<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
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WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
NEW YORK 33-37534-NY 13-3577716
---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
2700 Via Fortuna, Suite 400, Austin, Texas 78746
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 306-8222
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 31, 2000, the
Registrant had the following number of shares of common stock, $0.001 par value
per share, outstanding: 12,661,343.
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE> 3
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
ASSETS (UNAUDITED) 1999
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 738,151 2,732,175
Receivable from clearing broker, partially restricted 3,385,397 4,640,052
Receivables from employees and stockholders 429,015 627,454
Securities owned, at market value 4,479,346 6,207,748
Other investments -- 932,253
Furniture and equipment, net 569,299 323,281
Deferred tax asset, net 22,016 54,086
Prepaid expenses and other assets 1,829,358 597,053
--------------- ---------------
Total assets $ 11,452,582 16,114,102
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,421,672 2,905,020
Securities sold, not yet purchased 60,000 187,940
Payable to clearing broker 4,373,026 6,196,059
Notes payable 1,500,000 --
Subordinated debt 1,000,000 1,000,000
--------------- ---------------
Total liabilities 8,354,698 10,289,019
--------------- ---------------
Minority interest in subsidiary 609,331 976,725
Stockholders' equity:
Common stock, $0.001 par value
50,000,000 shares authorized; 12,661,343 and
12,537,218 issued at September 30, 2000 and
December 31, 1999, respectively 12,661 12,537
Additional paid in capital 1,924,027 1,669,473
Retained earnings 551,865 3,166,348
--------------- ---------------
Total stockholders' equity 2,488,553 4,848,358
--------------- ---------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 11,452,582 16,114,102
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 1,882,890 4,862,593 14,249,986 20,327,944
Underwriting and investment banking income 318,609 55,000 1,747,809 220,766
Net dealer inventory and investment income (loss), net
of trading interest expense of $88,039 and $92,262
for the three months ended September 30, 2000 and 1999,
$612,963 and $332,341 for the nine months ended
September 30, 2000 and 1999, respectively (675,384) 987,494 (3,038,675) 4,296,711
Equity loss of unconsolidated affiliate -- -- (310,726) --
Other income 17,877 132,806 172,351 219,871
------------ ------------ ------------ ------------
Total revenues 1,543,992 6,037,893 12,820,745 25,065,292
------------ ------------ ------------ ------------
Expenses:
Commissions, employee compensation and benefits 2,398,033 3,064,339 11,422,548 15,492,833
Clearing and floor brokerage 196,529 108,978 870,065 341,381
Communications and occupancy 504,728 329,726 1,497,545 881,410
Professional fees 165,025 666,430 1,292,189 855,775
Interest 65,576 32,706 130,994 65,315
Other 570,884 527,350 2,060,268 1,381,040
------------ ------------ ------------ ------------
Total expenses 3,900,775 4,729,529 17,273,609 19,017,754
------------ ------------ ------------ ------------
Income (loss) before income tax expense (benefit)
and minority interest (2,356,783) 1,308,364 (4,452,864) 6,047,538
Income tax expense (benefit) (735,617) 556,900 (1,419,820) 2,422,324
------------ ------------ ------------ ------------
Income (loss) before minority interest (1,621,166) 751,464 (3,033,044) 3,625,214
Minority interest (257,988) 376,091 (418,561) 376,091
------------ ------------ ------------ ------------
Net income (loss) $ (1,363,178) 375,373 (2,614,483) 3,249,123
============ ============ ============ ============
Earnings (loss) per share:
Basic $ (0.11) 0.03 (0.21) 0.26
============ ============ ============ ============
Diluted $ (0.11) 0.03 (0.21) 0.24
============ ============ ============ ============
Weighted average shares outstanding:
Basic 12,661,343 12,537,218 12,602,499 12,537,218
============ ============ ============ ============
Diluted 15,306,402 12,816,081 12,602,499 15,038,787
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,614,483) 3,249,123
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Equity loss of unconsolidated affiliate 310,726 --
Deferred tax expense 32,070 1,565,950
Depreciation and amortization expense 94,249 50,763
Minority interest (367,394) 376,091
Decrease (increase) in receivable from clearing broker 1,254,655 (6,216,100)
Decrease (increase) in receivable from employees and stockholders 198,439 (253,837)
Decrease (increase) in securities owned 1,728,402 (10,556,823)
Decrease in other investments 621,527 --
Increase in prepaid expenses other assets (1,027,627) (185,278)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (1,483,348) 2,543,614
