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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. TWO TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
NEW YORK 33-37534-NY 13-3577716
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2700 Via Fortuna, Suite 400, Austin, Texas 78746
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 306-8222
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of class)
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ITEM 1. BUSINESS.
GENERAL
Westech Capital Corp., a New York corporation (the "Company"), is a holding
company whose wholly owned subsidiary, Tejas Securities Group Holding Company
("Tejas Holding") owns approximately 85% of the Company's primary operating
subsidiary, Tejas Securities Group, Inc. ("Tejas Securities"). Both Tejas
Holding and Tejas Securities are Texas corporations. Tejas Securities is engaged
in the business of providing brokerage and related financial services to
institutional and retail customers nationwide.
The Company was incorporated as a shell corporation in New York on July 18,
1990, and made an initial public offering in November 1991. The Company was
acquired by Tejas Securities in a reverse merger effected on August 27, 1999.
See "-Change in Control." During the first quarter of 2000, the Company
anticipates submitting to its shareholders a proposal to change the Company's
state of incorporation from New York to Delaware. The Company does not expect
the reincorporation to have any material effects on it or its subsidiaries.
Tejas Securities' business is conducted out of its primary office in Austin,
Texas and a branch office in Atlanta, Georgia. Tejas Securities anticipates
expanding its operations by March 2000 with branches in Dallas, Texas and
Houston, Texas. See "-Growth Strategy."
Tejas Securities is a registered broker-dealer and investment advisor offering:
(i) brokerage services to retail and institutional customers; (ii) high quality
investment research to institutional and retail customers; (iii) market-making
activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services.
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During the first quarter of 2000, the Company intends to assume the management
of a private investment company (commonly referred to as a "hedge fund"). Tejas
Securities will purchase, at cost, the equity of TSG Capital, LLC, a Texas
limited liability company, which serves as the general partner of TSG Internet
Fund I, Ltd. (the "Fund"), a Texas limited partnership. Thereafter, Tejas
Securities will manage the Fund for a one-time placement fee of 5%, a quarterly
management fee of .375% of the average monthly asset balance, and an annual
performance fee of 20% of the Fund's net gain. See Item 7 - Certain
Relationships and Certain Transactions. If the Company is successful in
integrating and managing the Fund, it may offer additional hedge funds in the
future. Based on the experience of the Fund, such activities are not likely to
require a significant capital commitment by Tejas Securities or Westech.
CHANGE IN CONTROL
On August 27, 1999, pursuant to an Agreement and Plan of Merger by and among the
Company, Tejas Securities, Tejas Holding, and Westech Merger Sub, Inc., a
Delaware corporation ("Merger Sub"), Tejas Securities acquired the Company
through a reverse merger (the "Merger") of Tejas Holding and Merger Sub. Tejas
Holding and Merger Sub were established for the sole purpose of effecting this
transaction. As a result of the Merger, Tejas Holding became a wholly owned
subsidiary of Westech. Upon the effectiveness of the Merger, the Company's board
of directors resigned and John J. Gorman, Jay W. Van Ert and Joseph F. Moran
were appointed as directors of the Company.
Under the terms of the Merger, the shareholders of Tejas Holding exchanged their
shares for shares of the Company at a ratio 2.4825 to one. The former
shareholders of Tejas Holding currently own 95.21% of the issued and outstanding
common stock of the Company, $ .001 par value per share (the "Common Stock").
EARLY OPERATIONS
Tejas Securities' initial focus was to provide institutional money managers and
mutual funds high quality investment research covering large nationally based
companies which were believed to be overly leveraged or which were in default on
their liabilities or in bankruptcy. Historically, these companies were not
followed closely by a large number of analysts. Tejas Securities used this
opportunity to establish itself as a source of high quality research products
and trading support. Tejas Securities took advantage of its initial research
success and expanded its research coverage to special situation equities and
began underwriting initial public offerings of equity securities for a select
group of companies. These underwritings coupled with a demand for Tejas
Securities' research by individuals led Tejas Securities to expand its client
base to include retail accounts.
BROKERAGE SERVICES
Tejas Securities provides brokerage services to approximately 6,000 retail
customers and 500 institutional customers. Tejas Securities offers a menu of
services and products to customers, which includes the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. Tejas Securities' marketing strategy
has been to emphasize its high level of service and its unique knowledge of the
companies covered by its research department.
In recent years, the general public has become more comfortable dealing with
financial matters through electronic means, more specifically over the Internet.
Several brokerage firms have positioned themselves to take advantage of this
opportunity by offering online trading and account information. Tejas Securities
intends to capitalize on this trend by expanding into online trading, while
continuing to provide the level of service and research products that its
customers have come to expect.
Currently, Tejas Securities provides its customers with the ability to receive
stock quotes and access research on the Internet through its website
(www.tejassec.com). Tejas Securities anticipates that its customers will have
the ability to make trades over the Internet prior to the end of the first half
of 2000. Tejas Securities believes Internet trading is in high demand by its
customers and will continue to devote a substantial portion of its resources to
its Internet strategy.
Tejas Securities generated $3,648,255, $4,810,520 and $7,932,780 in commission
revenues for the years ended 1996, 1997 and 1998, respectively, or 86%, 74% and
77% of total revenue, respectively. During the nine months ended September 30,
1999, Tejas Securities generated $20,327,944 in commission revenue, or 80% of
total revenue.
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RESEARCH
The cornerstone of Tejas Securities' business model is to create proprietary
products for its clients that focus on its research and trading capabilities.
Tejas Securities distributes these products through traditional as well as new
channels of distribution, including the Internet. Tejas Securities believes that
brokerage companies that are able to utilize technological changes to improve
methods of delivering information to their clients will accomplish significant
gains in market share and profitability.
Tejas Securities anticipates that it will continue to devote a substantial
portion of its assets to support its research department. Currently, the
research department consists of five experienced analysts with proven expertise
in special situation equity research and in distressed securities. The analyst
group has the background to analyze many industries, but has a primary focus on
telecommunications and the Internet. Tejas Securities believes that the rapid
changes in each of these industries provide excellent investment opportunities.
Tejas Securities believes there will be increased demand in these areas and
anticipates adding three analysts to the research department in the near future.
The additional analysts will allow Tejas Securities to expand its research
coverage of telecommunications and Internet companies that have traditionally
lacked research coverage by the New York-based brokerage community.
Tejas Securities believes that the number of high quality technology companies
being formed in the Austin area is significant and will continue to grow. Tejas
Securities believes that its research department is well suited to cover these
companies and will focus a large percentage of its research resources to
providing research coverage of these companies. The research department will
cover both public companies as well as private companies that are candidates for
becoming publicly traded companies.
MARKET MAKING
In August 1999, the NASD approved Tejas Securities to make markets in Nasdaq
securities. Making markets in securities facilitates the execution of security
transactions for Tejas Securities' customers. Tejas Securities acts as a market
maker for approximately 25 public corporations whose stocks are traded on the
Nasdaq National Market System.
Generally, Tejas Securities does not maintain inventories of securities for sale
to its customers. However, Tejas Securities does engage in certain principal
transactions where, in response to a customer order, Tejas Securities will go at
risk to the marketplace to attempt to capture the spread between the bid and
offer. Most of Tejas Securities' larger competitors are engaged in similar
market making activities through subsidiaries or receive order flow payments
from companies engaged in such market making activities. Tejas Securities
believes it can maintain better control and be assured of proper executions of
customer trades by providing these market making services directly to its
customers.
INVESTMENT BANKING
Tejas Securities raises capital through public offerings of securities for
corporations that are engaged in a variety of businesses. Tejas Securities
participates in underwritings of corporate securities as managing underwriter
and as a syndicate member. Management of an underwriting account is generally
more profitable than participation as a member of an underwriting syndicate.
Historically, Tejas Securities underwrote public offerings of securities in the
range of $5 to $10 million on a "best efforts" basis. As an underwriter, Tejas
Securities is also subject to potential liability under federal and state
securities laws and other laws if the registration statement or prospectus
contains a material misstatement or omission. Tejas Securities' potential
liability as an underwriter is uninsured.
Tejas Securities' participation in or initiation of underwritings may be limited
by the financial requirements of the SEC and NASD. See "- Net Capital
Requirements."
