<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
WESTECH CAPITAL CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
NEW YORK 6211 13-3577716
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
2700 VIA FORTUNA, SUITE 400
AUSTIN, TEXAS 78746
(512) 306-8222
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
JAY W. VAN ERT, PRESIDENT
2700 VIA FORTUNA, SUITE 400
AUSTIN, TEXAS 78746
(512) 306-8222
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
Copies to:
BRICE TARZWELL, ESQ.
WINSTEAD SECHREST & MINICK P.C.
5400 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 745-5400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) SHARE(2) PRICE REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share.... 2,710,883 $2.81 $7,617,581 $2,011
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This amount is based upon the maximum number of shares of common stock of
Westech Capital Corp. issuable upon consummation of the offer for shares of
common stock of Tejas Securities Group, Inc. outstanding as of July 26,
2000.
(2) Calculated solely for the purposes of this offering under Rule 457(c) of the
Securities Act of 1933, on the basis of the average of the bid and asked
price as of July 26, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell and it is not seeking offers to buy, securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED JULY 27, 2000
OFFER TO EXCHANGE 2.4825 SHARES OF COMMON STOCK
OF
WESTECH CAPITAL CORP.
FOR
EVERY ONE SHARE OF COMMON STOCK
OF
TEJAS SECURITIES GROUP, INC.
Westech Capital Corp.'s wholly owned subsidiary, Tejas Securities Group
Holding Company, is the holder of approximately 81% of the common stock of Tejas
Securities Group, Inc. In order for Tejas Holding, and indirectly Westech, to
acquire 100% of the issued and outstanding common stock of Tejas Securities,
Westech is causing Tejas Holding to offer, upon the terms and subject to the
conditions set forth herein and in the related letter of transmittal, to
exchange 2.4825 shares of Westech common stock for each share of Tejas
Securities common stock.
The offer and withdrawal rights will expire at 12:00 midnight, Austin time,
on , 2000, unless extended. Shares tendered pursuant to this offer may be
withdrawn at any time prior to the expiration of the offer, but not during any
subsequent offering period.
Westech's common stock is currently traded on the OTC Bulletin Board, under
the symbol "WSTE.OB". On July 26, 2000, the average of the bid and asked price
of one share of Westech common stock was $2.81.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR FACTORS THAT YOU SHOULD CONSIDER
IN CONNECTION WITH THE OFFER.
---------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 5
THE EXCHANGE OFFER.......................................... 10
CAPITALIZATION.............................................. 18
SELECTED HISTORICAL FINANCIAL DATA.......................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 21
BUSINESS.................................................... 30
MANAGEMENT.................................................. 37
PRINCIPAL SHAREHOLDERS...................................... 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 44
DESCRIPTION OF CAPITAL STOCK................................ 46
PRICE RANGE OF COMMON STOCK................................. 47
DIVIDEND POLICY............................................. 47
EXPERTS..................................................... 47
LEGAL MATTERS............................................... 47
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. TEJAS HOLDING IS OFFERING TO EXCHANGE, SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. YOU SHOULD ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON THE
FRONT COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
Westech files annual, quarterly and special reports, proxy statements and
other information with the SEC under the Securities Exchange Act of 1934. You
may read and copy this information at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You may also obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports, proxy statements
and other information about issuers, like Westech, who file electronically with
the SEC. The address of that site is http://www.sec.gov.
Westech filed a registration statement on Form S-4 to register with the SEC
the shares to be issued pursuant to this exchange offer. This prospectus is a
part of that registration statement. As allowed by SEC rules, this prospectus
does not contain all the information you can find in the registration statement
or the exhibits to the registration statement.
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT WESTECH THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO THE TEJAS SECURITIES SHAREHOLDERS
UPON WRITTEN REQUEST TO THE PRINCIPAL EXECUTIVE OFFICES OF WESTECH LOCATED AT
2700 VIA FORTUNA, SUITE 400, AUSTIN, TEXAS 78746 OR BY TELEPHONE AT (512)
306-8222. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH INFORMATION, YOUR REQUEST
MUST BE RECEIVED BY , 2000.
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including our financial
statements and related notes, and consider the information set forth under "Risk
Factors" in connection with our offer. Unless we indicate otherwise, the
information set forth in this prospectus includes reference to Tejas Securities
Group, Inc., our 81% indirect subsidiary.
THE OFFERING
Tejas Holding is offering to exchange 2.4825 shares of Westech common stock
for each share of Tejas Securities, Inc. common stock. The purpose of this offer
is to enable Tejas Holding, and indirectly Westech, to acquire 100% of the
outstanding common stock of Tejas Securities.
Because Westech is currently traded on the OTC Bulletin Board and Tejas
Securities is not currently publicly traded, Westech and Tejas Holding believe
the exchange will benefit the Tejas Securities' shareholders by providing them
with some limited liquidity for their investment. Other than its indirect 81%
ownership of Tejas Securities, Westech has no assets, operations or liabilities.
All of the members of Westech's board of directors are also the members of Tejas
Securities' board of directors.
The offer and withdrawal rights will expire at 12:00 midnight, Austin time,
on 2000, unless extended. Shares tendered pursuant to this
offer may be withdrawn at any time prior to the expiration of the offer, but not
during any subsequent offering period. The Tejas Securities shareholders do not
have any appraisal rights with respect to the exchange.
The exchange will qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended. See "The
Exchange Offer -- Certain Federal Income Tax Consequences."
Tejas Holding will pay each Tejas Securities shareholder cash in lieu of
any fractional share they would otherwise be entitled to receive in an amount
equal to the cash value of such fractional share based on the average bid and
asked price of Westech shares on the date of the exchange.
In order to accept Tejas Holding's offer, Tejas Securities' shareholders
must complete and return the attached letter of transmittal to Tejas Holding at
the address indicated in the letter of transmittal.
OUR COMPANY
Westech is engaged in the business of providing brokerage and related
financial services to institutional and retail customers nationwide. We believe
our Austin, Texas headquarters and our research and investment banking focus on
telecommunications and technology companies gives us a unique opportunity in
this growing region. Through Tejas Securities, a registered broker-dealer and
investment advisor, we offer:
- brokerage services;
- high quality investment research;
- market-making activities in stocks traded on the Nasdaq National Market
System;
- investment banking services; and
- asset management services.
As of June 30, 2000, we were providing brokerage services to approximately
6,000 retail customers and 500 institutional customers. We offer a menu of
services and products to customers including the ability to buy and sell common
and preferred stock, stock options, mutual funds, index funds, fixed income
products, annuities and other investment securities. We currently intend to
expand our services to include online trading to further meet the needs of our
customers. We emphasize our high level of service and our
1
<PAGE> 5
unique knowledge of the companies covered by our research department in
marketing our services and products.
The cornerstone of our business is the creation of proprietary products for
our clients based on our research and investment banking capabilities. Our
research department's primary focus will be companies in the telecommunications
and technology industries, paying particular attention to companies in the
Austin, Texas area. We believe that the number of high quality companies in
these industries being formed in the Austin area is significant and will
continue to grow. We believe our research department is well suited to cover
these companies and we will focus a large percentage of our research resources
to covering them.
In August 1999 Tejas Securities was approved to make markets in Nasdaq
securities. As a market maker, we are better able to facilitate the execution of
security transactions for our customers. We believe we can maintain better
control and be assured of proper executions of customer trades by providing
these market making services directly to our customers. Currently we act as a
market maker for more than 30 public corporations whose stocks are traded on the
Nasdaq National Market System.
We raise capital through public and private offerings of securities for
corporations that are engaged in a variety of businesses, but primarily in
telecommunications and technology. We participate in underwritings of corporate
securities as managing underwriter and as a syndicate member. We began our
investment banking operations in late 1997 underwriting offerings for
micro-capitalization companies (under $100 million market capitalization). At
the end of 1998, we decided to shift our focus to larger more established
companies. During the fourth quarter of 1999, we employed an Executive Vice
President and Managing Director to oversee all investment banking operations and
to increase staffing in this department. During the first quarter of 2000, we
participated in the underwriting of a $55 million convertible debt issue for a
publicly traded company.
In 1999, we formed our first private investment fund (commonly known as a
"hedge fund"). At June 30, 2000, the TSG Investment Fund I, Ltd. had
approximately $8.9 million in assets under management.
Our principal offices and Tejas Securities' principal offices, are located
at 2700 Via Fortuna, Suite 400, Austin, Texas 78746 and our telephone number is
(512) 306-8222. Our website is located at http://www.tejassec.com. Information
contained on our website is not a part of this prospectus.
2
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary statement of operations data and the summary statement of
financial condition data as of and for each of the years in the five-year period
ended December 31, 1999 and for the three months ended March 31, 1999 and 2000
is as follows. See "Selected Historical Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included in this prospectus. Historical financial
results may not be indicative of our future performance.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
AS OF AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(1)(2)
Commissions................. $3,674,261 $3,648,255 $4,810,520 $ 7,932,780 $25,291,212 $ 4,981,533 $ 8,516,778
Investment banking.......... -- -- 752,554 2,584,770 925,616 -- 1,071,165
Trading income (loss)....... 44,486 567,537 833,227 (272,811) 3,475,539 1,795,021 70,390
Other....................... 62,500 41,720 9,248 23,530 740,342 8,771 45,270
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total revenue....... 3,781,247 4,257,512 6,405,549 10,268,269 30,432,709 6,785,325 9,703,603
Employee compensation....... 2,808,053 3,448,700 4,459,420 7,397,860 19,992,928 2,646,986 6,311,019
Other expenses.............. 398,010 1,015,567 1,453,086 3,431,631 4,802,555 806,558 2,019,212
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total expenses...... 3,206,063 4,464,267 5,912,506 10,829,491 24,795,483 3,453,544 8,330,231
Income (loss) before income
taxes and minority
interest.................. 575,184 (206,755) 493,043 (561,222) 5,637,226 3,331,781 1,373,372
Income tax expense
(benefit)................. 25,057 -- 19,008 (163,900) 2,201,598 1,309,424 532,800
Minority interest........... -- -- -- -- 297,285 -- 182,247
---------- ---------- ---------- ----------- ----------- ----------- -----------
Net income (loss)... $ 550,127 $ (206,755) $ 474,035 $ (397,322) $ 3,138,343 $ 2,022,357 $ 658,325
========== ========== ========== =========== =========== =========== ===========
Earnings (loss) per share:
Basic..................... $ 0.03 $ (0.04) $ 0.25 $ 0.18 $ 0.05
========== =========== =========== =========== ===========
Diluted................... $ 0.03 $ (0.04) $ 0.22 $ 0.18 $ 0.05
========== =========== =========== =========== ===========
Weighted average shares
outstanding:
Basic..................... 9,432,783 10,664,369 12,501,191 11,149,284 12,537,218
========== =========== =========== =========== ===========
Diluted................... 9,432,783 10,664,369 15,291,965 11,149,284 15,731,351
========== =========== =========== =========== ===========
STATEMENT OF FINANCIAL
CONDITION DATA:
Cash and cash equivalents... $ 133,569 $ 275,165 $ 170,474 $ 201,312 $ 2,732,175 $ 229,730 $ 1,123,413
Receivable from clearing
broker.................... 335,181 451,357 825,707 1,505,648 4,640,052 5,380,201 6,478,162
Securities owned............ -- 952,092 634,419 1,539,424 6,207,748 5,261,032 7,563,189
Other assets................ 283,828 267,229 343,978 695,843 2,534,127 462,308 2,357,518
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total assets........ $ 752,578 $1,945,843 $1,974,578 $ 3,942,227 $16,114,102 $11,333,271 $17,522,282
========== ========== ========== =========== =========== =========== ===========
Liabilities................. $ 44,863 $ 38,480 $ 141,330 $ 577,736 $ 2,905,020 $ 2,620,557 $ 3,625,412
Securities sold, not yet
purchased................. -- -- -- -- 187,940 67,500 471,407
Payable to clearing
broker.................... -- 1,007,514 608,848 1,459,678 6,196,059 4,889,135 5,759,808
Subordinated debt........... -- -- -- 500,000 1,000,000 500,000 1,000,000
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total liabilities... 44,863 1,045,994 750,178 2,537,414 10,289,019 8,077,192 10,856,627
Minority interest........... -- -- -- -- 976,725 -- 1,158,972
Common stock................ 5,140 9,926 9,580 11,615 12,537 11,149 12,537
Additional paid in
capital................... 544,620 855,085 937,298 1,461,456 1,669,473 1,461,923 1,669,473
Subscription receivable..... -- -- (100,000) (96,263) -- (95,239) --
Treasury stock.............. (133,240) -- (47,805) -- -- (172,114) --
Retained earnings........... 291,195 34,838 425,327 28,005 3,166,348 2,050,360 3,824,673
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total stockholders'
equity............ 707,715 899,849 1,224,400 1,404,813 4,848,358 3,256,079 5,506,683
Total liabilities
and stockholders'
equity............ $ 752,578 $1,945,843 $1,974,578 $ 3,942,227 $16,114,102 $11,333,271 $17,522,282
========== ========== ========== =========== =========== =========== ===========
</TABLE>
3
<PAGE> 7
(1) On August 27, 1999, we acquired an indirect ownership of 81% of Tejas
Securities in a reverse merger. Westech was previously a shell corporation
and had no substantial operations. Tejas Securities is the operating and
acquiring enterprise for financial reporting purposes. The historical
financial statements of Tejas Securities are presented as the historical
financial statements of the combined enterprise. The results of operations
of Westech are included in the financial statements of the combined
enterprise only from the date of acquisition. See "Business -- Change in
Control," and Note 1 to the consolidated financial statements.
(2) Prior to January 1, 1998 Tejas Securities elected to be taxed as an S
corporation under the provisions of the Internal Revenue Code. All federal
income taxes were paid by the shareholders of Tejas Securities for the years
ended December 31, 1997 and prior. Amounts reflected for income taxes for
1995 through 1997 are Texas franchise taxes. Earnings per share information
for 1997 is based on a pro forma calculation as if we had been a C
corporation for that year and includes a provision for federal income taxes
for purposes of earnings per share.
4
<PAGE> 8
RISK FACTORS
Investing in our common stock involves risks. You should carefully consider
the following risks together with the other information contained in this
prospectus. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial also could harm our business, financial condition
and operating results.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 we make. The factors identified in this
section 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, actual results almost always vary from assumed
facts, and the differences between assumed facts 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 predicted future result will be achieved or accomplished. Taking into
account the foregoing, the risk factors discussed below are important factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by us. If any of the following risks actually
occur, our business, financial condition or operating results could be
materially adversely affected. In that case, the trading price of our stock
could decline, and you may lose all or part of your investment.
FAILURE TO EFFECTIVELY MANAGE A CHANGING BUSINESS COULD RESULT IN OUTDATED
SERVICES.
Our business and operations have changed substantially since we began
offering brokerage services, and we expect the pace of change in the brokerage
business to continue to increase. Rapid change places significant demands on our
administrative, operational, financial and other resources. Failure to properly
manage these changes could result in our services becoming outdated, which would
have a material adverse effect on our business, financial condition and
operating results.
FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR
BUSINESS.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations 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.
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 April 2000, the stock market
generally and technology stocks in particular 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 result 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.
5
<PAGE> 9
OUR FOCUS IS ON RELATIVELY FEW INDUSTRIES AND A DOWNTURN IN THESE INDUSTRIES
COULD ALSO IMPACT US.
As a result of our dependence on revenues related to securities issued by
companies in specific industry sectors, any downturn in the market for the
securities of companies in these industries, or factors affecting such
companies, could adversely affect our operating results and financial
conditions. Securities offerings can vary significantly from industry to
industry due to economic, legislative, regulatory and political factors.
Underwriting activities in a particular industry can decline for a number of
reasons. Underwriting and brokerage activity can also be materially adversely
affected for a company or industry segment by disappointments in quarterly
performance relative to analysts' expectations, or by changes in long-term
prospects for particular companies, industries or industry segments.
The telecommunications and technology sectors account for the majority of
our research, sales and trading activities, exposing us to potential downturns
in these industries similar to the decline in April 2000. We also derive a
significant portion of our revenues from institutional brokerage transactions
related to the securities of companies in these sectors. In the past, revenues
from such institutional brokerage transactions have declined when underwriting
activities in these industry sectors declined, the volume of trading on The
Nasdaq Stock Market or the NYSE declined, or when industry sectors or individual
companies reported results below investors' expectations.
OUR CUSTOMERS MAY DEFAULT ON MARGIN LOANS PASSING THEIR LOSSES ON TO US.
Our customers sometimes purchase securities on margin through our clearing
broker and we are subject to the risks inherent in extending credit. This risk
is especially great when the market is rapidly declining. In such a decline, the
value of the collateral could fall below the amount of a customer's
indebtedness. Specific regulatory guidelines mandate the amount that can be
loaned against various security types. We rigorously adhere to these guidelines
and in a number of instances exceed those requirements. Also, independent of our
review, our corresponding clearing company independently maintains a credit
review of our customer accounts. If customers fail to honor their commitments,
the clearing broker would sell the securities held as collateral. If the value
of the collateral is not sufficient to repay the loan, a loss would occur which
would be solely for our account. Any such losses could have a material adverse
effect on our business, financial condition and operating results.
MANY OF OUR COMPETITORS ARE LARGER AND BETTER KNOWN THAN WE ARE.
The market for brokerage services is rapidly evolving and intensely
competitive. We face direct competition from firms offering discount and
electronic brokerage services such as Charles Schwab & Co., Inc., Fidelity
Brokerage Services, Inc., Waterhouse Securities, Inc., Ameritrade, Inc. (a
subsidiary of Ameritrade Holding Corporation), and E*TRADE Group, Inc. We also
encounter competition from established full commission brokerage firms such as
Morgan Stanley Dean Witter, Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Solomon Smith Barney, Inc., among others. In addition, we compete with
financial institutions, mutual fund sponsors and other organizations. We have
also 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
6
<PAGE> 10
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 "Business -- Securities Industry
Practices." Broker-dealers are subject to regulations covering all aspects of
the securities business.
The SEC, the NASD and 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 operations 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 such marketing
activities. 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. Our compliance
officer reviews all marketing materials prior to release to ensure compliance
with NASD regulations.
There can be no assurance that other federal, state or foreign agencies
will not attempt to regulate our business. If such regulations are enacted, our
business or operations could be rendered more costly or burdensome, less
efficient or even impossible or our business, financial condition and operating
results could experience some other material adverse effect.
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
broker-dealers. Net capital is the net worth of a broker-dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from Tejas Securities could be
restricted, which in turn could limit our ability to pay dividends, repay debt
and redeem or purchase shares of our outstanding stock. A large operating loss
or charge against net capital could adversely affect our ability to expand or
even maintain our present levels of business, which could have a material
adverse effect on our business, financial condition and operating results.
7
<PAGE> 11
OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephones. As a result, 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.
OUR BUSINESS STRATEGY INCORPORATES THE INTERNET WHICH IS STILL IN THE EARLY
STAGE OF DEVELOPMENT.
The market for electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving.
Consequently, demand and market acceptance for recently introduced services and
products are subject to a high level of uncertainty. Our growth will depend in
part on consumers adopting the Internet as a method of doing business. Moreover,
several key issues including security, reliability, cost, ease of use,
accessibility and quality of service continue to be concerns and may negatively
affect the growth of Internet use or commerce on the Internet. While we are not
dependent upon Internet based trading, we anticipate investing substantial
resources in the development of Internet based activities.
OUR COMMON STOCK IS THINLY TRADED AND THE MARKET IS VOLATILE.
A broad public market for our common stock does not currently exist. The
bid and ask price has been determined by market makers. We cannot predict the
extent to which investor interest in us will lead to the development of a liquid
trading market. The trading price of our common stock could be subject to wide
fluctuations in response to factors unrelated to our operating results such as:
- announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments
by us or our competitors;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts; and
- additions or departures of key personnel.
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
8
<PAGE> 12
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.
9
<PAGE> 13
THE EXCHANGE OFFER
OVERVIEW
Westech's wholly owned subsidiary, Tejas Holding, is the holder of
approximately 81% of the common stock of Tejas Securities. In order for Tejas
Holding, and indirectly Westech, to acquire 100% of the issued and outstanding
common stock of Tejas Securities, Westech is causing Tejas Holding to offer,
upon the terms and subject to the conditions set forth herein and in the related
letter of transmittal, to exchange 2.4825 shares of Westech common stock for
each share of Tejas Securities common stock.
Westech and Tejas Holding believe that the proposed acquisition of Tejas
Securities represents an opportunity to provide some limited liquidity to the
Tejas Securities shareholders. Westech's common stock is currently traded on the
OTC Bulletin Board. Tejas Securities' stock is not currently publicly traded.
THE OFFER
Westech's wholly owned subsidiary, Tejas Holding, offers to exchange 2.4825
shares of Westech common stock for each share of Tejas Securities common stock
validly tendered and not properly withdrawn, subject to the terms and conditions
described in this document and the related letter of transmittal. Based on the
average of the bid and asked price of one share of Westech common stock on July
26, 2000, the offer had a value of $6.98 per share of Tejas Securities common
stock. The offer will expire on the expiration date, 12:00 midnight, Austin
time, on , 2000, unless Westech extends the period of time for
which this offer is open, in which case the term expiration date will be the
latest time and date on which the offer, as so extended, expires.
Westech is causing Tejas Holding to make this offer in order for Westech to
indirectly acquire the entire common equity interest in Tejas Securities. In the
event Tejas Holding does not receive 100% of the Tejas Securities common stock,
Westech and Tejas Holding may consider effecting a merger involving Tejas
Securities in which the remaining holders of Tejas Securities common stock would
receive Westech common stock as merger consideration.
If Tejas Holding obtains all of the outstanding shares of Tejas Securities
common stock pursuant to this offer, tendering Tejas Securities shareholders
would own approximately 17.6% of the outstanding Westech shares.
Tejas Holding's obligation to exchange shares of Westech common stock for
Tejas Securities common stock pursuant to the offer is subject to several
conditions referred to below under "Conditions of the Offer."
TIMING, EXTENSION, TERMINATION AND AMENDMENT OF THE OFFER
Tejas Holding's offer is scheduled to expire at 12:00 midnight, Austin
time, on , 2000. Tejas Holding expressly reserves the right, in its
sole discretion, at any time or from time to time, to extend the period of time
during which its offer remains open. If Tejas Holding decides to extend its
offer, it will announce a subsequent offering period no later than 9:00 a.m.,
Austin time, on the next business day after the previously scheduled expiration
date. Tejas Holding is not promising that it will exercise its right to extend
its offer by providing a subsequent offering period, although Tejas Holding
currently intends to do so until all conditions have been satisfied or waived.
You will not be allowed to withdraw shares tendered during any subsequent
offering period. You should read the discussion under the caption "Withdrawal
Rights" for details regarding the withdrawal of tendered Tejas Securities
shares.