(Decrease) increase in payable to clearing broker (1,823,033) 11,832,627
(Decrease) increase in securities sold, not yet purchased (127,940) --
--------------- ---------------
Net cash provided (used) by operating activities (3,203,757) 2,406,130
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture and equipment (340,267) (182,351)
--------------- ---------------
Net cash used by investing activities (340,267) (182,351)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of subordinated debt -- 500,000
Proceeds from notes payable 1,500,000 --
Proceeds from stock issuances 50,000 --
Capital contributions -- 763,335
Subscription collected -- 96,263
--------------- ---------------
Net cash provided by financing activities 1,550,000 1,359,598
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,994,024) 3,583,377
Cash and cash equivalents at beginning of period 2,732,175 201,312
--------------- ---------------
Cash and cash equivalents at end of period $ 738,151 3,784,689
=============== ===============
Supplemental disclosures:
Interest paid $ 730,832 397,656
Taxes paid $ 934,440 856,369
</TABLE>
In May 2000, Tejas Securities forgave a $50,000 subscription receivable from an
employee for common stock of Tejas Securities. The forgiveness of the $50,000 is
recorded as non-cash compensation expense and as a capital contribution to the
minority interest.
In May 2000, an employee of the Company exercised non-qualified stock options to
purchase 124,125 shares of the Company's common stock at $0.40 per share
($50,000 in stock proceeds). As a result of this transaction, the Company
recognized a non-cash increase in additional paid in capital of $204,678.
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(1) General
Westech Capital Corp. ("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 of 2.4825 to
one. The former shareholders of Tejas Holding currently own 94.20% 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 10-Q 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. The results of operations for the nine months ended September
30, 2000 are not necessarily indicative of the results of the year ending
December 31, 2000.
In October 2000, Westech's shareholders approved 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, with branch offices in Houston, Texas and Atlanta, Georgia.
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.
4
<PAGE> 7
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(2) Net Capital
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements for
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.
Tejas Securities elects to use the basic method of the Rule, which requires it
to maintain minimum net capital equal to the greater of $250,000 or 6-2/3% of
aggregate indebtedness. As of September 30, 2000, Tejas Securities' net capital
of $1,351,896 was $1,101,896 in excess of the minimum required.
(3) Earnings (Loss) 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 (loss) per share is 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 the three month and nine month periods ended September 30, 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.
5
<PAGE> 8
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
Earnings (loss) per share is calculated as follows.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (1,363,178) 375,373 (2,614,483) 3,249,123
Weighted average shares outstanding 12,661,343 12,537,218 12,602,499 12,537,218
Basic earnings (loss) per share $ (0.11) 0.03 (0.21) 0.26
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (1,363,178) 375,373 (2,614,483) 3,249,123
Income impact of assumed conversion
of subsidiary stock and recognition of
minority interest income (257,988) -- -- 376,091
Income (loss) available to common
stockholders after assumed conversions (1,621,166) 375,373 (2,614,483) 3,625,214
Weighted average shares outstanding 12,661,343 12,537,218 12,602,499 12,537,218
Effect of dilutive securities:
Warrants -- -- -- --
Options -- 278,863 -- 92,954
Assumed conversion of subsidiary stock 2,524,703 -- -- 2,263,316
Application of treasury stock method to 120,356 -- -- 145,299
subscriptions receivable
Weighted average shares outstanding 15,306,402 12,816,081 12,602,499 15,038,787
Diluted earnings (loss) per share $ (0.11) 0.03 (0.21) 0.24
</TABLE>
Warrants to purchase 558,562 shares Westech's common stock at September 30, 1999
were not included in the computation of diluted earnings (loss) per share
because the warrants' exercise price was greater than the estimated market value
per share of common stock for the period. Westech has not included the dilutive
effects of options to purchase 3,759,187 shares of its common stock at September
30, 2000 in the computation of diluted earnings (loss) per share because the
options were antidilutive.