Between September 30, 1997, and December 31, 1998, Tejas Securities acted as the
managing underwriter or co-managing underwriter for initial public offerings of
four common stock offerings and one preferred stock offering, which raised
approximately $40 million for corporate finance clients. Tejas Securities
typically received 2 to 3 percent of the aggregate amount of money raised in an
offering to cover nonaccountable expenses and between 7 and 9 percent as
compensation to underwriters, selling group members and registered
representatives. Tejas Securities generated $752,554 and $2,584,770 in
investment banking revenues for the years ended 1997 and 1998, respectively, or
12% and 25% of total revenue, respectively. There were no fees generated from
investment banking activities in 1996.
At the end of 1998, Tejas Securities decided to reduce its focus on underwriting
small public offerings and refocus on underwritings of larger, more established
companies and advisory assignments and financial advisory assignments. In that
connection, the Company determined that a greater commitment to after-market
support services was necessary and its underwriting activities were essentially
curtailed while it sought additional executive experience. In November, 1999,
Tejas Securities employed Mike McAllister to serve as Executive Vice President
and Managing Director. Mr. McAllister will oversee all investment banking
operations for Tejas Securities. See Item 5-Directors and Executive Officers.
There were no significant investment banking transactions during 1999 and the
Company expects no significant activity until the second half of 2000.
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CUSTOMERS
Historically, Tejas Securities' customer base has been comprised of
predominately large nationally known institutional customers. These customers
demand high quality research and sophisticated trading capabilities. Tejas
Securities believes that it has served the needs of this segment of its customer
base well, resulting in increased trading volume. Tejas Securities believes that
the increase in the scope of its research services should further customer
satisfaction and increase its revenues from institutional customers.
Currently, the fastest growing segment of Tejas Securities' business is its
retail division. Tejas Securities believes its strategy of providing
institutional quality research and customer service to retail customers has been
well received. The retail division has grown from 3,000 customers in 1997 into
6,000 customers at September 30, 1999. Tejas Securities will continue to expand
this division by adding additional sales personnel focused exclusively on this
market and continuing the rollout of products such as market making and money
management that appeal to this market.
EMPLOYEES
On December 15, 1999, Tejas Securities had approximately 80 employees. Of these
employees, 40 work in sales, 8 in trading, 5 in research positions and the
remaining employees perform management and administrative functions. Employees
will continue to be added in several areas of the firm. However, it is Tejas
Securities' goal to use the sales support functions that are currently in place
to support additional sales staff. Tejas Securities believes that taking
advantage of the infrastructure currently in place will allow an increase in
productivity in the sales area with minimal additional support cost.
COMPETITION
All aspects of Tejas Securities' business are highly competitive. In its general
brokerage activities, Tejas Securities competes directly with numerous other
broker-dealers, many of which are large well-known firms with substantially
greater financial and personnel resources. Many of Tejas Securities' competitors
employ extensive advertising and actively solicit potential clients in order to
increase business. In addition, brokerage firms compete by furnishing investment
research publications to existing clients, the quality and breadth of which are
considered important in the development of new business and the retention of
existing clients. Tejas Securities also competes with a number of smaller
regional brokerage firms in Texas and the Southwest.
Some commercial banks and thrift institutions offer securities brokerage
services. Many commercial banks offer a variety of investment banking services.
Competition among financial services firms also exists for investment
representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive since Tejas Securities was founded, as numerous securities firms
have either ceased operations or have been acquired by or merged into other
firms. In addition, companies not engaged primarily in the securities business,
but with substantial financial resources, have acquired leading securities
firms. These developments have increased competition from firms with greater
capital resources than those of Tejas Securities.
Various legislative and regulatory developments have also tended to increase
competition within the industry or reduced profits for the industry. On November
12, 1999, President Clinton signed into law legislation that allows bank holding
companies to engage in a wider range of nonbanking activities, including greater
authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve
Board, in consultation with the Secretary of the Treasury, determines by
regulation or order is (1) financial in nature, (2) identical to any such
financial activity, or (3) complementary to any such financial activity and does
not pose a substantial risk to the safety or soundness of depositary
institutions or the financial system generally. The Act effects significant
changes to United States banking law, primarily by repealing restrictive
provisions of the 1933 Glass-Steagall Act. The Act also provides for certain
activities which are financial in nature, including, among others, lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; and providing financial, investment or economic advisory services,
underwriting, dealing in or making a market in, securities. The Company
anticipates that these changes will result in an increase in the number, size
and financial strength of potential competitors.
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The securities industry has experienced substantial commission discounting by
broker-dealers competing for brokerage business. In addition, an increasing
number of specialized firms now offer "discount" services to individual
customers. These firms generally effect transactions for their customers on an
"execution only" basis without offering other services such as portfolio
valuation, investment recommendations and research. A growing number of discount
brokerage firms offer their services over the Internet, further decreasing
offered commission rates and increasing ease of use for customers. The
continuation of such discounting and an increase in the number of new and
existing firms offering discounts could adversely affect Tejas Securities. In
addition, rapid growth in the mutual fund industry is presenting potential
customers of Tejas Securities with an increasing number of alternatives to
traditional stock brokerage accounts.
In its investment banking activities, Tejas Securities competes with other
brokerage firms, venture capital firms, banks and all other sources of capital
for small, growing companies. In addition, large national and regional
investment banking firms occasionally manage offerings of a size that is
competitive with Tejas Securities, typically for fees and compensation
comparable to that charged by Tejas Securities. When the market for initial
public offerings is active, many small regional firms that do not typically
engage in investment banking activities also begin to compete with Tejas
Securities.
GROWTH STRATEGY
Tejas Securities anticipates increasing its market penetration in Texas and the
Southwest United States. Tejas Securities believes this growth strategy will be
accomplished through acquisitions of other brokerage companies, investment
banking companies, groups of brokers, or individual brokers using cash, stock or
a combination of cash and stock and by opening offices in new markets and
subsequently recruiting brokers. Tejas Securities believes that increased
penetration in these markets will enhance revenue balance and provide greater
leverage of its fixed costs. Tejas Securities anticipates it will achieve a
market presence in both Houston and Dallas by March 2000. Tejas Securities
anticipates taking advantage of other strategic market opportunities as they
arise.
FEES ON MARGIN LOANS
Tejas Securities derives a portion of its income from fees generated on margin
loans made to Tejas Securities' customers and financed through our clearing
agent, Schroder & Co. A margin account allows the customer to deposit less than
the full cost of the securities purchased while Tejas Securities lends the
balance of the purchase price to the customer, secured by the purchased
securities. Customers are charged interest on the amount borrowed to finance
their margin transactions ranging from 0.25% below to 2.75% above the broker
call rate, which is the rate at which brokers can generally obtain financing
using margined and firm owned securities as collateral. Tejas Securities earns a
fee equal to 50% of the interest charged on customer margin loans. As of
December 15, 1999, the total of all customer securities pledges on debit
balances and held in active margin accounts was approximately $20,000,000.
SECURITIES INDUSTRY PRACTICES
Tejas Securities is registered as a broker-dealer with the SEC and the NASD.
Tejas Securities is registered as a securities broker-dealer in 39 states and
the District of Columbia. Tejas Securities is also a member of the Securities
Investors Protection Corporation, which provides Tejas Securities' customers
with insurance protection for amounts of up to $500,000 each, with a limitation
of $100,000 on claims for cash balances. Tejas Securities has also acquired an
additional $10,000,000 in insurance coverage through Seabury & Smith, as added
protection for individual customers' securities, covering all clients of Tejas
Securities' institutional and retail customers.
Tejas Securities is subject to extensive regulation by federal and state laws.
The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules,
subject to approval by the SEC, which govern the industry and conduct periodic
reviews of member broker-dealers. Securities firms are also subject to
regulation by state securities commissions in the states in which they do
business. The SEC, self-regulatory organizations, and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, suspension, or expulsion of a broker-dealer, its officers or employees.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than protection of
creditors and shareholders of broker-dealers. See "Forward-Looking Statements
and Risk Factors" below.
