
installments in the amounts set out in the
"Monthly Installments" column hereinbelow.
<TABLE>
<S> <C> <C>
Lease Months Annual Rate Monthly Installments
- -------------------------- --------------------- ------------------------
1 - 2 - 0 - - 0 -
- -------------------------- --------------------- ------------------------
3 (March 1,2000) - 60 $17.50 $36,404.38$
- -------------------------- --------------------- ------------------------
61 - 87 $18.50 $38,488.63$
- -------------------------- --------------------- ------------------------
</TABLE>
RENT: The Minimum Rent, Additional Rent (hereinafter
defined), and all other amounts payable by Tenant
to Landlord under this Lease.
TENANT'S PERCENTAGE: 21.78%
EFFECTIVE DATE: September 30, 1999.
COMMENCEMENT DATE: As defined in Section 2.01 of the lease which is
projected to be December 15, 1999.
LEASE TERM: Eighty-seven (87) months, commencing on the
Commencement Date and subject to the option to
extend set forth on Exhibit H.
BUILDING STANDARD HOURS: 7:00 A.M. to 7:00 P.M. on each Monday through
Friday (excluding Building Holidays) and 8:00
A.M. to 5:00 P.M. on each Saturday (excluding
Building Holidays).
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<PAGE> 6
BUILDING HOLIDAYS: New Years Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
LANDLORD'S BROKER: Colliers Oxford Commercial, Inc.
1500 Nations Bank Tower
515 Congress Avenue
Austin, Texas 78701
TENANT'S BROKER: R. K. Neblett Interests
2121 Sage Road #350
Houston, Texas 77056
PARKING: Tenant shall be entitled to no more than one
hundred eleven (111) parking spaces at no
cost to Tenant during the term of this
Lease, of which fifteen (15) are reserved
spaces the location of which is shown on
Exhibit B-1 attached hereto.
PERMITTED USE: General office, including but not limited to,
facilities for brokerage services (including a
trading floor) and associated ancillary uses.
The Basic Lease Provisions set forth hereinabove are hereby incorporated into
and made a part of the Lease Agreement which is attached hereto (the "Lease").
Each reference in the Lease to any of the provisions or definitions set forth in
these Basic Lease Provisions shall mean and refer to the provisions and
definitions hereinabove set forth and shall be used in conjunction with the
provisions of the Lease. In the event of any direct conflict between these Basic
Lease Provision and the Lease, these Basic Lease Provisions shall control;
provided, however, that those provisions in the Lease (including all exhibits
and attachments thereto) which expressly require an adjustment or modification
to any of the matters set forth in these Basic Lease Provisions shall supersede
the adjusted or modified provisions of these Basic Lease Provisions.
3
<PAGE> 7
EXECUTED by the undersigned in multiple originals as of the Effective Date set
out hereinabove.
LANDLORD: DESTA TWO PARTNERSHIP, LTD.,
a Texas limited partnership
By: DESTA TWO MANAGEMENT CORP.,
a Texas corporation, its General Partner
By:
L. Paul Latham, President
TENANT:
WESTECH CAPITAL CORP.,
a New York Corporation
By: /s/ JAY W. VAN ERT
-----------------------------------------------
Name: Jay W. Van Ert
--------------------------------------------
Title: President
-------------------------------------------
4
<PAGE> 8
LEASE AGREEMENT
This Lease Agreement ("Lease") is entered into as of the Effective Date
specified in the Basic Lease Provisions by and between Landlord and Tenant. The
Basic Lease Provisions attached hereto and the defined terms set out therein are
hereby incorporated herein by reference.
ARTICLE I - LEASED PREMISES
Section 1.01 Leased Premises
(a) The Leased Premises are depicted generally on Exhibit B and are or
will be bounded by the inside surface of the window wall(s) and the
centerline of walls separating the Leased Premises from areas leased
to or held for lease to other tenants or from Common Areas as
described herein. No deduction from usable area will be made for
columns or projections necessary to the Building or for special
stairs, elevators or other vertical penetrations which are for the
specific use of Tenant.
(b) The term "Rentable Area", as used herein with respect to the Leased
Premises, refers to the sum of (i) the usable floor area of the Leased
Premises, estimated to be 23,863 plus (ii) Tenant's share of all
common use: corridors, lobbies, elevator foyers, restrooms, as well as
all mechanical and electrical rooms, janitor's closets and other
similar facilities of the Building (such areas being herein referred
to as "Common Areas"). "Rentable Area" as used herein with respect to
the Building, includes all space occupied or to be occupied by
Tenants, together with the Common Areas. Upon the completion of
construction of improvements to the Leased Premises, useable floor
area of the Leased Premises, but not the Common Area, may be
re-measured at the request of either party. The cost of re-measurement
shall be borne by the party requesting re-measurement. If it is
determined that the useable floor area of the Leased Premises varies
from the estimate set forth above, then the Rentable Area of the
Leased Premises will be appropriately adjusted. If neither party
requests a re-measurement within thirty (30) days after the
Commencement Date, then it will be presumed for all purposes under
this Lease that the information in the Basic Lease Provisions with
respect to the number of square feet of Rentable Area in the Leased
Premises is correct, and such number will be a stipulated number which
will be utilized for all relevant purposes under this Lease.
Section 1.02 Lease Grant
For the consideration and subject to the terms, provisions and conditions
set out below, Landlord lets and leases to Tenant and Tenant leases from
Landlord the Leased Premises and the right to use all areas commonly held
for use by tenants of the Building and located on the Land described on
Exhibit A.
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<PAGE> 9
Section 1.03 Building Core and Shell
Landlord will provide the improvements which are listed and described on
Exhibit C which is attached hereto and incorporated herein by reference
(the "Building Core and Shell"). If improvements are to be constructed by
Landlord within the Leased Premises, then all of Landlord's agreements with
respect thereto are set forth in a tenant work letter which is attached to
this Lease (the "Tenant Work Letter").
ARTICLE II - LEASE TERM
Section 2.01 Lease Term
(a) Subject to and upon the terms and conditions set forth in the Lease,
or in any exhibit attached hereto, the primary term of this Lease
shall commence on the earlier of (i) the Completion Date or (ii) the
date Tenant occupies all or part of the Leased Premises, (such earlier
date being the "Commencement Date") and shall expire on the last day
of the eighty-seventh (87th) month after the Commencement Date. The
"Lease Term" of this Lease shall be the primary term specified in this
Section 2.01, as renewed or otherwise extended or earlier terminated
pursuant to the terms and provisions set forth herein.
(b) As used herein, "Completion Date" means the date Tenant's leasehold
improvements are Substantially Completed (as defined below). If the
Commencement Date is other than the first day of a calendar month, the
Lease Term will be extended and will be calculated as if the
Commencement Date were the first day of the next full calendar month
and the Rent hereunder will be prorated for the first partial month.
(c) The Leased Premises shall be deemed Substantially Completed when: (i)
Landlord's architect has certified to Tenant the Leased Premises are
complete with all the improvements identified in the Tenant Work
Letter and change orders, if any, completed in accordance with
Tenant's plans and specifications (except for minor "punch list"
items, which must be completed by Landlord within thirty (30) days
after Tenant's submission of such "punch list" to Landlord); and (ii)
Landlord has delivered to Tenant a copy of a Temporary Certificate of
Occupancy for the Leased Premises approving the work and lawfully
permitting Tenant's intended uses (as such term is defined below) of
the Leased Premises. Tenant's agents shall have reasonable access to
the Leased Premises on a rent-free basis to make any installations of
telephone systems, equipment, fixtures and furnishings; provided,
however, if Tenant's agents cause the date of Substantial Completion
to be after March 1, 2000, then for each day of such delay after March
1, 2000, Tenant shall be obligated to pay one day's Minimum Rent to
Landlord for each day of delay.
2
<PAGE> 10
(d) By its execution of the Lease, Landlord hereby consents to Tenant's
plans and specifications for initial improvements, copies of which,
initialed and dated by Landlord and Tenant, are in the possession of
both parties (the "Plans").
(e) After the Completion Date, Landlord and Tenant shall promptly, upon
the request of either of them, execute and deliver to each other an
agreement setting forth the Commencement and Expiration Dates.
Section 2.02 Holding Over
Should Tenant hold the Leased Premises after termination of this Lease, by
lapse of time, default, or otherwise, such holding over shall be construed
as a tenancy at sufferance only, and Tenant shall pay in advance, as Rent,
for each day of such holding, a per diem amount equal to 1/30 of one
hundred fifty percent (150%) of the Rent payable for the last month of the
Lease Term. No receipt of money by Landlord from Tenant after termination
of this Lease shall reinstate or extend this Lease, or affect any prior
notice given by Landlord to Tenant, and no extension shall be valid unless
in writing, signed by Landlord and Tenant. The foregoing shall not be
construed as Landlord's consent for any such holding over, and Landlord
reserves the right to proceed against Tenant for any damages caused
thereby.
ARTICLE III - RENT
Section 3.01 Minimum Rent
Tenant shall pay the Minimum Rent to Landlord in monthly installments in
advance on or before the first day of each calendar month during the Lease
Term beginning on the later of (i) sixty (60) days after the date of
Substantial Completion or (ii) March 1, 2000, subject to any Landlord delay
as defined in the Tenant Work Letter.
Section 3.02 Additional Rent
(a) For purposes of this Lease "Operating Expenses" means all of
Landlord's reasonable costs and expenses paid or incurred in owning,
operating, managing and maintaining the Building for a particular
calendar year or portion thereof, including by way of illustration but
not limitation: (i) all taxes, assessments and governmental charges of
any kind and nature whatsoever levied or assessed against the
Building, excluding penalties, interest and attorney's fees assessed
due to non-payment; (ii) any and all assessments levied by the planned
unit development owner's association; (iii) all normal and customary
premiums for any and all insurance maintained in connection with the
ownership, operation, maintenance, and/or management of the Building
(including but not limited to property and liability coverage); (iv)
water, sewer, electrical and other utility charges (but excluding any
of such items paid separately by other Tenants of the Building); (v)
service and other charges incurred in the operation and maintenance of
the
3
<PAGE> 11
elevators and the heating, ventilation and air-conditioning system;
(vi) cleaning and other janitorial services; (vii) tools and supplies;
(viii) repair costs to the Building that are not capitalized; (ix)
landscape installation and maintenance costs (other than original
installation); (x) security services; (xi) license, permit and
inspection fees other than that required for Tenant's interior
improvements; (xii) reasonable management fees which are earned
relating exclusively to management functions for the Building; (xiii)
wages and related benefits payable to employees who render services to
or for the benefit of the Building or tenants of the Building; (xiv)
legal and accounting fees; (xv) trash removal; (xvi) garage
maintenance and operating costs; (xvii) the cost of electrical surveys
(xviii) costs associated with building amenities; (xviv) capital
improvements costing less than five thousand dollars ($5,000) and, in
general, all other costs and expenses which would generally be
regarded as operating and maintenance costs and expenses, including
those which would normally be amortized over a period not to exceed
five (5) years employing Generally Accepted Accounting Principals.