Westech has included the dilutive effects of shares of Tejas Securities' common
stock which may be exchanged for shares of Westech common stock for the three
months ended September 30, 2000. Tejas Securities has 1,017,000 shares of its
common stock issued and outstanding at September 30, 2000 which may be exchanged
into common stock of Westech at a ratio of 2.4825 to one (2,524,703 shares on a
weighted average basis for the three month period ended September 30, 2000).
Westech has not included the dilutive effects of shares of Tejas Securities'
common stock which may be exchanged into the Company's common stock for the nine
months ended September 30, 2000 as they are antidilutive. In addition, Westech
has included the dilutive effects of Tejas Securities' subscriptions receivable
based on the treasury stock method for the three months ended September 30,
2000. Westech recognizes the incremental effect on its shares outstanding
assuming the subscriptions receivable are fully paid for and exchanged for its
common stock versus Westech repurchasing those shares using a weighted average
market price for the period. In addition, Westech has not included the dilutive
effects of Tejas Securities' subscriptions receivable based on the treasury
stock method for the nine months ended September 30, 2000 as they are
antidilutive.
6
<PAGE> 9
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(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 and encompasses both retail and institutional customer
accounts. These segments require the commitment of significant human capital and
financial resources, as well as industry specific skills. The investment banking
segment participates in underwriting of corporate securities as managing
underwriter and as a syndicate member. The investment banking segment also
generates corporate advisory fees associated with merger and acquisition
activity. Income associated with other investments accounted for under the
equity method is included in other segment activity for the nine months ended
September 30, 2000 and 1999.
The following table presents segment revenues, profits (losses) from operations
before income taxes and minority interest, and assets for the nine months ended
September 30, 2000.
<TABLE>
<CAPTION>
Investment
Brokerage Banking Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external
customers $ 11,683,386 1,747,809 (138,375) 13,292,820
Interest revenue 140,888 -- -- 140,888
Interest expense 743,957 -- -- 743,957
Depreciation and amortization 94,249 -- -- 94,249
Segment profit (loss) (5,653,415) 1,338,926 (138,375) (4,452,864)
Segment assets 11,452,582 -- -- 11,452,582
Capital expenditures 340,267 -- -- 340,267
</TABLE>
The following table presents segment revenues, profits and assets for the nine
months ended September 30, 1999
<TABLE>
<CAPTION>
Investment
Brokerage Banking Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external
customers $ 23,867,411 220,766 -- 24,088,177
Interest revenue 1,309,456 -- -- 1,309,456
Interest expense 397,656 -- -- 397,656
Depreciation and amortization 50,763 -- -- 50,763
Segment profit 5,826,772 220,766 -- 6,047,538
Segment assets 25,029,848 -- -- 25,029,848
Capital expenditures 182,351 -- -- 182,351
</TABLE>
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements and Risk Factors
All statements past and future, written or oral, made by Westech or its
officers, directors, stockholders, agents, representatives or employees,
including without limitation, those statements contained in this Report on Form
10-Q, that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding Westech's
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements may appear in this document or other documents,
reports, press releases, and written or oral presentations made by officers of
Westech to stockholders, analysts, news organizations or others. Readers should
not place undue reliance on forward-looking statements. All forward-looking
statements are based on information available to Westech and the declarant at
the time the forward-looking statement is made, and Westech assumes no
obligation to update any such forward-looking statements. It is important to
note that Westech's actual results could differ materially from those described
in such forward-looking statements. In addition to any risks and uncertainties
specifically identified in connection with such forward-looking statements, the
reader should consult Westech's filings under the Securities Exchange Act of
1934, for factors that could cause actual results to differ materially from
those presented.