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NET CAPITAL REQUIREMENTS
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a broker-dealer's position in securities. A deduction is made
against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with the Rule could require intensive
use of capital and could limit Tejas Securities' ability to pay dividends to the
Company, which in turn could limit the Company's ability to pay dividends to its
shareholders. Failure to comply with the Rule could require the Company to
infuse additional capital into Tejas Securities, could limit the ability of
Tejas Securities to pay its debts and/or interest obligations, and may subject
Tejas Securities to certain restrictions which may be imposed by the SEC, the
NASD, and other regulatory bodies. Moreover, in the event that the Company could
not or elected not to infuse the additional capital or otherwise bring Tejas
Securities into compliance, Tejas Securities would ultimately be forced to cease
operations. See "Forward-Looking Statements and Risk Factors" below.
At December 31, 1998, and 1997 Tejas Securities elected to use the alternative
method permitted by the Rule, which requires it to maintain minimum net capital,
as defined, equal to the greater of $100,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At December 31, 1998, Tejas
Securities had net capital of $842,544, which was $742,544 in excess of the
minimum amount required. At December 31, 1997, Tejas Securities had net capital
of $703,302, which was $603,302 in excess of the minimum amount required. At
September 30, 1999, Tejas Securities had net capital of $2,681,665, which was
$2,387,170 in excess of the minimum amount required.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
We are including the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us. The factors identified in this
cautionary statement are important factors (but not necessarily all of the
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by us. Where any
forward-looking statement includes a statement of the assumptions underlying the
forward-looking statement, we caution you that while we believe the assumptions
to be reasonable and make them in good faith, assumed facts almost always vary
from actual results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances. Where, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there is no assurance that the statement of
expectation or belief will result or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by us, or on our behalf. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, the trading price of our
stock could decline, and you may lose all or part of your investment.
The dates on which we believe our Year 2000 efforts will be completed are based
on our best estimates, which were derived using numerous assumptions of future
events, including the continued availability of certain resources, third-party
modification plans and other factors. However, there is no guarantee that these
estimates will be achieved or that there will not be a delay in, or increased
costs associated with, the implementation of the Year 2000 efforts described
above. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer codes, timely responses to and corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties, we cannot ensure our
ability to timely and cost-effectively resolve problems associated with the Year
2000 issue that may affect our operations and business, or expose us to
third-party liability.
FAILURE TO EFFECTIVELY MANAGE A CHANGING BUSINESS COULD RESULT IN OUTDATED
SERVICES.
Our business and operations have changed substantially since we began offering
brokerage services, and we expect the pace of change in the brokerage business
to continue. This rapid change places significant demands on our administrative,
operational, financial and other resources. Failure to properly manage these
changes could result in our services becoming outdated, which would have a
material adverse effect on our business, financial condition and operating
results.
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FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR
BUSINESS.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, service providers and market makers. While we have
selected these third-party vendors carefully, we do not control their actions.
Any problems caused by these third parties could have a material adverse effect
on our business, financial condition and operating results.
OUR BUSINESS STRATEGY INCORPORATES THE INTERNET WHICH IS STILL IN THE EARLY
STAGE OF DEVELOPMENT.
The market for electronic brokerage services, particularly over the Internet, is
at an early stage of development and is rapidly evolving. Consequently, demand
and market acceptance for recently introduced services and products are subject
to a high level of uncertainty. Much of our growth will depend on consumers
adopting the Internet as a method of doing business. The Internet could lose its
viability due to slow development or adoption of standards and protocols to
handle increased activity, or due to increased governmental regulation.
Moreover, several key issues including security, reliability, cost, ease of use,
accessibility and quality of service continue to be concerns and may negatively
affect the growth of Internet use or commerce on the Internet. While we are not
dependent upon Internet based trading, we anticipate investing substantial
resources in the development of Internet based activities.
WE ARE SUBJECT TO MARKET FORCES BEYOND OUR CONTROL WHICH COULD IMPACT US MORE
SEVERELY THAN OUR COMPETITORS.
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets could adversely
affect our operating results. In October 1987 and October 1998, the stock market
suffered major declines, as a result of which many firms in the industry
suffered financial losses. Additionally, the level of individual investor
trading activity decreased after these events. Reduced trading volume and prices
have historically resulted in reduced transaction revenues. When trading volume
is low, our profitability may be adversely affected because our overhead remains
relatively fixed. Severe market fluctuations in the future could have a material
adverse effect on our business, financial condition and operating results. Some
of our competitors with more diverse product and service offerings might
withstand such a downturn in the securities industry better than we would.
OUR CUSTOMERS MAY DEFAULT ON THEIR MARGIN ACCOUNTS, EFFECTIVELY PASSING THEIR
LOSSES ON TO US.
We sometimes allow customers to purchase securities on margin, therefore we are
subject to risks inherent in extending credit. This risk is especially great
when the market is rapidly declining. In such a decline, the value of the
collateral we hold could fall below the amount of a customer's indebtedness.
Specific regulatory guidelines mandate the amount that can be loaned against
various security types. We rigorously adhere to these guidelines and a number of
instances exceed those requirements. Also, independent of our review, our
corresponding clearing company independently maintains a credit review of our
customer's accounts. If customers fail to honor their commitments, we would sell
the securities held as collateral. If the value of the collateral is not
sufficient to repay the loan, a loss would occur. Any such losses could have a
material adverse effect on our business, financial condition and operating
results.
IF WE DO NOT CONTINUE TO INTRODUCE NEW SERVICES AND PRODUCTS WE MAY LOSE OUR
CUSTOMERS.
Our future success depends in part on our ability to develop and enhance our
services and products. There are significant risks in the development of new
services and products or enhanced versions of existing services and products,
particularly in our electronic brokerage business. We may also experience
difficulties that could delay or prevent the development, introduction or
marketing of these services and products. Additionally, these new services and
products may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we are unable to develop and introduce enhanced or new
services and products quickly enough to respond to market or customer
requirements, or if they do not achieve market acceptance, our business,
financial condition and operating results will be materially adversely affected.
MANY OF OUR COMPETITORS ARE LARGER AND BETTER KNOWN THAN WE ARE.
The market for brokerage services is rapidly evolving and intensely competitive.
We face direct competition from firms offering discount and electronic brokerage
services such as Charles Schwab & Co., Inc., Fidelity Brokerage Services, Inc.,
Waterhouse Securities, Inc., Ameritrade, Inc. (a subsidiary of Ameritrade
Holding Corporation), and E*TRADE Group, Inc. We also encounter
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competition from established full commission brokerage firms such as PaineWebber
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Solomon
Smith Barney, Inc., among others. In addition, we compete with financial
institutions, mutual fund sponsors and other organizations. Further, Tejas
Securities has seen a substantial increase in the number of companies providing
electronic brokerage services in recent years, and this trend is expected to
continue.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors have greater name recognition and larger
customer bases that could be leveraged, thereby gaining market share from us.
Our competitors may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can be no assurance
that we will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on our
business, financial condition and operating results.
WE MAY NOT SUCCESSFULLY ASSIMILATE ACQUIRED COMPANIES.
We may acquire other companies in the future, and we regularly evaluate such
opportunities. Acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention from other business concerns, amortization of acquired intangible
assets and potential loss of key employees of acquired companies. We have
limited experience in assimilating acquired organizations into our operations.
We may not successfully integrate any operations, personnel, services or
products that might be acquired in the future. Failure to successfully
assimilate acquired organizations could have a material adverse effect on our
business, financial condition and operating results.
WE ARE SUBJECT TO STRICT GOVERNMENT REGULATION AND THE FAILURE TO COMPLY COULD
RESULT IN DISCIPLINARY ACTIONS.
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. See "- Securities Industry Practices" above.
Broker-dealers are subject to regulations covering all aspects of the securities
business.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our business, financial
condition and operating results.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
We have initiated a marketing campaign designed to bring brand name recognition
to Tejas Securities. The NASD regulates all marketing activities by Tejas
Securities. The NASD can impose certain penalties for violations of its
advertising regulations, including censures or fines, suspension of all
advertising, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees. Tejas
Securities' compliance officers review all marketing materials prior to release
to ensure compliance with NASD regulations.
There can be no assurance that other federal, state or foreign agencies will not
attempt to regulate our business. If such regulations are enacted, our business
or operations would be rendered more costly or burdensome, less efficient or
even impossible or otherwise have a material adverse effect on our business,
financial condition and operating results.
WE MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS WHICH COULD SLOW OUR EXPANSION
PLANS OR PREVENT PAYMENTS OF DIVIDENDS.