Also included in Operating Expenses is the cost of any capital
improvement made to the Building by Landlord after the date of this
Lease that is required under governmental law or regulation not
applicable to the Building at the time the Building was constructed,
amortized employing Generally Accepted Accounting Principals together
with an amount equal to interest at the rate of ten (10) percent per
annum on the unamortized balance.
All references in this Section 3.02(a) to Operating Expenses mean
actual Operating Expenses; provided, however, for any calendar year or
partial calendar year in which the rentable area of the Building is
not one hundred percent (100%) occupied with all tenants in occupancy
and paying full rent, variable Operating Expenses for that period
shall be calculated in a manner, and in the amount, that would have
been incurred had the Building been one hundred percent (100%)
occupied with all tenants in occupancy and paying full rent the result
of which is Tenant not being assessed in excess of Tenant's
Percentage. Notwithstanding anything to the contrary in the preceding
sentence, in no event will Landlord bill tenants of the Building, or
collect from tenants of the Building, amounts for reimbursement of
Operating Expenses which exceed, in the aggregate, after all
adjustments to correct and conform any estimated billings to actual
expenses, the actual amount of Operating Expenses incurred by Landlord
in any calendar year.
If Landlord installs any device, improvement or equipment which will
improve the operating efficiency of any system within the Building
(e.g. solar collectors) or reduce Operating Expenses, or any device or
equipment that is required to be installed by any government or
governmental agency having authority to order that it be installed,
then Landlord may add to the Operating Expenses each year during the
useful life of the installed device, improvement, or equipment (as the
useful life is determined by Landlord) an amount equal to the annual
amortization of the cost of the installed device, improvement, or
equipment, calculated in accordance with
4
<PAGE> 12
Generally Accepted Accounting Principals but in no event more than the
actual cost saved as a result of the installation thereof.
(b) Operating Costs shall not include costs for (i) repair, replacements
and general maintenance paid by proceeds of insurance or by Tenant or
other third parties; (ii) interest, amortization or other payments on
loans to Landlord; (iii) leasing commissions; (iv) legal or accounting
expenses for services, other than those that benefit the Building
tenants generally (e.g., tax disputes); (v) renovating or otherwise
improving space for occupants of the Building or vacant space in the
Building other than Common Areas; (vi) the costs incurred by Landlord
to bring the Building, the Land or any equipment maintained therein in
compliance with laws, ordinances, rules, regulations, requirements,
directives, guidelines and orders in effect and applicable to the
Building as of the date of this Lease; (vii) the cost of any services
or materials supplied to other tenants and not to Tenant; (viii) the
cost of any services or materials for which Landlord receives
reimbursement or payment from other sources; (ix) depreciation on the
Building; (x) federal income taxes imposed on or measured by the
income of Landlord from the operation of the Building; (xi) repairs,
alternations, additions, improvements, replacements made to rectify or
correct any defect in the original design, materials or workmanship of
Building or Common Areas other than repairs, alterations, additions,
improvements or replacements made as a result of ordinary wear and
tear; (xii) damage and repairs attributable to fire or other casualty;
(xiii) damage and repairs necessitated by the negligence or willful
misconduct of Landlord, Landlord's employees, contractors or agents;
(xiv) executive salaries or salaries of service personnel to the
extent that such the services of such persons do not relate to the
management, operation, repair or maintenance of the Building; (xv)
Landlord's general overhead expenses not related to the Building;
(xvi) costs including permit, license and inspection fees incurred in
renovating or otherwise improving, decorating or painting or altering
space for tenants or other occupants or of vacant space (excluding
Common Areas) in the Building; (xvii) costs incurred due to a
violation by Landlord or any other tenant of the Building of the terms
and conditions of a lease; and (xviii) cost of any service provided to
Tenant or other occupants of the Building for which Landlord is
reimbursed has received reimbursement from another source.
For the purposes of calculating Tenant's obligation for the payment of
Additional Rent under this Article, if any tenants of the Building are
billed separately for any category of Operating Expense (e.g.,
separately metered utilities) the amount of the separately billed
Operating Expenses will not be included in Operating Expenses. For any
category of Operating Expense for which one or more tenants of the
Building make(s) separate payments, Tenant's Percentage will be
adjusted for that category of Operating Expense by excluding from the
denominator thereof the Rentable Area of all tenants making separate
payments with respect to such category.
5
<PAGE> 13
Further, with regards to all operating expenses, Landlord shall, at
its sole cost and expense: (a) competitively bid all services, the
charges for which are passed to Tenant under the definition of
Operating Expenses (so that the result of the same is services or
items provided at comparable prices for like buildings); (b) contest
unreasonable increases in ad valorem taxes, assessments, utilities, or
the like; (c) see that, with respect to all accounting and related
treatment decisions, Generally Accepted Accounting Principles are
used; and (d) cause any company related to Landlord to render such
service at competitive prices comparable to like services for like
buildings.
(c) In addition to the Minimum Rent, Tenant shall pay to Landlord as
Additional Rent for the Leased Premises, in each calendar year, or
partial calendar year, during the Lease Term, an amount equal to
Tenant's Percentage of the Operating Expenses for the calendar year or
portion of the calendar year; provided, however, Tenant shall not be
required to pay Additional Rent during the period of time of abatement
of Minimum Rent as set forth in paragraph 3.01; nor shall Tenant be
required to pay Additional Rent in excess of $8.00 per rentable square
foot for the calendar year 2000.
(d) Landlord shall estimate Tenant's Additional Rent for each subsequent
calendar year, and give written notice thereof to Tenant as soon as
reasonably possible. For each calendar year (or partial calendar year)
Tenant shall pay to Landlord each month, at the same time the Minimum
Rent is due, an amount equal to one-twelfth (1/12) of the estimated
annual Additional Rent due provided that Landlord agrees that in
calendar year 2002 and subsequent calendar years Operating Expenses
which may be controlled by Landlord shall not increase more than six
percent (6%) in any one (1) calendar year. For these purposes,
Operating Expenses over which Landlord has no control shall include,
but not be limited to (i) taxes, assessments and governmental charges
or impositions of any kind or nature whatsoever; (ii) premiums for any
and all property, casualty, worker's compensation and/or other
insurance maintained in connection with the ownership, operation,
maintenance or management of the Building; or (iii) impositions,
charges or fees of whatever kind or nature for water, sewer, gas,
electric or other utilities. For any year during which Additional Rent
is due for less than the entire calendar year, Tenant shall pay to
Landlord each calendar month during such year, one-twelfth of the
estimated Additional Rent that would have been due if Additional Rent
had been due throughout that calendar year.
(e) If Operating Expenses increase during a calendar year, Landlord may
revise the estimated Additional Rent during such year by giving Tenant
written notice to that effect, and thereafter Tenant shall pay to
Landlord, in each of the remaining months of that calendar year, an
additional amount equal to the amount of the increase in the estimated
Additional Rent divided by the number of months remaining in the year.
6
<PAGE> 14
(f) Within one hundred twenty (120) days after the end of each calendar
year, or as soon thereafter as figures are reasonably available,
Landlord shall prepare and deliver to Tenant a statement showing
Tenant's actual Additional Rent for that calendar year. Within thirty
(30) days after receipt of each statement, Tenant shall pay to
Landlord, or Landlord shall credit against the next Additional Rent
payment or payments due from Tenant, as the case may be, the
difference between Tenant's actual Additional Rent for the preceding
calendar year and the estimated Additional Rent paid by Tenant during
the year. If Tenant is owed money after the termination of this Lease,
Landlord shall pay such overpayment to Tenant within thirty (30) days.
(g) Tenant will have the right, for a period of two (2) years after the
expiration of any calendar year (but not thereafter) to audit
Landlord's books, at Tenant's cost and expense, to verify the
Operating Expenses for such calendar year. If Tenant does not request
an audit within two (2) years after the expiration of any particular
calendar year, then Tenant will be deemed to have waived any right it
may have to an adjustment to Tenant's Percentage of any Operating
Expenses for such calendar year.
(h) Tenant's right to verify Operating Expenses shall be subject to the
following limitations and conditions: (i) Tenant shall have no right
to verify Operating Expenses if Tenant has committed a monetary Event
of Default or if an event has occurred which, with the giving of
notice, the passage of time, or both, would constitute a monetary
Event of Default on the part of Tenant (ii) Tenant shall have provided
Landlord with timely written notice of its desire to verify Operating
Expenses and specified a date for such verification not less than
fourteen (14) nor more than thirty (30) from the delivery of the
notice to Landlord; (iii) such review or verification shall take place
in Landlord's offices in Austin, Texas; and (iv) Tenant and any third
party auditor, reviewer, attorney or accountant employed by Tenant
shall execute and deliver to Landlord a confidentiality agreement
acceptable to Landlord and which shall include, among other terms, the
agreement of Tenant and such third party not to disclose to any other
person the existence of the review, the results of the review and the
agreement of any third party not to solicit or conduct verifications
or reviews on the part of any other tenant of the Building or the
Project.
(i) In the event Landlord and Tenant are unable to agree on the
appropriate resolution of any dispute relating to Operating Expenses,
the sole and exclusive remedy of Tenant shall be to submit the
appropriate determination of Operating Expenses to binding arbitration
in Travis County, Texas in accordance with the rules of the American
Arbitration Association for commercial disputes. In the event Landlord
and Tenant can not agree on a panel of arbiters within ten (10) days
after either party notifies the other of its election to submit the
matter to arbitration, then Landlord and Tenant shall each appoint an
arbitrator and the two arbitrators selected shall appoint the third.
All arbitrators selected or appointed for resolution
7
<PAGE> 15
of the dispute shall be unaffiliated with the parties and shall have
at least ten (10) years experience in commercial real estate leasing
in Travis County, Texas as either an attorney or a licensed real
estate broker. The arbitration panel shall render a decision within
ninety (90) days of appointment.
(j) If (i) an arbitration panel determines, or (ii) Landlord agrees that
Tenant's audit results in a finding that Tenant was overcharged in an
amount in excess of five percent (5%) of the actual costs incurred by
Landlord for the Operating Expenses, then in such event, Landlord
shall reimburse Tenant for the reasonable costs of the audit, as well
as refund the overpayment plus interest at the rate of ten percent
(10%) per year. Landlord agrees to make such payment within thirty
(30) days.
Section 3.03 Rent Payments
(a) All Rent is payable by Tenant at the times and in the amounts
specified in this Lease in legal tender of the United States of
America to Landlord at Landlord's management office in the Building,
or to any other person or at any other address as Landlord may from
time to time designate by notice to Tenant.
(b) Rent is payable by Tenant without notice, demand, abatement,
deduction, or set-off except as expressly specified in this Lease.
Tenant's obligation to pay Rent is independent of any obligation of
Landlord under this Lease. If any installment of Rent is not paid
within ten (10) days after it is due, Tenant shall pay to Landlord a
late charge in an amount equal to five percent (5%) of the delinquent
installment of Rent when it pays the delinquent installment. In
addition, if Tenant fails to pay any Rent when the same is due (and
which represents amounts not already specified as bearing interest
under other provisions of this Lease) then Tenant shall also pay to
Landlord interest on the unpaid Rent from the due date until the date
paid at the highest rate lawfully permitted to be contracted for,
charged or received pursuant to a written contract under applicable
federal or state law (whichever is higher) or such lower rate as may
be assessed by Landlord (the "Interest Rate").