Subject to the SEC's applicable rules and regulations, Tejas Holding also
reserves the right, in its sole discretion, at any time or from time to time,
(a) to delay acceptance for exchange of or, regardless of whether Tejas Holding
previously accepted Tejas Securities shares for exchange, exchange of any Tejas
Securities shares pursuant to Tejas Holding's offer or to terminate its offer
and not accept for exchange, or exchange, any Tejas Securities shares not
previously accepted for exchange, or exchanged, upon the failure
10
<PAGE> 14
of any of the conditions of the offer to be satisfied and (b) to waive any
condition (other than the regulatory approvals condition and the conditions
relating to the absence of an injunction or a stop order) or otherwise amend the
offer in any respect, by giving oral or written notice of such extension,
termination or amendment to the Tejas Securities shareholders. Tejas Holding
will follow any extension, termination or amendment, as promptly as practicable,
with a public announcement. In the case of an extension, any such announcement
will be issued no later than 9:00 a.m., Austin time, on the next business day
after the previously scheduled expiration date.
Tejas Holding confirms to you that if it makes a material change in the
terms of its offer or the information concerning the offer, or if Tejas Holding
waives a material condition of the offer, Tejas Holding will extend the offer if
necessary. If, prior to the expiration date, Tejas Holding changes the
percentage of Tejas Securities shares being sought or the consideration offered
to you, that change will apply to all holders whose Tejas Securities shares are
accepted for exchange pursuant to the offer. If at the time notice of that
change is first published, sent or given to you, the offer is scheduled to
expire at any time earlier than the tenth business day from and including the
date that such notice is first so published, sent or given, Tejas Holding will
extend the offer until the expiration of that ten business-day period. For
purposes of Tejas Holding's offer, a "business day" means any day other than a
Saturday, Sunday or federal holiday and consists of the time period from 12:01
a.m. through 12:00 midnight, Austin time.
Tejas Holding may, although it does not currently intend to, elect to
provide a subsequent offering period of 3 to 20 business days after the
acceptance of Tejas Securities shares in the offer. You will not have the right
to withdraw Tejas Securities shares that you tender in any subsequent offering
period.
EXCHANGE OF TEJAS SECURITIES SHARES; DELIVERY OF WESTECH COMMON STOCK
Upon the terms and subject to the conditions of the offer, Tejas Holding
will accept for exchange, and will exchange, Tejas Securities shares validly
tendered and not withdrawn as promptly as practicable after the expiration date.
In addition, subject to applicable rules of the SEC, Tejas Holding expressly
reserves the right to delay acceptance for exchange, or the exchange, of Tejas
Securities shares in order to comply with any applicable law. In all cases,
exchange of Tejas Securities shares tendered and accepted for exchange pursuant
to the offer will be made only after timely receipt by Tejas Holding of
certificates for those Tejas Securities shares, a properly completed and duly
executed letter of transmittal (or a manually signed facsimile of that document)
and any other required documents.
For purposes of the offer Tejas Holding will be deemed to have accepted for
exchange Tejas Securities shares validly tendered and not withdrawn, as if and
when Tejas Holding accepts the tenders of those Tejas Securities shares pursuant
to the offer. Tejas Holding will deliver Westech shares in exchange for Tejas
Securities shares tendered pursuant to the offer, and cash instead of fractional
shares as soon as practicable after receipt of such notice. Tejas Holding will
pay cash instead of fractional shares and transmit the Westech shares directly
to you. You will not receive interest on any cash that Tejas Holding pays you,
even if there is a delay in making the exchange.
If Tejas Holding does not accept any tendered Tejas Securities shares for
exchange pursuant to the terms and conditions of the offer for any reason, Tejas
Holding will return certificates for such unexchanged Tejas Securities shares
without expense to the tendering shareholder as soon as practicable following
expiration or termination of the offer.
Because the number of Westech shares you will receive in the offer is fixed
and because the market price of Westech common stock may fluctuate prior to the
completion of the offer, the value of the Westech shares that holders of Tejas
Securities shares will receive in the offer may increase or decrease prior to
and following the offer.
11
<PAGE> 15
CASH INSTEAD OF FRACTIONAL SHARES
Tejas Holding will not issue certificates representing fractional shares of
Westech common stock pursuant to the offer. Instead, each tendering shareholder
who would otherwise be entitled to a fractional share will receive cash in an
amount equal to such fraction, multiplied by the average of the bid and asked
price of one share of Westech's common stock on the OTC Bulletin Board on the
date that Tejas Holding accepts those Tejas Securities shares for exchange
rounded to the nearest $.01.
WITHDRAWAL RIGHTS
Your tender of Tejas Securities shares pursuant to the offer is
irrevocable, except that Tejas Securities shares tendered pursuant to the offer
may be withdrawn at any time prior to the expiration date, and, unless Tejas
Holding previously accepted them pursuant to the offer, may also be withdrawn at
any time after , 2000. If Tejas Holding elects to provide a subsequent
offering period you will not have the right to withdraw Tejas Securities shares
that you tender in the subsequent offering period.
For your withdrawal to be effective, Tejas Holding must receive from you a
written notice of withdrawal at the appropriate address set forth in the
enclosed letter of transmittal, and your notice must include your name, address,
social security number, the certificate number(s) and the number of Tejas
Securities shares to be withdrawn as well as the name of the registered holder,
if it is different from that of the person who tendered those Tejas Securities
shares.
A financial institution must guarantee all signatures on the notice of
withdrawal. Most banks, savings and loan associations and brokerage houses are
able to effect these signature guarantees for you. If certificates have been
delivered or otherwise identified to Tejas Holding, the name of the registered
holder and the certificate numbers of the particular certificates evidencing the
Tejas Securities shares withdrawn must also be furnished to Tejas Holding, as
stated above, prior to the physical release of such certificates. Tejas Holding
will decide all questions as to the form and validity (including time of
receipt) of any notice of withdrawal, in Tejas Holding's sole discretion, and
its decision shall be final and binding. Neither Tejas Holding nor any other
person will be under any duty to give notification of any defects or
irregularities in any notice of withdrawal or will incur any liability for
failure to give any such notification. Any Tejas Securities shares properly
withdrawn will be deemed not to have been validly tendered for purposes of Tejas
Holding's offer. However, you may retender withdrawn Tejas Securities shares by
following one of the procedures discussed under the captions entitled "Procedure
for Tendering" at any time prior to the expiration date.
PROCEDURE FOR TENDERING
For you to validly tender Tejas Securities shares pursuant to the offer, a
properly completed and duly executed letter of transmittal (or manually executed
facsimile of that document), along with any required signature guarantees, and
any other required documents, must be transmitted to and received by Tejas
Holding at the address set forth on the letter of transmittal, and certificates
for tendered Tejas Securities shares must be received by Tejas Holding at such
address before the expiration date.
If the certificates for Tejas Securities shares are registered in the name
of a person other than the person who signs the letter of transmittal, or if
certificates for unexchanged Tejas Securities shares are to be issued to a
person other than the registered holder(s), the certificates must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered owner or owners appear on the certificates, with
the signature(s) on the certificates or stock powers guaranteed in the manner
described above.
The method of delivery of Tejas Securities share certificates and all other
required documents is at your option and risk, and the delivery will be deemed
made only when actually received by Tejas Holding. If delivery is by mail, we
recommend registered mail with return receipt requested, properly insured. In
all cases, you should allow sufficient time to ensure timely delivery.
12
<PAGE> 16
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET FORTH
BELOW IS FOR GENERAL INFORMATION ONLY AND DOES NOT PURPORT TO BE A COMPLETE
DISCUSSION OR ANALYSIS OF ALL POTENTIAL TAX CONSEQUENCES WHICH MAY APPLY TO A
TEJAS SECURITIES SHAREHOLDER. TEJAS SECURITIES SHAREHOLDERS ARE STRONGLY URGED
TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO
THEM OF THE EXCHANGE OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
The following discussion sets forth the principal United States federal
income tax consequences of the exchange offer to Tejas Securities shareholders
who exchange Tejas Securities shares for Westech shares pursuant to the exchange
offer. The following disclosure addresses only the United States federal income
tax consequences to Tejas Securities shareholders who hold their Tejas
Securities shares as a capital asset. The following disclosure does not address
all of the federal income tax consequences that may be relevant to particular
shareholders based upon their individual circumstances or to shareholders who
are subject to special rules, such as financial institutions, tax-exempt
organizations, insurance companies, dealers in securities, foreign holders or
holders who acquired their shares pursuant to the exercise of employee stock
options or otherwise as compensation. The following disclosure is based upon the
Internal Revenue Code of 1986, as amended, laws, regulations, rulings and
decisions in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect, and to differing interpretations. The
following disclosure does not address the tax consequences to Tejas Securities
shareholders under state, local and foreign laws. Neither Westech nor Tejas
Securities has requested or received a tax opinion from legal counsel with
respect to any of the matters discussed herein. No rulings have been or will be
requested from the IRS with respect to any of the matters discussed herein.
There can be no assurance that future legislation, regulations, administrative
rulings or court decisions would not alter the consequences set forth below.
Tejas Securities shareholders who exchange their Tejas Securities shares
for Westech shares pursuant to the exchange offer will not recognize gain or
loss for United States federal income tax purposes, except with respect to cash,
if any, they receive in lieu of fractional shares of Westech. Each such
shareholder's aggregate tax basis in the Westech shares received in the exchange
will equal his, her or its aggregate tax basis in the Tejas Securities shares
exchanged therefor, decreased by the amount of any tax basis allocable to any
fractional share interest for which cash is received. The holding period of
Westech shares will include the holding period of the Tejas Securities shares
surrendered in exchange therefor. Tejas Securities shareholders who receive cash
in lieu of fractional shares of Westech in the exchange generally will be
treated as if the fractional shares of Westech had been distributed to them as
part of the exchange and then redeemed by Westech in exchange for the cash
actually distributed in lieu of the fractional shares, with such redemption
qualifying as an exchange under Section 302 of the code. Consequently, Tejas
Securities shareholders generally will recognize capital gain or loss with
respect to the cash they receive in lieu of fractional shares. The tax rate
applicable to capital gains of an individual taxpayer varies depending on the
taxpayer's holding period for the shares. In the case of an individual
shareholder, any such capital gain will be subject to a maximum federal income
tax rate of 20% if the individual held his or her Tejas Securities shares for
more than one year on the date of the exchange offer. The deductibility of
capital losses is subject to limitations for both individuals and corporations.
13
<PAGE> 17
CONDITIONS OF THE OFFER
Notwithstanding any other provision of Tejas Holding's offer, Tejas Holding
shall not be required to accept for exchange or exchange any Tejas Securities
shares, may postpone the acceptance for exchange of or exchange for tendered
Tejas Securities shares, and may, in its sole discretion, terminate or amend the
offer as to any Tejas Securities shares not then exchanged (a) if at the
expiration date Westech or Tejas Holding has not received any required
regulatory approval or (b) if on or after the date of this document and at or
prior to the time of exchange of any such Tejas Securities shares (whether or
not any Tejas Securities shares have theretofore been accepted for exchange or
exchanged pursuant to the offer), any of Tejas Holding's other conditions are
not satisfied. Those conditions are as follows:
(a) No stop order suspending the effectiveness of the registration
statement of which this prospectus is a part shall have been issued nor shall
there have been proceedings for that purpose initiated or threatened by the SEC
and Westech and Tejas Holding shall have received all necessary state securities
law or "blue sky" authorizations;
(b) No temporary restraining order, preliminary or permanent injunction or
other order or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the offer or
any of the other transactions contemplated by this document shall be in effect;
no statute, rule, regulation, order, injunction or decree shall have been
enacted, entered, promulgated or enforced by any court, administrative agency or
commission or other governmental authority or instrumentality which prohibits,
restricts or makes illegal the consummation of Tejas Holding's offer; nor shall
there have been a failure to obtain any required consent or approval under
foreign laws or regulations which would prohibit the consummation of the offer
or would have a material adverse effect on Westech, Tejas Holding, or Tejas
Securities; and
(c) There shall not be pending any suit, action or proceeding by any
governmental entity (i) challenging the offer, seeking to restrain or prohibit
the consummation of the offer or seeking to obtain from Tejas Securities, Tejas
Holding, or Westech any damages that are material in relation to Tejas
Securities, Tejas Holding, or Westech and its subsidiaries taken as a whole,
(ii) seeking to prohibit or limit the ownership or operation by Tejas
Securities, Tejas Holding, or Westech or any of their subsidiaries of any
material portion of the business or assets of Tejas Securities, Tejas Holding,
or Westech or any of their subsidiaries or to compel Tejas Securities, Tejas
Holding, or Westech or any of their subsidiaries to dispose of or hold separate
any material portion of the business or assets of Tejas Securities, Tejas
Holding, or Westech or any of their subsidiaries as a result of the offer, (iii)
seeking to prohibit Westech or Tejas Holding from effectively controlling in any
material respect the business or operations of Tejas Securities, or (iv) which
otherwise is reasonably likely to have a material adverse effect on Westech,
Tejas Holding, or Tejas Securities.
The foregoing conditions are solely for Tejas Holding's benefit and Tejas
Holding may assert them regardless of the circumstances giving rise to any such
conditions (including any action or inaction by Tejas Holding). Tejas Holding
may waive these conditions in whole or in part (other than the regulatory
approvals condition and the conditions relating to the absence of an injunction
or a stop order). The determination as to whether any condition has been
satisfied shall be in Tejas Holding's reasonable judgment and will be final and
binding on all parties. The failure by Tejas Holding at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed a continuing right which may be asserted at any time
and from time to time. Notwithstanding the fact that Tejas Holding reserves the
right to assert the failure of a condition following acceptance for exchange but
prior to exchange in order to postpone, terminate or amend Tejas Holding's
obligation to exchange properly tendered Tejas Securities shares, Tejas Holding
will either promptly exchange such Tejas Securities shares or promptly return
such Tejas Securities shares.
14
<PAGE> 18
COMPARISON OF TEXAS AND NEW YORK CORPORATE LAW
Tejas Securities is a Texas corporation and Westech is a New York
corporation. Accordingly, Texas law currently governs your rights as a
shareholder; however, upon tender of your shares pursuant to the offer, you will
become a shareholder of Westech and your rights as a shareholder will be
governed by New York law. It is impractical to summarize all of the differences
between Texas and New York law in this prospectus. However, certain significant
differences between the corporate laws of each state that could materially
effect your rights as a shareholder are described below.
Amendment of Charter
New York law generally only requires approval of the majority of
shareholders to amend the certificate of incorporation. Unlike New York, Texas
law provides that the articles of incorporation may be amended only if the
proposed amendment receives the affirmative vote of the holders of at least
two-thirds of the outstanding shares of voting stock of the corporation and the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of each class that are entitled to vote as a class on the amendment.
Removal of Directors
Under New York law, any or all of the directors may be removed for cause by
vote of the shareholders. In addition, the certificate of incorporation or
specific provisions of the bylaws adopted by the shareholders may provide for
removal for cause by action of the board, except in certain instances when a
director is elected by cumulative voting or by the holders of the shares of any
class or series. Texas law provides that, subject to the rights of holders of
any class or series of shares entitled to elect directors as set forth in the
corporation's articles of incorporation, any director may be removed from office
at any time, with or without cause, by holders of a specified portion, but not
less than a majority, of the shares then entitled to vote at an election of
directors.
Sales of Substantially All Assets
Under New York law, a sale of substantially all of the assets of the
corporation, if not made in the usual or regular course of business conducted by
the corporation, must be approved by the holders of two-thirds of all
outstanding shares entitled to vote thereon, unless the certificate of
incorporation expressly provides for majority vote. Similarly, under Texas law,
a sale of substantially all of the assets of a corporation, if not made in the
usual and regular course of business, must be authorized by two-thirds of all
outstanding shares entitled to vote thereon, unless otherwise provided in the
articles of incorporation.
Shareholder Vote for Mergers
New York law and Texas law each provide that a corporation may merge or
consolidate with another corporation if the plan of merger or consolidation
receives the affirmative vote of the holders of at least two-thirds of the
outstanding shares of all stock of the corporation entitled to vote thereon,
unless otherwise provided in the certificate of incorporation or articles of
incorporation, respectively. In addition, Texas law specifically provides that
the board of directors may require a greater percentage of the shareholders to
approve the transaction.
Shareholder Inspection Rights
Under New York law, any shareholder of record of a corporation, upon at
least five days' written demand, has the right to examine in person or by agent
or attorney, minutes of the proceedings of the corporation's shareholders and
the record of shareholders for any purpose reasonably related to such person's
interest as a shareholder. Under Texas law, a shareholder may demand to inspect
the books and records of the corporation if the shareholder has been a
shareholder for at least six months at the time of the demand or is the holder
of 5% of all the outstanding shares of a corporation.
15
<PAGE> 19
Limitation of Liability and Indemnification Matters
New York law provides in general that a corporation may indemnify any
director or officer made, or threatened to be made, a party to an action or
proceeding, whether civil or criminal, by reason of the fact that he was a
director or officer of the corporation, against judgments, fines, amounts paid
in settlement and reasonable expenses, including attorney fees actually and
reasonably incurred. Under Texas law, a corporation is permitted to provide
indemnification, by a bylaw provision, agreement, or otherwise against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the person in connection with the proceeding.
Dissenters' Rights
New York law provides that, upon compliance with the applicable
requirements and procedures, a dissenting shareholder has the right to receive
the fair value of his shares if he objects to:
- certain mergers,
- certain sales, leases, exchanges or other dispositions of all or
substantially all the assets of the corporation, or
- certain share exchanges.
Similarly, Texas law provides each shareholder of the corporation the right to
object to:
- certain mergers,
- any sale, lease, exchange or other disposition of all or substantially
all the assets of the corporation if shareholder approval is required, or
- a plan of exchange in which the shares of the corporation held by the
shareholder are to be acquired
and to demand payment of the fair value of his shares calculated as of the day
before the vote was taken authorizing the transaction, excluding any
appreciation or depreciation in anticipation of the transaction.
COMPARISON OF TEJAS SECURITIES' AND WESTECH'S CHARTER DOCUMENTS
Upon acceptance of the offer, the certificate of incorporation and bylaws
of Westech will be the controlling documents with respect to your rights as a
shareholder. The following is a summary of the significant differences between
the provisions of the certificate of incorporation and bylaws of Westech and the
articles of incorporation and bylaws of Tejas Securities.
Capitalization
The certificate of incorporation of Westech authorizes 50,000,000 shares of
common stock, par value $.001 per share. The articles of incorporation of Tejas
Securities authorize a total of 11,000,000 shares, of which 1,000,000 shares are
designated as preferred stock and 10,000,000 are designated as common stock,
each with no par value per share. The Tejas Securities preferred stock may be
issued from time to time in one or more series, each of which is to have the
designations, preferences and rights as determined by the board of directors.
Each corporation's charter documents specifically deny shareholders the right to
cumulative voting and preemptive rights.
Removal of Directors; Filling Vacancies on the Board of Directors
The bylaws of Westech provide that any director or the entire board of
directors generally may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote at an election of directors. The Tejas
Securities bylaws similarly provide that a director may be removed, with or
without cause, by the affirmative vote of the holders of a majority of the
shares then entitled to vote in the election of directors at any duly called
shareholders' meeting.
16
<PAGE> 20
The Westech bylaws and the Tejas Securities bylaws each provide that if the
office of any director becomes vacant, the remaining directors in office, by a
majority vote, although less than a quorum, may appoint any qualified person to
fill such vacancy. Such appointee shall be permitted to hold office until the
next annual meeting of shareholders or until his successor is chosen.
Indemnification of Directors
The certificate of incorporation and bylaws of Westech provide that Westech
will indemnify any director, officer or trustee to the fullest extent permitted
by New York law. Similarly, the bylaws of Tejas Securities provide that Tejas
Securities will indemnify any director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another entity to the maximum
extent allowed by Texas law.
Limitation of Director's Liability
Neither the certificate of incorporation nor the bylaws of Westech provide
for a limitation of a director's liability to the corporation. Tejas Securities'
articles of incorporation provide that no director will be liable to the
corporation or its shareholders for monetary damages for an act or omission in
the director's capacity as a director, except for liability of a director for:
- a breach of a director's duty of loyalty to the corporation or its
shareholders,
- an act or omission not in good faith that constitutes a breach of duty of
the directors to the corporation or an act or omission that involves
intentional misconduct or a knowing violation of the law,
- a transaction from which a director received an improper benefit, whether
or not the benefit resulted from an action taken within the scope of the
director's office, or
- an act or omission for which the liability of a director is expressly
provided for by an applicable statute.
17
<PAGE> 21
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
2000 and our pro forma capitalization assuming Tejas Holding obtains all of the
outstanding shares of Tejas Securities.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------
ACTUAL PRO FORMA
---------- ----------
<S> <C> <C>
Long-term debt.............................................. $1,000,000 $1,000,000
---------- ----------
Shareholders' equity:
Common Stock, $0.001 par value
Authorized shares -- 50,000,000 shares actual and pro
forma
Issued and outstanding -- 12,537,218 shares actual;
15,248,101 shares pro forma(1)....................... 12,537 15,248
Additional paid-in capital................................ 1,669,473 2,825,734
Retained earnings......................................... 3,824,673 3,824,673
---------- ----------
Total shareholders' equity........................ 5,506,683 6,665,655
---------- ----------
Total capitalization.............................. $6,506,683 $7,665,655
========== ==========
</TABLE>
The exchange of common stock of Westech for the common stock of Tejas
Securities will be accounted for at carryover basis. The exchange will not be
accounted for by the purchase method as an acquisition of minority interests
because the only assets, liabilities, and activities of the combined entity
after the exchange are those of Tejas Securities prior to the exchange; a change
in ownership has not taken place.
---------------
(1) Outstanding shares do not include shares of common stock reserved for
issuance under our stock option plan.
18
<PAGE> 22
SELECTED HISTORICAL FINANCIAL DATA
Following is summary statement of operations data and summary statement of
financial condition data as of and for each of the years in the five-year period
ended December 31, 1999 and for the three months ended March 31, 1999 and 2000.