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from Tejas Securities could be
restricted, which in turn could limit our ability to pay dividends, repay debt
and redeem or purchase shares of our outstanding stock. A large operating loss
or charge against net capital could adversely affect our
8
<PAGE> 10
ability to expand or even maintain our present levels of business, which could
have a material adverse effect on our business, financial condition and
operating results.
OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephone. Thus, we depend heavily on the integrity of
the electronic systems supporting this type of trading. Heavy stress placed on
our systems during peak trading times could cause our systems to operate too
slowly or fail. If our systems or any other systems in the trading process slow
down significantly or fail even for a short time, our customers would suffer
delays in trading, potentially causing substantial losses and possibly
subjecting us to claims for such losses or to litigation claiming fraud or
negligence. During a systems failure, we may be able to take orders by
telephone; however, only associates with securities broker's licenses can accept
telephone orders, and an adequate number of associates may not be available to
take customer calls in the event of a systems failure. In addition, a hardware
or software failure, power or telecommunications interruption or natural
disaster could cause a system failure. Any systems failure that interrupts our
operations could have a material adverse effect on our business, financial
condition and operating results.
ADVANCES IN ENCRYPTION TECHNOLOGY MAY NOT OCCUR QUICKLY ENOUGH AND OUR CUSTOMERS
MAY STOP TRADING WITH US.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We will rely on encryption and
authentication technology to provide secure transmission of confidential
information. Despite our best efforts, advances in computer and cryptography
capabilities or other developments may result in a compromise of the algorithms
we use to protect customer transaction data. If a compromise of our security
were to occur, it is likely that our customers would stop trading with us.
NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND NONE MAY DEVELOP.
A public market for our common stock does not currently exist. We cannot predict
the extent to which investor interest in us will lead to the development of a
trading market or how liquid that market might become. The trading price of our
common stock could be subject to wide fluctuations in response to factors
unrelated to our operating results such as:
o announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments by
us or our competitors;
o new products or services offered by us or our competitors;
o changes in financial estimates by securities analysts;
o additions or departures of key personnel; and
o sales of our common stock.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of listed companies. Some of these fluctuations may be due
to speculative trading by individual investors, including investors commonly
referred to as "day traders." The trading prices of many companies' stocks are
at or near historical highs and these trading prices and multiples are
substantially above historical levels. These trading prices and
9
<PAGE> 11
multiples may not be sustained. These broad market factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance.
OUR EFFORTS TO DEVELOP WIDESPREAD BRAND RECOGNITION ARE LIKELY TO BE EXPENSIVE
AND MAY FAIL.
The development of the Tejas Securities brand is important to our future
success. If we fail to develop sufficient brand recognition, our ability to
attract customers may be impaired, and our revenue will suffer. In order to
build our brand awareness we must succeed in our brand marketing efforts and
deliver products and services that are in demand by our customers. These efforts
have required, and will continue to require, significant expenses. If we expend
additional resources to build the Tejas Securities brand and do not generate a
corresponding increase in revenue as a result of our branding efforts, or if we
otherwise fail to promote our brand successfully our business could be harmed.
We cannot assure that we will be successful in developing our brand.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our online trading and research distribution. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition, our new
enhancements must meet the requirements of our current and prospective customers
and must achieve significant market acceptance. We could also incur substantial
costs if we need to modify our service or infrastructures to adapt to these
changes.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
We recently hired and anticipate continuing to hire additional sales, research,
and investment banking personnel. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives, and we may experience
constraints that will adversely affect our ability to expand our customer base.
We have at times experienced, and continue to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel is an intensely
competitive and time-consuming process.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL.
Sales of a large number of shares of our common stock in the public market or
the perception that such sales could occur could cause the market price of our
common stock to drop. As of August 27, 1999, we had 12,536,737 shares of common
stock outstanding, of which 600,000 shares will be freely transferable without
restriction or registration under the Securities Act of 1933, unless such shares
are held by our affiliates, as that term is defined in Rule 144 under the
Securities Act. Sales of common stock by existing shareholders in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
In addition, as soon as practicable after the date of this prospectus, we intend
to file a registration statement on Form S-8 with the SEC covering the 3,000,000
shares of common stock reserved for issuance under our stock option plan and for
options issued outside such plan. On the date 180 days after the effective date
of this filing, approximately 758,561 shares will be subject to immediately
exercisable options (based on options outstanding on October 18, 1999). Sales of
a large number of shares could have an adverse effect on the market price for
our common stock.
10
<PAGE> 12
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following summary statement of operations data and the summary statement of
financial condition data as of and for each of the years in the five year period
ended December 31, 1998 have been derived from the audited financial statements
of Tejas Securities. The selected statement of operations data and statement of
financial condition data should be read in conjunction with the audited
financial statements as of December 31, 1997 and 1998 and for the years ended
December 31, 1996, 1997 and 1998 as included elsewhere herein. The unaudited
statement of operations data and statement of financial condition data as of and
for the nine months ended September 30, 1998 and 1999 have been prepared by
Tejas Securities and have been filed with the National Association of Securities
Dealers as required on a quarterly basis. This data includes all adjustments and
estimates that management considers necessary for the fair presentation of such
financial data for the periods then ended. The financial results for the
nine-month periods ended September 30, 1998 and 1999 are not necessarily
indicative of results for a full year of operations. Historical financial
results may not be indicative of future performance of the Company or its
affiliates.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31
1994 1995 1996 1997 1998
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commissions $ 0 3,674,261 3,648,255 4,810,520 7,932,780
Investment banking 0 0 0 752,554 2,584,770
Trading income 0 44,486 567,537 924,587 (299,166)
Other 0 62,500 41,720 9,248 23,530
Total revenue 0 3,781,247 4,257,512 6,496,909 10,241,914
Employee compensation 0 2,808,053 3,448,700 4,459,420 8,007,363
Other expenses 3,943 398,010 1,015,567 1,544,446 2,795,773
Total expenses 3,943 3,206,063 4,464,267 6,003,866 10,803,136
Income (loss) before income taxes (3,943) 575,184 (206,755) 493,043 (561,222)
Income tax expense (benefit) 0 25,057 0 19,008 (163,900)
Net income (loss) $(3,943) 550,127 (206,755) 474,035 (397,322)
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents $ 9,331 133,569 275,165 170,474 201,312
Receivable from broker-dealers 0 335,181 451,357 825,707 1,468,424
Securities owned 0 0 952,092 634,419 1,539,424
Other assets 2,726 283,828 267,229 343,978 733,067
Total assets $12,057 752,578 1,945,843 1,974,578 3,942,227
Liabilities $ 0 44,863 38,480 141,330 577,736
Securities sold, not yet purchased 0 0 0 0 0
Payable to broker-dealers 0 0 1,007,514 608,848 1,459,678
Subordinated debt 0 0 0 0 500,000
Total liabilities 0 44,863 1,045,994 750,178 2,537,414
Preferred stock 0 0 0 0 0
Common stock 16,000 549,760 865,011 946,878 1,473,071
Subscriptions receivable 0 0 0 (100,000) (96,263)
Treasury stock 0 (133,240) 0 (47,805) 0
Retained earnings (3,943) 291,195 34,838 425,327 28,005
Total shareholders' equity 12,057 707,715 899,849 1,224,400 1,404,813
Total liabilities and
shareholders' equity $12,057 752,578 1,945,843 1,974,578 3,942,227
------- ------- --------- --------- ---------
</TABLE>
11
<PAGE> 13
- - --------------------------------------------------------------------------------
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1999
--------- ----------
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C>
Commissions 5,358,043 20,327,944
Investment banking 2,309,601 220,766
Trading income (452,356) 4,629,052
Other 38,304 219,862
Total revenue 7,253,592 25,397,624
Employee compensation 4,850,291 15,492,833
Other expenses 2,674,084 3,706,762
Total expenses 7,524,375 19,199,595
Income (loss) before income taxes (270,783) 6,198,029
Income tax expense (benefit) (54,961) 2,478,324
Net income (loss) (215,822) 3,719,705
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents 215,813 3,784,689
Receivable from broker-dealers 2,921,660 7,721,748
Securities owned 1,534,886 12,435,365
Other assets 728,771 1,088,046
Total assets 5,401,130 25,029,848
Liabilities 922,878 4,417,425
Securities sold, not yet purchased 865,000 339,118
Payable to broker-dealers 1,528,175 13,292,305
Subordinated debt 500,000 1,000,000
Total liabilities 3,816,053 19,048,848
Preferred stock 0 0
Common stock 1,473,072 2,370,674
Subscriptions receivable (97,499) (135,047)
Treasury stock 0 (2,333)
Retained earnings 209,504 3,747,706
Total shareholders' equity 1,585,077 5,981,000
Total liabilities and
shareholders' equity 5,401,130 25,029,848
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Tejas Holding completed a reverse merger acquisition with the Company on August
27, 1999. The Company anticipates that the availability of public resources
through additional issuance of common stock or debt securities will provide
funding for future expansion in the securities industry. In the event the
Company issues additional equity to provide funding for expansion, current
shareholders may experience dilution in ownership percentage or book value.