ARTICLE IV - UTILITIES AND SERVICES
Section 4.01 Services to be Provided
Provided Tenant is not in default hereunder, Landlord shall furnish or
cause to be furnished to the Leased Premises, the utilities and services
described below, subject to the conditions and in accordance with the
standards set forth herein:
(a) Landlord shall provide not less than one (1) automatic elevator
service to the Leased Premises twenty-four (24) hours per day, seven
(7) days per week.
(b) During Building Standard Hours, Landlord agrees to ventilate the
Leased Premises and furnish heat or air conditioning, at such
temperatures and in such amounts as
8
<PAGE> 16
is necessary and appropriate for the comfortable occupancy of the
Leased Premises, reasonably consistent with the standards of "Class A"
office buildings in Austin, Texas. Landlord's obligations to provide
heating and air conditioning are subject to any governmental
requirements or standards relating to, among other things, energy
conservation. Upon reasonable request (in both time and manner) from
Tenant, Landlord shall make available at Tenant's expense heat or air
conditioning at times other than Building Standard Hours. The minimum
charge and the hourly rate for the use of after hours heat or air
conditioning shall be determined from time to time by Landlord and
confirmed in writing to Tenant. Until further notice is given by
Landlord to Tenant, the hourly rate for such after hours heart or air
conditioning shall be Eight Dollars ($8.00) per hour for one-half hour
service or Sixteen Dollars ($16.00) per hour for full hour service.
Such charge shall not exceed Landlord's costs to provide such service.
(c) Electric lighting for the Common Areas of the Building.
(d) Toilet facilities and hot and cold water for lavatory purposes (at
temperatures prescribed by applicable law).
(e) Replacement, as necessary, of all lamps and ballasts in the H Building
Standard light fixtures within the Leased Premises and Common Areas.
(f) Window washing of exterior windows not less than once each year.
(g) Professional landscaping services for all landscaped areas from time
to time on the Land.
(h) Display, throughout the Term, on all Building directories of Tenant's
name and suite number. At Tenant's request, Landlord shall provide at
no cost to Tenant not less than twenty percent (20%) of the space on
the Building directory.
(i) Janitorial services at times and comparable and reasonably consistent
in quality to those being provided by other Class A office buildings
in Austin, Texas.
(j) Landlord shall furnish to the Leased Premises at all times, subject to
interruptions beyond Landlord's control and temporary interruptions
necessary or appropriate for Building maintenance or equipment
installation, electricity sufficient to operate normal office lighting
and equipment. Tenant shall not install or operate in the Leased
Premises any electrically operated machinery or equipment which
requires high electricity consumption for operation without the prior
written consent of Landlord. In no event may Tenant's use of
electricity exceed the capacity of the feeders to the Building or the
risers or wiring installation. Electrical consumption in the Leased
Premises, or in any portion of the Leased Premises in which excess
electricity is consumed, may, at Landlord's option, be separately
metered after written notice to Tenant. Tenant shall pay within thirty
(30) days of invoicing
9
<PAGE> 17
from Landlord all costs associated with any separate metering required
by Landlord, including but not limited to installation of any separate
metering devices and the costs of all electrical consumption in any
areas which are separately metered. The obligation of Landlord to
provide or cause to be provided electricity is subject to the rules
and regulations of the supplier of electricity and of any municipal or
other governmental authority regulating the business of providing
electricity. Landlord is not liable or responsible to Tenant for any
loss, damage or expense Tenant sustains or incurs if either the
quality or character of the electricity is changed or is no longer
available or no longer suitable for Tenant's requirements. At any time
when Landlord is furnishing electricity to the Leased Premises under
this subsection, Landlord may, at its option, upon not less than
thirty (30) days prior written notice to Tenant, discontinue the
furnishing of electricity. If Landlord gives a notice of
discontinuance, Landlord shall make all reasonably necessary
arrangements with the public utility supplying the electricity to the
Building with respect to connecting electrical service to the Leased
Premises, but Tenant shall contract directly with the public utility
with respect to supplying the electrical service.
Notwithstanding the above, Landlord shall not be allowed to
discontinue electrical service without providing (and assisting with
causing Tenant to contract with) an additional electrical service. In
this regard, Landlord shall allow Tenant (and the new service
provider) to use all facilities reasonably necessary to install and
provide such electricity.
Section 4.02 Additional Services
Landlord may impose a reasonable charge for heating, ventilating and air
conditioning provided by Landlord at any time other than the Building
Standard Hours or for any use beyond what Landlord agrees to furnish or
because of special electrical, cooling, and ventilating needs created by
Tenant's telephone equipment, computers, and other equipment or uses.
Section 4.03 Tenant's Obligations
Tenant shall reasonably cooperate at all times with Landlord and abide by
all regulations and requirements Landlord may prescribe for the use of all
utilities and services and which Landlord has notified Tenant of in
writing.
Section 4.04 Service Interruptions
(a) Landlord does not warrant that the services provided by Landlord will
be free from any slow-down, interruption, or stoppage by governmental
bodies, regulatory agencies, utility companies, and others supplying
services or caused by the maintenance, repair, replacement, or
improvement of any equipment involved in the furnishing of the
services or caused by changes of services, alterations, strikes,
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lock-outs, labor controversies, fuel shortages, accidents, acts of
God, the elements, or other causes beyond the reasonable control of
Landlord. Landlord shall use due diligence to resume the service upon
any slow-down, interruption, or stoppage.
(b) No slow-down, interruption, or temporary stoppage of the services may
be construed as an eviction, actual or constructive, of Tenant. If all
of the services provided by Landlord are interrupted to such an extent
that the Leased Premises are not usable by Tenant for a period of five
(5) consecutive days, then Tenant, as its exclusive remedy, shall be
entitled to a rental abatement to a fair and equitable extent until
such services are reinstated. Except for such abatement of rent, no
slowdown, interruption or temporary stoppage of the services to be
provided by Landlord hereunder will in any manner or for any purpose
relieve Tenant from its obligations under this Lease. Landlord is not
liable for damage to persons or property, or in default under this
Lease, as a result of any slow-down, interruption, or temporary
stoppage. If the services provided by Landlord are interrupted to such
an extent that the Leased Premises are not usable by Tenant for a
period of thirty (30) consecutive days and reasonable accommodation
(including all costs associated with a move) has not been made by
Landlord for Tenant to continue to operate Tenant's business in an
adjacent building, then Tenant may terminate this Lease and thereafter
be released from all future obligations under this Lease.
ARTICLE V - USE AND OCCUPANCY
Section 5.01 Use and Occupancy
(a) The Leased Premises may be used and occupied by Tenant only for
general business offices, including, but not limited to, facilities
for brokerage services (including a trading floor) and associated
ancillary uses and for no other purpose. Tenant shall use and maintain
the Leased Premises in a clean, careful, safe, and proper manner and
shall comply with all laws, ordinances, orders, rules, regulations and
requirements of any kind imposed by any governmental authority (state,
federal, county and municipal) applicable to or having jurisdiction
over the use, occupancy, operation, and maintenance of the Leased
Premises and the Building, including without limitation, all
applicable environmental laws and the Americans With Disabilities Act
of 1990 (ADA) (those laws, ordinances, orders, rules, decisions, and
regulations hereafter referred to as "Applicable Law" or "Applicable
Laws"). Landlord shall comply with all applicable Laws relating to the
use, condition, access to and occupancy of the Building. Landlord
represents that to the best of its knowledge on the Commencement Date
the Leased Premises (if planned and by Landlord's architect and
constructed by a contractor selected by Landlord) and the Building
shall comply with Title III of the Americans With Disabilities Act and
if the Premises do not so comply, then Landlord shall cause the
Premises and the Building to so comply within a reasonable time
thereafter.
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(b) Tenant may not deface or injure the Leased Premises or the Building or
any part thereof or overload the floors of the Leased Premises. Tenant
may not commit waste or permit waste to be committed or cause or
permit any nuisance on or in the Leased Premises or the Building.
Tenant shall pay Landlord as Rent, after written notice and a
reasonable opportunity to cure, for any damage to the Leased Premises
or to any other part of the Building caused by any negligence or
willful act or any misuse or abuse (whether or not the misuse or abuse
results from negligence or willful acts) by Tenant or Tenant's
employees.
(c) Tenant may not use or allow the Leased Premises to be used for any
purpose prohibited by any Applicable Law applicable to the Building.
Tenant and each of Tenant's employees shall conduct its business and
occupy the Leased Premises so as not to create any material nuisance
or interfere with, annoy, or disturb any other tenants in the Building
or Landlord in its management of the Building (or its occupancy of
portions of the Building).
(d) Tenant shall not erect, place, or allow to be placed any sign, symbol,
advertising matter, stand, booth, or showcase in or upon the
doorsteps, vestibules, halls, corridors, doors, walls, windows, or
pavement of the Building visible outside the Leased Premises (except
for lettering on the door or doors to the Leased Premises as allowed
by the Rules and Regulations attached hereto as Exhibit D) without the
prior consent of Landlord.
(e) Tenant may not use or allow or permit the Leased Premises to be used
in any way or for any purpose that:
(1) is hazardous on account of the possibility of fire or other
casualty, or hazardous substances;
(2) increases the rate of fire or other insurance for the Building or
its contents or in respect of the operation of the Building; or
(3) renders the Building uninsurable at normal rates by responsible
insurance carriers authorized to do business in the State of
Texas or renders void or voidable any insurance on the Building.
If insurance premiums are increased because of Tenant's use of the
Leased Premises, then, in addition to any other remedies Landlord may
have, Tenant shall pay the amount of the increase to Landlord as Rent
within thirty (30) days after written notice of such increase from
Landlord. If Tenant's use of the Leased Premises is modified,
resulting in a reduction of the insurance premiums, Landlord agrees to
then reduce the additional rent accordingly.
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Section 5.02 Rules and Regulations
Tenant and its employees, agents and licensees shall comply with the rules
and regulations (as changed from time to time as hereinafter provided)
attached as Exhibit D (the "Rules and Regulations"). Landlord may at any
time make reasonable changes to the Rules and Regulations or promulgate
other Rules and Regulations as Landlord deems advisable for the safety,
care, cleanliness, or orderliness of the Building. No changes are effective
until a copy of the changes is delivered to Tenant. Tenant is responsible
for the compliance with the Rules and Regulations by Tenant's employees.
Landlord shall use reasonable efforts to enforce compliance by all other
tenants with the Rules and Regulations from time to time in effect, but
Landlord is not responsible to Tenant for failure of any person to comply
with the Rules and Regulations.
Section 5.03 Quiet Enjoyment
If Tenant pays the Rent when due and timely performs all other obligations
of Tenant under this Lease, then Tenant may peaceably and quietly enjoy the
Leased Premises during the Lease Term without any disturbance from Landlord
or from any other person claiming by, through, or under Landlord, subject
to the terms of this Lease and of the deeds of trust, mortgages, ground
leases, ordinances, leases, utility easements, agreements and other matters
to which this Lease may be subordinate.