The summary statement of operations data and the summary statement of financial
condition data as of and for each of the years in the five-year period ended
December 31, 1999 is derived from our audited financial statements. The summary
statement of operations data and summary statement of financial condition data
for the three months ended March 31, 1999 and 2000 is unaudited, but in the
opinion of management, reflects all adjustments necessary for a fair
presentation of such information. Historical financial results may not be
indicative of our future performance.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
AS OF AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(1)(2)
Commissions...................... $3,674,261 $3,648,255 $4,810,520 $ 7,932,780 $25,291,212 $ 4,981,533 $ 8,516,778
Investment banking............... -- -- 752,554 2,584,770 925,616 -- 1,071,165
Trading income (loss)............ 44,486 567,537 833,227 (272,811) 3,475,539 1,795,021 70,390
Other............................ 62,500 41,720 9,248 23,530 740,342 8,771 45,270
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total revenue............ 3,781,247 4,257,512 6,405,549 10,268,269 30,432,709 6,785,325 9,703,603
Employee compensation............ 2,808,053 3,448,700 4,459,420 7,397,860 19,992,928 2,646,986 6,311,019
Other expenses................... 398,010 1,015,567 1,453,086 3,431,631 4,802,555 806,558 2,019,212
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total expenses........... 3,206,063 4,464,267 5,912,506 10,829,491 24,795,483 3,453,544 8,330,231
Income (loss) before income taxes
and minority interest.......... 575,184 (206,755) 493,043 (561,222) 5,637,226 3,331,781 1,373,372
Income tax expense (benefit)..... 25,057 -- 19,008 (163,900) 2,201,598 1,309,424 532,800
Minority interest................ -- -- -- -- 297,285 -- 182,247
---------- ---------- ---------- ----------- ----------- ----------- -----------
Net income (loss)................ $ 550,127 $ (206,755) $ 474,035 $ (397,322) $ 3,138,343 $ 2,022,357 $ 658,325
========== ========== ========== =========== =========== =========== ===========
Earnings (loss) per share:
Basic.......................... $ 0.03 $ (0.04) $ 0.25 $ 0.18 $ 0.05
========== =========== =========== =========== ===========
Diluted........................ $ 0.03 $ (0.04) $ 0.22 $ 0.18 $ 0.05
========== =========== =========== =========== ===========
Weighted average shares
outstanding:
Basic.......................... 9,432,783 10,664,369 12,501,191 11,149,284 12,537,218
========== =========== =========== =========== ===========
Diluted........................ 9,432,783 10,664,369 15,291,965 11,149,284 15,731,351
========== =========== =========== =========== ===========
STATEMENT OF FINANCIAL CONDITION
DATA:
Cash and cash equivalents........ $ 133,569 $ 275,165 $ 170,474 $ 201,312 $ 2,732,175 $ 229,730 $ 1,123,413
Receivable from clearing
broker......................... 335,181 451,357 825,707 1,505,648 4,640,052 5,380,201 6,478,162
Securities owned................. -- 952,092 634,419 1,539,424 6,207,748 5,261,032 7,563,189
Other assets..................... 283,828 267,229 343,978 695,843 2,534,127 462,308 2,357,518
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total assets............. $ 752,578 $1,945,843 $1,974,578 $ 3,942,227 $16,114,102 $11,333,271 $17,522,282
========== ========== ========== =========== =========== =========== ===========
Liabilities...................... $ 44,863 $ 38,480 $ 141,330 $ 577,736 $ 2,905,020 $ 2,620,557 $ 3,625,412
Securities sold, not yet
purchased...................... -- -- -- -- 187,940 67,500 471,407
Payable to clearing broker....... -- 1,007,514 608,848 1,459,678 6,196,059 4,889,135 5,759,808
Subordinated debt................ -- -- -- 500,000 1,000,000 500,000 1,000,000
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total liabilities........ 44,863 1,045,994 750,178 2,537,414 10,289,019 8,077,192 10,856,627
Minority interest................ -- -- -- -- 976,725 -- 1,158,972
Common stock..................... 5,140 9,926 9,580 11,615 12,537 11,149 12,537
Additional paid in capital....... 544,620 855,085 937,298 1,461,456 1,669,473 1,461,923 1,669,473
Subscription receivable.......... -- -- (100,000) (96,263) -- (95,239) --
Treasury stock................... (133,240) -- (47,805) -- -- (172,114) --
Retained earnings................ 291,195 34,838 425,327 28,005 3,166,348 2,050,360 3,824,673
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total stockholders'
equity................. 707,715 899,849 1,224,400 1,404,813 4,848,358 3,256,079 5,506,683
Total liabilities and
stockholders' equity... $ 752,578 $1,945,843 $1,974,578 $ 3,942,227 $16,114,102 $11,333,271 $17,522,282
========== ========== ========== =========== =========== =========== ===========
</TABLE>
19
<PAGE> 23
(1) On August 27, 1999, we acquired an indirect ownership of 81% of Tejas
Securities in a reverse merger. Westech was previously a shell corporation
and had no substantial operations. Tejas Securities is the operating and
acquiring enterprise for financial reporting purposes. The historical
financial statements of Tejas Securities are presented as the historical
financial statements of the combined enterprise. The results of operations
of Westech are included in the financial statements of the combined
enterprise only from the date of acquisition. See "Business -- Change in
Control" and Note 1 to the consolidated financial statements.
(2) Prior to January 1, 1998, Tejas Securities elected to be taxed as an S
corporation under the provisions of the Internal Revenue Code. All federal
income taxes were paid by the shareholders of Tejas Securities for the years
ended December 31, 1997 and prior. Amounts reflected for income taxes for
1995 through 1997 are Texas franchise taxes. Earnings per share information
for 1997 is based on a pro forma calculation as if we had been a C
corporation for that year and includes a provision for federal income taxes
for purposes of earnings per share.
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that the availability of public resources through additional
issuance of common stock or debt securities will provide funding for future
expansion. In the event we issue 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. We cannot give any assurance that we
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 SEC, NASD and various other
regulatory agencies requirements. Factors affecting our 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, our liquidity may be
affected depending on the value of the securities involved. During times of
general market declines, Tejas Securities may experience market value losses,
which ultimately affects liquidity through broker-dealer net capital
requirements. In addition, we may decide not to liquidate a security holding 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 shares of its common stock for $704,833 in cash. Proceeds from
the stock issuance were partially used to finance the reverse merger and the
expansion of infrastructure.
In September 1998, Tejas Securities issued subordinated debt in exchange
for $500,000 from a then current member of its board of directors. The
subordinated debt was a short-term loan used to increase equity capital required
for underwriting activities. During 1998, the repayment terms of the loan were
extended 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 shares of Tejas Securities common stock.
In June 1999, Tejas Securities completed the second issuance of
subordinated debt for $500,000 from the same director. The proceeds from the
loan were used to finance Tejas Securities' expansion activities, 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 shares of Tejas Securities common stock.
The warrants associated with the September 1998 and June 1999 subordinated
debt were cancelled in 1999 in an agreement with the director. On January 1,
2000, we issued options to purchase 558,562 shares
21
<PAGE> 25
of our common stock to replace the warrants. The purchase price of the shares is
$1.07 per share and the options expire four years from the date of the grant.
In June 2000, we obtained a $1,500,000 line of credit to facilitate our
working capital needs. The loan accrues interest at a rate of prime plus one,
with interest due on a quarterly basis. The loan was secured by our ownership of
4,808,555 shares of Tejas Securities common stock and a personal guarantee by
John Gorman, our Chief Executive Officer.
In addition to the sources of capital described above, we utilize the
receivable balance from our clearing broker, Schroder & Co., to fund operating
and investing activities. The receivable balance represents the residual equity
due to us from Schroder & Co. if we liquidated all of our 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 our
trading accounts. The receivable balance held at Schroder & Co. may fluctuate
depending on factors such as the market valuation of securities held in our
trading accounts, realized trading profits, commission revenue, cash withdrawals
and clearing costs charged to us for conducting our trading activities.
LIQUIDITY
Our cash increased from $229,730 to $1,123,413 from March 31, 1999 to March
31, 2000. As of year-end our cash position increased to $2,732,175 in 1999, from
a balance of $201,312 in 1998 and $170,474 in 1997. The fluctuations during
these annual periods reflect changes in the operating and financing activities
of Tejas Securities from 1997 through 1999.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided (used) by operating activities was $(1,574,675) and
$211,929 for the three months ended March 31, 2000 and 1999, respectively. Net
cash provided (used) by operating activities was $1,481,301, $(858,413) and
$(18,542) in 1999, 1998 and 1997, respectively. The net cash provided (used) by
operating activities is impacted primarily by the brokerage operating activities
and changes in the brokerage-related assets and liabilities.
The change in cash used by operating activities during the three months
ended March 31, 2000 was due primarily to changes in operating working capital.
In 1999, the most significant sources of cash were from the increase in the
payable to the clearing broker and the increase in accrued liabilities. The
$4,736,381 increased payable to the clearing broker corresponds to the overall
increase in securities owned of $4,668,324, taking into account market value
adjustments. The $2,327,284 increase in accounts payable, accrued expenses and
other liabilities relates to our remaining 1999 estimated income tax liability
and employee compensation accruals. The primary uses of cash include the
increase in securities owned and the increase in the receivable from clearing
broker of $3,134,404. The increase in the receivable from clearing broker is due
to the increased level of commission and trading activity during 1999, and the
retention of a portion of the proceeds. Other significant uses of cash include
the conversion of the $700,088 performance fee earned by the manager of the TSG
Internet Fund into equity of the TSG Internet Fund, and the $500,955 increase in
employee and shareholder receivables. See "Certain Relationships and Related
Transactions -- TSG Internet Fund I, Ltd." The net cash effect of these
transactions is the use of $1,940,106 in cash, with the remaining $3,421,407
addition consisting of net income plus changes in other asset and liability
accounts.
In 1998, the most significant use of cash was represented by the $679,941
increase in the receivable from the clearing broker. The increased receivable
was indirectly the result of Tejas Securities' use of proceeds from the $500,000
subordinated debt agreement. Proceeds from the debt were used for operations
thereby allowing Tejas Securities to retain a larger receivable balance with the
clearing broker. In addition, Tejas Securities' overall investment in securities
increased by $905,005 from 1997 to 1998. This increase corresponds to the
$850,830 increase in payable to the clearing organization, taking into account
market
22
<PAGE> 26
value appreciation of the securities. The net cash effect of these transactions
is the use of $734,116, with the remaining $124,297 being net income plus
changes in other asset and liability accounts.
In 1997, the most significant changes in cash were represented by changes
in the receivable from the clearing broker and changes in the investment
balances. Tejas Securities' positive earnings were captured through increased
commissions, and were retained in the receivable from clearing broker, resulting
in an increase of $374,350. Investments in securities decreased by $317,673 in
1997, which corresponds to the decrease of $398,666 in the payable to the
clearing organization, taking into account market value depreciation of the
securities. The net cash effect of these transactions is the use of $455,343,
with the remaining cash provided of $436,801 being net income plus changes in
other asset and liability accounts.
We anticipate that a portion of the cash provided from future operating
activities of Tejas Securities might be used to facilitate additional investing
activities, specifically the expansion of current office space in Austin and
Atlanta or the expansion of future offices. Future proceeds from cash provided
from operating activities may also be used to finance acquisition activities.
CASH FLOWS USED IN INVESTING ACTIVITIES
Net cash used by investing activities was $(34,087) and $(12,421) for the
three months ended March 31, 2000 and 1999, respectively. Net cash provided
(used) by investing activities was $(318,918), $(188,484) and $63,335 in 1999,
1998 and 1997, respectively. In 1999, Tejas Securities advanced $116,004 to TSG
Capital, LLC in conjunction with the organizing of the TSG Internet Fund I, Ltd.
The remaining cash uses in 1999 and 1998 are directly the result of capital
expenditures for office expansion in Austin, Atlanta and New York. During 1998,
we opened an additional office in New York as part of our expansion into the
investment banking and retail brokerage segments of the industry. The New York
office was subsequently closed during 1999.
In 1997, we entered into a sale-leaseback transaction with a related party.
See "Certain Relationships and Related Transactions -- Sale Leaseback." We sold
furniture and fixtures for the book value of approximately $204,000, which
generated cash of $204,268.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used by financing activities was $0 and $(171,091) for the three
months ended March 31, 2000 and 1999, respectively. Net cash provided (used) by
financing activities was $1,368,480, $1,077,735 and $(149,484) in 1999, 1998 and
1997, respectively.
During 1999, Tejas Securities issued $500,000 of subordinated debt to one
of our directors as described above. In addition, Tejas Securities issued stock
with a value of $775,884 through a subscription program. In 1999, $750,164 of
the current and prior year subscriptions were collected.
Financing activities provided $500,000 in cash during 1998 through the
issuance of subordinated debt. In addition, we 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, we received $250,000 from a director for the temporary financing
of operating activities. The director elected to have the outstanding balance of
the note payable converted into equity of Tejas Securities. In addition, we sold
treasury stock of Tejas Securities 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.
23
<PAGE> 27
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
The following table presents additional information regarding the results
of operations as presented in the Selected Historical Financial Data for the
three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 2000
---------- ----------------------
(000'S) (000'S) % CHANGE
<S> <C> <C> <C>
REVENUES:
Commissions............................................ $4,981,533 $8,516,778 71
Underwriting and investment banking.................... -- 1,071,165 --
Net dealer inventory and investment income............. 1,795,021 70,390 (96)
Other income........................................... 8,771 45,270 416
---------- ---------- ---
$6,785,325 $9,703,603 43
EXPENSES:
Commissions, employee compensation and benefits........ 2,646,986 6,311,019 138
Clearing and floor brokerage........................... 98,967 377,329 281
Underwriting........................................... -- -- --
Communications and occupancy........................... 269,800 477,611 77
Professional........................................... 67,110 368,405 449
Other.................................................. 370,681 795,867 115
---------- ---------- ---
$3,453,544 $8,330,231 141
</TABLE>
The revenues and operating expenses of Westech's operating subsidiary,
Tejas Securities, are influenced by fluctuations in the equity markets, general
economic and market conditions, as well as Tejas Securities' ability to identify
investment opportunities for our trading accounts and our customer accounts.
Currently, Tejas Securities revenue is derived primarily from principal debt and
equity transactions, which generate both commission revenue and investment
income.
Our total revenues increased by $2,918,278 or 43% to $9,703,603 for the
three months ended March 31, 2000 compared to the prior year quarter. The
reasons for the increases are set forth below.
Commission revenues from principal transactions increased $3,535,245 or 71%
to $8,516,778 for the three months ended March 31, 2000. Commission revenues
from agency transactions increased $751,991 or 514% to $898,166 for the three
months ended March 31, 2000. We realized an increase of 676% in agency trades
for the three months ended March 31, 2000. The increase in agency commissions
and trades relates to the increase in the number of retail brokers employed by
us since the first quarter of 1999, the addition of market making activities and
our continued focus on expanding our products and services to customers.
Commissions from principal trades increased due to a 472% increase in trades
executed during the three months ended March 31, 2000. The remaining commissions
were the result of portfolio advisory fees on managed accounts.
Investment banking revenues were $1,071,165 for the three months ended
March 31, 2000 versus $0 for the corresponding period in 1999. The increase is
the result of the re-establishment of underwriting and syndicate activities
beginning in January 2000. We generated $469,021 in private placement fees for
the three months ended March 31, 2000. Fees from syndicate activities increased
to $362,144 for the three months ended March 31, 2000. Corporate advisory fees
of $240,000 were also generated.
Net dealer inventory and investment income decreased by $1,724,631 or 96%
to $70,390 for the three months ended March 31, 2000. The decrease in inventory
and investment income resulted from trading activity in proprietary positions.
For the three months ended March 31, 2000, other income increased $36,499
or 416% to $45,270. The increase for the three months ended March 31, 2000 is
due to an increase in customer margin interest revenue.
24
<PAGE> 28
Total expenses increased by $4,876,687 or 141% to $8,330,231 for the three
months ended March 31, 2000. Net income for the three months decreased by
$1,364,032 or 67% to $658,325. The explanations for the changes are set forth
below.
Commissions, employee compensation and benefits increased $3,664,033 or
138% to $6,311,019 for the three months ended March 31, 2000. Commission expense
increased $2,350,885 or 119% to $4,326,105 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,
including a Chief Financial Officer and other management level personnel.
Clearing and floor brokerage costs increased $278,362 or 281% to $377,329
for the three months ended March 31, 2000. The overall increase in clearing and
floor brokerage costs for the three months ended March 31, 2000 results from
greater trading activity in the over-the-counter equity markets and on the
national exchanges. Most of the cost increase is attributed to the market making
activities, and the increased activity in both the retail and institutional
equity departments. Our percentage of revenues derived from equity securities
increased during 2000 in comparison to the volume of fixed income securities
being traded.
Communications and occupancy charges increased $207,811 or 77% to $477,611
for the three months ended March 31, 2000. The increases in occupancy charges
are the result of the relocation of our Austin headquarters in January 2000.
Communications charges increased as a function of the 100% increase in employees
since the first quarter of 1999, plus the addition of market making support
systems.
Professional fees for the three months ended March 31, 2000 increased
$301,295 or 449% to $368,405. Of the total increase for the three-month period,
approximately $200,000 was accrued legal expenses relating to the registration
of our common stock, legal fees for the settlement of private equity securities
transactions with its customers, and fees for general legal counsel. In
addition, we incurred additional accounting costs associated with our annual
reporting as well as for the registration of our common stock. The remaining
costs during the three months ended March 31, 2000 related to consulting fees
incurred during the normal course of business.
Interest expense for the three months ended March 31, 2000 increased
$14,493 or 102% to $28,671. The increase is due to the addition of $500,000 of
subordinated debt in June 1999.
Other expenses increased $410,693 or 115% to $767,196 for the three months
ended March 31, 2000. The overall increase in other expenses during the three
months ended March 31, 2000 is the result of increases in general and
administrative services needed to support administrative infrastructure as well
as increases in marketing expenditures related to growth initiatives.
Income tax expense decreased $776,624 or 59% to $532,800 for the three
months ended March 31, 2000. The overall decrease in income tax expense for the
three months ended March 31, 2000 is due to the decrease in taxable income
during the respective period. Our effective tax rate was 39% for the three
months ended March 31, 2000.
Minority interest in net income for the three months ended March 31, 2000
was $182,247. Minority interest in net income was created as a result of the
merger of Westech and Tejas Securities.
25
<PAGE> 29
For the Years Ended December 31, 1997, 1998 and 1999
The following table presents additional information regarding the results
of operations as presented in the Selected Historical Financial Data for the
years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
------- ------------------ ------------------
(000'S) (000'S) % CHANGE (000'S) % CHANGE
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
REVENUES:
Commissions.................................. $4,811 $ 7,933 65 $25,291 219
Underwriting and investment banking.......... 753 2,585 243 926 (64)
Net dealer inventory and investment income... 833 (273) (133) 3,476 --
Other income................................. 9 24 166 740 2,983
------ ------- ----- ------- -----
$6,406 $10,269 60 $30,433 196
EXPENSES:
Commissions, employee compensation
and benefits............................... $4,459 7,398 66 19,993 170
Clearing and floor brokerage................. 147 439 199 615 40
Underwriting................................. 479 590 23 -- (100)
Communications and occupancy................. 441 817 85 1,242 52
Professional................................. 312 440 41 971 121
Other........................................ 74 1,145 1,447 1,974 72
------ ------- ----- ------- -----
$5,912 $10,829 83 $24,795 129
</TABLE>
The increase in commission revenues during 1999 and 1998 is due to
increased activity in agency and principal transactions during the periods. We
continued to expand our presence in Texas and Georgia through the addition of
established brokers and through additional product and securities offerings.
Underwriting and investment banking revenues declined in 1999 as a result
of the discontinuation of underwriting activities in October 1998. The growth in
underwriting and investment banking revenue in 1998 from 1997 is attributed to
the expansion into the New York City, and Atlanta markets. These new markets
allowed us the opportunity to complete three initial public offerings and one
preferred stock offering during 1998. During 1999, we were involved in the
private placement of TSG Internet Fund increasing both expenses and net revenue.
The remaining fees in 1999 were for advisory services and syndicate
participation.
Net dealer inventory and investment income increased during 1999 primarily
from favorable investment performance of companies in the telecommunications and
Internet industries. Much of this increase was due to merger and acquisition
activity within those sectors, and consequently the appreciation in the
underlying securities, both debt and equity. A byproduct of the investment
banking activity in 1998 was the increase in securities owned at year-end,
including positions in the companies underwritten. As the overall stock market
declined during the fourth quarter, so did the value of the securities owned,
thus resulting in the trading losses at year-end.
Other income increased in 1999 from the addition of the year-end
performance fee received from the TSG Internet Fund. We earn 20% of the increase
in market value of the fund on an annual basis. Otherwise, other revenues were
consistent between 1999, 1998 and 1997.
Commissions, employee compensation and benefits increased in 1999 primarily
as a result of the increase in commission revenue. General and administrative
salaries and other employee benefits increased due to overall salary increases
and additional hires. Incentive compensation and year-end bonus accruals
increased as a result of higher profits. The increase in employee compensation
during 1998 resulted from the addition of general administrative and management
personnel needed to oversee operations in the New York, Atlanta and Dallas
offices. The New York office was shut down in 1999.
26
<PAGE> 30
Clearing and floor brokerage costs increased in 1999 and 1998 as a result
of greater trading activity in the over-the-counter equity markets and on the
national exchanges. Our percentage of revenues derived from equity securities
increased during 1999 in comparison to the volume of fixed income securities
being traded.
No underwriting expenses were incurred during 1999 as we did not actively
engage in underwriting or investment banking activities, other than a private
placement during the second quarter of 1999 and syndicate participations. The
only expenses associated with the private placement were legal fees and
commission expense, which were not material to the overall financial results.
The increase in underwriting expenses in 1998 corresponded to the increase in
initial public offerings and the preferred stock offering.
Communications and occupancy charges increased significantly in 1999. The
increase is attributed to two factors. In June 1998, we began our expansion into
the New York market. The additional cost of rent and telecommunications was
incurred for a portion of 1998 versus the full cost during 1999. In addition, we
increased the availability of quote and news services to our brokers and traders
in the Austin and Atlanta offices. This increase in services provided was needed
to support the increase in commission generating employees.
Professional fees for 1999 increased significantly due primarily to the
increased legal fees during the third quarter of 1999. Of the total increase for
the year, $344,020 was accrued legal expenses relating to the reverse merger;
legal fees for the settlement of private equity securities transactions with our
customers; and fees for general legal counsel. The remaining costs during 1999
related to consulting and accounting fees incurred during the normal course of
business.
Other expenses increased in both 1999 and 1998. The overall increase in
other expenses is the result of increases in personnel and general and
administrative services needed to support those personnel.
Income tax expense increased during 1999 as a result of the increase in
taxable income during the year. Our effective tax rate was 39% for 1999. Income
tax expense was minimal in 1998 due to the pre-tax loss, and the lack of
operations prior to the reverse merger. Prior to 1998, Tejas Securities was an S
corporation for Federal tax purposes, and was not subject to Federal income
taxes.
Minority interest in net income resulted from the minority shareholders of
Tejas Securities subsequent to the reverse merger on August 27, 1999.
EFFECTS OF INFLATION
The effects of inflation have been minimal on our results of operations and
the financial condition in recent years. However, the rising cost of labor and
competitive market for brokers could effect general and administrative costs in
the near term.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, in June 2000. We
are required to implement these standards effective with our 2001 fiscal year
(after deferral by SFAS No. 137). SFAS 133 and 138 address the accounting for
derivative instruments, including certain instruments embedded in other
contracts, and for hedging activities. Under these statements, we will be
required to recognize all derivative instruments as either assets or liabilities
in the statement of financial condition and measure those at fair value. If
certain conditions are met a derivative may be specifically designated as a
hedge, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-dominated forecasted transaction. We do not believe that these
statements will have a material effect on our financial condition or results of
operations.
We may invest in derivative transactions during the normal course of
business, primarily to satisfy the needs of our clients. Derivative transactions
entered into are recorded at the market value with realized or
27
<PAGE> 31
unrealized gains and losses recognized in the statement of operations. Market
value is generally determined by quoted market prices for exchange-traded
options. We held a long position of 743,423 warrants with a market value of
$1,765,630 as of March 31, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation (FIN) No. 44, Accounting for Certain Transactions involving Stock
Compensation. FIN No. 44 clarifies the application of APB Opinion No. 25,
Accounting for Stock Issued to Employees. This interpretation is effective July
1, 2000. We do not believe that this interpretation will have a material effect
on our financial condition or results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our 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 our business. Managing risk is critical to our
profitability and to reducing the likelihood of earnings volatility. Our risk
management policies and procedures have been established to continually
identify, monitor and manage risk. The major types of risk that we face 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. We clear our securities
transactions through a clearing broker. Under the terms of the clearing
agreement, the clearing broker has the right to charge us for losses that result
from our customers' failure to fulfill their contractual obligations. In order
to mitigate risk, our policy is to monitor the credit standing of our customers
and maintain collateral to support customer margin balances. Further,
significant portions of our assets are held at our clearing broker, Schroder &
Co. Therefore, we could incur substantial losses if our 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 us.