Additionally, such equity may contain preferences and rights not available to
the current equity holders. The Company cannot give any assurance that it will
not need to issue additional equity or debt in the future in order to respond to
industry trends, potential business opportunities or unforeseen events.
As a broker-dealer, Tejas Securities is required to maintain a certain level of
liquidity or net capital in accordance with NASD regulations. Factors effecting
Tejas Securities' liquidity include the value of securities held in trading
accounts, the value of non-current assets, the amount of unsecured receivables,
and the amount of general business liabilities, excluding amounts payable to its
clearing broker and NASD approved subordinated debt.
Tejas Securities' inventory balance fluctuates daily based on the current market
value and types of securities held. Tejas Securities typically invests in
securities in which it provides research coverage. The types of securities may
include publicly traded debt, equity, options and private security issuances. As
a market maker, Tejas Securities provides bid and ask quotes on certain equity
securities on the NASDAQ market. Tejas Securities' ability to generate revenues
from market making activities may depend upon the level and value of securities
held in inventory.
Market values for some of the securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, Tejas Securities' liquidity
may be affected depending on the value of the securities involved. During times
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<PAGE> 14
of general market declines, Tejas Securities may experience market value losses,
which ultimately affects the liquidity of Tejas Securities through its
broker-dealer net capital requirements. In addition, Tejas Securities may decide
not to liquidate its security holdings to increase cash availability if
management believes a market turnaround is likely in the near term or if
management believes the securities are undervalued in the current market.
Since Tejas Securities' inception in March of 1994, management has raised
capital from two primary sources: the issuance of common stock and subordinated
debt. Tejas Securities generally has issued stock to either raise capital for
expansion or as an incentive to members of management. In April 1999, Tejas
Securities issued 1,006,975 shares of the common stock for $704,833 in cash. The
April 1999 stock issuance to Tejas Securities employees and management members
was a means of recognizing each individual's contribution to Tejas Securities
and to expand the shareholder base. Proceeds from the stock issuance were
partially used to finance the reverse merger and the expansion of Tejas
Securities' infrastructure.
In September 1998, Tejas Securities issued subordinated debt in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
subordinated debt was a short-term loan agreement used to increase equity
capital required for Tejas Securities underwriting activities. In November 1998,
Tejas Securities extended the repayment terms of the loan agreement so that the
loan became due and payable in November 2001. The loan accrues interest at 11.5%
per annum and is considered equity capital for NASD purposes. As a condition of
the loan agreement, Tejas Securities issued warrants to the lender to purchase
112,500 shares of common stock of Tejas Securities, exercisable at a price of
$2.65 per share.
In June 1999, Tejas Securities completed the second issuance of subordinated
debt in exchange for $500,000 from Clark Wilson. The proceeds from the loan
agreement were used to finance the expansion activities of Tejas Securities, as
well as contribute to operating activities. The loan accrues interest at 11.5%
per annum and is also considered equity capital for NASD purposes. As a
condition of the loan agreement, Tejas Securities issued additional warrants to
the lender to purchase 112,500 shares of common stock of Tejas Securities,
exercisable at a price of $2.65 per share of common stock. The warrants expire
in November 2003.
As of September 30, 1999, none of the 225,000 total warrants issued in
conjunction with the loan agreements had been exercised.
In addition to the sources of capital described above, Tejas Securities utilizes
the receivable balance from its clearing broker, Schroder & Co., to fund
operating and investing activities. The receivable balance represents the
residual equity due to Tejas Securities from Schroder & Co. if Tejas Securities
liquidated all of its investment security holdings. The receivable balance from
the clearing broker is also used to secure temporary financing from Schroder &
Co. for the purchase of investments in Tejas Securities' trading accounts. The
receivable balance held at Schroder & Co. may fluctuate depending on factors
such as the market valuation of securities held in Tejas Securities' trading
accounts, realized trading profits, commission revenue, cash withdrawals and
clearing costs charged to Tejas Securities for conducting its trading
activities.
In August 1999, Tejas Securities established a wholly-owned subsidiary, Tejas
Securities Group - East, L.L.C., a Georgia limited liability company ("Tejas -
East"), for the purpose of increasing the accountability of its primary branch
office and also for minimizing general business liability associated with
contracts and employment issues. Under an agreement between Tejas - East and
Tejas Securities, Tejas Securities provides a revolving line of credit in the
amount of $200,000, bearing interest at the prime rate plus 2%. Operating costs
for Tejas - East are funded through the excess of commission and trading
revenues over commission expense and clearing costs. As these amounts are not
completely known by management until the month end reporting process is
complete, Tejas Securities provides temporary funding through intercompany cash
transfers. Excess cash flows or deficiencies are carried forward on a monthly
basis, and are eliminated through Tejas Securities' monthly financial statement
consolidation process.
LIQUIDITY AT DECEMBER 31, 1996, 1997 AND 1998
Tejas Securities' cash position increased to $201,312 in 1998, from a balance of
$170,474 in 1997. These balances are comparable with the December 31, 1996
balance of $275,165. The fluctuations during these periods reflect changes in
the operating and financing activities of Tejas Securities from 1996 through
1998.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used by operating activities was $858,413, $18,542 and $174,816 in
1998, 1997 and 1996, respectively. The net cash used by operating activities is
impacted primarily by the brokerage operating activities and changes in the
brokerage-related assets and liabilities.
In 1998, the most significant use of cash was represented by the $642,717
increase in the receivable from the clearing broker. The increased receivable
was indirectly the result of Tejas Securities' use of proceeds from the $500,000
subordinated debt agreement.
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<PAGE> 15
Proceeds from the debt were used for operations thereby allowing Tejas
Securities to retain a larger receivable balance with the clearing broker. In
addition, Tejas Securities' overall investment in securities increased by
$905,005 from 1997 to 1998. This increase corresponds to the $850,830 increase
in payable to the clearing organization, taking into account market value
appreciation of the securities. The net cash effect of these transactions is the
use of $696,892, with the remaining $161,521 being net operating income plus
changes in other asset and liability accounts.
In 1997, the most significant changes in cash were represented by changes in the
receivable from the clearing broker and changes in the investment balances.
Tejas Securities' positive earnings were captured through increased commissions,
and were retained in the receivable from clearing broker, resulting in an
increase of $374,350. Investments in securities decreased by $317,673 in 1997,
which corresponds to the decrease of $398,666 in the payable to the clearing
organization, taking into account market value depreciation of the securities.
The net cash effect of these transactions is the use of $455,343, with the
remaining cash provided of $436,801 being net operating income plus changes in
other asset and liability accounts.
In 1996, the most significant change in cash was for the purchase of $952,092 in
investment securities. This use of cash was offset by the $1,007,514 increase in
the payable to the clearing organization. The net cash effect of these
transactions is $55,422 of cash provided, with the remaining $230,238 of cash
used being net operating income and changes in other assets and liabilities.
The Company anticipates that a portion of the cash provided from future
operating activities of Tejas Securities might be used to facilitate additional
investing activities, specifically the expansion of current office space in
Austin and Atlanta or the expansion of future offices. Future proceeds from cash
provided from operating activities may also be used to finance acquisition
activities.
Results of future operating activities of Tejas Securities will impact the
deferred tax asset or liabilities recorded by the Company. The value of the
deferred tax assets or liabilities may require the use of cash to satisfy
federal and state tax liabilities.