ARTICLE VI - REPAIRS, MAINTENANCE AND ALTERATIONS
Section 6.01 Repair and Maintenance by Tenant
(a) Tenant shall keep the Leased Premises and all fixtures installed by or
on behalf of Tenant in good and tenantable condition, normal wear and
tear excepted. Tenant shall promptly make all necessary non-structural
repairs and replacements thereto except those caused by fire or other
casualty covered by Landlord's insurance on the Building, or resulting
from Landlord or Landlord's employees or contractors negligence or
willful misconduct, all at Tenant's expense and with the approval of
Landlord. All repairs and replacements must be equal in quality to the
original work, and all contractors and subcontractors performing such
repairs and replacements must comply with the conditions specified in
Section 6.02(a) hereinbelow. Without diminishing this obligation of
Tenant, if Tenant fails to make any repairs and replacements within
thirty (30) days after the occurrence of the damage or injury,
Landlord may at its option after written notice make the repairs and
replacements and Tenant shall pay Landlord on demand as Rent the costs
incurred by Landlord plus an administrative fee equal to ten (10)
percent of the costs.
(b) Tenant shall pay the cost of repairs and replacements due to damage or
injury to the Building or any part thereof caused by any of Tenant's
employees or by any malfunction or misuse of any equipment installed
by or on behalf of Tenant unless improperly installed by Landlord's
contractor. This amount is payable by Tenant to Landlord as Rent
within thirty (30) days after written notice from Landlord. If
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Tenant requests Landlord to perform any maintenance or repairs to the
Leased Premises, over and above the services required to be performed
by Landlord pursuant to Article IV, Tenant shall pay the actual cost
thereof, plus an administrative fee equal to ten (10) percent of the
actual cost thereof, to Landlord as Rent within thirty (30) business
days after demand.
Section 6.02 Alterations and Additions by Tenant
(a) Tenant may not make or permit any alterations, improvements or
additions in or to the Leased Premises or the Building without
Landlord's prior written consent, such consent not to be unreasonably
withheld. All alterations, additions and improvements made to, or
fixtures or other improvements placed in or upon, the Leased Premises,
whether temporary or permanent in character, by either party (except
only Tenant's movable trade fixtures, office furniture and equipment)
are a part of the Building and are the property of Landlord when they
are placed in the Leased Premises. Alterations, improvements and
additions in and to the Leased Premises requested by Tenant must be
made in accordance with plans and specifications approved in advance
in writing by Landlord. All work must be performed at Tenant's expense
either by Landlord or by contractors and subcontractors approved in
advance by Landlord. If the work is not performed by Landlord, then
all work performed by Tenant's contractors and subcontractors is
subject to the following conditions:
(1) Each contractor and subcontractor must deliver evidence
reasonably satisfactory to Landlord that the insurance specified
by Landlord is in force prior to commencing work.
(2) Tenant shall insure that all workers are cooperative with
Building personnel and comply with all Building Rules and
Regulations.
(3) Tenant must deliver to Landlord evidence that Tenant has obtained
all necessary governmental permits and approvals, if any are
required, for the improvements or alterations prior to starting
any work.
(4) All construction must be done in a good and workmanlike manner
and is subject to approval by Landlord during and after
construction, in its reasonable discretion.
(5) Lien releases from each contractor and subcontractor must be
submitted to Landlord within five days after completion of the
work performed by the contractor or subcontractor.
(6) Within thirty (30) days after completion of any improvements or
alterations, Tenant, at its cost, shall deliver to Landlord two
reproducible copies of "as-built" plans and specifications (1/8"
scale) for each floor where alterations or improvements were
made.
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(b) All alterations and improvements must comply with all Applicable
Laws. If Tenant's use of the Leased Premises causes Landlord to
make any alterations or improvements to the Building to comply
with the provisions of ADA or any other Applicable Laws, Tenant
shall reimburse Landlord for the cost of the alterations or
improvements within thirty (30) days after written notice.
Neither Landlord's approval of Tenant's plans and specifications
for the alterations or improvements nor Landlord's acceptance of
Tenant's as-built plans is a confirmation or agreement by
Landlord that the improvements and alterations comply with
Applicable Laws.
(c) Within thirty (30) days after Tenant installs any telephone or
data cables, whether or not in connection with an alteration or
addition to the Leased Premises, Tenant, at its cost, shall
deliver to Landlord two reproducible copies of "as-built" plans
and specifications (1/8" scale) showing the location of the
telephone and data cables.
Section 6.03 Mechanics' Liens - Tenant's Obligations
Tenant may not cause or permit any mechanic's or materialman's lien to
be placed upon Landlord's interest in the Building or the Leased
Premises or any part thereof or against Landlord's interest under this
Lease by any architect, contractor, subcontractor, laborer, or
materialman performing any labor or furnishing any materials to Tenant
for any improvement, alteration, or repair of or to the Leased
Premises, the Building, or any part thereof. If any lien is filed on
Landlord's interest in the Building or Tenant's interest in the Leased
Premises, Tenant shall cause the same to be discharged of record
within thirty (30) days after filing, or post a bond reasonably
satisfactory to Landlord pending such discharge. If Tenant does not
discharge the lien within the thirty (30) day period or post the bond,
then, in addition to any other right or remedy of Landlord, Landlord
may, but is not obligated to, discharge the lien by paying the amount
claimed to be due or by procuring the discharge of the lien by deposit
in court or bonding. Any amount paid by Landlord relating to any lien
not caused by Landlord, and all reasonable legal and other expenses of
Landlord, including reasonable attorneys' fees, in defending any
action or in procuring the discharge of any lien, with interest
thereon at the Interest Rate from date of payment by Landlord until
paid by Tenant, is payable by Tenant to Landlord on demand as Rent.
Section 6.04 Maintenance and Repair by Landlord
(a) Landlord shall maintain the Building in a clean, and operable
condition, and shall not permit or allow to remain any waste or
damage to any portion of the Building. Landlord shall keep or
cause to be kept (i) the roof, exterior walls, foundations,
exterior canopies, gutters and water spouts, truck loading
facilities and structural components of the Building, utility
services extending to the service connections within the Leased
Premises and those improvements located on the exterior of the
Leased Premises, (ii) the Common Areas and (iii) all other
improvements in a neat,
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clean and orderly condition (including repair and replacement),
reasonable wear and tear excepted, and shall promptly repair any
damage to such improvements.
(b) Landlord shall pay the cost of repairs and replacements due to
damage or injury to the Leased Premises or Tenant's personal
property located therein resulting from the negligence or willful
misconduct of Landlord, or Landlord's employees, agents or
contractors. Any amounts due Tenant pursuant to this paragraph
6.04(b) shall be payable within thirty (30) days after written
notice from Tenant to Landlord.
ARTICLE VII - INSURANCE, FIRE AND CASUALTY
Section 7.01 Tenant's Insurance
(a) Tenant shall, at its expense, maintain at all times a policy or
policies of insurance insuring Tenant against all liability for
injury to or death of a person or persons and for damage to or
destruction of property occasioned by or arising out of or in
connection with the use or occupancy of the Leased Premises or by
the condition of the Leased Premises (including Tenant's
contractual liability to indemnify and defend Landlord) with a
combined single limit of $1,000,000 for bodily injury and
property damages, or with increased limits as may be required
from time to time by Landlord by giving notice to Tenant.
Tenant's policies must be written by an insurance company or
companies satisfactory to Landlord and licensed to do business in
the State of Texas with Landlord and Landlord's manager named as
additional insureds without restriction. If Tenant has an
umbrella or excess policy, Tenant shall name Landlord and
Landlord's manager as additional insureds without restriction on
all layers of umbrella or excess policies. Tenant shall obtain a
written obligation on the part of each insurance company to
notify Landlord at least fifteen (15) days prior to cancellation
of the insurance.
(b) Tenant shall deliver copies of its insurance policies or duly
executed certificates of insurance to Landlord prior to occupying
any part of the Leased Premises. Tenant shall deliver
satisfactory evidence of renewals of the insurance policies to
Landlord at least fifteen (15) days prior to the expiration of
the respective policies. If Tenant fails to comply with these
insurance requirements, Landlord may obtain the insurance and
Tenant shall pay to Landlord on demand as additional Rent the
premium cost thereof plus interest at the Interest Rate from the
date of payment by Landlord until paid by Tenant.
(c) Tenant shall use its best efforts to insure that all contractors,
subcontractors, moving companies and others performing work of
any type for Tenant in the Building shall comply with the
insurance requirements set out on Exhibit E attached hereto and
incorporated herein by reference, as such requirements may be
revised from time to time by Landlord.
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Section 7.02 Landlord's Insurance
Landlord shall, at all times during the Lease Term, maintain a policy
of insurance insuring the Building against loss or damage by fire,
explosion or other hazards and contingencies in amounts determined by
Landlord. Tenant agrees that all personal property upon the Leased
Premises shall be at the risk of Tenant only that the Landlord shall
not be liable for any damage thereto or theft thereof. Tenant will not
permit anything to be done which will in any way increase the rate of
fire and casualty insurance on the Building or contents. If by reason
of any act or conduct of business of Tenant there shall be any
increase in the rate of insurance on the Building or contents created
by Tenant's acts or conduct of business, such act or conduct shall
constitute an event of default under this Lease and Tenant agrees to
pay Landlord the amount of such increase on demand.
Section 7.03 Fire or Other Casualty
(a) If the Leased Premises or any part thereof are damaged by fire or
other casualty, Tenant shall give prompt notice thereof to
Landlord. If the Building is so damaged by fire or other casualty
that, in Landlord's reasonable opinion and discretion,
substantial alteration or reconstruction of the Building is
required or desirable (whether or not the Leased Premises are
damaged) or if any mortgagee under a mortgage or deed of trust
covering the Building requires that the insurance proceeds
payable as a result of the fire or other casualty be used to
retire the mortgage debt, Landlord may, at its sole option,
terminate this Lease by giving Tenant notice of termination
within sixty (60) days after the date of the damage. If Landlord
terminates this Lease under this Section, the Rent shall abate as
of the date of the damage.
(b) If Landlord does not elect to terminate this Lease, Landlord
shall, within seventy-five (75) days after Landlord's receipt of
insurance proceeds relating to the damage, commence to repair and
restore the Building (except that Landlord is not responsible for
delays outside its control) to substantially the same condition
in which it was immediately prior to the casualty. Landlord is
not required to rebuild, repair, or replace any part of Tenant's
furniture or furnishings or fixtures and equipment removable by
Tenant under the provisions of this Lease. Landlord is not liable
for any inconvenience or annoyance to Tenant or any Tenant's
employees or injury to the business of Tenant resulting in any
way from casualty damage or the repairs; provided, during the
time and to the extent the Leased Premises are unfit for
occupancy, Landlord shall either furnish Tenant with comparable
office space at prevailing market rates or a fair diminution of
Rent, the choice of which is at Landlord's sole discretion.
(c) If the damages are caused by the negligence or willful misconduct
of Tenant or Tenant's employees, Rent does not abate. Any
insurance carried by Landlord or Tenant against loss or damage to
the Building or to the Leased Premises is for the sole benefit of
the party carrying the insurance and under its sole control.