Forward-looking statements are necessarily based on various assumptions and
estimates and are inherently subject to various risks and uncertainties,
including risks and uncertainties relating to the possible invalidity of the
underlying assumptions and estimates and possible changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners and competitors and
legislative, judicial and other governmental authorities and officials.
Assumptions relating to the foregoing involve judgements with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of Westech. Any such
assumptions could be inaccurate and, therefore, there can be no assurance that
any forward-looking statements by Westech or its officers, directors,
stockholders, agents, representatives or employees, including those
forward-looking statements contained in this Report on Form 10-Q, will prove to
be accurate.
Results of Operations
The revenues and operating expenses of 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 its trading accounts and its customer accounts.
Currently, Tejas Securities revenue is derived primarily from principal debt and
equity transactions, which generate both commission revenue and investment
income, as well as from investing excess liquid capital in proprietary
positions. During the second and third quarters of 2000, Tejas Securities
realized significant trading losses in principal transactions related to its
proprietary accounts. These losses were the result of a severe downturn in the
securities markets which impacted the results of operations for the third
quarter and the nine month period ended September 30, 2000.
Westech's total revenues decreased by $12,244,547 or 49% to $12,820,745 for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999. Total revenues decreased by $4,493,901 or 74% to $1,543,992 for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. The reasons for the decreases are discussed below.
Commission revenues from principal transactions decreased $5,546,026 or 30% to
$12,722,897 and $2,482,271 or 60% to $1,676,815 for the nine months and three
month ended September 30, 2000, respectively, compared to the corresponding
prior periods. For the nine month period ended September 30, 2000, commission
revenues from agency transactions decreased $635,786 or 31% to $1,390,459. For
the three month period ended September 30, 2000, commission revenues from agency
transactions decreased $447,014 or 72% to $174,544. The decrease in agency
commissions and principal commissions relates to the overall downturn in the
capital markets during both the second and third quarters of 2000. The
8
<PAGE> 11
remaining commissions were the result of portfolio advisory fees on managed
accounts and commissions on insurance contracts.
Underwriting and investment banking revenues increased $1,527,043 or 692% to
$1,747,809 and $263,609 or 479% to $318,609 for the nine and three month periods
ended September 30, 2000, respectively. The increase is the result of the
re-establishment of underwriting and syndicate activities beginning in January
2000. Tejas Securities generated $830,243 in corporate advisory fees for the
nine months ended September 30, 2000. Fees from syndicate activities increased
to $413,543 for the nine months ended September 30, 2000. Private placement fees
of $504,023 were also generated during this period.
Net dealer inventory and investment income (loss) decreased by $7,335,386 or
171% to $(3,038,675) for the nine months ended September 30, 2000 compared to
the same period in 1999. For the three months ended September 30, 2000, net
dealer inventory and investment income (loss) decreased $1,662,878 or 168% to
$(675,384) from the corresponding period in the prior year. The decrease in
inventory and investment income (loss) resulted from trading activity in
proprietary positions which was adversely affected by a continuing market
decline during the third quarter of 2000.
For the nine months and three months ended September 30, 2000, equity loss of
unconsolidated affiliate was $(310,726) and $0, respectively. The Company
realized the loss on its investment of TSG Internet Fund I, Ltd. upon
liquidation of the investment in June 2000.
For the nine and three month periods ended September 30, 2000, other income
decreased $47,520 or 22% to $172,351 and $114,929 or 87% to $17,877,
respectively. The decrease for the nine and three month periods ended September
30, 2000 is due to a decrease in asset management income and other miscellaneous
receipts.
Total expenses decreased by $1,744,145 or 9% to $17,273,609 for the nine months
ended September 30, 2000. For the three months ended September 30, 2000, total
expenses decreased $828,754 or 18% to $3,900,775. Net income (loss) for the nine
months decreased by $5,863,606 or 180% to $(2,614,483). Net income (loss) for
the three months ended September 30, 2000 decreased $1,738,551 or 463% to
$(1,363,178). The explanations for the changes are discussed below.