Operating risk arises from the daily conduct of our business and relates to
the potential for deficiencies in control processes and systems, mismanagement
of our activities or mismanagement of customer accounts by our employees. We
rely heavily on computer and communication systems in order to conduct our
brokerage activities. Third party vendors, such as the clearing broker and news
and quote providers, provide many of the systems critical to our business. Our
business could be adversely impacted if any of these systems were disrupted. We
mitigate 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, we utilize 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.
Our 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 we have no control. Securities owned by us are either related to daily
trading activity or our 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 us and by
limiting exposure to any one investment or type of investment.
Our trading securities were $7,563,189 in long positions and $471,407 in
short positions at March 31, 2000. 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 $803,000 as of March 31, 2000. A 10% hypothetical
decline was used to represent a significant and plausible market change.
28
<PAGE> 32
Our investment securities are typically those reported on by our research
analysts. These positions often consist of high-yield debt securities and the
related equity securities. We monitor 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 our
research analysts versus current market performance.
29
<PAGE> 33
BUSINESS
GENERAL
We are a holding company whose primary operating subsidiary is Tejas
Securities Group, Inc., a Texas corporation. Through our subsidiary, we are
engaged in the business of providing brokerage and related financial services to
institutional and retail customers nationwide.
We were incorporated as a shell corporation in New York on July 18, 1990,
and made an initial public offering in November 1991. We were acquired by Tejas
Securities in a reverse merger effected on August 27, 1999. See "The Exchange
Offer -- Background of the Offer." During the second half of 2000, we anticipate
submitting to our shareholders a proposal to change our state of incorporation
from New York to Delaware. We do not expect the reincorporation to have any
material effects on us or our subsidiaries.
Our business is conducted out of our primary office in Austin, Texas and a
branch office in Atlanta, Georgia. We anticipate expanding our operations in the
year 2000 with branches in Dallas and Houston. See "-- Growth Strategy." We
moved our primary office in the first quarter of 2000 to 2700 Via Fortuna, Suite
400, Austin, Texas 78746.
Our subsidiary, Tejas Securities, is a registered broker-dealer and
investment advisor offering: (i) brokerage services; (ii) high quality
investment research; (iii) market-making activities in stocks traded on the
Nasdaq National Market System; (iv) investment banking services; and (v) asset
management services.
CHANGE IN CONTROL
On August 27, 1999, pursuant to an Agreement and Plan of Merger, dated
August 20, 1999, by and among Westech, Tejas Securities, Tejas Holding, and
Westech Merger Sub, Inc., a Delaware corporation, Merger Sub, a wholly owned
subsidiary of Westech, was merged with and into Tejas Holding, the parent
company of Tejas Securities, with Tejas Holding being the surviving corporation.
Prior to the Merger, holders of 4,808,555 shares of Tejas Securities common
stock exchanged their shares for an equal number of Tejas Holding shares. As a
result, 4,808,555 shares of Tejas Holding common stock were issued and
outstanding to a total of eleven shareholders, and Tejas Holding's sole asset
was 4,808,555 shares of Tejas Securities common stock. The Tejas Securities
common stock held by Tejas Holding currently represents approximately 81% of the
issued and outstanding Tejas Securities common stock. As consideration for the
merger, each share of Tejas Holding common stock issued and outstanding as of
the date of the merger was exchanged for 2.4825 shares of Westech common stock.
As the result of the merger, an aggregate of 12,661,343 shares of Westech common
stock are issued and outstanding and the former holders of Tejas Holding common
stock own approximately 94% of Westech's common stock.
EARLY OPERATIONS
Our initial focus was to provide institutional money managers and mutual
funds high quality investment research covering large U.S. based companies which
were believed to be overly leveraged or which were in default on their
liabilities or in bankruptcy. Historically, these companies were not followed
closely by a large number of research analysts. We used this opportunity to
establish ourself as a source for high quality research products and trading
support. We took advantage of this initial research success and expanded our
research coverage to special situation equities and began underwriting initial
public offerings of equity securities for a select group of companies in 1997.
These underwritings coupled with a demand for our research by individuals led us
to expand our client base to include retail accounts.
30
<PAGE> 34
BROKERAGE SERVICES
We provide brokerage services to approximately 6,000 retail customers and
500 institutional customers. We offer a menu of services and products to
customers, including the ability to buy and sell common and preferred stock,
stock options, mutual funds, index funds, fixed income products, annuities and
other investment securities. Our marketing strategy has been to emphasize our
high level of service and our unique knowledge of the companies covered by our
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. We
intend to capitalize on this trend by expanding into online trading, while
continuing to provide the high level of service and proprietary research
products that our customers have come to expect.
Currently, we provide our customers with the ability to receive stock
quotes and access research on the Internet through our website
(www.tejassec.com). We anticipate that our customers will have the ability to
make trades over the Internet prior to the end of the year 2000. We believe
Internet trading is in high demand by our customers and will continue to devote
a substantial portion of our resources to our Internet strategy.
We generated $25,291,212, $7,932,780 and $4,810,520 in commission revenues
for the years ended 1999, 1998 and 1997, respectively, or 83%, 77% and 75% of
total revenue, respectively. For the three months ended March 31, 2000 and 1999,
we generated $8,516,778 and $4,981,533 on commission revenue, respectively, or
88% and 73% of total revenue, respectively.
RESEARCH
The cornerstone of our business is the creation of proprietary products for
our clients based on our research and trading capabilities. We distribute these
products through traditional as well as new channels of distribution. We believe
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.
We anticipate that we will continue to devote a substantial portion of our
resources to support our research department. Currently, the research department
consists of six analysts with proven expertise in special situation equity
research and in distressed securities. The analyst group has the background to
analyze many industries, but has a primary focus on telecommunications and
technology. We believe that the rapid changes in each of these industries
provide excellent investment opportunities. Our analysts will allow us to expand
our research coverage of Austin-based telecommunications and technology
companies that have limited research coverage by the New York-based brokerage
community.
We believe that the number of high quality telecommunications and
technology companies being formed in the Austin area is significant and will
continue to grow. We believe our research department is well suited to cover
these companies and will focus a large percentage of our research resources to
covering them. The research department will cover both public companies as well
as identify private companies that are candidates for becoming publicly traded
companies.
MARKET MAKING
In August 1999, the NASD approved Tejas Securities to make markets in
Nasdaq securities. Making markets in securities facilitates the execution of
security transactions for our customers. We act as a market maker for more than
30 public corporations whose stocks are traded on the Nasdaq National Market
System.
Generally, we do not maintain inventories of securities for sale to our
customers. However, we do engage in certain principal transactions where, in
response to a customer order, we will go at risk to the marketplace to attempt
to capture the spread between the bid and offer. Most of our larger competitors
31
<PAGE> 35
are engaged in similar market making activities through subsidiaries or receive
order flow payments from companies engaged in such market making activities. We
believe we can maintain better control and be assured of proper executions of
customer trades by providing these market making services directly to our
customers.
INVESTMENT BANKING
We raise capital through public and private offerings of securities for
corporations that are engaged in a variety of businesses, but primarily in our
industry focus areas -- telecommunications and technology. We participate in
underwritings of corporate securities as managing underwriter and as a syndicate
member. Management of an underwriting transaction is generally more profitable
than participation as a member of an underwriting syndicate. As an underwriter,
we are 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. Our potential liability as an underwriter is
uninsured. Our participation in or initiation of underwritings may be limited by
the financial requirements of the SEC, the NASD and various other regulatory
agencies. See "-- Net Capital Requirements."
We began our investment banking operations in late 1997 with a strategy to
focus on underwriting offerings for micro-capitalization companies (under $100
million market capitalization). Between September 30, 1997, and December 31,
1998, we acted as the managing underwriter or co-managing underwriter for
initial public offerings of four common stock offerings and one preferred stock
offering, raising approximately $40 million for corporate finance clients. We
typically receive two to three percent of the aggregate amount of money raised
for these offerings to cover nonaccountable expenses and between seven and nine
percent as compensation to underwriters, selling group members and registered
representatives, although these percentages may be lower for larger
transactions. We generated $925,616, $2,584,770 and $752,554 in investment
banking revenues for the years ended 1999, 1998 and 1997, respectively, or 3%,
25% and 12% of total revenue, respectively. For the three months ended March 31,
2000 and 1999, we generated $1,071,165 and $0 in investment banking revenues,
respectively, or 11% and 0%, respectively. At the end of 1998, we decided to
eliminate our focus on underwriting small public offerings and suspend our
investment banking efforts.
In 1999, we decided to shift our investment banking efforts to the
underwriting of and financial advisory assignments of larger more established
companies. We felt that by refocusing our efforts, we could leverage the
strengths of our proprietary research as well as our growing institutional
investor customer base. To accomplish this change in investment banking focus,
we began a search for a senior investment banker with a suitable business
background. During the fourth quarter of 1999, we employed an Executive Vice
President and Managing Director to oversee all investment banking operations and
have continued to increase staffing in this department. See "Management." During
the second quarter of 2000, we participated in a private placement of $55
million of convertible debt.
ASSET MANAGEMENT SERVICES
We created an Asset Management Services Division to manage money for
accredited investors in a private investment fund format (commonly referred to
as a "hedge fund"). During 1999, we assumed the management of our first hedge
fund, TSG Internet Fund I, Ltd. We purchased the equity of TSG Capital, LLC, a
Texas limited liability company, which serves as the general partner of TSG
Internet Fund. We will manage the hedge fund for a one-time placement fee of 5%
of each new dollar invested in the fund, an annual management fee of 1.5% of the
average monthly net asset value, and an annual performance fee of 20% of the
hedge fund's net gain. See "Certain Relationships and Related
Transactions -- TSG Internet Fund I, Ltd."
We anticipate offering more hedge funds in the future. Based on the size of
our hedge funds, such activities are not likely to require us to make a
significant capital commitment.
32
<PAGE> 36
CUSTOMERS
Historically, our customer base has been comprised of predominately large
nationally known institutional customers. These customers demand high quality
research and sophisticated trading capabilities. We believe that we have served
the needs of this segment of our customer base well, resulting in increased
trading volume. We believe that the increase in the scope of our research
services should increase customer satisfaction and increase our revenues from
institutional customers.
Currently, the fastest growing segment of our business is our retail
division. We believe our strategy of providing institutional quality research
and high customer service to retail customers has been well received. The retail
division has grown from 3,000 customers in 1997 into 6,000 customers at June 30,
2000. We 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 June 30, 2000, we had approximately 85 employees. Of these employees,
approximately 45 work in sales, 5 in trading, 8 in research and investment
banking and the remaining employees perform management and administrative
functions. Employees will continue to be added in several areas of the firm.
However, it is our goal to use the sales support functions that are currently in
place to support additional sales staff. We believe 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 our business are highly competitive. In our general
brokerage activities, we compete directly with numerous other broker-dealers,
many of which are large well-known firms with substantially greater financial
and personnel resources. Many of our 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. We
also compete 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 we were 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 ours.
Various legislative and regulatory developments have also tended to
increase competition within the industry or reduced profits for the industry. In
particular, on November 12, 1999, President Clinton signed into law legislation
that allows bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act, 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:
- financial in nature,
- identical to any such financial activity, or
- 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.
33
<PAGE> 37
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. We
anticipate that these changes will result in an increase in the number, size and
financial strength of potential competitors.
The securities industry has experienced substantial commission discounting
by broker-dealers competing for brokerage business. In addition, an increasing
number of specialized firms now offer "discount" services to individual
customers. These firms generally effect transactions for their customers on an
"execution only" basis without offering other services such as portfolio
valuation, investment recommendations and research. A growing number of discount
brokerage firms offer their services over the Internet, further decreasing
offered commission rates and increasing ease of use for customers. The
continuation of such discounting and an increase in the number of new and
existing firms offering discounts could adversely affect us. In addition, rapid
growth in the mutual fund industry is presenting our potential customers with an
increasing number of alternatives to traditional stock brokerage accounts.
In our investment banking activities, we compete with other brokerage
firms, venture capital firms, banks and all other sources of capital for small,
growing companies. Large national and regional investment banking firms
occasionally manage offerings of a size that is competitive with us. 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
us.
GROWTH STRATEGY
We anticipate expanding our investment banking and asset management
divisions. We believe this expansion will be accomplished through acquisitions
of other companies and through recruiting efforts.
We anticipate increasing our market penetration in Texas and the
Southwestern United States. We believe 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. We believe that increased penetration in these markets will enhance
revenue balance and provide greater leverage of our fixed costs. We anticipate
we will achieve a market presence in both Houston and Dallas in the year 2000.
We anticipate taking advantage of other strategic market opportunities as they
arise.
FEES ON MARGIN LOANS
We derive a portion of our income from fees generated on margin loans made
to our customers and financed through our clearing agent, Schroder & Co. A
margin account allows the customer to deposit less than the full cost of the
securities purchased while Schroder & Co. lends the balance of the purchase
price to the customer, secured by the purchased securities. Customers are
charged interest on the amount borrowed to finance their margin transactions
ranging from 0.25% below to 2.75% above the broker call rate, which is the rate
at which brokers can generally obtain financing using margined and firm owned
securities as collateral. We earn a fee equal to 50% of the interest charged on
customer margin loans. As of June 30, 2000, 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
and 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 our customers with insurance protection for amounts
of up to $500,000 each, with a limitation of $100,000 on claims for cash
balances. We have also acquired an additional $10,000,000 in insurance coverage
through Seabury & Smith, as added protection for individual customers'
securities, covering all clients of our institutional and retail customers.
34
<PAGE> 38
We are subject to extensive regulation by federal and state authorities.
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 "Risk Factors -- We are
subject to strict government regulation and the failure to comply could result
in disciplinary actions."
NET CAPITAL REQUIREMENTS
Tejas Securities is subject to Securities and Exchange Commission Rule
15c3-1, Net Capital Requirements For Brokers or Dealers, 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 our ability to pay dividends to our shareholders.
Failure to comply with the rule could require us 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 we 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 "Risk
Factors -- We are subject to strict government regulation and the failure to
comply could result in disciplinary actions."
At December 31, 1999 and 1998, Tejas Securities elected to use the
alternative method permitted by the rule, which requires it to maintain minimum
net capital, as defined, equal to the greater of $250,000 in 1999 and $100,000
in 1998 or 2% of aggregate debit balances arising from customer transactions, as
defined. At December 31, 1999, Tejas Securities had net capital of $2,813,049,
which was $2,563,049 in excess of the minimum amount required. At December 31,
1998, Tejas Securities had net capital of $842,544, which was $742,544 in excess
of the minimum amount required. At March 31, 2000, Tejas Securities had net
capital of $2,069,943, which was $1,819,943 in excess of the minimum amount
required.
PROPERTIES
We lease space for our offices in Austin, Texas and Atlanta, Georgia.
Future commitments associated with the leases are included in the footnotes to
the consolidated financial statements. These leases are for terms of
approximately eight years and five years, respectively, and contain renewal
options. Our headquarters are located at 2700 Via Fortuna, Suite 400, Austin,
Texas, and consists of approximately 24,700 square feet. Our Atlanta office is
located at 12725 Morris Road, Suite 100, Alpharetta, Georgia, and consists of
approximately 2,500 square feet. We believe each of these facilities will be
adequate for the foreseeable future. We have subleased the space from our former
headquarters in Austin, Texas.
LEGAL PROCEEDINGS
In June 1999, Starlight Entertainment, Inc. submitted an arbitration claim
against us and a former employee before the NASD. Starlight alleges that we and
our former employee failed to act diligently in bringing to market Starlight's
planned 1998 initial public offering. Starlight is seeking approximately
$225,000 in out-of-pocket expenses incurred in the offering, as well as the
anticipated $6,800,000 proceeds
35
<PAGE> 39
of the offering. 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. On July 21, 2000, we reached an
oral agreement with Starlight Entertainment, Inc. to settle this matter for
$50,000. We anticipate completing documentation of the final settlement
agreement by the end of August 2000.
On June 12, 2000, J. Michael Sargeant, our former employee, filed suit in
Texas State District Court alleging we breached his employment contract by
terminating him without good cause. Mr. Sargeant has alleged damages of less
than $500,000. We believe the complaint to be without merit and intend to defend
this matter vigorously. We do not believe this matter will produce any material
adverse consequences to us.
There are no other liabilities arising from claims or legal actions that we
believe would have a significant adverse effect on our financial condition or
results of operations.
36
<PAGE> 40
MANAGEMENT
The following information sets forth certain information with respect to
our executive officers and directors. Each of the directors is elected to serve
until the next election of directors at a meeting of the shareholders. Their
respective backgrounds are described below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John J. Gorman........................ 40 Director, Chairman and Chief Executive
Officer
Jay W. Van Ert........................ 39 Director and President
Joseph F. Moran....................... 39 Director, Vice Chairman and Managing
Director
Charles H. Mayer...................... 53 Director and Chief Operating Officer
Michael L. McAllister................. 45 Executive Vice President and Managing
Director
Gregory D. Woodby..................... 39 Managing Director
Robert E. Gillette.................... 34 Secretary and Treasurer
A. Reed Durant........................ 45 Director of Compliance
Kurt J. Rechner....................... 39 Chief Financial Officer
John F. Garber........................ 30 Director of Finance
Barry A. Williamson................... 43 Director
Clark N. Wilson....................... 43 Director
</TABLE>
John J. Gorman. Mr. Gorman became our Chairman of the board of directors
and Chief Executive Officer in August 1999. He has been the Chairman and Chief
Executive Officer of Tejas Securities since July 1997. Mr. Gorman has over 16
years of experience in the brokerage industry. Mr. Gorman became a principal of
Tejas Securities on April 18, 1995. From 1988 until joining Tejas Securities,
Mr. Gorman worked at APS Financial Inc., most recently as a Senior Vice
President. Mr. Gorman served primarily in a broker capacity at APS Financial
Inc., a broker-dealer in Austin, Texas. Mr. Gorman has held positions at APS
Financial Inc., Landmark Group, Shearson Lehman and Dean Witter. In addition,
Mr. Gorman serves on the Board of Directors of Lincoln Heritage Corporation, a
publicly traded company. Mr. Gorman is the nephew of Charles H. Mayer. Mr.
Gorman received his B.B.A. from Southern Methodist University in 1983.
Jay W. Van Ert. Mr. Van Ert became our President and a Director in August
1999. Mr. Van Ert joined Tejas Securities in 1995 as Director of Research, was
elected to the board of directors of Tejas Securities in 1997, and was named
President in May 1998. Mr. Van Ert has spent in excess of fifteen years in the
investment industry. Prior to joining Tejas Securities, Mr. Van Ert was employed
from 1989 to 1995 as a Vice President with T. Rowe Price Associates Inc. where
he served as an Analyst, Portfolio Manager and Director of High Yield Research.
Mr. Van Ert earned a B.B.A. in Finance from the University of Texas in 1983 and
an M.B.A. from Southern Methodist University in 1984.
Joseph F. Moran. Mr. Moran became our Vice Chairman of the board of
directors and a Managing Director in August 1999. Mr. Moran joined Tejas
Securities in January 1996 as Senior Vice President of Fixed Income Sales. He
was named a Managing Director and a member of the board of directors of Tejas
Securities in 1997. From 1991 until joining Tejas Securities, Mr. Moran worked
at APS Financial Inc. most recently as a Senior Vice President. Mr. Moran served
primarily in a broker capacity at APS Financial Inc. Mr. Moran received his
B.B.A. from Baylor University in 1984.
Charles H. Mayer. Mr. Mayer joined us in September 1999 as the Chief
Operating Officer and a Director. From 1995 until he joined Tejas Securities,
Mr. Mayer was self-employed and managed personal investments in a number of
companies not related to the securities industry. From 1990 to 1995, Mr. Mayer
was the Managing Director and Chief Information Officer with CS First Boston.
Other experience includes 21 years in senior positions with Morgan Stanley, Tech
Partners, Salomon Brothers,
37
<PAGE> 41
Lehman Brothers and the Federal Reserve Bank of New York. Mr. Mayer earned a BBA
and MBA from Seton Hall University.
Michael L. McAllister. Mr. McAllister joined us in November 1999 as
Executive Vice President and a Managing Director. Mr. McAllister has over 19
years experience as an investment banker. Mr. McAllister is the head of
investment banking and is also responsible for building our equity capital
markets business. From February 1998 until joining us, Mr. McAllister was Senior
Vice President and Managing Director of Corporate Finance at Southwest
Securities, Inc. From January 1995 to February 1998, Mr. McAllister was Managing
Director of Corporate Finance at Southcoast Capital Corporation. Previous to
this, Mr. McAllister was Managing Director of Corporate Finance from August 1992
to August 1994 at Kemper Securities, Inc. Prior to that, Mr. McAllister served
in the corporate finance departments of Lehman Brothers and The First Boston
Corporation.
Gregory D. Woodby. Mr. Woodby acted as our Secretary and Treasurer from
August 1999 until December 1999. Mr. Woodby became a Managing Director in
January 2000. 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 and named Secretary in 1997. From 1989 until joining Tejas
Securities, Mr. Woodby worked at APS Financial Inc., most recently as a Fixed
Income Trader. Mr. Woodby graduated from Baylor University earning a B.B.A. in
Management in 1983.
Robert E. Gillette. Mr. Gillette became Secretary and Treasurer in January
2000. Mr. Gillette joined Tejas Securities in March 1998 as Senior Vice
President and manager of the Atlanta branch office. Prior to joining Tejas
Securities, Mr. Gillette was a Vice President at Marion Bass Securities from
April 1996 to December 1997, a Vice President at Addison Securities from
November 1994 to April 1996, a Vice President at the GMS Group from July 1994 to
November 1994 and a Vice President at APS Financial Inc. from December 1993 to
July 1994. Mr. Gillette graduated from the University of Georgia with a B.A. in
Political Science in 1988 and received his J.D. degree with honors from the
Atlanta Law School in 1993.
A. Reed Durant. Mr. Durant became our Director of Compliance in August
1999. Mr. Durant joined Tejas Securities in November 1998 as the Compliance
Director. From January 1996 until joining Tejas Securities, Mr. Durant worked as
Senior Compliance Examiner for the NASD in the Regulation and Enforcement area.
From 1988 until joining the NASD, Mr. Durant worked at Principal Financial
Securities. Mr. Durant has over 20 years experience in the securities industry,
including 8 years as Compliance Director of a 400-broker, 30-branch NYSE member
firm. Mr. Durant graduated from Texas Tech University with a BA in economics.
Kurt J. Rechner, CPA, CFA. Mr. Rechner became our Chief Financial Officer
in January 2000. Mr. Rechner has spent the past eighteen years in the financial
services industry. Prior to joining Tejas Securities, Mr. Rechner was employed
from 1997 through 1999 as an Executive Vice President, Finance & Operations, CFO
for Xerox Federal Credit Union. From May 1995 to 1997 Mr. Rechner was the Chief
Executive Officer for Prism Capital Management, LLC, which managed a global
fixed income hedge fund. From 1990 through May 1995, Mr. Rechner was the Senior
Vice President of Accounting and Finance for Security Service Federal Credit
Union. Mr. Rechner earned a B.S. in Business Administration from the University
of Illinois in 1984 and an M.B.A. from Trinity University in 1985. Mr. Rechner
also holds the professional designations of Certified Public Accountant and
Chartered Financial Analyst.