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Section 7.04 Waiver of Subrogation
Each party waives all claims that arise or may arise in its favor
against the other party, or anyone claiming through or under them, by
way of subrogation or otherwise, during the Lease Term or any
extension or renewal thereof, for all losses of, or damage to, any of
its property (whether or not the loss or damage is caused by the fault
or negligence of the other party or anyone for whom the other party is
responsible), which loss or damage is covered by valid and collectible
fire and extended coverage insurance policies, to the extent that the
loss or damage is recovered under the insurance policies. These
waivers are in addition to, and not in limitation of, any other waiver
or release in this Lease with respect to any loss or damage to
property of the parties. Since these mutual waivers preclude the
assignment of any claim by way of subrogation (or otherwise) to an
insurance company (or any other person), each party shall immediately
give each insurance company issuing to it policies of fire and
extended coverage insurance written notice of the terms of these
mutual waivers, and have the insurance policies properly endorsed, if
necessary, to prevent the invalidation of the insurance coverages by
reason of these waivers.
ARTICLE VIII - CONDEMNATION
(a) If all or substantially all of the Building is taken for any
public or quasi-public use under any governmental law, ordinance
or regulation or by right of eminent domain or is sold to the
condemning authority in lieu of condemnation, then this Lease
will terminate as of the date when physical possession of the
portion of the Building is taken by the condemning authority. If
less than all or substantially all of the Building is taken or
sold, Landlord (whether or not the Leased Premises are affected)
may terminate this Lease by giving notice to Tenant within sixty
(60) days after the right of election accrues, in which event
this Lease will terminate as of the date when physical possession
of the portion of the Building is taken by the condemning
authority.
(b) If this Lease is not terminated upon any taking or sale of less
than all or substantially all of the Building:
(1) The Rent will be reduced by an amount representing that part
of the Rent properly allocable to the portion of the Leased
Premises taken or sold, if any; and
(2) Landlord shall, at Landlord's sole expense, restore the
Building to substantially its former condition to the extent
reasonably deemed feasible by Landlord, but:
(A) Landlord's restoration obligation does not exceed the
scope of the work done by Landlord in originally
constructing the Building and installing Tenant finish
improvements in the Leased Premises; and
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(B) Landlord is not required to spend for the work an
amount in excess of the amount received by Landlord as
compensation or damages (over and above amounts going
to the mortgagee of the property taken) for the part of
the Building so taken.
(c) Landlord is entitled to receive all of the compensation awarded
upon a taking of any part or all of the Building, including any
award for the value of the unexpired Lease Term. Tenant is not
entitled to and expressly waives all claim to any compensation;
provided, Tenant is entitled to make a claim against the
condemning authority and to receive any award from the condemning
authority for moving costs and damages to Tenant's personal
property, fixtures, loss of business and business interruption.
ARTICLE IX - INDEMNIFICATIONS AND WAIVER
SECTION 9.01 LIMITATIONS ON LIABILITY OF LANDLORD: WAIVER
(a) LANDLORD IS NOT LIABLE TO ANY TENANT, AND TENANT WAIVES ANY
LIABILITY OF LANDLORD, FOR:
(1) ANY INJURY OR DAMAGE TO PERSON OR PROPERTY DUE TO THE
CONDITION OR DESIGN OF, OR ANY DEFECT IN, THE BUILDING THAT
EXISTS NOW OR OCCURS IN THE FUTURE, EXCEPT FOR LANDLORD'S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT;
(2) ANY INJURY OR DAMAGE TO PERSON OR PROPERTY DUE TO THE
BUILDING OR RELATED IMPROVEMENTS OR APPURTENANCES BEING OUT
OF REPAIR, OR DEFECTS IN OR FAILURE OF PIPES OR WIRING, OR
BACKING UP OF DRAINS, OR THE BURSTING OR LEAKING OF PIPES,
FAUCETS AND PLUMBING MIXTURES, OR GAS, WATER, STEAM,
ELECTRICITY, OR OIL LEAKING, ESCAPING, OR FLOWING INTO THE
LEASED PREMISES, UNLESS CAUSED BY LANDLORD'S WILLFUL
MISCONDUCT OR GROSS NEGLIGENCE;
(3) ANY LOSS OR DAMAGE CAUSED BY THE ACTS OR OMISSIONS OF OTHER
TENANTS IN THE BUILDING OR OF ANY OTHER PERSONS, EXCEPTING
ONLY THE WILLFUL MISCONDUCT OR GROSS NEGLIGENCE OF DULY
AUTHORIZED EMPLOYEES AND AGENTS OF LANDLORD; OR
(4) ANY LOSS OR DAMAGE TO PROPERTY OR PERSON OCCASIONED BY
THEFT, FIRE, ACT OF GOD, PUBLIC ENEMY, INJUNCTION, RIOT,
INSURRECTION, WAR, COURT ORDER, REQUISITION, ORDER OF
GOVERNMENTAL AUTHORITY, AND ANY OTHER CAUSE BEYOND THE
CONTROL OF LANDLORD.
(b) NOTWITHSTANDING THE FOREGOING OR ANYTHING ELSE TO THE CONTRARY
CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD TO TENANT FOR
ANY DEFAULT OR INDEMNITY BY LANDLORD UNDER THIS LEASE IS LIMITED
TO THE INTEREST OF LANDLORD IN THE BUILDING. NEITHER LANDLORD NOR
ANY PARTNER, EMPLOYEE, AGENT, DIRECTOR, OR OFFICER OF LANDLORD
HAS ANY PERSONAL LIABILITY FOR ANY AMOUNTS PAYABLE OR OBLIGATIONS
PERFORMABLE BY LANDLORD UNDER THIS LEASE.
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SECTION 9.02 TENANT'S INDEMNIFICATION OF LANDLORD; ASSUMPTION; EMPLOYEES'
CLAIMS
(a) TENANT SHALL INDEMNIFY, DEFEND, AND HOLD LANDLORD HARMLESS FROM:
(1) ALL FINES, SUITS, LOSSES, COSTS, LIABILITIES, CLAIMS,
DEMANDS, ACTIONS, AND JUDGMENTS OF EVERY KIND AND CHARACTER
BY REASON OF ANY BREACH BY TENANT UNDER THIS LEASE; AND
(2) ALL CLAIMS, DEMANDS, ACTIONS, DAMAGES, LOSSES, COSTS,
LIABILITIES, EXPENSES, AND JUDGMENTS SUFFERED BY, RECOVERED
FROM, OR ASSERTED AGAINST LANDLORD DUE TO INJURY OR DAMAGE
TO PERSON OR PROPERTY TO THE EXTENT THAT THE DAMAGE OR
INJURY IS CAUSED, EITHER PROXIMATELY OR REMOTELY, WHOLLY OR
IN PART, BY AN ACT, OMISSION, NEGLIGENCE, OR MISCONDUCT OF
TENANT OR TENANT'S EMPLOYEES, OR WHEN THE INJURY OR DAMAGE
IS THE RESULT, PROXIMATE OR REMOTE, OF THE VIOLATION BY
TENANT OR ANY TENANT'S EMPLOYEES OF ANY APPLICABLE LAW, OR
WHEN THE INJURY OR DAMAGE IN ANY OTHER WAY ARISES OUT OF THE
OCCUPANCY OR USE BY TENANT OR ANY TENANT'S EMPLOYEES OF THE
LEASED PREMISES OR THE BUILDING.
(b) TENANT IS NOT REQUIRED TO INDEMNIFY, DEFEND, OR HOLD LANDLORD
HARMLESS FROM ANY CLAIM, DEMAND, FINE, SUIT, LOSS, LIABILITY,
ACTION OR JUDGMENT ARISING SOLELY FROM LANDLORD'S NEGLIGENCE OR
WILLFUL MISCONDUCT.
(c) IF LANDLORD IS MADE A PARTY TO ANY LITIGATION COMMENCED BY OR
AGAINST TENANT OR TENANT'S EMPLOYEES OR RELATING TO THIS LEASE OR
TO THE LEASED PREMISES, THEN TENANT SHALL PAY ALL COSTS AND
EXPENSES, INCLUDING ATTORNEYS FEES AND COURT COSTS, INCURRED BY
OR IMPOSED UPON LANDLORD BY VIRTUE OF THE LITIGATION. THE AMOUNT
OF ALL COSTS AND EXPENSES, INCLUDING ATTORNEY'S FEES AND COURT
COSTS, IS A DEMAND OBLIGATION PAYABLE BY TENANT TO LANDLORD AS
ADDITIONAL RENT BEARING INTEREST AT THE INTEREST RATE FROM THE
DATE OF PAYMENT BY LANDLORD UNTIL PAID BY TENANT.
(d) TENANT, ASSUMES ALL RISKS OF INJURY OR DAMAGE TO PERSON OR
PROPERTY, EITHER PROXIMATE OR REMOTE, BY REASON OF THE CONDITION
OR DESIGN OF, OR ANY DEFECTS IN, THE LEASED PREMISES.
(e) EXCEPT AS OTHERWISE PROVIDED HEREIN, ALL PERSONAL PROPERTY IN THE
LEASED PREMISES IS AT THE SOLE RISK OF TENANT.
(f) THE PROVISIONS OF THIS SECTION 9.02 SURVIVE THE EXPIRATION OR
EARLIER TERMINATION OF THIS LEASE.
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Section 9.03 Landlord's Indemnification of Tenant
(a) Landlord shall indemnify, defend and hold Tenant harmless from:
(1) all fines, suits, losses, costs, liabilities, claims,
demands, actions, and judgments of every kind and character
by reason of any breach by Landlord under this Lease; and
(2) all claims, demands, actions, damages, losses, costs,
liabilities, expenses, and judgments suffered by, recovered
from, or asserted against Tenant due to injury or damage to
person or property to the extent that the damage or injury
is caused, either proximately or remotely, wholly or in
part, by an act, omission, negligence, or misconduct of
Landlord or Landlord's employees, or when the injury or
damage is the result, proximate or remote, of the violation
by Landlord or any Landlord's employees of any Applicable
Law, or when the injury or damage in any other way arises
out of the ownership or control Landlord may have over the
leased Premises or the Building.
(b) Landlord is not required to indemnify, defend or hold Tenant
harmless from any claim, demand, fine, suit, loss, liability,
action or judgment arising solely from Tenant's negligence or
willful misconduct.
(c) The provisions of this Section 9.03 survive the expiration or
earlier termination of this Lease.
Section 9.04 No Implied Waiver
The failure of Landlord to insist at any time upon the strict
performance of any of the terms of this Lease or to exercise any
option, right, power or remedy contained in this Lease is not a waiver
of the right or remedy for the future. The waiver of any breach of
this Lease or violation of the Rules and Regulations attached hereto
does not prevent a subsequent act, which would have originally
constituted a breach or violation, from having all the force and
effect of an original breach or violation. No express waiver affects
any terms other than the ones specified in the waiver and those only
for the time and in the manner specifically stated. Acceptance by
Landlord of any Rent after the breach of any of the terms of this
Lease or violation of any Rule or Regulation is not a waiver of the
breach or violation or the right to collect applicable late charges
and interest, and no waiver by Landlord of any of the terms of this
Lease is effective unless expressed in writing and signed by Landlord.