Commissions, employee compensation and benefits decreased $4,070,285 or 26% to
$11,422,548 for the nine months ended September 30, 2000. Commissions, employee
compensation and benefits decreased $666,306 or 22% to $2,398,033 for the three
months ended September 30, 2000. Commission expense decreased $5,167,940 or 44%
to $6,620,002 for the nine months ended September 30, 2000 and decreased
$1,776,773 or 58% to $1,287,566 for the three months ended September 30, 2000.
These decreases in commission expense for the stated periods are primarily
attributable to reduced trading activity resulting from the continuing market
decline from April to September 2000. As a result of the downturn, commission
revenues decreased which in turn had a corresponding effect on commission
expense. General and administrative salaries and other employee benefits
increased for the nine months ended September 30, 2000 versus 1999 due to
overall salary increases and additional hires in the first quarter of 2000.
Clearing and floor brokerage costs increased $528,684 or 155% to $870,065 and
$87,551 or 80% to $196,529 for the nine and three months ended September 30,
2000, respectively. The overall increase in clearing and floor brokerage costs
for these periods resulted from greater trading activity in the over-the-counter
equity markets and on the national exchanges. Most of the cost increase is
attributed to market making activities, and the increased activity in both
the retail and institutional equity departments. Tejas Securities' 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 $616,135 or 70% to $1,497,545 and
$175,002 or 53% to $504,728 for the nine months and three months ended September
30, 2000, respectively. The increases in occupancy charges are the result of the
relocation of Westech's Austin headquarters in January 2000 and the addition of
the Houston branch in the third quarter of 2000. Communications charges
increased as a function of
9
<PAGE> 12
the net increase in employees since the first quarter of 1999, plus the addition
of market making support systems.
Professional fees increased $436,414 or 51% to $1,292,189 and decreased $501,405
or 75% to $165,025 for the nine months and three months ended September 30,
2000. For the nine month period ended September 30, 2000, approximately $600,000
was accrued legal expenses relating to the registration of Westech's common
stock, legal fees for the settlement of private equity securities transactions
with its customers, and fees for general legal counsel. Tejas Securities also
incurred approximately $300,000 in marketing costs associated with developing
its internet site and brand awareness. In addition, Westech incurred additional
accounting costs associated with its annual reporting as well as for the
registration of its common stock. The remaining costs during the nine month
period related to consulting fees incurred during the normal course of business.
For the three month period ended September 30, 2000, Tejas Securities and
Westech incurred minimal costs associated with its ongoing registration
and other consulting services.
Interest expense for the nine month and three month periods ended September 30,
2000 increased $65,679 or 101% to $130,994 and $32,870 or 101% to $65,576,
respectively. The increase is due to the addition of $500,000 of subordinated
debt in June 1999 and the $1,500,000 line of credit in June 2000.
Other expenses increased $679,228 or 49% to $2,060,268 and decreased $43,534 or
8% to $570,884 for the nine months and three months ended September 30, 2000.
The overall increase in other expenses during the nine month period is the
result of first quarter increases in general and administrative services needed
to support administrative infrastructure and the addition of equipment leases
for the new Austin headquarters. The decrease for the three month period ended
September 30, 2000 is associated with personnel reductions in the second
quarter.
Income tax expense (benefit) decreased $3,842,144 or 159% to $(1,419,820) and
$1,292,517 or 232% to $(735,617) for the nine months and three months ended
September 30, 2000. Westech's effective tax rate was 32% and 31% for the nine
months and three months ended September 30, 2000, respectively.
Minority interest in net loss for the nine months and three months ended
September 30, 2000 was $(418,561) and $(257,988), respectively. Minority
interest in net loss was created as a result of the Merger.
Liquidity and Capital Resources
Tejas Securities utilizes the receivable balance from its clearing broker to
fund operating and investing activities. The receivable balance represents the
residual equity due to Tejas Securities from its clearing broker if Tejas
Securities liquidated all of its investment security holdings. The receivable
balance is also used to secure temporary financing from its clearing broker for
the purchase of investments in Tejas Securities' trading accounts. The
receivable balance held at its clearing broker may fluctuate depending on
factors such as the market valuation of securities held in Tejas Securities'
trading accounts, realized trading profits, commission revenue, cash withdrawals
and clearing costs charged to Tejas Securities for conducting its trading
activities. The overall decrease in the receivable from clearing broker balance
resulted from the use of funds to pay operating expenses for the nine months
ended September 30, 2000.