John F. Garber, CPA. Mr. Garber became our Director of Finance in August
1999. Mr. Garber joined Tejas Securities in October 1998 as Director of Finance.
From April 1998 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. he was employed by KPMG LLP from 1995 to 1998 as
a supervising auditor in the financial assurance department. Mr. Garber
graduated from the University of Florida in 1992 with a B.S.B.A. in Finance. Mr.
Garber holds the professional designation of Certified Public Accountant.
38
<PAGE> 42
Barry A. Williamson. Mr. Williamson became a Director in October 1999. Mr.
Williamson was elected in 1992 as the 38th Texas Railroad Commissioner and
served from January 1993 to January 1999. He served as the Commission's Chairman
in 1995. During the late 1980's and early 1990's, Mr. Williamson served under
the Bush administration at the U.S. Department of Interior as the Director of
Minerals Management Service. Under President Bush, he managed mineral leases on
the nation's 1.4 billion-acre continental shelf and oversaw an annual budget of
almost $200 million. During the 1980's, Mr. Williamson served under the Reagan
administration as a principle advisor to the U.S. Secretary of Energy in the
creation and formation of a national energy policy. Mr. Williamson began his
career with the firm of Turpin, Smith, Dyer & Saxe, and in 1985 established the
Law Offices of Barry Williamson and founded an independent oil and gas company.
Mr. Williamson graduated from the University of Arkansas with a B.A. in
Political Science in 1979, and received his J.D. degree from the University of
Arkansas Law School in 1982.
Clark N. Wilson. Mr. Wilson became a Director in October 1999. Mr. Wilson
is the President and Chief Executive Officer of Clark Wilson Homes, Inc., a
subsidiary of Capital Pacific Holdings. Previously, Mr. Wilson was the President
of Doyle Wilson Homebuilder, Inc., serving in that position until 1992. Mr.
Wilson served as Vice President of Doyle Wilson Homebuilder, Inc. from 1986 to
1992. Mr. Wilson took Doyle Wilson Homebuilder, Inc. through a turbulent market
and formed Clark Wilson Acceptance Corporation in 1989 as a finance corporation,
personally financing over $35,000,000 of construction loans for Doyle Wilson
Homebuilder, Inc. Mr. Wilson has won numerous MAX awards between 1994 and 1998,
including the MAX Award for Grand Builder of the Year and best Quality Project
in 1994. Mr. Wilson is a Life Member of the National Association of Homebuilders
Spike Club. Mr. Wilson attended Amarillo College and the University of Texas at
Austin, and has nearly twenty-five years of experience in the homebuilding
industry.
BOARD COMMITTEES
The Stock Option Committee consists of Barry A. Williamson and Clark N.
Wilson. The Stock Option Committee administers our stock option plan. See
"-- Westech Capital Corp. 1999 Stock Option Plan."
The Audit Committee consists of Barry A. Williamson and Clark N. Wilson.
The Audit Committee:
- reviews, with our independent auditors, our financial statements and
internal accounting controls and the plans and results of the audit
engagement;
- reviews the independence of our independent auditors;
- reviews the adequacy of our internal accounting controls;
- prepares an annual report on executive compensation for inclusion in our
proxy statement for the annual meeting of shareholders; and
- fulfills such other powers and duties as determined and delegated by the
board of directors from time to time.
The Compensation Committee consists of Barry A. Williamson and Clark N.
Wilson. The Compensation Committee:
- makes recommendations to the board of directors regarding our policies
relating to, and the amounts and terms of, all compensation of our
executive officers;
- administers and discharges the employee stock plans, option plans and
such other compensation plans that are established by the board of
directors from time to time;
- engages any professional advisors as it deems appropriate; and
- fulfills such other powers and duties as determined and delegated by the
board of directors from time to time.
39
<PAGE> 43
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers served as a member of the compensation or
similar committee or board of directors of any other entity, other than our
subsidiaries, of which an executive officer served on our compensation committee
or board of directors.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information concerning compensation of our
chief executive officer and other highly compensated executive officers whose
salary and bonuses exceeded $100,000 for the year ended December 31, 1999, the
"named executive officers."
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS FORGIVEN DEBT COMMISSIONS(2)
--------------------------- ---- --------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C>
John J. Gorman........................ 1999 $ -- $ -- $ -- $5,848,050
Chairman and Chief 1998 125,000 -- 135,114 709,309
Executive Officer 1997 -- 261,000 -- 643,688
Jay W. Van Ert........................ 1999 250,000 156,386 -- 285,526
Director and President 1998 183,333 -- -- 47,255
1997 120,000 75,000 -- 44,000
Joseph F. Moran....................... 1999 -- -- -- 1,016,538
Managing Director 1998 -- -- -- 1,023,280
and Vice Chairman 1997 -- -- -- 977,890
Gregory D. Woodby(3).................. 1999 130,000 100,000 -- 199,150
Managing Director 1998 100,000 500 -- 76,748
1997 85,000 40,000 -- 59,481
Robert E. Gillette(3)................. 1999 72,000 -- -- 504,659
Secretary and Treasurer 1998 -- 1,000 -- 87,175
1997 -- -- -- --
</TABLE>
---------------
(1) Does not include certain prerequisites and other personal benefits that are
standard in the industry and have a total value of less than 10% of the
total annual salary, bonus and commissions reported for the named executive
officer.
(2) In association with its underwriting activities, Tejas Securities was given
warrants to purchase stock as partial consideration. All of the warrants had
a strike price that was greater than the initial public offering price of
the underlying stock. Tejas Securities distributed these warrants to certain
members of the group working on these public offerings. None of the
executive officers listed received warrants that are currently exercisable
for less than the current trading price of the underlying stock.
Consequently, no value is included in "commissions" for these warrants.
(3) Mr. Woodby acted as the Secretary and Treasurer from August 1999 to December
31, 1999. Mr. Gillette became the Secretary and Treasurer on January 1,
2000.
40
<PAGE> 44
OPTION GRANTS AND EXERCISES
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1999 to
the named executive officers. No stock appreciation rights were granted during
1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES FOR EXERCISE PRICE -----------------------
NAME GRANTED(1) FISCAL YEAR(2) ($/SHARE) EXPIRATION DATE 5% 10%
---- ---------- ------------------ -------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John J. Gorman....... 250,000 12.69% $2.00 October 15, 2004 $138,141 $305,255
150,000 7.62% 2.20 October 15, 2004 91,173 201,468
Jay W. Van Ert....... 325,000 16.50% 2.00 October 15, 2004 179,583 396,832
Joseph F. Moran...... 100,000 5.08% 2.20 October 15, 2004 60,782 134,312
Gregory D. Woodby.... -- -- -- -- -- --
Robert E. Gillette... -- -- -- -- -- --
</TABLE>
---------------
(1) One-third of the options become exercisable on each of October 15, 1999,
2000 and 2001.
(2) In 1999, we granted employees options to purchase an aggregate of 1,969,750
shares of common stock.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are based on the assumption that the exercise price was the fair market
value of the shares on the date of the grant. There is no assurance provided
to any executive officer or any other holder of our securities that the
actual price appreciation over the 5 year option term will be at the assumed
5% and 10% levels or at any other defined level.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table provides information concerning unexercised options
held as of December 31, 1999 by the named executive officers. No options were
exercised during this period.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John J. Gorman................................ 133,333 266,667 $ -- $ --
Jay W. Van Ert................................ 108,333 216,667 $ -- $ --
Joseph F. Moran............................... 33,333 66,667 $ -- $ --
Gregory D. Woody.............................. -- -- $ -- $ --
Robert E. Gillette............................ -- -- $ -- $ --
</TABLE>
---------------
(1) The amount set forth represents the difference between the fair market value
of the underlying stock on December 31, 1999 ($2.00 per share) and the
exercise price of the option. The fair market value was determined by our
board of directors.
DIRECTOR COMPENSATION
As part of their incentive to join the board of directors, Mr. Wilson and
Mr. Williamson were each provided with options to purchase 100,000 shares of
common stock. The options are exercisable at $2.00 per share and expire on
October 15, 2004. The options vest in three equal annual installments beginning
on October 15, 1999. Currently no other directors receive any form of cash or
non-cash compensation for fulfilling their roles on the board of directors.
41
<PAGE> 45
WESTECH CAPITAL CORP. 1999 STOCK OPTION PLAN
In October 1999, we adopted our stock option plan to strengthen our ability
to attract, motivate, compensate and retain employees, directors, and
consultants by providing a means for such persons to acquire a proprietary
interest in us and to participate in our growth through ownership of our common
stock. The Stock Option Committee of our board of directors administers our
stock option plan, provided, however, that our board of directors may also take
all actions to administer the stock option plan, including granting options.
Shares Subject to the Plan
Under our stock option plan, we can grant awards consisting of either
incentive stock options or nonqualified stock options not to exceed 3,000,000
shares of our common stock. That number will be adjusted automatically if the
outstanding shares of common stock are increased or decreased or changed into or
exchanged for a different number of shares or kind of shares or other securities
of ours or of another corporation, by reason of reorganization, split,
combination of shares, or a dividend payable in common stock. Equitable
adjustments to the number of shares subject to each award and to the payment
required to obtain such shares will also be made so that the same proportion of
shares will be subject to the award and the aggregate consideration to acquire
all shares subject to the award will remain as it was prior to the
recapitalization. We intend to seek approval from our shareholders to increase
the number of shares we may grant under our stock option plan to 5,000,000 in
the third quarter of 2000.
As of March 31, 2000, we had granted options under our stock option plan to
acquire 2,765,000 shares of our common stock, none of which had been exercised,
or cancelled and all of which remained outstanding.
Shares Not Subject to the Plan
During 1999, Tejas Securities granted options to purchase 300,000 shares of
Tejas Securities' common stock (744,750 shares of the Company's common stock
giving effect to the reverse merger) at a price of $1.00 per share ($0.40 per
share giving effect to the reverse merger). The Tejas Securities options were
cancelled upon termination of Tejas Securities' option plan in 1999. Options to
purchase 744,750 shares of the Company's common stock were subsequently issued
on January 1, 2000 at a price of $0.40 per share.
Eligibility
All of our employees, directors and consultants are eligible to receive
awards under our stock option plan. For tax reasons, the availability of
incentive stock options is restricted to employees, with nonqualified stock
options available to employees, directors and consultants. The Stock Option
Committee, as administrator of our stock option plan, determines:
- the persons to whom stock option awards are to be granted;
- whether an option shall be an incentive stock option or nonqualified
stock option or both;
- the number of shares of our common stock subject to each grant;
- the time or times at which stock option awards will be granted and the
time or times of the exercise period, which shall not exceed the maximum
period described below.
Types of Awards
Options granted under our stock option plan may be either options that are
intended to qualify for treatment as "incentive stock options" under Section 422
of the Internal Revenue Code or options that are not, which are "nonqualified
stock options". The exercise price of incentive stock options must be at least
the fair market value of a share of the common stock on the date of grant, and
not less than 110% of the fair market value in the case of an incentive stock
option granted to an optionee owning 10% or more of the common stock. The
aggregate fair market value of common stock (calculated on the date of grant)
42
<PAGE> 46
with respect to which incentive stock options are exercisable for the first time
by an optionee during any calendar year shall not exceed $100,000. The term of
an option may not exceed ten years (or five years in the case of an incentive
stock option granted to an optionee owning 10% or more of our common stock).
Termination of Awards
Our stock option plan limits the time during which a holder of an option
can exercise an option to no more than ten years. In addition, an optionee who
leaves our employment will generally have no more than three months to exercise
an option, reduced to no days after employment is terminated for cause, and
additional rules apply to cases of death and disability. Upon the occurrence of
certain events which constitute a change of control, all granted options shall
become exercisable during the period beginning on the date of the occurrence of
the change of control and ending sixty days later. The Stock Option Committee
may, however, override the plan's rules, other than the ten year limit. We
cannot grant additional options under our stock option plan after October 15,
2009, the tenth anniversary of its adoption.
Amendments to Our Stock Option Plan
Our board of directors may amend or terminate our stock option plan, as
long as no amendment or termination affects options previously granted. However,
the plan requires shareholder approval of any amendment that increases the
number of shares available under the plan which may be issued as incentive stock
options or that modify the requirements as to eligibility to receive incentive
stock options under the plan.
PRINCIPAL SHAREHOLDERS
The following table provides information with respect to ownership of our
common stock at June 30, 2000 and as adjusted to reflect the exchange of all
outstanding shares of Tejas Securities:
- each beneficial owner of five percent or more of the common stock;
- each director;
- each of the named executive officers; and
- all directors and officers as a group.
Except as indicated on the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. Options exercisable on or
before August 29, 2000, are included as shares beneficially owned. For purposes
of calculating percent ownership as of June 30, 2000, 12,661,343 shares were
issued and outstanding actual and 15,372,226 shares were issued and outstanding
pro forma for any individual who beneficially owns shares represented by options
exercisable on or before June 30, 2000, these shares are treated as if
outstanding for that person but not for any other person.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NUMBER OWNED
----------------------- --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER ACTUAL PRO FORMA ACTUAL PRO FORMA
------------------------------------ ---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
John J. Gorman(1)(2)(3)......................... 5,915,269 7,528,893 46.23% 48.56%
Jay W. Van Ert(1)(4)............................ 1,253,828 1,253,828 9.82% 8.10%
Joseph F. Moran(1)(5)........................... 2,515,954 2,515,954 19.82% 16.33%
John R. Ohmstede(6)............................. 789,435 789,435 6.24% 5.14%
Gregory D. Woodby(1)............................ 248,250 248,250 1.96% 1.61%
Charles H. Mayer(1)(7).......................... 703,958 703,958 5.27% 4.38%
Barry A Williamson(5)........................... 33,333 33,333 * *
Clark N. Wilson(5)(8)........................... 591,896 591,896 4.47% 3.71%
All officers and directors as a group (12
total)........................................ 11,262,488 13,099,536 78.95% 77.16%
</TABLE>
43
<PAGE> 47
---------------
* Less than 1%.
(1) The address for Messrs. Gorman, Van Ert, Moran, Woodby and Mayer is 2700 Via
Fortuna, Suite 400, Austin, Texas 78746.
(2) Includes 133,333 shares of common stock issuable pursuant to an option
granted under our stock option plan which is immediately exercisable as of
June 30, 2000.
(3) Includes 806,812 shares of common stock, giving effect to the exchange, held
by the John Joseph Gorman IV Trust and 806,812 shares of common stock,
giving effect to the exchange, held by the Ryleigh Gorman Trust, each of
which is established for the benefit of Mr. Gorman's sons with Tamara
Gorman, Mr. Gorman's wife, as the trustee. Mr. Gorman disclaims beneficial
ownership of these shares except as to his pecuniary interests therein.
(4) Includes 108,333 shares of common stock issuable pursuant to an option
granted under our stock option plan which is immediately exercisable as of
June 30, 2000.
(5) Includes 33,333 shares of common stock issuable pursuant to an option
granted under our stock option plan which is immediately exercisable as of
June 30, 2000.
(6) The address for Mr. Ohmstede is 5905 Overlook Drive, Austin, Texas 78731.
(7) Includes 83,333 shares of common stock issuable pursuant to an option
granted under our stock option plan which is immediately exercisable as of
March 31, 2000. Includes 620,625 shares of common stock issuable pursuant to
an option granted outside our stock option plan which is immediately
exercisable as of June 30, 2000.
(8) Includes 558,562 shares of common stock issuable pursuant to an option
granted outside our stock option plan which is immediately exercisable as of
June 30, 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALE LEASEBACK
In September 1997, we entered into a sale-leaseback transaction with Sandy
Hook Management, a company owned by Charles H. Mayer, a member of the board of
directors. Sandy Hook Management purchased the assets for $204,268. We 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. Our previous Chief Financial Officer
made the determination of the book value. Under the terms of this transaction,
we agreed to lease the furniture and fixtures commencing in October 1998 through
September 2000. We make monthly lease payments of $6,373 to Sandy Hook
Management and have an option to purchase the furniture and fixtures at a
discounted price in September 2000.
SUBORDINATED DEBT
We issued subordinated debt in September 1998 in exchange for $500,000 from
Clark N. Wilson, a current member of the board of directors. The transaction is
described in "Management's Discussion and Analysis of Financial Condition and
results of Operations -- Liquidity and Capital Resources."
We completed a second issuance of subordinated debt in June 1999 in
exchange for $500,000 from Clark N. Wilson. The transaction is described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
TSG INTERNET FUND I, LTD.
In April 1999, John J. Gorman, Jay W. Van Ert, Joseph F. Moran and Clark N.
Wilson, along with three other owners of less than 5% of our stock established
TSG Capital, LLC, a Texas limited liability company, for the purpose of acting
as general partner of TSG Internet Fund I, LTD., a Texas limited partnership. In
addition to the investment in TSG Capital, Messrs. Gorman, Van Ert, Moran and
Wilson
44
<PAGE> 48
invested as limited partners in TSG Internet 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 our stock
also invested $200,000 in TSG Internet Fund as a limited partner through a
trust. The total capital contribution by TSG Capital was less than $50,000.
TSG Capital acts as the general partner of TSG Internet Fund and has no
other operations. The managers and principal executive officers include Jay W.
Van Ert and A. Reed Durant who are also our officers. TSG Capital 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, TSG Capital receives a
performance fee equal to 20% of the annual net profits of TSG Internet Fund
after the end of each fiscal year. These fees are in turn paid to us through a
portfolio management assistance agreement in exchange for providing services to
TSG Capital for investment management, compliance and accounting and reporting.
In 1999, we purchased TSG Capital for $50,000 through the conversion of
liabilities owed to us by TSG Capital. TSG Capital distributed the equity
interests of the former owners of TSG Capital totaling $50,000. In addition, we
received a capital contribution from the former owners of TSG Capital in the
amount of $116,161 in conjunction with the purchase.
TSG Capital's ownership interest in the TSG Internet Fund was approximately
15% of the total equity. We recognized approximately $734,000 of income during
1999 from the TSG Internet Fund consisting of management fees of $34,066 and a
performance fee of $700,088. We converted the performance fee to an additional
equity ownership in the fund as of December 31, 1999. As of March 31, 2000, we
recognized approximately $38,000 of income from the TSG Internet Fund in the
form of management fees.
TSG Internet Fund engaged us 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, we 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. As of March 31,
2000, TSG Internet Fund engaged us to solicit additional private placement
subscriptions which totaled $4,605,000. In exchange for acting as the placement
agent, we received placement agent fees equal to 5% of the additional capital
contributions to the fund. The total placement agent fee for the three months
ended March 31, 2000 was $230,250.
OFFICER AND DIRECTOR RECEIVABLES
During 1999, we received a $200,000 note from Charles H. Mayer in
conjunction with his employment. The note bears no interest and is due on
demand.
We make cash advances to certain employees from time to time, which are
typically secured and repaid from commissions. During 1998, we forgave
approximately $135,000 in advances receivable from John J. Gorman as described
in Note 3 to the accompanying consolidated financial statements.
45
<PAGE> 49
SALE OF STOCK TO EMPLOYEES
In April 1999, Tejas Securities issued 1,006,975 shares of its common stock
with a value of $704,833 to then current employees and management. Of the shares
issued, 360,000 shares were issued to directors or executive officers and were
exchanged for 893,700 shares of Westech stock in the reverse merger and 90,000
shares were issued to Tejas Securities' executive officers and will be exchanged
for 223,424 shares of Westech stock in this offering. 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 our
directors or executive officers:
<TABLE>
<CAPTION>
COMPANY SHARES COMPANY SHARES
DIRECTOR/EXECUTIVE CONVERTED CONVERTED
OFFICER SHARES SUBSCRIBED IN REVERSE MERGER IN OFFERING SUBSCRIPTION PRICE
------------------ ----------------- ----------------- -------------- ------------------
<S> <C> <C> <C> <C>
John J. Gorman......... 100,000 248,250 -- $70,000
Jay W. Van Ert......... 100,000 248,250 -- 70,000
Joseph F. Moran........ 100,000 248,250 -- 70,000
Gregory D. Woodby...... 60,000 148,950 -- 42,000
A. Reed Durant......... 25,000 -- 62,062 17,500
John F. Garber......... 25,000 -- 62,062 17,500
Robert E. Gillette..... 40,000 -- 99,300 28,000
</TABLE>
LINCOLN HERITAGE CORPORATION
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. We acted as
managing underwriter in Lincoln Heritage's IPO and currently own less than 5% of
the common equity of Lincoln Heritage.
CONSULTING AGREEMENT
On November 1, 1999, we entered into a consulting agreement with Barry A.
Williamson. The agreement calls for Mr. Williamson to provide us consulting
services on a month to month basis at the rate of $12,500 per month. On June 30,
2000, the consulting agreement was amended to a rate of $6,250 per month.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value per share. Each holder of common stock is entitled to one vote
per share held of record in the election of members of our 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 our
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 our liquidation, dissolution or winding up, holders of common stock are
entitled to share ratably in the assets available for distribution.
As of May 31, 2000, there were approximately 29 holders of record of our
common stock.
SHAREHOLDER AGREEMENT
As of November 23, 1999, we and holders of 2,527,185 shares of our common
stock entered into a shareholder agreement which restricts the shareholders'
ability to sell their shares of common stock. The shareholder agreement provides
that no shares may be transferred prior to January 1, 2001 (except certain
46
<PAGE> 50
transfers to family members) and that only one-third of their shares may be
subject to a lien as collateral for a lending transaction. After January 1,
2001, but prior to January 1, 2002, each shareholder my transfer one-third of
their shares held of record on January 1, 2001 and subject up to two-thirds of
their shares less any transferred shares to a lien. Between January 1, 2002 and
January 1, 2003, each shareholder may transfer those shares available for
transfer from the prior year, but not transferred, plus up to one-third of the
shares they held of record on January 1, 2002. After January 1, 2002, each
shareholder may pledge all of their shares without restriction. As of January 1,
2003, each shareholder may transfer all their shares, provided such shares are
registered under the Securities Act of 1933.
The shareholder agreement will terminate on the earliest to occur of:
- the written agreement of all parties;
- our dissolution, bankruptcy, or insolvency; or
- January 1, 2003.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Corporate Stock
Transfer at 370 17th Street, Denver, Colorado.
PRICE RANGE OF COMMON STOCK
Currently, our shares are traded on the OTC Bulletin Board, under the
symbol "WSTE.OB." The following table sets forth, for the calendar periods
indicated, the high and low reported sales prices per share of Westech common
stock on the OTC Bulletin Board reporting system. Such over-the-counter market
quotations reflect inter dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
2000(1)
1st Quarter............................................... $11.00 $ 1.87
2nd Quarter............................................... $11.00 $2.687
3rd Quarter (through July 26, 2000)....................... $2.875 $ 2.75
</TABLE>
---------------
(1) Westech's common stock began trading on the OTC Bulletin Board on March 13,
2000.
There is no public market for Tejas Securities common stock.