Section 9.05 Waiver by Tenant
Tenant waives and surrenders for itself and all persons or entities
claiming by, through, and under it, including creditors of all kinds:
(A) any right and privilege which it or any
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of them has under any present or future constitution, statute, or rule
of law to redeem the Leased Premises or to have a continuance of this
Lease for the Lease Term after termination of Tenant's right of
occupancy by order or judgment of any court or by any legal process or
writ, or under the terms of this Lease, (B) the benefits of any
present or future constitution, statute, or rule of law that exempts
property from liability for debt or for distress for Rent, (C) any
provision of law relating to notice or delay in levy of execution in
case of eviction of a Tenant for nonpayment of Rent, and (D) any
rights, privileges, and liens set out under Sections 91.004 and 93.003
of the Texas Property Code (as amended), and Tenant exempts Landlord
from any liability or duty thereunder.
Section 9.06 Hazardous Materials
(a) Tenant has no liability or responsibility with respect to
Hazardous Substances, if any, which were placed or located within
the Leased Premises or the Building prior to the Effective Date,
but Tenant may not:
(1) cause or permit the escape, disposal, or release in the
Leased Premises or the Building of any biologically active,
chemically active, or hazardous substances or materials
(hereafter referred to as "Hazardous Substances"); or
(2) bring or permit or allow any Tenant's employee to bring, any
Hazardous Substances into the Leased Premises or the
Building.
The term Hazardous Substances includes, but is not limited to,
those described in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601 et seq., the Resource Conservation and Recovery Act,
as amended, 42 U.S.C. Section 6901 et seq., the Texas Water Code,
the Texas Solid Waste Disposal Act, and other applicable state or
local environmental laws and the regulations adopted under those
acts.
(b) If any lender or governmental agency requires testing to
ascertain whether or not a release of Hazardous Substances has
occurred in or on the Leased Premises or the Building based on
probable cause that a release occurred and was caused by any
Tenant or Tenant's employees, then Tenant shall reimburse the
reasonable costs of the testing to Landlord as Rent within thirty
(30) days from the date of written notice from Landlord.
(c) Tenant shall execute affidavits, representations, and the like
from time to time at Landlord's request concerning Tenant's best
knowledge and belief regarding the presence of Hazardous
Substances in the Leased Premises and the Building.
(d) Tenant shall indemnify Landlord in the manner elsewhere provided
in this Lease from any release of Hazardous Substances in or on
the Leased Premises or the Building caused or permitted by any
Tenant or Tenant's employees.
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(e) Landlord may not cause or permit the escape, disposal, or release
in the Building of any Hazardous Substances or bring, or
knowingly permit any tenant to bring, any Hazardous Substances
into the Building.
(f) The provisions of this Section 9.06 survive the expiration or
earlier termination of this Lease.
ARTICLE X - ASSIGNMENT AND SUBLETTING
10.01 Assignment or Subletting Without Consent.
(a) Tenant may, subject to the below conditions, sublet or assign all
or a portion of the Leased Premises so long as Tenant first
offers back the Leased Premises to Landlord (in accordance with
subparagraph d below).
(b) In the event Landlord elects not to terminate the Lease as to the
portion of the Leased Premises Tenant desires to sublease or
assign, the same shall be allowed if: (i) Tenant reconfirms in
writing it is still liable in all respects under the Lease; (ii)
Landlord reasonably approves the written sublease or assignment
document; and (iii) such proposed subtenant or assignee does not
violate (1) any exclusive rights to operate certain types of
business in the building, and (2) the use of such proposed
subtenant or assignee does not violate any material provision of
the Lease, including, but not limited to, rules and regulations.
(c) In the event the Minimum Rent paid by any assignee or subtenant
exceeds the Minimum Rent due from Tenant, Landlord shall be
entitled to receive one-half (1/2) of such excess less one-half
reasonable costs (including tenant build-out and brokerage
commission) in addition to the Minimum Rent.
(d) Upon receipt of written notice from Tenant of its intent to
sublet or assign Landlord may exercise an option to terminate the
lease as to that portion of the Leased Premised Tenant desires to
sublet or assign. In the event Landlord elects to exercise this
right to terminate the Lease, Tenant shall surrender possession
of the Lease Premises to Landlord on the later of (i) the
proposed date of possession by the assignee or subtenant or (ii)
ninety (90) days after the date of Landlord's notice of
termination to Tenant.
(e) Landlord may not elect to exercise its option to terminate
granted herein if the proposed subtenant or assignee is an
affiliate or subsidiary of Tenant and the same shall be allowed
hereunder.
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ARTICLE XI - DEFAULT
Section 11.01 Default
(a) Each of the following shall constitute an "Event of Default" by
Tenant:
(1) The Tenant abandons all or any part of the Leased Premises
and fails to pay one or more installments of Minimum Rent or
Additional Rent due hereunder; or, if Tenant is a
corporation or partnership, Tenant dissolves or liquidates;
or
(2) The filing of a petition to declare Tenant bankrupt or to
delay, reduce or modify Tenant's debts or obligations, or
for the appointment of a receiver or trustee of Tenant or
its property or for the winding up or liquidation of its
affairs; or if Tenant makes an assignment of the benefits of
Tenant's creditors or admits in writing Tenant's inability
to pay the debts due; or, if Tenant dissolves or liquidates;
and in either case does not pay any Rent due hereunder; or,
(3) The failure of Tenant to pay when due any subsequent
installment of Minimum Rent, or Additional Rent, or any
other money payments due hereunder, or any part thereof, and
such failure shall continue for a period of ten (10) days
after Landlord has delivered to Tenant written notice of
such failure provided, however, if Tenant fails to pay
installments of Rent, Additional Rent, or any other money
payments due hereunder on a timely basis: (i) on two or more
occasions during any calendar year; or (ii) in two or more
consecutive calendar months, then Landlord will thereafter
have no obligation to deliver any notice of default to
Tenant under the terms hereof and an "Event of Default" will
be deemed to have occurred immediately upon the failure of
Tenant to pay when due any installment of Rent, Additional
Rent, or any other money payments due hereunder, without any
grace period and without necessity of Landlord delivering
any notice of default to Tenant); or
(4) The failure of Tenant to fulfill or perform in whole or in
part, any material agreement or provision of this Lease
which is an obligation upon Tenant, other than the payment
of Rent, Additional Rent or any other money amounts due
hereunder, and such failure or nonperformance shall continue
for a period of thirty (30) days after written notice
thereof has been given by Landlord to Tenant; or
(b) Upon the occurrence of any Event of Default, Landlord shall have
the option to do any one or more of the following without any
notice or demand, in addition to and in limitation of any other
remedy permitted by law or by this lease:
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(1) Landlord may terminate this Lease and forthwith repossess the
Leased Premises and be entitled to recover forthwith as damages a
sum of money equal to the total of: (i) the cost of recovering
the Leased Premises (including attorneys' fees and costs of
suit); (ii) the unpaid Rent earned at the time of termination,
plus interest thereon at Interest Rate; (iii) the entire amount
of the total Rent payable during the remainder of the Lease Term;
and (iv) any other sum of money and damages owed by Tenant to
Landlord.
(2) Landlord may terminate Tenant's right of possession (but not this
Lease) and may repossess the Leased Premises by forcible entry or
detainer suit or otherwise, without demand or notice of any kind
to Tenant and without terminating this Lease, in which event
Landlord may (but shall be under no obligation to do so) relet
the Leased Premises for the account of Tenant for such rent and
upon such terms as shall be satisfactory to Landlord, in
Landlord's sole and absolute discretion. For the purpose of such
reletting, Landlord is authorized to make any repairs, changes,
alterations, or additions in or to Leased Premises which Landlord
may consider to be necessary, in Landlord's reasonable judgment.
If Landlord shall fail or refuse to relet the Leased Premises,
then Tenant shall pay to Landlord as damages a sum equal to the
amount of the Rent and all other sums due hereunder, plus the
cost of recovering possession of the Leased Premises, plus
interest on all of the foregoing at the Interest Rate. If the
Leased Premises are relet and a sufficient sum is not realized
from such reletting (after paying the reasonable cost of
recovering possession of the Leased Premises, plus all of the
costs and expenses of repairs, changes, alterations, and
additions to the Leased Premises, plus all expenses of reletting
the Leased Premises, plus interest on all of the forgoing at the
Interest Rate) to satisfy the Rent provided for in this Lease to
be paid, plus all other sums owed by Tenant to Landlord, plus
interest on all of the foregoing at the Interest Rate, then
Tenant shall satisfy and pay any such deficiency to Landlord upon
demand therefor from time to time, and Tenant agrees that
Landlord may file suit to recover any sums falling due under the
terms of this paragraph from time to time, and that no delivery
or recovery of any portion due Landlord hereunder shall be any
defense to any subsequent action brought for any amount not
theretofore reduced to judgment in favor of Landlord, nor shall
such reletting be construed as an election on the part of
Landlord to terminate this Lease unless a written notice of such
intention be given to Tenant by Landlord. Notwithstanding any
such reletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such previous
breach.
(3) Landlord may make such payments and/or take such actions
(including, without limitation, entering upon or within the
Leased Premises, by force if necessary) and do whatever Tenant is
obligated to do under the terms of
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this Lease, and Tenant covenants and agrees to reimburse Landlord
on demand for any expenses which Landlord may incur in effecting
compliance with Tenant's obligations under this Lease, together
with interest thereon at the Interest Rate from the date paid by
Landlord.
(4) At any time after an Event of Default by Tenant has occurred
hereunder, Landlord shall have the right to change or modify door
locks on entry doors to the Leased Premises, and such right to
modify or change locks shall continue so long as Tenant is in
default hereunder. Landlord shall not be obligated to furnish
Tenant with a new key or to allow Tenant to enter the Leased
Premises, until and unless Tenant has cured any default
hereunder. Landlord may take such action as is required to cure
any breach or default by Tenant hereunder and bill Tenant for any
expenses incurred by Landlord in curing such breach, and Tenant
shall be obligated to pay such bill immediately upon its receipt
by Tenant.
(5) Landlord shall have the right to cause a receiver to be appointed
in any action against Tenant to take possession of the Leased
Premises and/or to collect the rents or profits derived
therefrom. The appointment of such receiver shall not constitute
an election on the part of Landlord to terminate this Lease
unless notice of such intention is given to Tenant.
(6) After terminating this Lease or Tenant's right to possession of
the Leased Premises, Landlord may, without notice to Tenant or
any other party, remove any and all personal property located in
the Leased Premises and either dispose of or store such personal
property at Tenant's expense.
(7) In addition to the other remedies provided in this Lease,
Landlord shall be entitled, to the extent permitted by applicable
law, to injunctive relief in case of the violation or attempted
or threatened violation, of any of the provisions of this Lease,
or to a decree compelling performance of any other provisions of
this lease, or to any other remedy allowed at law or in equity.