On May 19, 2000, Tejas Securities signed a clearing agreement with First
Clearing Corporation to provide clearing services in the future. Tejas
Securities completed the transition from Schroder & Co. to First Clearing
Corporation in October of 2000. The Company does not believe that this change
will have an adverse effect on our financial condition or results of operations.
In June 2000, the Company 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. The loan covenants of the line of
credit were subsequently modified in September 2000 to require a minimum net
worth of $2,500,000 from $4,000,000 and working capital of $1,500,000
from $2,500,000.
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In November 2000, the Company entered into short-term loan agreements with John
J. Gorman for $500,000 and Charles H. Mayer for $250,000 to facilitate
short-term working capital needs and to satisfy certain regulatory requirements
of Tejas Securities. The demand loans accrue interest at the prime rate, with
interest due on a quarterly basis, and are unsecured. If Tejas Securities
continues to experience losses similar to the losses incurred during the second
and third quarters of 2000, additional capital will be required. There is no
assurance that additional capital will be available in such circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Tejas Securities' 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 Tejas Securities' business. Managing risk
is critical to Tejas Securities' profitability and to reducing the likelihood of
earnings volatility. The major types of risk that Tejas Securities faces include
credit risk, operating risk and market risk.
Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. Tejas Securities clears its securities
transactions through a clearing broker. Under the terms of the clearing
agreement, the clearing broker has the right to charge Tejas Securities for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, Tejas Securities' policy is to monitor
the credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of Tejas Securities' assets are
held at its clearing broker. Therefore, Tejas Securities could incur substantial
losses if its clearing broker were to become insolvent or otherwise unable to
meet its financial obligations. As of September 30, 2000, Schroder & Co. had in
excess of $250 million in capital and has historically met all of its
obligations to Tejas Securities.
Operating risk arises from the daily conduct of the Tejas Securities' business
and relates to the potential for deficiencies in control processes and systems,
mismanagement of the Company's activities or mismanagement of customer accounts
by its employees. Tejas Securities relies heavily on computer and communication
systems in order to conduct its brokerage activities. Third party vendors, such
as the clearing broker and news and quote providers, provide many of the systems
critical to Tejas Securities' business. Tejas Securities' business could be
adversely impacted if any of these systems were disrupted. Tejas Securities
mitigates the risk associated with systems by hiring experienced personnel, and
providing employees with alternate means of acquiring or processing information.
In order to mitigate the risk associated with mismanagement or customer
accounts, Tejas Securities utilizes compliance and operations personnel to
review the activities of administrative and sales personnel. In addition, the
activities of management are actively reviewed by other members of management on
a regular basis and by the Board of Directors.
Tejas Securities' 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 Tejas Securities has no control. Securities owned by Tejas
Securities are either related to daily trading activity or Tejas Securities'
principal investing activities. Market price risk related to trading securities
is managed primarily through the daily monitoring of funds committed to the
various types of securities owned by Tejas Securities and by limiting exposure
to any one investment or type of investment.
Tejas Securities' trading securities were $4,479,346 in long positions and
$60,000 in short positions at September 30, 2000. These trading securities may
be debt securities, private company securities, exchange listed, Nasdaq or other
over-the-counter securities on both long and short positions. Historically,
Tejas Securities has invested a portion of its assets in high yield securities
of distressed companies, which are closely monitored by Tejas Securities'
research analysts. Valuation of high yield securities may be based
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upon factors other than those experienced by the overall equity and debt
markets. The potential loss in fair value of Tejas Securities' trading
securities, using a hypothetical 10% decline in prices, is estimated to be
$454,000 as of September 30, 2000. A 10% hypothetical decline was used to
represent a significant and plausible market change.