CASH FLOWS USED IN INVESTING ACTIVITIES
Net cash provided (used) by investing activities was $(188,484), $63,335 and
$(82,477) in 1998, 1997 and 1996, respectively. The cash uses in 1998 are
directly the result of capital expenditures for office expansion in Austin,
Atlanta, and New York. During 1998, Tejas Securities opened an additional office
in New York as part of its expansion into the investment banking and retail
brokerage segments of the industry.
In 1997, Tejas Securities entered into a sale-leaseback transaction with a
related party, as discussed in Item 7. Tejas Securities sold furniture and
fixtures for the book value of approximately $204,000, which generated cash of
$204,267.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided (used) by financing activities was $1,077,735, $(149,484) and
$398,889 in 1998, 1997 and 1996, respectively. Financing activities provided
$1,000,000 in cash during 1998 through the issuance of subordinated debt as
noted in Item 7. Of the $1,000,000 of debt issued in 1998, $500,000 was repaid
to the lender. In addition, Tejas Securities received $475,405 in proceeds from
common stock issuance to management, as well as $98,593 on the sale of treasury
stock to members of management.
In 1997, Tejas Securities received $250,000 from Joseph F. Moran for the
temporary financing of operating activities. Mr. Moran elected to have the
outstanding balance of the note payable converted into equity of Tejas
Securities. In addition, Tejas Securities sold treasury stock and received
$117,228 in proceeds from the sale. This was the final year that shareholder
distributions were paid as Tejas Securities elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code effective January
1, 1998. Tejas Securities paid $83,546 in shareholder distributions during 1997.
During 1996, Tejas Securities obtained $171,424, $154,576 and $122,491 through
the issuance of common stock, the sale of treasury stock, and contributions
received from shareholders, respectively. Tejas Securities also paid $49,602 to
shareholders in year-end distributions.
The Company may issue additional equity or debt securities in the future to
assist in the acquisition of additional businesses or expansion of current
offices.
14
<PAGE> 16
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
The Company's total revenues increased by $18,144,041 or 250% to $25,397,633 for
the nine months ended September 30, 1999. Total revenues increased $3,538,032 or
135% to $6,162,860 for the three months ended September 30, 1999. The reasons
for the increases are set forth below.
Commission revenues from principal transactions increased $13,369,298 or 273% to
$18,268,923 for the nine months ended September 30, 1999. Research coverage and
investment in CAI Wireless Systems Inc., CS Wireless Systems Inc., American
Telecasting Inc. and Wireless One Inc. provided a significant portion of this
revenue during a two-month period in early 1999. Commission revenues from agency
transactions increased $1,564,107 or 338% to $2,026,245 for the nine months
ended September 30, 1999. Tejas Securities' realized an increase of 8,595 agency
trades for the nine months ended September 30, 1999. The increase in agency
commissions and trades relates to the increase in the number of retail brokers
employed by Tejas Securities during 1999, and its continued focus on expanding
its products and services to individuals. Commissions from principal trades
increased due to an additional 1,412 trades executed during the nine months
ended September 30, 1999. In addition, Tejas Securities generated increased
commissions due to the appreciation of investments in the trading accounts for
the nine months ended September 30, 1999.
Investment banking revenues were $220,766 for the nine months ended September
30, 1999 versus $2,309,601 for the corresponding period in 1998. The decrease is
the result of the discontinuation of underwriting activities in October 1998.
For the nine months ended September 30, 1998, Tejas Securities underwrote two
initial public offerings and one preferred stock placement. For the
corresponding period in 1999, Tejas Securities was involved in one private
placement, which generated 62% of the investment banking revenue. The remaining
fees in 1999 were for advisory services and syndicate participation.
Net dealer inventory and investment income increased by $5,081,408 to $4,629,052
for the nine months ended September 30, 1999 compared to the same period in
1998. The increase in inventory and investment income resulted from favorable
investment performance of companies in the telecommunications and Internet
industries during the nine months ended September 30, 1999.
For the nine months ended September 30, 1999, other income increased $181,567 or
474% to $219,871. The increase for the nine months ended September 30, 1999 is
due to an increase in customer margin fee revenue.
Total expenses increased by $11,825,720 or 157% to $19,350,095 for the nine
months ended September 30, 1999. Net income for the nine months increased by
$3,464,945 to $3,249,123. The explanations for the increases are set forth
below.
Commissions, employee compensation and benefits increased $10,642,542 or 219% to
$15,492,833 for the nine months ended September 30, 1999. Commission expense
increased $8,346,226 or 241% to $11,787,942 primarily as a result of the
increase in commission revenue. General and administrative salaries and other
employee benefits increased due to overall salary increases and additional
hires. Incentive compensation and year-end bonus accruals increased as a result
of higher profits.
Clearing and floor brokerage costs increased $36,647 or 12% to $341,381 for the
nine months ended September 30, 1999. The overall increase in clearing and floor
brokerage costs for the nine months ended September 30, 1999 results from
greater trading activity in the over-the-counter equity markets and on the
national exchanges. Tejas Securities' percentage of revenues derived from equity
securities increased during 1999 in comparison to the volume of fixed income
securities being traded.
No underwriting expenses were incurred during the nine months ended September
30, 1999 as Tejas Securities did not actively engage in underwriting or
investment banking activities, other than the private placement during the
second quarter of 1999. The only expenses associated with the private placement
were legal fees and commission expense, which were not material to the overall
financial results.
Communications and occupancy charges increased $339,094 or 62% to $881,410 for
the nine months ended September 30, 1999. The increase is attributed to two
factors. In June 1998, Tejas Securities began its expansion into the New York
market. The additional cost of rent and telecommunications was incurred for a
portion of the nine months ended September 30, 1998 versus the full cost during
the nine months in 1999. In addition, Tejas Securities has increased the
availability of quote and news services to its brokers and traders in the Austin
and Atlanta offices. This increase in services provided was needed to support
the increase in commission generating employees.
Professional fees for the nine months ended September 30, 1999 increased
$453,598 or 112% to $855,775. The increase in costs is due primarily to the
increased legal fees during the quarter ended September 30, 1999. Of the total
increase for the nine-month period, $344,020 was accrued legal expenses relating
to the merger of the Company and Tejas Securities; legal fees for the settlement
of private equity securities transactions with its customers; and fees for
general legal counsel. The remaining costs during the nine months ended
September 30, 1999 related to consulting and accounting fees incurred during the
normal course of business.
15
<PAGE> 17
Tejas Securities increased its leverage on its receivable from clearing broker
balance during 1999, which resulted in an increase in interest expense of
$353,926 or 809% to $397,656 for the nine months ended September 30, 1999. As of
September 30, 1999, securities owned approximated 161% of the receivable from
clearing broker balance. As of September 30, 1998, securities owned approximated
105% of the receivable from clearing broker balance. Margin interest paid on
these leveraged balances accounted for $320,429 of the overall increase. Margin
interest on the leveraged balances accounted for $117,053 of the overall
increase. The remaining increase in interest expense relates to the addition of
subordinated debt in October 1998 and June 1999.
Other expenses increased $423,038 or 44% to $1,381,040 for the nine months ended
September 30, 1999. The overall increase in other expenses during the nine
months ended September 30, 1999 is the result of increases in personnel and
general and administrative services needed to support those personnel.
Income tax expense increased $2,477,285 to $2,422,324 for the nine months ended
September 30, 1999. The overall increase in income tax expense for the nine
months ended September 30, 1999 is due to the increase in gross profit during
the period. The Company's effective tax rate was 39% for the nine months ended
September 30, 1999.
Minority interest in net income results from the allocation of net income of
Tejas Securities subsequent to the Merger on August 27, 1999.
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
During 1998, Tejas Securities' total revenue increased 58% to $10.2 million from
$6.5 million for 1997. Of the total increase in revenues, underwriting and
investment banking activity provided the largest increase of 243% over the prior
year. Commission revenue for 1998 increased 65% over the previous year. The
growth in underwriting and investment banking revenue and commission revenue is
attributed to the expansion of Tejas Securities into the New York City, and
Atlanta markets. These new markets allowed Tejas Securities the opportunity to
complete three initial public offerings and one preferred stock offering during
1998. A byproduct to the investment banking activity was the increase in
securities inventory owned at year-end, including positions in the companies
underwritten. As the overall stock market declined during the fourth quarter, so
did the value of the securities inventory owned, thus resulting in a trading
loss of $299,166 at year-end.