Notwithstanding any other remedy or provision set forth in this Lease: (i)
if Landlord has made rent concessions of any type or character, or waived
any rent, and Tenant defaults at any time during the term of this Lease,
the rent concessions, including any waived rent, shall be canceled and the
amount of the rent concessions shall be due and payable immediately as if
no rent concessions or waiver of any rent had ever been granted; (ii) this
Lease may be terminated by Landlord only by written notice of such
termination to Tenant given in accordance with the notice provisions of
this Lease, and no other act or omission of Landlord shall be construed as
a termination of this Lease; (iii) all rights and remedies of Landlord
herein or existing at law or in equity are cumulative and the exercise of
one or more rights or remedies shall not be taken to exclude or waive the
right to the exercise of any other; (iv) Tenant agrees that acceptance of
full or partial payments by Landlord
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after notice of termination or forfeiture will not constitute a waiver of
the default, termination, or forfeiture unless Landlord agrees to a waiver
in writing, nor affect any legal proceedings taken or to be taken by
Landlord except to reduce Tenant's obligation to Landlord by the amount of
such payment; and (v) waiver by Landlord of any defaults or breaches by
Tenant of any provisions of this Lease shall not bar Landlord thereafter
from requiring prompt performance by Tenant of the obligations of this
Lease, nor shall Landlord be barred thereafter from immediate exercise of
any of Landlord's rights or remedies in case of continuing or subsequent
default or violation by Tenant.
Section 11.02 Landlord's Lien
(a) Tenant hereby grants to Landlord a security interest to secure payment
of all rent and other sums of money coming due hereunder from Tenant,
and to secure payment of any damages or loss which Landlord may suffer
by reason of the breach by Tenant of any covenant, agreement, or
condition contained herein, upon all equipment, fixtures, furniture,
improvements and other personal property of Tenant presently or which
may hereafter be situated on the Leased Premises, and all proceeds
therefrom. Such property shall not be removed from the Leased Premises
at any time without the consent of the Landlord until all arrearages
in rent as well as any other sums of money then due to Landlord
hereunder shall first have been paid and discharged, and all the
covenants, agreements, and conditions hereof have been fulfilled and
performed by Tenant. In addition to any other remedies provided
herein, in the event of default, Landlord may enter the Leased
Premises and take possession of any and all equipment, fixtures,
furniture, improvements and other personal property of Tenant situated
upon the Leased Premises without liability for trespass or conversion.
Landlord may sell the same at a public or private sale, with or
without having such property at the sale, after giving Tenant
reasonable notice as to the time and place of the sale. At such sale,
Landlord or its assigns may purchase the Property unless such purchase
is otherwise prohibited by law. Unless otherwise provided by law, the
requirement of reasonable notice shall be met if such notice is given
to Tenant at the address hereafter prescribed at least fifteen (15)
days prior to the time of the sale. The proceeds of any such
disposition, less all expenses connected with the taking of possession
and sale of the property, including a reasonable attorney's fee, shall
be applied as a credit against the indebtedness secured by the
security interest granted in this paragraph. Any surplus shall be paid
to Tenant and Tenant shall pay any deficiencies upon demand. Upon
request by Landlord, Tenant will execute and deliver to Landlord a
financing statement in a form sufficient to perfect the security
interest of the Landlord in the aforementioned property and the
proceeds thereof under the provision of the uniform commercial code in
force in the State of Texas. The statutory lien for rent is not
waived; the security interest herein granted is in addition and
supplementary thereto.
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(b) Landlord agrees to reasonably subordinate its Landlord's lien to any
lender or similar entity which provides purchase money financing or a
financing lease facility for furnishings and equipment located in the
Leased Premises.
Section 11.03 Mitigation of Damages
(a) Both Landlord and Tenant shall each use commercially reasonable
efforts to mitigate any damages resulting from a default of the other
party under this Lease.
(b) Landlord and Tenant agree to the following criteria in connection with
Landlord's obligation to mitigate damages after a default by Tenant
under this Lease:
(1) Landlord will have no obligation to solicit or entertain
negotiations with any other prospective tenants of the Leased
Premises until and unless Landlord obtains full and complete
possession of the Leased Premises, including without limitation,
the final and unappealable legal right to relet the Leased
Premises free of any claim of Tenant.
(2) Landlord will not be obligated to offer the Leased Premises to a
prospective tenant when other premises suitable for that
prospective tenant's use are (or soon will be) available in the
Building or in any other building which is located in the
vicinity of the Building and which is owned by Landlord or by any
affiliate of Landlord. For all purposes under this Lease,
affiliates of Landlord shall mean and include: (i) any person or
entity owning or holding (directly or indirectly) any interest in
Landlord; and (ii) any entity in which Landlord or any person or
entity owning or holding any interest (directly or indirectly) in
Landlord, owns or holds any interest (directly or indirectly).
(3) Landlord will not have any obligation to lease the Leased
Premises for any rental less than the current rate then
prevailing for similar space in the Building (or if no similar
space is available in the Building, the current fair market
rental then prevailing for similar space in comparable buildings
in the same market area as the Building) nor shall Landlord be
obligated to enter into a new lease under any terms or conditions
that are unacceptable to Landlord under Landlord's then current
leasing policies for comparable space in the Building.
(4) Landlord will not be obligated to enter into any lease with any
prospective tenant whose presence or operations in the Building
would: (i) disrupt the tenant mix or balance of the Building;
(ii) violate any restriction, covenant or requirement contained
in the lease of another tenant in the Building; (iii) adversely
affect the reputation of the Building; or (iv) be incompatible
with the operation of the Building as a first class office
building.
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(5) Landlord will not be obligated to enter into a lease with any
prospective tenant which does not have, in Landlord's sole
judgment and opinion, sufficient financial resources and
operating experience to operate the Leased Premises in a first
class manner and meet its financial obligations.
(6) Landlord will not be required to expend any amount of money to
alter, remodel or otherwise make the Leased Premises suitable for
use by any prospective tenant.
(7) Landlord will have no obligation to advertise or expend any sums
of money to market the Leased Premises.
If Landlord makes the Leased Premises available for reletting under
the criteria set forth hereinabove, Landlord will be deemed to have
fully satisfied Landlord's obligation to mitigate damages under this
Lease and under any law or judicial ruling in effect on the date of
this Lease or at the time of Tenant's default, and Tenant hereby
waives and releases, to the fullest extent legally permissible, any
right to assert in any action by Landlord to enforce the terms of this
Lease, any defense, counterclaim, or rights of set-off or recoupment
respecting the mitigation of damages by Landlord (or alleged failure
by Landlord to adequately mitigate its damages), unless and to the
extent Landlord maliciously or in bad faith fails to act in accordance
with the requirements of this Section 11.03.
(c) Tenant's right to seek mitigation as a result of a default by Landlord
under this Section 11.03 shall be conditioned on Tenant taking all
actions reasonably required, under the circumstances, to minimize any
loss or damage to Tenant's property or business, or to any of Tenant's
officers, employees, agents, invitees, or other third parties that may
be caused by any such default of Landlord.
ARTICLE XII - MISCELLANEOUS PROVISIONS
Section 12.01 Rights Reserved by Landlord
Landlord reserves the following rights, which may be exercised by
Landlord at any time and from time to time with notice and without
liability to Tenant or Tenant's employees for damage or injury to
property, persons, or business. The rights reserved by Landlord
hereunder are as follows:
(a) To change the Building's name.
(b) To install, affix, and maintain any signs on the exterior and
interior of the Building.
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(c) To designate and approve, prior to installation, all types of
window shades, blinds, drapes, awnings, window ventilators, and
similar equipment, and to control all internal lighting that is
visible from the exterior of the Building.
(d) To designate, restrict, and control all sources within the
Building where Tenant may obtain ice, drinking water, towels,
toilet supplies, catering, food and beverages, and like or other
services on the Leased Premises and, in general, the exclusive
right to designate, limit, restrict and control any business and
any service in or to the Building and its tenants.
(e) To enter upon the Leased Premises at reasonable hours to clean
and with reasonable notice (except in the case of an emergency)
to inspect, or make repairs or alterations to the Leased Premises
(but without any obligation to do so, except as expressly
specified in this Lease), to make repairs or alterations to any
part of the Building or the Building systems (including adjacent
premises), to show the Leased Premises to prospective lenders,
purchasers, and, during the last six (6) months of the Lease
Term, to show the Leased Premises to prospective tenants at
reasonable hours and, if the Leased Premises are vacant, to
prepare them for re-occupancy.
(f) To retain at all times, and to use in appropriate instances, keys
to all doors within and into the Leased Premises. No locks may be
changed or added without the prior written consent of Landlord.
(g) To decorate and make repairs, alterations, additions, changes, or
improvements, whether structural or otherwise, in and about the
Building and for those purposes to enter upon the Leased Premises
and, during the continuance of the work, temporarily close doors,
entryways, public space, and corridors in the Building, to
interrupt or temporarily suspend Building services and
facilities, and to change the arrangement and location of
entrances or passageways, doors and doorways, corridors,
elevators, stairs, toilets, or other public parts of the
Building, all without abatement or set-off of Rent or affecting
any of Tenant's obligations under this Lease, so long as the
Leased Premises are reasonably accessible and useable. Landlord
will use its best efforts to conduct such activities in the
Leased Premises during non-business hours.
(h) To have and retain a paramount title to the Leased Premises and
the Building free and clear of any act of Tenant purporting to
burden or encumber the Leased Premises or the Building.
(i) To grant to anyone the exclusive right to conduct any business or
render any service in or to the Building, provided the exclusive
right does not operate to exclude Tenant from the uses expressly
permitted in this Lease.
(j) To approve the weight, size, and location of safes, heavy
equipment, file cabinets, book shelves, and other heavy items in
and about the Leased Premises and the
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Building and to reasonably require all those items and all
furniture to be moved into and out of the Building and the Leased
Premises only at times and in a manner specified by Landlord.
Movements of Tenant's property into or out of the Building and
within the Building are entirely at the risk and responsibility
of Tenant.
(k) To have access for Landlord and other tenants in the Building to
any mail chutes or other depositories located on the Leased
Premises according to the rules of the United States Postal
Service.
(l) To take reasonable measures as Landlord deems advisable for the
security of the Building and its occupants including, without
limitations the search of all persons entering or leaving the
Building, the evacuation of the Building for cause, suspected
cause, or for drill purposes, the temporary denial of access to
the Building, and the closing of the Building after Building
Standard Hours, subject to Tenant's right to admittance when the
Building is closed after Building Standard Hours under reasonable
regulations Landlord may prescribe from time to time.
(m) To transfer, assign or convey, in whole or in part, the Building
and Landlord's rights under this Lease. If Landlord transfers,
assigns, or conveys its rights under this Lease, Landlord is
released from any obligations which arise under this Lease after
the date of such transfer, conveyance or assignment and Tenant
shall look solely to the successor in interest of Landlord for
performance of the obligations of "Landlord" thereafter under
this Lease.
(n) Landlord agrees no action shall be taken pursuant to this Section
12.01 which will (i) detract from any signage of Tenant or (ii)
materially limits the access or usage of Tenant and Tenant's
employees or agents to the Building.
Section 12.02 Taxes on Tenant's Property
Tenant shall pay, and indemnify, defend, and hold Landlord harmless
against, all taxes levied or assessed against personal property,
furniture, fixtures, or other improvements placed by or for Tenant in
the Leased Premises. If any taxes for which Tenant is liable are
levied or assessed against Landlord or Landlord's property and if
Landlord is required to pay the taxes or if the assessed value of
Landlord's property is increased by inclusion of personal property,
furniture, fixtures, or other improvements placed by or for Tenant in
the Leased Premises and Landlord elects to pay the increased taxes,
Tenant shall pay to Landlord on demand as additional Rent that part of
the taxes for which Tenant is liable under this Section.