Tejas Securities' investment securities are typically those reported on by Tejas
Securities' research analysts. These positions often consist of high-yield debt
securities and the related equity securities, and other equity positions of
telecommunication and technology related companies. Westech monitors this risk
by maintaining current operating and financial data on the companies involved,
and projecting future valuations based upon the occurrence of critical future
events.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 12, 2000, J. Michael Sargeant, a former employee, filed suit in the
Texas State District Court alleging that we breached his employment contract by
terminating him without good cause. Mr. Sargeant has alleged damages of
approximately $500,000. In September 2000, employees of Tejas Securities and Mr.
Sargeant began the deposition process. We believe this complaint to be without
merit and intend to defend this matter vigorously. Because this matter is in the
early stages of discovery, the Company is unable to predict whether this matter
will produce any material adverse consequences to us.
In August 2000, the Company filed suit in the Texas State District Court against
Simon A. Rose, a former employee, for a declaration that Mr. Rose breached his
employment agreement with Tejas Securities in various respects, and that a put
option for Tejas Securities' common stock held by Mr. Rose had been cancelled by
mutual agreement of the parties. Mr. Rose presented the Company with a demand
letter in August 2000 in an attempt to exercise his put option with a value of
$425,000. Subsequent to the Company's suit, Mr. Rose filed a counterclaim and
third-party petition in the Texas State District Court against the Company and
John J. Gorman alleging that the Company breached its agreement to provide Mr.
Rose with equivalent value or the cancelled put option. We believe this
complaint to be without merit and intend to defend this matter vigorously.
Because this matter is in the early stages of discovery, the Company is unable
to predict whether 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 3, 2000, the Company held its annual meeting of stockholders at its
corporate office in Austin, Texas.
At the meeting, 10,352,510 shares of the Company's common stock were represented
by stockholders present or represented by proxy, which constituted 81.77% of the
shares entitled to vote. For Item 1, stockholders approved the re-election of
the directors with 10,351,510 shares voting in favor. The remaining 1,000 shares
voted against the re-election of the directors. For Item 2, stockholders
approved the proposal to adopt the Westech Capital Corp. 1999 Stock Option plan
with 10,351,110 shares voting in favor. The remaining 1,400 shares voted against
the proposal. For Item 3, stockholders approved the proposal to amend the number
of shares under the plan with 10,351,910 shares voting in favor. The remaining
600 shares voted against the proposal. For Item 4, stockholders approved the
proposed
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reincorporation with 10,352,510 shares voting in favor. For Item 5, stockholders
approved the ratification of KPMG LLP as independent auditors with 10,352,510
shares voting in favor.
ITEM 5. OTHER INFORMATION
Effective October 30, 2000, Joseph Moran resigned as a member of the board of
directors of the Company, including its subsidiaries. There were no
disagreements between Joseph Moran and management or the board of directors of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
Exhibit list
b) Current reports on Form 8-K
On July 17, 2000, the Company filed an amendment to the Form 8-K filed
on September 8, 1999.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Westech Capital Corp.
Date: November 14, 2000
/s/ JAY VAN ERT
----------------------------------
Jay Van Ert
President
/s/ KURT RECHNER
----------------------------------
Kurt Rechner
Chief Financial Officer
/s/ JOHN GARBER
----------------------------------
John Garber
Director of Finance (Principal
Accounting Officer)
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C>
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 (Incorporated herein by reference
to Exhibit 3.1 above)
4.5 Bylaws (Incorporated herein by reference to Exhibit 3.2 above)
10.13 Agreement, dated May 19, 2000, with First Clearing Corporation
(Incorporated herein by reference to Exhibit 10.13 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000
10.14* Promissory note agreement, dated November 9, 2000, between
Charles H. Mayer and the Company (Incorporated herein by
reference to Exhibit 10.14 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000)
10.15* Promissory note agreement, dated November 9, 2000, between
John J. Gorman and the Company (Incorporated herein by
reference to Exhibit 10.15 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000)
27.1* Financial Data Schedule
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))
</TABLE>
* Filed herewith.