DIVIDEND POLICY
We have never paid cash or stock dividends and have no present plan to pay
any such dividends. Currently, we intend to reinvest our earnings in order to
facilitate expansion. The likelihood of future dividends will be decided by our
board of directors and will be based upon our future earnings, financial
condition and capital requirements. Tejas Securities, our subsidiary, paid
$83,546 and $49,602 in shareholder distributions for the years ended December
31, 1997 and 1996, respectively, while it was an S corporation.
EXPERTS
The consolidated financial statements of Westech Capital Corp. as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, have been included herein in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the issuance of the common stock offered by us in this
offering will be passed upon for us by Winstead Sechrest & Minick P.C., Dallas,
Texas.
47
<PAGE> 51
WESTECH CAPITAL CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998............................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
Interim Unaudited Financial Statements:
Consolidated Statements of Financial Condition as of March
31, 2000 and December 31, 1999......................... F-22
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999.......................... F-23
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.......................... F-24
Notes to Consolidated Financial Statements................ F-25
</TABLE>
F-1
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Westech Capital Corp.:
We have audited the accompanying consolidated statements of financial
condition of Westech Capital Corp. and Subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Westech
Capital Corp. and Subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Austin, Texas
March 22, 2000
F-2
<PAGE> 53
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,732,175 $ 201,312
Receivable from clearing broker, partially restricted....... 4,640,052 1,505,648
Receivables from employees and stockholders................. 627,454 126,499
Securities owned, at market value........................... 6,207,748 1,539,424
Other investments........................................... 932,253 --
Furniture and equipment, net................................ 323,281 208,883
Deferred tax asset, net..................................... 54,086 178,500
Prepaid expenses and other assets........................... 597,053 181,961
----------- ----------
Total assets...................................... $16,114,102 $3,942,227
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities.... $ 2,905,020 $ 577,736
Securities sold, not yet purchased.......................... 187,940 --
Payable to clearing broker.................................. 6,196,059 1,459,678
Subordinated debt........................................... 1,000,000 500,000
----------- ----------
Total liabilities................................. 10,289,019 2,537,414
----------- ----------
Minority interest in subsidiary............................. 976,725 --
Stockholders' equity:
Common stock, $0.001 par value 50,000,000 shares
authorized; 12,537,218 and 11,615,994 issued at
December 31, 1999 and 1998, respectively............... 12,537 11,615
Additional paid in capital................................ 1,669,473 1,461,456
Subscriptions receivable.................................. -- (96,263)
Retained earnings......................................... 3,166,348 28,005
----------- ----------
Total stockholders' equity........................ 4,848,358 1,404,813
----------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity........ $16,114,102 $3,942,227
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 54
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenue:
Commissions.......................................... $25,291,212 $ 7,932,780 $4,810,520
Underwriting and investment banking income........... 925,616 2,584,770 752,554
Net dealer inventory and investment income, net of
trading interest expense of $516,975, $39,072 and
$91,360, respectively............................. 3,475,539 (272,811) 833,227
Other income......................................... 740,342 23,530 9,248
----------- ----------- ----------
Total revenue................................ 30,432,709 10,268,269 6,405,549
----------- ----------- ----------
Expenses:
Commissions, employee compensation and benefits...... 19,992,928 7,397,860 4,459,420
Clearing and floor brokerage......................... 615,273 438,944 146,834
Underwriting expenses................................ -- 590,202 479,025
Communications and occupancy......................... 1,242,370 817,382 440,930
Professional fees.................................... 971,250 439,835 312,175
Interest............................................. 97,029 26,355 5,859
Other................................................ 1,876,633 1,118,913 68,263
----------- ----------- ----------
Total expenses............................... 24,795,483 10,829,491 5,912,506
----------- ----------- ----------
Income (loss) before income tax expense
(benefit) and minority interest............ 5,637,226 (561,222) 493,043
Income tax expense (benefit)........................... 2,201,598 (163,900) 19,008
----------- ----------- ----------
Income (loss) before minority interest....... 3,435,628 (397,322) 474,035
Minority interest...................................... 297,285 -- --
----------- ----------- ----------
Net income (loss)............................ $ 3,138,343 $ (397,322) $ 474,035
=========== =========== ==========
Earnings (loss) per share:
Basic................................................ $ 0.25 $ (0.04) $ 0.03
=========== =========== ==========
Diluted.............................................. $ 0.22 $ (0.04) $ 0.03
=========== =========== ==========
Weighted average shares outstanding:
Basic................................................ 12,501,191 10,664,369 9,432,783
=========== =========== ==========
Diluted.............................................. 15,291,965 10,664,369 9,432,783
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 55
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN SUBSCRIPTIONS RETAINED TREASURY
SHARES STOCK CAPITAL RECEIVABLE EARNINGS STOCK TOTAL
---------- ------- ---------- ------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996..... 9,930,657 $ 9,930 855,081 -- 34,838 -- 899,849
Stockholder distributions........ -- -- -- -- (83,546) -- (83,546)
Treasury stock purchases......... (1,342,253) (1,342) -- -- -- (181,824) (183,166)
Treasury stock sales............. 991,940 992 82,217 (100,000) -- 134,019 117,228
Net income....................... -- -- -- -- 474,035 -- 474,035
---------- ------- --------- -------- --------- -------- ---------
BALANCE AT DECEMBER 31, 1997..... 9,580,344 9,580 937,298 (100,000) 425,327 (47,805) 1,224,400
Stock issuances.................. 1,685,337 1,685 473,720 -- -- -- 475,405
Treasury stock sales............. 350,313 350 50,438 -- -- 47,805 98,593
Subscription collected........... -- -- -- 3,737 -- -- 3,737
Net loss......................... -- -- -- -- (397,322) -- (397,322)
---------- ------- --------- -------- --------- -------- ---------
BALANCE AT DECEMBER 31, 1998..... 11,615,994 11,615 1,461,456 (96,263) 28,005 -- 1,404,813
Stock issuances.................. 2,796,295 2,796 825,973 (775,884) -- -- 52,885
Contributed capital.............. -- -- 94,613 -- -- -- 94,613
Treasury stock purchases......... (708,339) (708) -- -- -- (173,739) (174,447)
Treasury stock sales............. 700,065 700 -- -- -- 171,414 172,114
Subscription collected........... -- -- -- 750,164 -- -- 750,164
Subscription cancelled........... (4,138) (4) (31,162) 31,166 -- -- --
Effect of reverse merger (Note
1)............................. (1,862,659) (1,862) (681,407) 90,817 -- 2,325 (590,127)
Net income....................... -- -- -- -- 3,138,343 -- 3,138,343
---------- ------- --------- -------- --------- -------- ---------
BALANCE AT DECEMBER 31, 1999..... 12,537,218 $12,537 1,669,473 -- 3,166,348 -- 4,848,358
========== ======= ========= ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 56
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 3,138,343 $ (397,322) $ 474,035
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred tax expense (benefit).......................... 124,414 (178,500) --
Depreciation and amortization expense................... 74,506 38,110 39,834
Loss on disposition of furniture and equipment.......... 14,011 -- --
Performance fee converted to equity interest............ (700,088) -- --
Minority interest....................................... 297,285 -- --
Increase (decrease) in payable to clearing broker, net
of receivable from clearing broker.................... 1,601,977 208,113 (773,016)
Decrease (increase) in receivable from employees and
stockholders.......................................... (500,955) 135,949 (262,448)
Decrease (increase) in securities owned................. (4,668,324) (905,005) 317,673
Decrease (increase) in prepaid expenses other assets.... (415,092) (196,164) 82,530
Increase in accounts payable, accrued expenses and other
liabilities........................................... 2,327,284 436,406 102,850
Increase in securities sold, not yet purchased.......... 187,940 -- --
----------- ---------- ---------
Net cash provided (used) by operating activities.... 1,481,301 (858,413) (18,542)
----------- ---------- ---------
Cash flows from investing activities:
Advances to limited partnership........................... (116,004) -- --
Proceeds from sale of furniture and equipment............. -- -- 204,268
Purchase of furniture and equipment....................... (202,914) (188,484) (140,933)
----------- ---------- ---------
Net cash provided (used) by investing activities.... (318,918) (188,484) 63,335
----------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable and subordinated
debt.................................................... 500,000 1,000,000 250,000
Principal payments on notes payable and subordinated
debt.................................................... -- (500,000) (433,166)
Sale of treasury stock.................................... 172,114 98,593 117,228
Purchase of treasury stock................................ (174,447) -- --
Stockholder distributions paid............................ -- -- (83,546)
Subscription collected.................................... 750,164 3,737 --
Capital contribution from acquired enterprise............. 3,115 -- --
Capital contribution from minority interest............... 64,649 -- --
Proceeds from stock issuances............................. 52,885 475,405 --
----------- ---------- ---------
Net cash provided (used) by financing activities.... 1,368,480 1,077,735 (149,484)
----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... 2,530,863 30,838 (104,691)
Cash and cash equivalents at beginning of year.............. 201,312 170,474 275,165
----------- ---------- ---------
Cash and cash equivalents at end of year.................... $ 2,732,175 $ 201,312 $ 170,474
=========== ========== =========
Supplemental disclosures:
Interest paid............................................. $ 614,004 $ 65,427 $ 97,219
Taxes paid................................................ $ 1,110,407 $ 23,738 $ 22,829
</TABLE>
SUMMARY OF NON-CASH TRANSACTIONS:
TSG Capital, LLC (General Partner), a wholly-owned subsidiary, acts as the
general partner of TSG Internet Fund I, Ltd. (the Fund). The Company recognized
$700,088 of income during 1999 related to a performance fee paid by the Fund.
The Company converted the full amount of the performance fee to an equity
ownership of the Fund as of December 31, 1999. (Note 5)
The Company also received a non-cash contribution totaling $116,161,
representing their general partner interests from the former owners of the
general partnership interest of TSG Capital, LLC. These individuals also have an
ownership interest in the Company. Of this amount, $21,549 has been allocated to
minority interest.
The Company recorded a non-cash capital reduction totaling $590,127 in
association with the Merger (Note 1). Of this amount, $90,817 and $2,325 of
subscriptions receivable and treasury stock, respectively, which existed as of
the date of the Merger, have been allocated to minority interest since these
rights were not converted at the time of the Merger.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 57
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION
Westech Capital Corp., a New York corporation, is a holding company whose
primary operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas Securities"). Westech Capital Corp. was incorporated as a
shell corporation in New York on July 18, 1990, and made an initial public
offering in November 1991. Westech Capital Corp. was acquired by Tejas
Securities in a reverse merger effected on August 27, 1999.
Tejas Securities is primarily engaged in securities brokerage, investment
banking and trading activities. Tejas Securities is registered as a broker and
dealer in securities with the National Association of Securities Dealers, Inc.
and clears its transactions on a fully disclosed basis through Schroder & Co.,
Inc. Tejas Securities' headquarters are located in Austin, Texas and have been
since incorporation on March 2, 1994. Tejas Securities' wholly-owned operating
subsidiary, Tejas Securities Group -- East, LLC ("Tejas -- East"), a Georgia
limited liability company, is a branch office located in Atlanta, Georgia. TSG
Capital, LLC, a wholly-owned subsidiary of Tejas Securities was acquired in
1999. It is the general partner in TSG Internet Fund I, Ltd., an investment
hedge fund managed by Tejas Securities.
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and
among Westech Capital Corp., Tejas Securities, newly-formed Tejas Securities
Group Holding Company, a Texas corporation ("Tejas Holding"), and newly-formed
Westech Merger Sub, Inc., a Delaware corporation ("Merger Sub"), Tejas
Securities acquired Westech Capital Corp. through a reverse merger (the
"Merger") of Tejas Holding and Merger Sub. Tejas Holding and Merger Sub were
established for the sole purpose of effecting this transaction. As a result of
the Merger, Tejas Holding became a wholly owned subsidiary of Westech Capital
Corp. Tejas Holding is the holder of approximately 81% of the outstanding common
stock of its subsidiary, Tejas Securities. Under the terms of the Merger, the
stockholders of Tejas Holding exchanged their shares for shares of Westech
Capital Corp. at a ratio 2.4825 to one. The former stockholders of Tejas Holding
currently own 95.21% of the issued and outstanding common stock of Westech
Capital Corp., $ .001 par value per share.
On August 27, 1999, the assets and liabilities of Westech Capital Corp.
consisted of $4,466 in cash and $1,351 in accrued expenses. These assets and
liabilities were recorded at fair value as required by the purchase method of
accounting and the tangible net assets were credited to additional paid in
capital.
Prior to the effective date of the Merger, the Board of Directors of
Westech Capital Corp. approved a stock split in the form of a stock dividend by
issuing 2.28767 shares of common stock for each one share of common stock
outstanding to stockholders of record on August 13, 1999. The stock split
occurred on August 27, 1999 in conjunction with the Merger and has been
reflected in the accompanying consolidated financial statements.
Westech Capital Corp. was previously a shell corporation and had no
substantial operations. Tejas Securities is the operating enterprise and is the
acquiring enterprise for financial reporting purposes. The historical financial
statements of Tejas Securities (accounting acquirer) are presented as the
historical financial statements of the combined enterprise. The results of
operations of Westech Capital Corp. (the acquired enterprise) are included in
the financial statements of the combined enterprise only from the date of
acquisition.
The equity of Tejas Securities is presented as the equity of the combined
enterprise giving effect to the minority interest in Tejas Securities at August
27, 1999, however, the common stock account of Tejas Securities has been
adjusted to reflect the par value of the outstanding stock of Westech Capital
Corp. after giving effect to the number of shares used in the business
combination. The difference between the common stock account of Tejas Securities
and the common stock account of Westech Capital Corp. (presented as the common
stock account of the combined enterprise) has been recorded as an adjustment
F-7
<PAGE> 58
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to additional paid in capital of the combined enterprise. For periods prior to
August 27, 1999, the equity of the combined enterprise is the historical equity
of Tejas Securities prior to the merger retroactively restated to reflect the
number of shares received in the business combination. Earnings (loss) per share
for periods prior to the business combination have been restated to reflect the
post merger number of shares outstanding.
References to the Company within the accompanying notes to the consolidated
financial statements are to Westech Capital Corp. and subsidiaries, which are
the historical amounts for Tejas Securities prior to the reverse merger.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the consolidated
accounts of the Company and its first and second tier subsidiaries, Tejas
Securities Group Holding Company, Tejas Securities Group, Inc., Tejas Securities
Group -- East, LLC and TSG Capital, LLC. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(b) Securities Transactions
Securities transactions and the related commission revenue and expense are
recorded on a trade date basis.
The Company does not carry or clear customer accounts, and all customer
transactions are executed and cleared with other brokers on a fully disclosed
basis. These brokers have agreed to maintain such records of the transaction
effected and cleared in the customers' accounts as are customarily made and kept
by a clearing broker pursuant to the requirements of Rules 17a-3 and 17a-4 of
the Securities and Exchange Commission, and to perform all services customarily
incident thereto.
(c) Investment Banking
Investment banking revenues include gains, losses, and fees, net of
syndicate expenses, arising from securities offerings in which the Company acts
as an underwriter or agent. Investment banking revenues also include fees earned
from providing merger-and-acquisition and advisory services. Investment banking
management fees are recorded on offering date, sales concessions on settlement
date, and underwriting fees at the time the underwriting is completed and the
income is reasonably determinable.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits,
certificates of deposit and money market accounts.
As of December 31, 1999, a certificate of deposit in the amount of
approximately $82,000 was pledged by the Company as security on an irrevocable
letter of credit issued in conjunction with the Atlanta office lease.
(e) 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-8
<PAGE> 59
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Estimated useful lives approximate those used for Federal income tax
purposes and range from 3 to 7 years.
(g) Repurchase and Resale Agreements
Repurchase and resale agreements are treated as financing transactions and
are carried at the amounts at which the securities will be subsequently
reacquired or resold as specified in the respective agreements. There were no
repurchase or resale agreements outstanding at December 31, 1999 or 1998.
(h) Federal Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to January 1, 1998, Tejas Securities elected to be taxed as an S
Corporation under the provisions of Subchapter S of the Internal Revenue Code.
As a result, all Federal income tax expense and liability was paid by the
shareholders of Tejas Securities for the year ended December 31, 1997. The
amounts included as income tax expense in the accompanying statements of
operations for the year ended December 31, 1997 are a result of the income
component of the Texas franchise tax which is computed at approximately 4.5% of
income before income tax expense.
(i) 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.
(j) Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company is required to implement this
standard effective with its 2001 fiscal year (after deferral by SFAS No. 137).
SFAS No. 133 addresses the accounting for derivative instruments, including
certain instruments embedded in other contracts, and for hedging activities.
Under this Statement, the Company will be required to recognize all derivative
instruments as either assets or liabilities in the statement of financial
condition and measure those at fair value. If certain conditions are met a
derivative may be specifically designated as a hedge, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-dominated
forecasted transaction. The Company does not believe that this Statement will
have a material effect on its financial position or results of operations.
The Company may invest in derivative transactions during the normal course
of business, primarily to satisfy the needs of its clients. Derivative
transactions entered into are recorded at the market value with realized or
unrealized gains and losses recognized in the statements of operations. Market
value is
F-9
<PAGE> 60
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally determined by quoted market prices for exchange-traded options. The
Company held a short position in 17,000 warrants with a market value of $61,265
as of December 31, 1999.
(k) Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, but applies Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for its stock option
plan.
(l) Marketable Securities
The Company's investments in debt and equity securities are classified as
trading securities. The Company accounts for trading securities at fair value
with unrealized gains and losses included in earnings.
(3) RECEIVABLES FROM EMPLOYEES AND STOCKHOLDERS
The Company makes advances to certain employees in months when their
commission payout does not meet a predetermined amount. As of December 31, 1999
and 1998, $251,000 and $126,499, respectively, had been advanced to employees
under this agreement. These receivables are to be repaid through reductions of
future commissions.
During 1999, the Company forgave approximately $70,000 in advances
receivable from employees. In 1998, the Company forgave approximately $135,000
in advances receivable from its Chairman of the Board and approximately $163,000
in advances receivable from employees. The amounts forgiven are included in
commission expense in the accompanying financial statements.
During 1999, the Company received a $200,000 note from an officer of the
Company. The note bears no interest and is due on demand if the officer resigns
as an employee of the Company prior to December 31, 2000. Under the terms of the
note, matured unpaid principal and interest shall bear interest at the lesser of
5.55% per annum or the maximum rate allowed by law from the earlier of December
31, 2000 or the officer's voluntary termination.
During 1999, the Company received a $50,000 note from an employee and
stockholder of the Company to supplement the employee's commission payout during
1999. The note bears interest of 8% per annum, and is due and payable on August
27, 2000. The note is secured by a stock pledge agreement for the employee's
shares issued by the Company.
The Company has notes receivable, and related interest accrued, from other
employees and related parties of the Company totaling $126,454 as of December
31, 1999. The notes have terms which either require settlement by pre-determined
dates or which allow the notes to be forgiven based on pre-determined
conditions, which are based on employee compensation arrangements.
In April 1999, the Company issued 1,006,975 shares of Tejas Securities
common stock (2,499,815 shares of the Company's common stock giving effect to
the Merger) for $704,833 in cash and subscriptions receivable to employees of
the Company. Subsequent to this issuance, the Company issued another 30,000
shares of Tejas Securities common stock (74,475 shares of the Company's common
stock giving effect to the Merger) to an employee under the terms of the April
1999 offering for $27,000. Of the 1,036,975 shares of Tejas Securities issued
under the April 1999 common stock offering, the Company collected $723,550 in
cash. The Company cancelled 1,667 shares of Tejas Securities common stock (4,138
shares of the Company's common stock giving effect to the Merger) valued at
$1,166 upon the termination of employment by an employee.
F-10
<PAGE> 61
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, the Company received a $100,000 note from an employee in
consideration for the issuance of common stock for $1 per share. The note was
not interest bearing and was originally due and payable on December 31, 1999.
This amount was recorded as a stock subscription receivable. During 1998, the
Company collected $3,737 of the subscription receivable, resulting in a balance
of $96,263 in subscription receivable as of December 31, 1998. In April 1999,
the terms of the note were restructured so that the employee could purchase the
original 100,000 shares of Tejas Securities common stock (248,250 shares of the
Company's common stock giving effect to the Merger) at the April 1999 offering
price of $0.70 per share. This restructuring resulted in the reduction of the
subscription receivable and common stock balances by $30,000. The remaining
balance was collected in 1999.
Subsequent to the April 1999 stock offering to employees, the Company
received a $50,000 and $100,000 note from two employees for 50,000 shares and
100,000 shares of Tejas Securities common stock, respectively (124,125 and
248,250 shares of the Company's common stock giving effect to the Merger). The
$50,000 note bears no interest and is due and payable on June 1, 2000. The
$100,000 note bears no interest and is due in two installments, beginning with a
$25,000 payment on October 1, 1999 and the remaining $75,000 on August 23, 2001.
The first installment of $25,000 was collected in 1999. The balance of $125,000
for the two notes is included in minority interest in the accompanying
consolidated financial statements. Both notes are secured by stock pledge
agreements for the shares issued by Tejas Securities. Furthermore, the Company
has recognized additional subscriptions receivable on Tejas Securities common
stock in the amount of $1,168 related to an additional individual, which is
included in minority interest in accompanying consolidated financial statements.
(4) MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED
At December 31, 1999 and 1998, marketable securities owned and sold, not
yet purchased consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
SOLD, SOLD,
NOT YET NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
State and municipal obligations.......... $ 28,761 18,475 $ -- --
Corporate bonds.......................... 3,582,228 30,480 1,238,167 --
Equity securities........................ 2,596,759 77,720 301,257 --
Options and warrants..................... -- 61,265 -- --
---------- ------- ---------- --------
$6,207,748 187,940 $1,539,424 --
========== ======= ========== ========
</TABLE>
(5) OTHER INVESTMENTS
Other investments may include marketable equity securities and
non-marketable securities, including those of private companies, investment
partnerships and other venture capital interests. Other investments recorded
under the equity method of accounting are based on the degree of control and
percentage ownership interest, whereby the carrying amount of the investment is
adjusted to recognize the Company's share of the earnings or losses. Other
investments at December 31, 1999 represent the Company's investment in TSG
Capital, LLC (the "General Partner") in the amount of $700,088, net advances of
$116,004 and contributed capital of $116,161.
In April 1999, certain owners and directors of the Company, established TSG
Capital, LLC, a Texas limited liability company, for the purpose of acting as
general partner of TSG Internet Fund I, LTD. (the "Fund"), a Texas limited
partnership. In addition to their investment in the General Partner, five
F-11
<PAGE> 62
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders and/or directors invested as limited partners in the Fund. Their
combined contributions were $820,520.
TSG Capital, LLC acts as the general partner of the Fund and has no other
operations. Its managers and principal executive officers include two officers
of the Company. The General Partner receives a management fee equal to .375% of
the average monthly net asset value of the Fund after the end of a fiscal
quarter. In addition, the General Partner receives a performance fee equal to
20% of the annual net profits of the Fund after the end of each fiscal year.
These fees are in turn paid to the Company in exchange for providing services to
the General Partner for investment management, compliance, accounting and
reporting. On December 28, 1999, the Company purchased TSG Capital, LLC for
$50,000 through the conversion of liabilities owed to the Company by TSG
Capital, LLC. TSG Capital, LLC distributed the equity interests of the former
owners of TSG Capital, LLC totaling $50,000. In addition, the Company received a
capital contribution from the former owners of TSG Capital, LLC in the amount of
$116,161 in conjunction with the purchase. Of this amount, $94,613 in included
as contributed capital in the consolidated financial statements, with the
remaining $21,549 included in the minority interest in the consolidated
financial statements.