Revenues increased 54% to $6.5 million in 1997 from $4.2 million in 1996,
primarily from the commencement of investment banking activities by Tejas
Securities. During 1997, Tejas Securities generated approximately $750,000 in
management and underwriting fees associated with initial public offerings. In
addition, Tejas Securities commission revenue increased from $3.6 million in
1996 to $4.8 million in 1997, primarily from the additional trading activity
associated with the initial public offerings.
The cost of expansion into new markets and the new products offered during 1998
had a significant impact on expenses as well. Commission expense increased 87%
from 1997 to 1998, and 76% from 1996 to 1997, while clearing costs increased
nearly 300% from 1997 to 1998, and 288% from 1996 to 1997. The increase in
commissions and clearing costs are attributed to the increased trading activity
and investment banking activity during 1998 and 1997. As a percentage of
commission revenue, commission expense during 1998 was 75% versus 66% in 1997
and 50% in 1996. Clearing costs remained consistent as a percentage of
commission revenues at 4% in 1998 and 3% in 1997, versus 1% in 1996.
In addition to the increased cost of conducting broker-dealer activities, Tejas
Securities realized an increase in other general and administrative costs during
1998. Employee compensation increased 54% from 1997 to 1998, and 5% from 1996 to
1997. The increase in employee compensation during 1998 resulted from the
addition of general administrative and management personnel needed to oversee
operations in the New York, Atlanta and Dallas offices. The number of general
administrative and management personnel employed by Tejas Securities during 1998
consisted of approximately twenty-two full time employees versus fourteen full
time employees during 1997. The number of general administrative and management
personnel grew between 1996 and 1997 from ten to fourteen full time employees.
Communications and occupancy costs, which include rent, telephone services and
market quotes and data, increased by 185% from approximately $440,000 in 1997 to
$817,000 in 1998, and 31% from approximately $337,000 in 1996 to the 1997
amount. These costs are variable expenses that increase with the number of
personnel employed and the number of offices in existence.
Overall, expenses before taxes for 1998 and 1997 increased by 80% and 35%,
respectively, to approximately $10,803,000, $6,004,000 and $4,464,000 for 1998,
1997 and 1996. Net income (loss) for the years 1998, 1997 and 1996 was
$(397,322), $474,035 and $(206,755), respectively.
Effective January 1, 1998, Tejas Securities elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code. For the year
ended December 31, 1998, income taxes were accounted for under the asset and
liability method, with adjustments to the
16
<PAGE> 18
asset or liability impacting the statement of operations as a benefit or
expense. For the year ended December 31, 1998, Tejas Securities recorded an
expected tax benefit of $163,900. The Company, prior to the merger, had a net
operating loss carryforward of $59,133 as of December 31, 1998. As of June 30,
1999, the Company's net operating loss carryforward was $63,966. The Company
will use the net operating loss carryforward to offset a portion of the tax
liability incurred by Tejas Securities as allowed by federal tax provisions.
Future tax benefits or expenses will be recorded based upon the enacted federal
and state income tax rates applicable to the Company.
EFFECTS OF INFLATION
The effects of inflation have been minimal on the results of operations and the
financial condition of Tejas Securities in recent years. However, the rising
cost of labor and competitive market for brokers could effect general and
administrative costs in the near term.
YEAR 2000 COMPLIANCE
Tejas Securities initiated its Year 2000 compliance project in early 1998. The
project was initiated in response to amended Rule 17a-5 of the Securities
Exchange Act of 1934, which required all broker-dealers to file a series of Year
2000 readiness reports with the SEC and its designated examining authority.
Tejas Securities' project included the assessment of both hardware and software
systems used internally or relied upon externally. In addition, the project
encompassed the Year 2000 readiness of service providers and vendors of Tejas
Securities.
Tejas Securities completed the majority of its Year 2000 compliance project by
June 30, 1999, including an inventory of systems, assessment of compliance, and
an impact analysis of non-compliant systems. The cost of assessing Year 2000
compliance has been absorbed by Tejas Securities through internal payroll. No
significant costs have been incurred for the replacement of equipment or
services as all of Tejas Securities' mission critical systems are maintained by
outside vendors that replaced non-compliant systems or equipment at no cost.
17
<PAGE> 19
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company is required to implement this standard effective with
its 2000 fiscal year. SFAS 133 addresses the accounting for derivative
instruments, including certain instruments embedded in other contracts, and for
hedging activities. Under this Statement, the Company will be required to
recognize all derivative instruments as either assets or liabilities in the
statement of financial position and measure those at fair value. If certain
conditions are met a derivative may be specifically designated as a hedge, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-dominated forecasted transaction. The Company does not believe
that this Statement will have a material effect on its financial position or
results of operations.
Tejas Securities may invest in derivative transactions during the normal course
of business, primarily to satisfy the needs of its clients. Derivative
transactions entered into are recorded at the market value with realized or
unrealized gains and losses recognized in the Statement of Operations. Market
value is generally determined by quoted market prices for exchange-traded
options. Tejas Securities held 175,140 warrants with a market value of $350,280
as of September 30, 1999.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal business activities are, by their nature, risky and
volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect the Company's business. Managing risk is
critical to the Company's profitability and to reducing the likelihood of
earnings volatility. The Company's risk management policies and procedures have
been established to continually identify, monitor and manage risk. The major
types of risk that the Company faces include credit risk, operating risk and
market risk.
Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. Tejas Securities clears its securities
transactions through a clearing broker. Under the terms of the clearing
agreement, the clearing broker has the right to charge Tejas Securities for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, Tejas Securities' policy is to monitor
the credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of Tejas Securities' assets are
held at its clearing broker, Schroder & Co. Therefore, Tejas Securities could
incur substantial losses if its clearing broker were to become insolvent or
otherwise unable to meet its financial obligations. Schroder & Co. has in excess
of $250 million in capital and has historically met all of its obligations to
Tejas Securities.
Operating risk arises from the daily conduct of the Company's business and
relates to the potential for deficiencies in control processes and systems,
mismanagement of Company activities or mismanagement of customer accounts by its
employees. The Company relies heavily on computer and communication systems in
order to conduct its brokerage activities. Third party vendors, such as the
clearing broker and news and quote providers, provide many of the systems
critical to the Company's business. The Company's business could be adversely
impacted if any of these systems were disrupted. The Company mitigates the risk
associated with systems by hiring experienced personnel, and providing employees
with alternate means of acquiring or processing information. In order to
mitigate the risk associated with mismanagement of Company activities or
customer accounts, the Company utilizes compliance and operations personnel to
review the activities of administrative and sales personnel. In addition, the
activities of management are actively reviewed by other members of management on
a regular basis and by the Board of Directors.
The Company's primary market risk exposure is to market price changes and the
resulting risk of loss that may occur from the potential change in the value of
a financial instrument as a result of price volatility or changes in liquidity
for which the Company has no control. Securities owned by Tejas Securities are
either related to daily trading activity or Tejas Securities' principal
investing activities. Market price risk related to trading securities is managed
primarily through the daily monitoring of funds committed to the various types
of securities owned by the Company and by limiting exposure to any one
investment or type of investment.
Tejas Securities trading securities were $5,592,799 in long positions and
$275,250 in short positions at September 30, 1999. These trading securities may
be exchange listed, Nasdaq or other over-the-counter securities on both long and
short positions. The potential loss in fair value, using a hypothetical 10%
decline in prices, is estimated to be $531,755 as of September 30, 1999. A 10%
hypothetical decline was used to represent a significant and plausible market
change.
Tejas Securities' investment securities are typically those reported on by Tejas
Securities' research analysts. These positions often consist of high-yield debt
securities and the related equity securities. The Company monitors this risk by
maintaining current operating and financial data on the companies involved, and
projecting future valuations based upon the occurrence of critical future
events. Any transactions involving the investment securities are typically based
upon the recommendations of Tejas Securities' research analysts versus current
market performance.
18
<PAGE> 20
ITEM 3. PROPERTIES.