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Section 12.03 Attorneys' Fees and Legal Expenses
If either party files litigation concerning the interpretation or
enforcement of this Lease, the prevailing party is entitled to recover
from the losing party the prevailing party's reasonable attorneys'
fees, court costs, and expenses, both at the trial level and at the
appellate level.
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Section 12.04 Subordination
(a) This Lease and all rights of Tenant under this Lease are subject
and subordinate to:
(1) any mortgage or deed of trust secured by a lien against the
Building;
(2) all increases, renewals, modifications, consolidations,
replacements, and extensions of any mortgage or deed of
trust; and
(3) all leases, restrictions, easements, and encumbrances
recorded in the Real Property Records of Travis County,
Texas, to the extent they validly affect the Building.
Tenant shall, upon demand at any time or times, execute,
acknowledge, and deliver to Landlord, or to Landlord's mortgagee,
any instruments that may be requested by Landlord or any
mortgagee of Landlord's to more effectively effect or evidence
this subordination to any mortgage or deed of trust.
(b) If any mortgage or deed of trust against the Building is
foreclosed, Tenant shall, upon request by the purchaser at the
foreclosure sale:
(1) attorn to the purchaser and recognize the purchaser as
"Landlord" under this Lease; and
(2) execute, acknowledge, and deliver to the purchaser a
statement in appropriate form acknowledging the attornment.
(c) Tenant waives the provisions of any statute or rule of law, now
or hereafter in effect, that may give or purport to give Tenant
any right or election to terminate or otherwise adversely affect
this Lease and the obligations of Tenant under this Lease if any
foreclosure sale occurs. This Lease is not affected in any way
whatsoever by any foreclosure sale unless the holder(s) of the
indebtedness or other obligations secured by the mortgages or
deeds of trust declare otherwise.
(d) As a condition to Tenant's agreement to these provisions,
Landlord shall provide within ten (10) days of the Effective
Date, a non-disturbance agreement, the form of which is attached
hereto as Exhibit I from Landlord's mortgagees.
Section 12.05 Estoppel Certificates
Tenant shall, from time to time within ten (10) days after receipt of
a request for same, execute, acknowledge, and deliver to Landlord an
Estoppel Certificate in substantially the form attached as Exhibit F.
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Section 12.06 Financial Statements
Tenant will, from time to time, within twenty (20) days after receipt
of a request for same, furnish to Landlord copies of its most current
financial statements as filed with the United States Securities and
Exchange Commission. Landlord will be authorized to deliver such
financial statements to any existing or proposed partner, investor,
lender or purchaser, or any agent or employee of any such parties.
Section 12.07 Notices
All notices, requests, approvals, and other communications required or
permitted to be delivered under this Lease must be in writing and are
effective:
(a) on the same business day sent, if sent by telecopier prior to
5:00 P.M., Austin, Texas time and the sending telecopier
generates a written confirmation of sending;
(b) the next business day after delivery on a business day to a
nationally-recognized-overnight-courier service for prepaid
overnight delivery;
(c) if orderly delivery of the mail is not then disrupted or
threatened, in which event some method of delivery other than the
mail must be used, 3 days after being deposited in the United
States mail, certified, return receipt requested, postage
prepaid; or
(d) upon receipt if delivered personally or by any method other than
by telecopier (with written confirmation),
nationally-recognized-overnight-courier service, or mail;
in each instance addressed to Landlord or Tenant, as the case may be,
at the address or the addresses (if more than one) specified for such
party in the Basic Lease Provisions, or to any other address or
addresses either party may designate by 10 days' prior notice to the
other party.
Section 12.08 Business Purpose
Tenant represents that this Lease is executed by Tenant, and all
obligations of Tenant arising out of this Lease are, primarily for
business or commercial purposes and not for personal, family, or
household purposes.
Section 12.09 Severability
Each of the terms of this Lease is, and must be construed to be,
separate and independent. If any of the terms of this Lease or its
application to any person or circumstances is to any extent invalid
and unenforceable, the remainder of this Lease, or the application of
that term to persons or circumstances other than those as to which it
is invalid or unenforceable, are not affected thereby.
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Section 12.10 No Merger
The fact that the same person may acquire or hold, directly or
indirectly, this Lease or the leasehold estate hereby created or any
interest in this Lease or in the leasehold estate as well as the fee
estate in the Leased Premises or any interest in the fee estate does
not cause a merger of this Lease or of the leasehold estate hereby
created with the fee estate in the Leased Premises.
Section 12.11 Force Majeure
When this Lease prescribes a period of time for action to be taken by
Landlord or Tenant, other than the payment of Rent hereunder, Landlord
and Tenant are not liable or responsible for, and there is excluded
from the computation for the period of time, any delays due to
strikes, acts of God, shortages of labor or materials, war,
governmental laws, regulations, restrictions, or any other cause of
any kind that is beyond the control of Landlord or Tenant.
Section 12.12 Gender
Words of any gender used in this Lease include any other gender and
words in the singular number include the plural, unless the context
otherwise requires.
Section 12.13 Joint and Several Liability
If there is more than one Tenant, the obligations imposed upon Tenant
under this Lease are joint and several. If Tenant is a general or
limited partnership, each general partner of Tenant is jointly and
severally liable for the obligations imposed upon Tenant under this
Lease.
Section 12.14 No Representations
Landlord or Landlord's agents made no representations or promises with
respect to the Leased Premises or the Building except as expressly set
forth in this Lease. No rights, easements, or licenses are acquired by
Tenant by implication or otherwise except as expressly set forth in
this Lease.
35
<PAGE> 43
Section 12.15 Entire Agreement; Amendments
This Lease is the entire agreement between the parties and supersedes
all negotiations, considerations, representations, and understandings
between Landlord and Tenant prior to the date hereof. No act or
omission of any employee or agent of Landlord or of Landlord's Broker
may alter, change, or modify any of the terms of this Lease. No
amendment or modification of this Lease is binding unless expressed in
a written instrument executed for that purpose by Landlord and Tenant.
Section 12.16 Section Headings
The section headings in this Lease are for convenience only and in no
way enlarge or limit the scope or meaning of the paragraphs in this
Lease.
Section 12.17 Binding Effect
All terms of this Lease are binding upon the respective heirs,
personal representatives, successors, and, to the extent assignment is
permitted, assigns of Landlord and Tenant.
Section 12.18 Counterparts
This Lease may be executed in two or more counterparts, each of which
is deemed an original and all of which together constitute one and the
same instrument.
Section 12.19 Rental Tax
Tenant shall pay as Rent all licenses, charges, and other fees of
every kind and nature as and when they become due arising out of or in
connection with Tenant's use and occupancy of the Leased Premises and
the Building (including the adjacent parking garage), including but
not limited to license fees, business license taxes, and privilege,
sales, excise, or other taxes (other than income) imposed upon Rent or
upon services provided by Landlord or upon Landlord in an amount
measured by Rent received by Landlord.
36
<PAGE> 44
Section 12.20 No Personal Liability of Landlord
If Landlord shall fail to perform any covenant, term or condition of
this Lease and, as a consequence, if Tenant shall recover a money
judgment against Landlord, except in the case of a recovery for fraud,
such judgment shall be satisfied only out of the proceeds received at
a judicial sale upon execution and levy against the right, title and
interest of Landlord in the Building and in the rents or other income
from the Building receivable by Landlord, and neither Landlord nor
Landlord's affiliate companies nor their respective owners, partners,
venturers, shareholders, directors or officers shall have any
personal, corporate or other liability hereunder. Tenant covenants and
agrees not to bring suit against: (i) the owners, partners, venturers,
shareholders, directors or officers of Landlord and/or affiliate of
Landlord; or (ii) any affiliate of Landlord.
Section 12.21 Authority to Sign Lease
If Tenant is a corporation or a partnership (general or limited), each
person(s) signing this Lease as an officer or partner of Tenant
represents to Landlord that such person(s) is authorized to execute
this Lease without the necessity of obtaining any other signature of
any other officer or partner, that the execution of this Lease has
been authorized by the board of directors of the corporation or by the
partners of the partnership, as the case may be, and that this Lease
is fully binding on Tenant. Landlord reserves the right to request
evidence of the approval of this Lease and authorization of Tenant's
signatories to bind Tenant, which evidence shall be satisfactory in
form and content to Landlord and its counsel.
Section 12.22 Execution and Approval of Lease
Employees and agents of Landlord and of Landlord's Broker have no
authority to make or agree to make a lease or any other agreement or
undertaking in connection herewith. The submission of this Lease for
examination and negotiation is not an offer to lease, agreement to
reserve, or option to lease the Leased Premises. This Lease is
effective and binding on Landlord only upon the execution and delivery
of this Lease by Landlord and Tenant.
ARTICLE XIII - ADDITIONAL AGREEMENTS
All additional agreements between Landlord and Tenant, if any, with
respect to this Lease and the Leased Premises are set out on Exhibit G
attached hereto and incorporated herein by reference.
37
<PAGE> 45
ARTICLE XIV - EXHIBITS AND ATTACHMENTS
The following exhibits are attached to and made a part of this Lease:
Exhibit A [Land], Exhibit B [Leased Premises], Exhibit B-1 [Reserved
Parking], Exhibit C [Building Core and Shell], Exhibit D [Building
Rules and Regulations], Exhibit E [Insurance Requirements], Exhibit F
[Estoppel Certificate], Exhibit G [Additional Agreements], Exhibit H
[Option to Extend Lease Term] and Exhibit I [Subordination, Attornment
and Non-Disturbance Agreement]. The Tenant Work Letter is also
attached.
This Lease is executed in multiple originals as of the Effective Date.
LANDLORD:
DESTA TWO PARTNERSHIP, LTD.,
a Texas limited partnership
By: DESTA TWO MANAGEMENT CORP., a Texas
corporation, its general partner
By:
L. Paul Latham, President
TENANT:
WESTECH CAPITAL CORP., a New York
corporation
By: /s/ JAY W. VAN ERT
------------------------------------
Name: Jay W. Van Ert
------------------------------------
Title: President
-----------------------------------
38
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 201,312 3,784,689
<RECEIVABLES> 1,468,424 7,721,748
<SECURITIES-RESALE> 1,539,424 12,435,365
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 209,431 340,471
<TOTAL-ASSETS> 3,942,227 25,029,848
<SHORT-TERM> 0 0
<PAYABLES> 1,459,678 13,292,305
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 500,000 1,000,000
0 0
0 0
<COMMON> 1,473,071 12,537
<OTHER-SE> (68,258) 1,574,858
<TOTAL-LIABILITY-AND-EQUITY> 3,942,227 25,029,848
<TRADING-REVENUE> (299,166) 4,629,052
<INTEREST-DIVIDENDS> 0 0
<COMMISSIONS> 7,932,780 20,327,944
<INVESTMENT-BANKING-REVENUES> 2,584,770 220,766
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 8,007,363 15,492,833
<INCOME-PRETAX> (561,222) 6,047,538
<INCOME-PRE-EXTRAORDINARY> (561,222) 6,047,538
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (397,322) 3,249,123
<EPS-BASIC> (0.03) 0.29
<EPS-DILUTED> (0.03) 0.29
</TABLE>