TSG Capital, LLC's ownership interest in the Fund was approximately 15% of
the total equity of the Fund. Due to the degree of control of the Fund exercised
by the General Partner, the Company accounts for its ownership using the equity
method. The Company recognized $734,154 of income during 1999 from the Fund
comprised of management fees of $34,066 and a performance fee of $700,088, which
is included in other income in the consolidated statements of operations. The
Company converted the $700,088 performance fee to an additional general partner
equity ownership in the Fund as of December 31, 1999 as disclosed in the summary
of non-cash transactions in the consolidated statements of cash flows.
The Fund engaged the Company to solicit subscriptions for the initial
$2,500,000 private placement of limited partnership interests in the Fund. In
exchange for acting as the placement agent, the Company received a placement
agent fee equal to 5% of the total initial capital contributions to the Fund.
The total placement agent fee equaled $136,025 and was paid in May 1999.
Summary condensed financial information for the Fund as of and for the
period ended December 31, 1999 follows:
<TABLE>
<S> <C>
Total assets............................................ $8,819,000
==========
Total liabilities....................................... $2,465,000
==========
Partners' capital....................................... $6,354,000
==========
Total revenue........................................... $3,697,000
==========
Net income.............................................. $2,800,000
==========
</TABLE>
F-12
<PAGE> 63
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Furniture and equipment..................................... $ 374,463 $191,939
Leasehold improvements...................................... 66,663 63,456
--------- --------
441,126 255,395
Accumulated depreciation.................................... (117,845) (46,512)
--------- --------
$ 323,281 $208,883
========= ========
</TABLE>
(7) SUBORDINATED DEBT
The Company had $1,000,000 and $500,000 in debt subordinated to claims of
general creditors as of December 31, 1999 and 1998, respectively. The
subordinated debt is due November 1, 2001 and bears interest at 11.5% and is
owed to a director of the Company. Interest is paid monthly. As of December 31,
1999 and 1998, the Company paid $90,582 and $26,355, respectively, in interest.
As a condition of the loan agreements, Tejas Securities issued to the lender
warrants to purchase 112,500 shares of common stock of Tejas Securities (279,281
shares of the Company's common stock giving effect to the Merger) in 1998 and
additional 112,500 shares (279,281 shares of the Company's common stock giving
effect to the Merger) in 1999. The warrants were exercisable at a price of $2.65
per share of common stock ($1.07 giving effect to the merger) and expired on
November 12, 2003. As of December 31, 1999, the warrants were cancelled by Tejas
Securities' board of directors prior to December 31, 1999 and subsequently
replaced with the Company's options with an effective date of January 1, 2000.
The options were granted outside of the Company's stock option plan adopted in
1999 as the warrants were originally granted in conjunction with the
subordinated debt. This transaction is being accounted for as a non-substantive
exchange and the options are reflected as outstanding for computing diluted
earnings per share for the year ended December 31, 1999.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are
carried at market value or at amounts which, because of their short-term nature
or because they carry market rates of interest, approximate current fair value.
The Company's short-term borrowings and subordinated debt, if recalculated based
on current interest rates, would not significantly differ from the amounts
recorded at December 31, 1999 and 1998.
(9) INCOME TAXES
The Company files a consolidated tax return. Income tax expense (benefit)
consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Federal
Current................................................... $1,941,198 $ --
Deferred.................................................. 124,414 (178,500)
State....................................................... 135,986 14,600
---------- ---------
$2,201,598 $(163,900)
========== =========
</TABLE>
F-13
<PAGE> 64
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of expected income tax expense (benefit) (computed by
applying the statutory income tax rate of 34% to income (loss) before income tax
expense (benefit) and minority interest) to total tax expense (benefit) in the
accompanying consolidated statements of operations follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Expected federal income expense (benefit)................... $1,916,657 $(190,815)
Meals and entertainment..................................... 84,634 34,325
State income tax............................................ 135,986 14,600
Other, net.................................................. 64,321 (22,010)
---------- ---------
$2,201,598 $(163,900)
========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ -- $145,700
Accrued expenses.......................................... 15,364 --
Other..................................................... 44,879 32,800
------- --------
Gross deferred tax assets................................. 60,243 178,500
Valuation allowance....................................... -- --
------- --------
Net deferred tax asset...................................... 60,243 178,500
------- --------
Deferred tax liabilities:
Property and equipment.................................... (291) --
Other..................................................... (5,866) --
Total gross deferred tax liability................ (6,157) --
------- --------
Net deferred tax asset............................ $54,086 $178,500
======= ========
</TABLE>
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 Company will realize the benefits of these deductible
differences net of the existing valuation allowances at December 31, 1999 and
1998.
(10) PROFIT SHARING AND STOCK OPTION PLANS
Profit Sharing Plan
In January 1997, Tejas Securities instituted a profit sharing plan under
section 401(k) of the Internal Revenue Code. The plan allows all employees who
are over 21 years old to defer a predetermined portion of their compensation for
federal income tax purposes. Contributions by Tejas Securities are
discretionary. For the years ended December 31, 1998 and 1997, Tejas Securities
made approximately $84,000 and $7,000, respectively, of contributions to the
plan. No contributions were made for 1999.
F-14
<PAGE> 65
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
Tejas Securities had a stock option plan for employees, which was rescinded
on October 26, 1999. Under the plan, Tejas Securities had agreed to sell stock
to employees at specified prices. As provided by SFAS No. 123, Tejas Securities
elected to continue to apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans.
During 1995, options for up to 2 percent of total shares issued and
outstanding of Tejas Securities were granted for employees who met certain
requirements for two years. In addition, employees who met certain other
requirements for two years could purchase up to 5 percent of the total shares
issued and outstanding. One employee exercised the options in 1997, and
purchased 80,000 shares of Tejas Securities common stock (198,600 shares of the
Company's common stock giving effect to the Merger). No compensation cost was
recognized for the options granted.
During 1996, two employees were granted options, vesting in 1997, to
purchase up to 2 percent and 1 percent of total shares issued and outstanding of
Tejas Securities. The option for 1 percent was exercised in 1997 and resulted in
the purchase of 40,000 shares of Tejas Securities common stock (99,300 shares of
the Company's common stock giving effect to the Merger). The other option was
revoked by the employee upon delivery of stock by a stockholder. No compensation
cost was recognized for the options granted.
During 1997, three employees were granted options, vesting in 1997, to
purchase up to 5 percent, 2.5 percent and 1 percent, respectively, of the total
shares issued and outstanding of Tejas Securities on the grant date. Two of the
options were fully exercised during 1997, resulting in the purchase of 140,000
shares of Tejas Securities common stock (347,550 shares of the Company's common
stock giving effect to the Merger). For the remaining option, one-half of the 5
percent option (or 2.5 percent) was exercised resulting in the purchase of
100,000 shares of Tejas Securities common stock (248,250 shares of the Company's
common stock giving effect to the Merger). The remaining options totaled 100,000
shares of Tejas Securities common stock (248,250 shares of the Company's common
stock giving effect to the Merger) and were forfeited in January 1999. An
additional option to purchase 119,946 shares of Tejas Securities common stock
(297,766 shares of the Company's common stock giving effect to the Merger) was
issued to an employee and forfeited during 1997. No compensation cost was
recognized for the options granted. During 1998, no options were exercised, and
no new options were granted.
During 1999, options totaling 300,000 shares of Tejas Securities common
stock (744,750 shares of the Company's common stock giving effect to the Merger)
were granted to employees. The purchase price was an agreed upon purchase price
of $1 per share ($0.40 giving effect to the Merger). The options were not
exercised in 1999 and were cancelled by Tejas Securities' board of directors
prior to December 31, 1999 and subsequently replaced with the Company's options
with substantially the same terms and an effective date of January 1, 2000. The
options were granted outside of the Company's stock option plan adopted in 1999
as they were originally granted under Tejas Securities' option plan. This
transaction is being accounted for as a non-substantive exchange and the options
were reflected as outstanding for computing diluted earnings per share for the
year ended December 31, 1999.
The Company established the Westech Capital Corp. 1999 Stock Option Plan
("the 1999 Plan") for employees, directors and consultants of the Company and
its subsidiaries on October 15, 1999. Under the 1999 Plan, the Company may grant
up to 3,000,000 shares of the Company's common stock through incentive stock
options or nonqualified stock options. The exercise price of each incentive
stock option is determined by the Option Committee of the Company, and shall not
be less than 100% of the fair market value of the stock on the grant date.
Incentive stock options awarded to ten-percent owners of the Company's common
stock shall not have an exercise price of less than 110% of the fair market
value of the stock on the grant date. Incentive stock options may only be
granted to employees of the Company or a subsidiary.
F-15
<PAGE> 66
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options become exercisable as determined at the date of the grant by the
Option Committee or the Board, in the case of non-employee directors. No option
under the 1999 Plan shall be exercisable after the expiration of ten years from
the date of the grant. Options granted to a ten-percent owner of the Company
shall not be exercisable after the expiration of five years from the date of the
grant. The aggregate fair market value of stock purchased under the 1999 Plan by
an employee during any calendar year shall not exceed $100,000. In the event
that the purchased stock exceeds $100,000, the excess amount shall constitute a
nonqualified stock option.
During 1999, options totaling 1,425,000 shares were granted to employees.
The options vest ratably over two years, and expire five years from the date of
the grant. The purchase price of the common stock ranges from $2.00 to $2.20 per
share. As there was no market for the Company's stock, fair value was determined
by the Board of Directors. No options were exercised in 1999.
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies APB Opinion No. 25, in accounting for its stock option plans. No cost
from stock-based compensation awards was recognized in 1999, 1998 and 1997. If
the Company had elected to recognize compensation cost of options granted based
on the fair value at the grant dates, consistent with SFAS No. 123, net income
(loss) and earnings (loss) per share would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Net income (loss) as reported
(Pro forma for 1997 for income tax effect) for
basic......................................... $3,138,343 $(397,322) $316,035
Net income (loss) as reported
(Pro forma for 1997 for income tax effect) for
diluted....................................... 3,435,628 (397,322) 316,035
Pro forma net income (loss) for basic.............. 3,053,589 (397,322) 308,035
Pro forma net income (loss) for diluted............ 3,350,874 (397,322) 308,035
Earnings (loss) per share as reported:
Basic............................................ $ 0.25 $ (0.04) $ 0.03
Diluted.......................................... $ 0.22 $ (0.04) $ 0.03
Pro forma earnings (loss) per share:
Basic............................................ $ 0.24 $ (0.04) $ 0.03
Diluted.......................................... $ 0.22 $ (0.04) $ 0.03
</TABLE>
The fair value of the options used to compute the pro forma amounts is
estimated using the Black Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................... 5.75% 5.75% 7.25%
Expected holding period................................... 3 years 3 years 3 years
Expected volatility....................................... .001 .001 .001
Expected dividend yield................................... 0.00% 0.00% 8.00%
</TABLE>
A summary of the Company's stock option activity and warrant activity, and
related information for the years ended December 31, follows. As of December 31,
1999, Tejas Securities' board of directors cancelled options to purchase 300,000
shares of the Tejas Securities' common stock (744,750 shares of the Company's
common stock giving effect to the merger) and warrants to purchase 225,000
shares of Tejas Securities' common stock (558,562 shares of the Company's common
stock giving effect to the merger). Options to purchase 1,303,312 shares of the
Company's common stock were subsequently reissued by the
F-16
<PAGE> 67
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company on January 1, 2000 as described in Note 18. Stock option and warrant
activity associated with the subordinated debt prior to August 27, 1999 has been
adjusted giving effect to the Merger.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ --------------------
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........................... 248,250 $0.20 248,250 $0.20 297,900 $0.04
Granted.......................... 2,169,750 1.48 -- 0.00 1,141,816 0.23
Exercised........................ -- 0.00 -- 0.00 (893,700) 0.20
Forfeited........................ (248,250) 0.20 -- 0.00 (297,766) 0.15
Cancelled........................ (744,750) 0.40 -- 0.00 -- 0.00
Outstanding -- end of year....... 1,425,000 $2.04 248,250 $0.20 248,250 $0.20
========= ===== ======= ===== ========= =====
Exercisable -- end of year....... 475,000 $2.04 248,250 $0.20 248,250 $0.20
========= ===== ======= ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
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............................ 279,281 $1.07 -- $0.00 -- $0.00
Granted........................... 279,281 1.07 279,281 1.07 -- 0.00
Cancelled......................... (558,562) 1.07 -- -- -- 0.00
Outstanding -- end of year........ -- $0.00 279,281 $1.07 -- $0.00
======== ===== ======= ===== ======== =====
Exercisable -- end of year........ -- $0.00 279,281 $1.07 -- $0.00
======== ===== ======= ===== ======== =====
</TABLE>
The weighted average fair value of Company stock options, calculated using
the Black Scholes option pricing model, granted during the year ended December
31, 1999 is $0.28 per option.
The following table summarizes the Company's options outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
---------------------------------- ------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
-------------- --------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$2.00................................. 1,175,000 4.8 years $2.00 391,667 $2.00
$2.20................................. 250,000 4.8 years $2.20 83,333 $2.20
--------- --------- ----- ------- -----
Total....................... 1,425,000 475,000
========= =======
</TABLE>
(11) EARNINGS (LOSS) PER SHARE
After the completion of the Merger, the Company had 12,537,218 shares of
common stock issued and outstanding. Prior to the Merger, the Company completed
a stock split in the form of a stock dividend by issuing 2.28767 new shares of
the Company's common stock for each one share of the Company's common stock
outstanding to stockholders of record on August 13, 1999, resulting in 599,981
shares outstanding immediately following the stock split. Under the terms of the
Merger, stockholders of Tejas Holding exchanged their shares for shares of the
Company at a ratio of 2.4825 to one. The effect of this
F-17
<PAGE> 68
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange was to issue an additional 11,937,237 shares of the Company's stock in
exchange for 100% of the outstanding stock of Tejas Holding.
Earnings (loss) per share for the periods prior to the Merger have been
restated to reflect the number of acquired shares received by the accounting
acquirer (Note 1). Earnings per share information for 1997 is based on a pro
forma calculation as if the Company had been a C Corporation for that year and
includes a provision for income taxes for purposes of earnings per share.
Basic earnings (loss) per share are based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings (loss) per
share reflects dilution from all contingently issuable shares, including options
issued during 1999. Contingently issuable shares are not included in the
weighted average number of shares when the inclusion would increase net income
per share or decrease the loss per share. The following calculations give effect
to the Merger on August 27, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss).................................... $ 3,138,343 $ (397,322) $ 316,035
Weighted average shares outstanding.................. 12,501,191 10,664,369 9,432,783
Basic earnings (loss) per share........................ $ 0.25 $ (0.04) $ 0.03
=========== =========== ==========
Diluted earnings (loss) per share:
Net income (loss).................................... $ 3,138,343 $ (397,322) $ 316,035
Income impact of assumed conversion of subsidiary
stock and recognition of minority interest
income.......................................... 297,285 -- --
Income available to common stockholders after
assumed conversions............................. $ 3,435,628 $ (397,322) $ 316,035
=========== =========== ==========
Weighted average shares outstanding.................... 12,501,191 10,664,369 9,432,783
Effect of dilutive securities:
Warrants.......................................... -- -- --
Options........................................... 212,840 -- --
Assumed conversion of subsidiary stock............ 2,352,036 -- --
Application of treasury stock method to
subscriptions
receivable...................................... 225,898 -- --
Weighted average shares outstanding.................... 15,291,965 10,664,369 9,432,783
=========== =========== ==========
Diluted earnings (loss) per share...................... $ 0.22 $ (0.04) $ 0.03
=========== =========== ==========
</TABLE>
Options to purchase 1,425,000, 248,250 and 248,250 shares of the Company's
common stock at December 31, 1999, 1998 and 1997 were not included in the
computation of diluted earnings (loss) per share because the options' exercise
price was greater than the market value per share during the respective period.
Warrants to purchase 279,281 shares of the Company's common stock as of December
31, 1998 were not included in the computation of diluted earnings (loss) per
share because the warrants' exercise price was greater than the market value per
share of common stock for the period.
The Company has included the dilutive effect of 1,303,312 options issued by
the Company on January 1, 2000 as a non-substantive exchange of Tejas
Securities' options and warrants, which were cancelled by the board of directors
as of December 31, 1999. Of the 1,303,312 options issued by the Company, 212,840
options are included as dilutive securities on a weighted average basis. Tejas
Securities' board of directors cancelled 744,750 options and 558,562 warrants.
For purposes of computing diluted earnings per share, this transaction is being
accounted for as a non-substantive exchange at December 31, 1999.
The Company has included the dilutive effect of shares of Tejas Securities'
common stock that are convertible into the Company's common stock. Tejas
Securities has 965,333 shares of its common stock issued and outstanding at
December 31, 1999 that are convertible into common stock of the Company at
F-18
<PAGE> 69
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the ratio of 2.4825 to one (2,396,439 shares). Of the 2,396,439 shares of Tejas
Securities common stock that are convertible into common stock of the Company,
2,352,036 shares are included as dilutive securities on a weighted average
basis. In addition, the Company has included the dilutive effect of Tejas
Securities' subscriptions receivable based on the treasury stock method. The
Company recognizes the incremental effect on its shares outstanding assuming the
subscriptions receivable are fully paid for and exchanged for the Company's
common stock versus the Company repurchasing those shares using a weighted
average market price for the year.
(12) OFF STATEMENT OF FINANCIAL CONDITION RISK
The Company is responsible to its clearing broker for payment of all
transactions executed both on its behalf and on behalf of its customers.
Therefore, the Company is exposed to off statement of financial condition risk
in the event a customer cannot fulfill its commitment and the clearing broker
must purchase or sell a financial instrument at prevailing market prices. The
Company and its clearing broker seek to control risk associated with customer
transactions through daily monitoring to assure margin collateral is maintained
under regulatory and internal guidelines.
The Company's receivable from clearing broker represents amounts on deposit
with Schroder & Co., Inc. The Company is exposed should Schroder & Co., Inc. be
unable to fulfill its obligations for securities transactions. Schroder & Co.,
Inc. requires the Company to maintain $100,000 in its account at all times.
The Company deposits its cash with financial institutions. Periodically
such balances exceed applicable FDIC insurance limits.
(13) INDUSTRY SEGMENT DATA
The Company has two reportable segments: brokerage services and investment
banking. The primary operating segment, brokerage services, includes sales,
trading and market-making activities of the Company and encompasses both retail
and institutional customer accounts. These segments require the commitment of
significant human capital and financial resources, as well as industry specific
skills. The investment banking segment participates in underwriting of corporate
securities as managing underwriter and as a syndicate member. Income associated
with other investments accounted for under the equity method is included in
other segment activity in 1999.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
The following table presents segment revenues, profits and assets for
the year ended December 31, 1999.
<TABLE>
<CAPTION>
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
----------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers........ $29,110,979 925,616 734,154 30,770,749
Interest revenue........................ 178,935 -- -- 178,935
Interest expense........................ 614,004 -- -- 614,004
Depreciation and amortization........... 74,506 -- -- 74,506
Segment profit.......................... 4,156,319 765,835 715,072 5,637,226
Segment assets.......................... 15,237,849 -- 932,253 16,170,102
Capital expenditures.................... 202,914 -- -- 202,914
</TABLE>
F-19
<PAGE> 70
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents segment revenues, profits and assets for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
---------- ---------- ----- ---------
<S> <C> <C> <C> <C>
Revenues from external customers.................... $7,022,776 2,584,770 -- 9,607,546
Interest revenue.................................... 699,795 -- -- 699,795
Interest expense.................................... 65,427 -- -- 65,427
Depreciation and amortization....................... 37,995 115 -- 38,110
Segment profit (loss)............................... (1,892,566) 1,331,344 -- (561,222)
Segment assets...................................... 3,954,309 1,267 -- 3,955,576
Capital expenditures................................ 186,554 1,382 -- 187,936
</TABLE>
The following table presents segment revenues, profits and assets for the
year ended December 31, 1997.
<TABLE>
<CAPTION>
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
---------- ---------- ----- ---------
<S> <C> <C> <C> <C>
Revenues from external customers............ $5,558,810 752,554 -- 6,311,364
Interest revenue............................ 185,545 -- -- 185,545
Interest expense............................ 97,219 -- -- 97,219
Depreciation and amortization............... 39,834 -- -- 39,834
Segment profit.............................. 225,381 267,662 -- 493,043
Segment assets.............................. 1,975,165 -- -- 1,975,165
Capital expenditures........................ 140,933 -- -- 140,933
</TABLE>
(14) LEASE COMMITMENTS
The Company leases its office facilities and certain office equipment under
operating leases. The future minimum payments due under these operating leases
as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.................................................... $1,134,000
2001.................................................... 1,059,000
2002.................................................... 785,000
2003.................................................... 601,000
2004.................................................... 492,000
Thereafter.............................................. 1,039,000
----------
$5,110,000
==========
</TABLE>
Rent expense amounted to approximately $885,000, $515,000 and $265,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
(15) CONTINGENCIES
In June 1999, Starlight Entertainment, Inc. (Starlight), submitted a claim
in an arbitration proceeding for damages in the amount of $6,800,000 for the
failed underwriting of a public offering of Starlight's common stock. The amount
of Starlight's claim is based upon the gross receipts that were expected from
the proposed public offering less the underwriting commission plus attorney's
fees. The Company's counsel has reviewed the complaint and is preparing an
answer with respect to the arbitration. Management does not believe this matter
will have a significant adverse effect on the consolidated financial condition
or results of operations of the Company.
F-20
<PAGE> 71
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. It is management's opinion that
liabilities, if any, arising from these actions would not have a significant
adverse effect on the consolidated financial condition or results of operations
of the Company.
(16) NET CAPITAL REQUIREMENTS
The Company, as a registered fully licensed broker and dealer in
securities, is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1). Under this rule, the Company is required to maintain
a minimum "net capital" to satisfy rule 15c3-1. At December 31, 1999, the
minimum "net capital" requirement for the Company was $250,000. "Net capital" at
December 31, 1999 aggregated $2,813,049.
(17) RELATED PARTY TRANSACTIONS
The Company engaged a director to act as a consultant for the Company on a
month to month basis beginning in October 1999. Under the terms of the
agreement, the Company will compensate the consultant for professional services
rendered at a rate of $12,500 per month, plus out of pocket expenses. As of
December 31, 1999, the total amount paid for services was $29,435.
On September 30, 1997, the Company entered into a sale-leaseback
transaction with a related party, whereby the Company sold furniture and
fixtures for their book value of approximately $204,000. As part of this
transaction, the Company agreed to lease the furniture and fixtures commencing
on October 1, 1998 through September 30, 2000. Payments of $6,373 per month are
due under the lease agreement and are included in the above schedule.
Also see Note 7 for related party subordinated debt.
(18) SUBSEQUENT EVENT
On January 1, 2000, the Company issued options to purchase 558,562 shares
of the Company's common stock to the holder of the subordinated debt, who is
also a director of the Company. The purchase price of the shares is $1.07 per
share and expires four years from the date of the grant. In addition, the
Company issued options to purchase 744,750 shares of the Company's common stock
to a director and employees of the Company at $0.40 per share. Of the options
granted, 620,625 options vest immediately and expire five years from the date of
the grant. The remaining 124,125 options vest immediately and expire June 1,
2000. All of the options were intended to constitute non-qualified stock
options, and are not included under the 1999 Plan. These transactions are being
accounted for as a non-substantive exchange of the Tejas Securities' warrants
and options outstanding at the Merger date as disclosed in Notes 7, 10 and 11.
F-21
<PAGE> 72
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1,123,413 $ 2,732,175
Receivable from clearing broker, partially restricted....... 6,478,162 4,640,052
Receivables from employees and stockholders................. 675,960 627,454
Securities owned, at market value........................... 7,563,189 6,207,748
Other investments........................................... 788,104 932,253
Furniture and equipment, net................................ 333,392 323,281
Deferred tax asset, net..................................... 54,086 54,086
Prepaid expenses and other assets........................... 505,976 597,053
----------- -----------
Total assets...................................... $17,522,282 $16,114,102
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities.... $ 3,625,412 $ 2,905,020
Securities sold, not yet purchased.......................... 471,407 187,940
Payable to clearing broker.................................. 5,759,808 6,196,059
Subordinated debt........................................... 1,000,000 1,000,000
----------- -----------
Total liabilities................................. 10,856,627 10,289,019
----------- -----------
Minority interest in subsidiary............................. 1,158,972 976,725
Stockholders' equity:
Common stock, $0.001 par value 50,000,000 shares
authorized;
12,537,218 issued at March 31, 2000 and December 31,
1999.................................................. 12,537 12,537
Additional paid in capital................................ 1,669,473 1,669,473
Retained earnings......................................... 3,824,673 3,166,348
----------- -----------
Total stockholders' equity........................ 5,506,683 4,848,358
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity........ $17,522,282 $16,114,102
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 73
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Commissions............................................... $ 8,516,778 $ 4,981,533
Underwriting and investment banking income................ 1,071,165 --
Net dealer inventory and investment income, net of trading
interest expense of $544,272 and $18,585,
respectively........................................... 70,390 1,795,021
Other income.............................................. 45,270 8,771
----------- -----------
Total revenues.................................... 9,703,603 6,785,325
----------- -----------
Expenses:
Commissions, employee compensation and benefits........... 6,311,019 2,646,986
Clearing and floor brokerage.............................. 377,329 98,967
Communications and occupancy.............................. 477,611 269,800
Professional fees......................................... 368,405 67,110
Interest.................................................. 28,671 14,178
Other..................................................... 767,196 356,503
----------- -----------
Total expenses.................................... 8,330,231 3,453,544
----------- -----------
Income before income tax expense and minority
interest........................................ 1,373,372 3,331,781
Income tax expense.......................................... 532,800 1,309,424
----------- -----------
Income before minority interest................... 840,572 2,022,357
Minority interest........................................... 182,247 --
----------- -----------
Net income........................................ $ 658,325 $ 2,022,357
=========== ===========
Earnings per share:
Basic..................................................... $ 0.05 $ 0.18
=========== ===========
Diluted................................................... $ 0.05 $ 0.18
=========== ===========
Weighted average shares outstanding:
Basic..................................................... 12,537,218 11,149,284
=========== ===========
Diluted................................................... 15,731,351 11,149,284
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 74
WESTECH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 658,325 $ 2,022,357
Adjustments to reconcile net income to net cash provided
(used )by operating activities:
Depreciation and amortization expense.................. 23,976 14,016
Minority interest...................................... 182,247 --
Decrease in payable to clearing broker, net of
receivable from clearing broker....................... (2,274,361) (445,095)
Decrease (increase) in receivable from employees and
stockholders.......................................... (48,506) 29,335
Increase in securities owned........................... (1,355,441) (3,721,607)
Decrease in other investments.......................... 144,149 --
Decrease in prepaid expenses other assets.............. 91,077 202,603
Increase in accounts payable, accrued expenses and
other liabilities..................................... 720,392 2,042,820
Increase in securities sold, not yet purchased......... 283,467 67,500
----------- -----------
Net cash provided (used) by operating
activities...................................... (1,574,675) 211,929
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment....................... (34,087) (12,421)
----------- -----------
Net cash used by investing activities............. (34,087) (12,421)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock................................ -- (172,114)
Subscription collected.................................... -- 1,023
----------- -----------
Net cash used by financing activities............. -- (171,091)
----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... (1,608,762) 28,417
Cash and cash equivalents at beginning of period............ 2,732,175 201,312
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,123,413 $ 229,729
=========== ===========
Supplemental disclosures:
Interest paid............................................. $ 450,485 $ 32,763
Taxes paid................................................ $ 700,000 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 75
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) GENERAL
Westech, a New York corporation, is a holding company whose primary
operating subsidiary is Tejas Securities Group, Inc., a Texas corporation
("Tejas Securities"). Tejas Securities is engaged in the business of providing
brokerage and related financial services to institutional and retail customers
nationwide.
Pursuant to an Agreement and Plan of Merger by and among Westech, Tejas
Securities, Tejas Securities Group Holding Company, a Texas corporation ("Tejas
Holding"), and Westech Merger Sub, Inc., a Delaware corporation ("Merger Sub"),
Merger Sub was merged (the "Merger") with and into Tejas Holding and Tejas
Holding (which owns approximately 81% of Tejas Securities) became a wholly-owned
subsidiary of Westech. Under the terms of the Merger, the shareholders of Tejas
Holding exchanged their shares for shares of Westech at a ratio 2.4825 to one.
The former shareholders of Tejas Holding currently own 95.21% of the issued and
outstanding common stock of Westech, $.001 par value per share.
Tejas Securities is the operating enterprise and the acquiring enterprise
for financial reporting purposes. The historical financial statements of Tejas
Securities (accounting acquirer) are presented as the historical financial
statements of the combined enterprise. The results of operations of Westech (the
acquired enterprise) are included only from the date of acquisition.
The accompanying unaudited consolidated financial statements of Westech,
and subsidiaries (collectively referred to as the "Company") have been prepared
in accordance with the instructions for Form 10Q and, therefore, do not include
all the disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments (consisting of only normal
recurring adjustments) that are necessary in the opinion of management for a
fair presentation of the interim financial statements have been included.
The interim financial information should be read in conjunction with
Westech's 1999 Form 10-K filed on March 23, 2000 (as amended on July 17, 2000).
The results of operations for the three months ended March 31, 2000 are not
necessary indicative of the results of the year ending December 31, 2000.
During the second quarter of 2000, Westech anticipates submitting to its
shareholders a proposal to change its state of incorporation from New York to
Delaware. Westech does not expect the reincorporation to have any material
effects on it or its subsidiaries.
Tejas Securities' business is conducted out of its primary office in
Austin, Texas and a branch office in Atlanta, Georgia. Tejas Securities
anticipates expanding its operations in the year 2000 with an additional branch
in Houston, Texas. Tejas Securities moved its primary office in the first
quarter of 2000 to 2700 Via Fortuna, Suite 400, Austin, Texas 78746.
Tejas Securities is a registered broker-dealer and investment advisor
offering brokerage services to retail and institutional customers as well as
investment banking services. Through our brokerage service, we provide
market-making activities in stocks traded on the Nasdaq and other OTC
securities, execution services in exchange listed securities, high quality
investment research to institutional and retail customers and asset management
services.
(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
F-25
<PAGE> 76
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
within the securities market. The net capital required under the Rule depends in
part upon the activities engaged in by the broker-dealer.
Tejas Securities elects to use the alternative method permitted by the
Rule, which requires it to maintain minimum net capital equal to the greater of
$250,000 or 2% of aggregate indebtedness. As of March 31, 2000, Tejas
Securities' net capital of $2,069,943 was $1,819,943 in excess of the minimum
required.
(3) EARNINGS PER SHARE
After the completion of the Merger, Westech had 12,537,218 shares of common
stock issued and outstanding. Prior to the Merger, Westech completed a stock
split in the form of a stock dividend by issuing 2.28767 new shares of Westech
common stock for each one share of Westech 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
Westech at a ratio of 2.4825 to one. The effect of this exchange was to issue an
additional 11,937,237 shares of Westech's stock in exchange for 100% of the
outstanding stock of Tejas Holding.
Earnings per share for the period prior to the Merger have been restated to
reflect the post merger number of shares outstanding.
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares, including options
issued during the three month periods ended March 31, 2000 and 1999.
Contingently issuable shares are not included in the weighted average number of
shares when the inclusion would increase net income per share or decrease the
loss per share.
Earnings per share is calculated as follows.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Basic earnings per share:
Net income................................................ $ 658,325 2,022,357
Weighted average shares outstanding....................... 12,537,218 11,149,284
Basic earnings per share.................................. $ 0.05 0.18
Diluted earnings per share:
Net income................................................ $ 658,325 2,022,357
Income impact of assumed conversion of subsidiary stock
and recognition of minority interest income........... 182,247 --
Income available to common stockholders after assumed
conversions........................................... 840,572 2,022,357
Weighted average shares outstanding......................... 12,537,218 11,149,284
Effect of dilutive securities:
Warrants.................................................. -- --
Options................................................... 555,274 --
Assumed conversion of subsidiary stock.................... 2,396,439 --
Application of treasury stock method to subscriptions
receivable............................................. 242,420 --
Weighted average shares outstanding......................... 15,731,351 11,149,284
Diluted earnings per share.................................. $ 0.05 0.18
</TABLE>
F-26
<PAGE> 77
WESTECH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants to purchase 279,281 shares of the Company's common stock at March
31, 1999 were not included in the computation of diluted earnings per share
because the warrants' exercise price was greater than the estimated market value
per share of common stock for the period. The Company has included the dilutive
effect of 1,303,312 shares of the Company's common stock at March 31, 2000 in
the computation of diluted earnings per share. Of the 1,303,312 options issued
by the Company, 555,274 options are included as dilutive securities on a
weighted average basis. Options to purchase 2,765,000 shares of the Company's
common stock at March 31, 2000 were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
estimated market value per share of common stock for the period.
The Company has included the dilutive effects of shares of Tejas
Securities' common stock that are convertible into the Company's common stock.
Tejas Securities has 965,333 shares of its common stock issued and outstanding
at March 31, 2000 that are convertible into common stock of the Company at a
ratio of 2.4825 to one (2,396,439 shares). In addition, the Company has included
the dilutive effect of Tejas Securities' subscriptions receivable based on the
treasury stock method. The Company recognizes the incremental effect on its
shares outstanding assuming the subscriptions receivable are fully paid for and
exchanged for the Company's common stock versus the Company repurchasing those
shares using a weighted average market price for the period.
(4) INDUSTRY SEGMENT DATA
Westech has two reportable segments: brokerage services and investment
banking. The primary operating segment, brokerage services, includes sales,
trading and market-making activities of Westech and encompasses both retail and
institutional customer accounts. These segments require the commitment of
significant human capital and financial resources, as well as industry specific
skills. The investment banking segment participates in underwriting of corporate
securities as managing underwriter and as a syndicate member. Income associated
with other investments accounted for under the equity method is included in
other segment activity for the three months ended March 31, 2000.
The following table presents segment revenues, profits and assets for the
three months ended March 31, 2000.
<TABLE>
<CAPTION>
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
----------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers....... $ 9,080,426 1,071,165 45,270 10,196,861
Interest revenue....................... 51,014 -- -- 51,014
Interest expense....................... 572,943 -- -- 572,943
Depreciation and amortization.......... 23,976 -- -- 23,976
Segment profit......................... 348,908 979,194 45,270 1,373,372
Segment assets......................... 16,734,178 -- 788,104 17,522,282
Capital expenditures................... 34,087 -- -- 34,087
</TABLE>
The following table presents segment revenues, profits and assets for the
three months ended March 31, 1999.
<TABLE>
<CAPTION>
INVESTMENT
BROKERAGE BANKING OTHER TOTAL
----------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers....... $ 6,319,839 -- 8,771 6,328,610
Interest revenue....................... 475,300 -- -- 475,300
Interest expense....................... 32,763 -- -- 32,763
Depreciation and amortization.......... 14,016 -- -- 14,016
Segment profit......................... 3,323,010 -- 8,771 3,331,781
Segment assets......................... 11,333,271 -- -- 11,333,271
Capital expenditures................... 12,421 -- -- 12,421
</TABLE>
F-27
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The general corporate law of New York, the jurisdiction in which Westech
Capital Corp. 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 Westech Capital Corp.'s Bylaws provide
indemnification of directors and officers under certain circumstances. In
addition, Westech Capital Corp. 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger (incorporated herein by
reference to Exhibit 1.1 to the registrant's Current
Report on Form 8-K/A filed on October 22, 1999)
3.1 -- Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 to the registrant's Registration
Statement on Form 10-12(g) (File No. 000-29235))
3.2 -- Bylaws (incorporated herein by reference to Exhibit 3.2
to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235))
4.1 -- NASD Subordinated Loan Agreement, Form SL-1, dated
October 13, 1998, between Clark N. Wilson and the Company
(incorporated herein by reference to Exhibit 4.1 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
4.2 -- NASD Subordinated Loan Agreement, Form SL-1, dated June
4, 1999, between Clark N. Wilson and the Company
(incorporated herein by reference to Exhibit 4.2 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
4.3 -- Shareholder Agreement, dated November 23, 1999, between
John Ohmstede, John Glade, Michael Hidalgo, Jon McDonald,
Britt Rodgers, Bob Sternberg, Mike Wolf, Greg Woodby and
the Company (incorporated herein by reference to Exhibit
4.3 to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235))
</TABLE>
II-1
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
4.4 -- Certificate of Incorporation (see Exhibit 3.1 above)
4.5 -- Bylaws (see Exhibit 3.2 above)
5.1+ -- Opinion of Winstead Sechrest & Minick P.C. regarding the
legality of the common stock (including the consent of
such counsel)
10.1 -- Agreement, dated June 5, 1997, with Schroder Wertheim &
Co. Incorporated (incorporated herein by reference to
Exhibit 10.1 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
10.2 -- Westech Capital Corp. 1999 Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
10.3 -- Form of Incentive Stock Option Agreement (incorporated
herein by reference to Exhibit 10.3 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235))
10.4 -- Form of Nonqualified Stock Option Agreement (incorporated
herein by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235))
10.5 -- Lease Agreement, effective as of September 30, 1999, by
and between Westech Capital Corp. and Desta Two
Partnership, Ltd. (incorporated herein by reference to
Exhibit 10.5 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
10.6 -- Employment and Confidentiality Agreement, dated as of
August 30, 1999, between Tejas Securities Group, Inc. and
Charles Mayer (incorporated herein by reference to
Exhibit 10.6 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.7 -- Employment and Confidentiality Agreement, dated as of
November 16, 1999, between Tejas Securities Group, Inc.
and Michael L. McAllister (incorporated herein by
reference to Exhibit 10.7 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999)
10.8 -- Employment and Confidentiality Agreement, dated as of
March 3, 1999, between Tejas Securities Group, Inc. and
Robert Gillette (incorporated herein by reference to
Exhibit 10.8 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.9 -- Employment and Confidentiality Agreement, dated as of
October 29, 1998, between Tejas Securities Group, Inc.
and Reed Durant (incorporated herein by reference to
Exhibit 10.9 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.10 -- Employment and Confidentiality Agreement, dated as of
January 10, 2000, between Tejas Securities Group, Inc.
and Kurt Rechner (incorporated herein by reference to
Exhibit 10.10 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.11 -- Employment and Confidentiality Agreement, dated as of
November 1, 1998, between Tejas Securities Group, Inc.
and John F. Garber (incorporated herein by reference to
Exhibit 10.11 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.12 -- Letter of Agreement, dated November 1, 1999, between
Tejas Securities Group, Inc. and Barry Williamson
regarding consulting services (incorporated herein by
reference to Exhibit 10.12 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999)
10.13* -- Promissory Note, dated June 7, 2000, between Westech
Capital Corp. and First United Bank
21.1 -- Registrant's Subsidiaries (incorporated herein by
reference to Exhibit 21.1 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999)
23.1* -- Consent of KPMG LLP
23.2+ -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1)
24.1* -- Power of attorney (included in the signature page of this
Registration Statement)
99.1 -- Articles of Incorporation of Tejas Securities Group, Inc.
(incorporated herein by reference to Exhibit 99.1 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
99.2 -- Bylaws of Tejas Securities Group, Inc. (incorporated
herein by reference to Exhibit 99.2 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235))
99.3 -- Articles of Incorporation of Tejas Securities Group
Holding Company (incorporated herein by reference to
Exhibit 99.3 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
99.4 -- Bylaws of Tejas Securities Group Holding Company
(incorporated herein by reference to Exhibit 99.4 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
99.5* -- Letter of Transmittal
</TABLE>
---------------
* Filed herewith.
+ To be filed by amendment.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Austin, State of Texas, on
the 27 day of July, 2000.
WESTECH CAPITAL CORP.
By: /s/ JAY W. VAN ERT
----------------------------------
Jay W. Van Ert
President
POWER OF ATTORNEY
We, the undersigned directors and officers of Westech Capital Corp., do
hereby constitute and appoint Jay W. Van Ert, Charles H. Mayer or Kurt J.
Rechner our true and lawful attorneys-in-fact and agents, to do any and all acts
and things in our names and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our name in the
capacities indicated below, which said attorneys and agents may deem necessary
or advisable to enable said Corporation to comply with the Securities Act of
1933 and any rules, regulations and requirements of the SEC, in connection with
this registration statement, or any registration statement for this offering
including specifically, but without limitation, power and authority to sign for
us or any of us in the names and in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto; and we do hereby ratify
and confirm all that said attorneys and agents shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN J. GORMAN Chief Executive Officer, Chairman July 27, 2000
----------------------------------------------------- of the Board
John J. Gorman
/s/ JAY W. VAN ERT President and Director July 27, 2000
-----------------------------------------------------
Jay W. Van Ert
/s/ KURT J. RECHNER Chief Financial Officer July 27, 2000
-----------------------------------------------------
Kurt J. Rechner
/s/ JOHN F. GARBER Director of Finance (Principal July 27, 2000
----------------------------------------------------- Accounting Officer)
John F. Garber
/s/ JOSEPH F. MORAN Managing Director, Vice Chairman July 27, 2000
----------------------------------------------------- and Director
Joseph F. Moran
/s/ CHARLES H. MAYER Chief Operating Officer and July 27, 2000
----------------------------------------------------- Director
Charles H. Mayer
Director , 2000
-----------------------------------------------------
Barry A. Williamson
Director , 2000
-----------------------------------------------------
Clark N. Wilson
</TABLE>
II-4
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger (incorporated herein by
reference to Exhibit 1.1 to the registrant's Current
Report on Form 8-K/A filed on October 22, 1999)
3.1 -- Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 to the registrant's Registration
Statement on Form 10-12(g) (File No. 000-29235))
3.2 -- Bylaws (incorporated herein by reference to Exhibit 3.2
to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235))
4.1 -- NASD Subordinated Loan Agreement, Form SL-1, dated
October 13, 1998, between Clark N. Wilson and the Company
(incorporated herein by reference to Exhibit 4.1 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
4.2 -- NASD Subordinated Loan Agreement, Form SL-1, dated June
4, 1999, between Clark N. Wilson and the Company
(incorporated herein by reference to Exhibit 4.2 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
4.3 -- Shareholder Agreement, dated November 23, 1999, between
John Ohmstede, John Glade, Michael Hidalgo, Jon McDonald,
Britt Rodgers, Bob Sternberg, Mike Wolf, Greg Woodby and
the Company (incorporated herein by reference to Exhibit
4.3 to the registrant's Registration Statement on Form
10-12(g) (File No. 000-29235))
4.4 -- Certificate of Incorporation (see Exhibit 3.1 above)
4.5 -- Bylaws (see Exhibit 3.2 above)
5.1+ -- Opinion of Winstead Sechrest & Minick P.C. regarding the
legality of the common stock (including the consent of
such counsel)
10.1 -- Agreement, dated June 5, 1997, with Schroder Wertheim &
Co. Incorporated (incorporated herein by reference to
Exhibit 10.1 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
10.2 -- Westech Capital Corp. 1999 Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
10.3 -- Form of Incentive Stock Option Agreement (incorporated
herein by reference to Exhibit 10.3 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235))
10.4 -- Form of Nonqualified Stock Option Agreement (incorporated
herein by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235))
10.5 -- Lease Agreement, effective as of September 30, 1999, by
and between Westech Capital Corp. and Desta Two
Partnership, Ltd. (incorporated herein by reference to
Exhibit 10.5 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
10.6 -- Employment and Confidentiality Agreement, dated as of
August 30, 1999, between Tejas Securities Group, Inc. and
Charles Mayer (incorporated herein by reference to
Exhibit 10.6 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.7 -- Employment and Confidentiality Agreement, dated as of
November 16, 1999, between Tejas Securities Group, Inc.
and Michael L. McAllister (incorporated herein by
reference to Exhibit 10.7 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999)
</TABLE>
II-5
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.8 -- Employment and Confidentiality Agreement, dated as of
March 3, 1999, between Tejas Securities Group, Inc. and
Robert Gillette (incorporated herein by reference to
Exhibit 10.8 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.9 -- Employment and Confidentiality Agreement, dated as of
October 29, 1998, between Tejas Securities Group, Inc.
and Reed Durant (incorporated herein by reference to
Exhibit 10.9 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.10 -- Employment and Confidentiality Agreement, dated as of
January 10, 2000, between Tejas Securities Group, Inc.
and Kurt Rechner (incorporated herein by reference to
Exhibit 10.10 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.11 -- Employment and Confidentiality Agreement, dated as of
November 1, 1998, between Tejas Securities Group, Inc.
and John F. Garber (incorporated herein by reference to
Exhibit 10.11 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999)
10.12 -- Letter of Agreement, dated November 1, 1999, between
Tejas Securities Group, Inc. and Barry Williamson
regarding consulting services (incorporated herein by
reference to Exhibit 10.12 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999)
10.13* -- Promissory Note, dated June 7, 2000, between Westech
Capital Corp. and First United Bank
21.1 -- Registrant's Subsidiaries (incorporated herein by
reference to Exhibit 21.1 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999)
23.1* -- Consent of KPMG LLP
23.2+ -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1)
24.1* -- Power of attorney (included in the signature page of this
Registration Statement)
99.1 -- Articles of Incorporation of Tejas Securities Group, Inc.
(incorporated herein by reference to Exhibit 99.1 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
99.2 -- Bylaws of Tejas Securities Group, Inc. (incorporated
herein by reference to Exhibit 99.2 to the registrant's
Registration Statement on Form 10-12(g) (File No.
000-29235))
99.3 -- Articles of Incorporation of Tejas Securities Group
Holding Company (incorporated herein by reference to
Exhibit 99.3 to the registrant's Registration Statement
on Form 10-12(g) (File No. 000-29235))
99.4 -- Bylaws of Tejas Securities Group Holding Company
(incorporated herein by reference to Exhibit 99.4 to the
registrant's Registration Statement on Form 10-12(g)
(File No. 000-29235))
99.5* -- Letter of Transmittal
</TABLE>
---------------
* Filed herewith.
+ To be filed by amendment.
II-6