Tejas Securities leases space for its offices in Austin, Texas, Atlanta, Georgia
and New York, New York. Future commitments associated with the leases are
included in the footnotes to the financial statements. These leases are for
terms of four years, five years, and five years, respectively, and contain
renewal options. Tejas Securities' headquarters are located at 1250 Capital of
Texas Highway South, Austin, Texas, and consists of approximately 7,800 square
feet. Tejas Securities' Atlanta office is located at 12725 Morris Road, Suite
100, Alpharetta, Georgia, and consists of approximately 2,500 square feet. The
New York office is located at 1 World Trade Center, New York, New York, and
consists of approximately 6,000 square feet. Tejas Securities has entered into a
lease for 24,700 square feet in Austin, Texas and will relocate its corporate
headquarters to that space in December 1999. Tejas Securities will attempt to
sublease its current Austin, Texas office space.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides information at November 30, 1999 with respect to
ownership of the Common Stock, by each beneficial owner of five percent or more
of the Common Stock, each director of the Company, each of the named executive
officers and all directors and officers as a group. Except as indicated on the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
---------------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER NUMBER PERCENT
--------------------------------- --------- -------
<S> <C> <C>
John J. Gorman (1) 5,781,936 46.12%
Jay W. Van Ert (1) 1,145,495 9.14%
Joseph F. Moran (1) 2,482,621 19.80%
Michael L. McAllister -- --
John R. Ohmstede (2) 789,435 6.30%
Gregory D. Woodby (1) 248,250 1.98%
A. Reed Durant (1) -- --
John F. Garber (1) -- --
Charles H. Mayer (1) -- --
Neil Ragin (3) 37,808 *
All officers and directors as a
group (9 total) 9,658,302 77.04%
</TABLE>
- - -------------------------------------------------------------------------------
* Less than 1%.
(1) The address for Messrs. Gorman, Van Ert, Moran, Woodby, Durant, Garber and
Mayer is 2700 Via Fortuna, Suite 400, Austin, Texas 78746.
(2) The address for Mr. Ohmstede is 5905 Overlook Drive, Austin, Texas 78731.
(3) The address for Mr. Ragin is 134 West 72nd Street, New York, New York,
10023. Mr. Ragin resigned as President, Treasurer and Director of the
Company effective August 26, 1999.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following information sets forth certain information with respect to the
executive officers and directors of the Company. Each of the Directors of the
Company is elected to serve until the next election of directors at a meeting of
the Stockholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------- ----- ------------------------------------------
<S> <C> <C>
John J. Gorman 39 Director, Chairman and Chief Executive
Officer
Jay W. Van Ert 38 Director and President
Joseph F. Moran 38 Director, Vice Chairman, Managing
Director
Charles H. Mayer 52 Director and Chief Operating Officer
Michael McAllister 45 Executive Vice President, Managing
Director
Gregory D. Woodby 38 Secretary and Treasurer
A. Reed Durant 44 Director of Compliance
John F. Garber 29 Director of Finance
Barry A. Williamson 42 Director
Clark N. Wilson 42 Director
</TABLE>
19
<PAGE> 21
JOHN J. GORMAN. Mr. Gorman became Chairman of the Board of Directors and Chief
Executive Officer of the Company in August 1999. He has been the Chairman and
Chief Executive Officer of Tejas Securities since July 1997. Mr. Gorman has over
16 years of experience in the brokerage industry. Mr. Gorman became a principal
of Tejas Securities on April 18, 1995. From 1988 until joining Tejas Securities,
Mr. Gorman worked at APS Financial Inc., most recently as a Senior Vice
President. Mr. Gorman served primarily in a broker capacity at APS Financial
Inc, broker-dealer in Austin, Texas. Mr. Gorman has held positions at APS
Financial Inc., Landmark Group, Shearson Lehman and Dean Witter. In addition,
Mr. Gorman serves on the Board of Directors of Lincoln Heritage Corporation, a
publicly traded company. Mr. Gorman is the nephew of Charles H. Mayer through
marriage. Mr. Gorman received his B.B.A. from Southern Methodist University in
1983.
JAY W. VAN ERT. Mr. Van Ert became the President and a Director of the Company
in August 1999. Mr. Van Ert joined Tejas Securities in 1995 as Director of
Research, was elected to the Board of Directors in 1997, and was named President
in May 1998. Mr. Van Ert has spent in excess of fifteen years in the investment
industry. Prior to joining Tejas Securities, Mr. Van Ert was employed from 1989
to 1995 as a Vice President with T. Rowe Price Associates Inc. where he served
as an Analyst, Portfolio Manager and Director of High Yield Research. Mr. Van
Ert earned a B.B.A. in Finance from the University of Texas in 1983 and an
M.B.A. from Southern Methodist University in 1984.
JOSEPH F. MORAN. Mr. Moran became the Vice Chairman of the Board of Directors
and Managing Director of the Company in August 1999. Mr. Moran joined Tejas
Securities in January 1996 as Senior Vice President of Fixed Income Sales. He
was elected to the Board of Directors of Tejas Securities in 1997 as Managing
Director and recently was named Vice Chairman of the Board. From 1991 until
joining Tejas Securities, Mr. Moran worked at APS Financial Inc. most recently
as a Senior Vice President. Mr. Moran served primarily in a broker capacity at
APS Financial Inc. Mr. Moran received his B.B.A. from Baylor University in 1984.
CHARLES H. MAYER. Mr. Mayer joined the Company in September 1999 as the Chief
Operating Officer and a Director. From 1995 until he joined Tejas Securities,
Mr. Mayer was 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, Lehman Brothers and the Federal Reserve Bank of New
York. Mr. Mayer earned a BBA and MBA from Seton Hall University.
MICHAEL L. MCALLISTER, Executive Vice President and Managing Director. Mr.
McAllister has over 19 years experience as an investment banker. Mr. McAllister
became Executive Vice President and Managing Director of Tejas in November 1999.
Mr. McAllister is the head of investment banking and is also responsible for
building the equity capital markets business. Previously, Mr. McAllister was
Senior Vice President and Managing Director of Corporate Finance at Southwest
Securities, Inc. from February 1998. From January 1995 to February 1998, Mr.
McAllister was Managing Director of Corporate Finance at Southcoast Capital
Corporation. Previous to this, Mr. McAllister was Managing Director from August
1992 to August 1994 at Kemper Securities, Inc. Prior to that, Mr. McAllister
served in the corporate finance departments of Lehman Brothers and The First
Boston Corporation.
GREGORY D. WOODBY. Mr. Woodby became the Secretary and Treasurer of the Company
in August 1999. Mr. Woodby joined Tejas Securities in January 1996 as Director
of Fixed Income Trading and was elected to the Board of Directors of Tejas
Securities in 1997 as Secretary. From 1989 until joining Tejas Securities, Mr.
Woodby worked at APS Financial Inc., most recently as a Fixed Income Trader for
APS Financial Inc. Mr. Woodby graduated from Baylor University earning a B.B.A.
in Management in 1983.
A. REED DURANT. Mr. Durant became the Director of Compliance for the Company in
August 1999. Mr. Durant joined Tejas Securities in November 1998 as the
Compliance Director. From January 1996 until joining Tejas Securities, Mr.
Durant worked as Senior Compliance Examiner for the NASD in the Regulation and
Enforcement area. Prior to joining NASD, Mr. Durant worked at Principal
Financial Securities since 1988. Mr. Durant brings over 20 years experience in
the securities industry to the Company, including 8 years as Compliance Director
of a 400-broker, 30-branch NYSE member firm. Mr. Durant graduated from Texas
Tech University with a BA in economics.
JOHN F. GARBER. Mr. Garber became the Director of Finance for the Company in
August 1999. Mr. Garber joined Tejas Securities in October 1998 as Director of
Finance. From April 1999 until joining Tejas Securities, Mr. Garber was employed
as the Controller for Loewenbaum & Co. Inc., an Austin based broker-dealer.
Prior to joining Loewenbaum & Co., Inc. in April 1998, he was employed by KPMG
LLP from 1995 to 1998 as a supervising auditor in the financial assurance
department. In addition, Mr. Garber serves as the Financial and Operations
Principal of Tejas Securities for regulatory reporting purposes. Mr. Garber
graduated from the University of Florida in 1992 with a B.S.B.A. in Finance. He
is a Certified Public Accountant and a member of the Texas Society of Certified
Public Accountants.
BARRY A. WILLIAMSON. Mr. Williamson became a Director of the Company in October
1999. Mr. Williamson was elected in 1992 as the 38th Texas Railroad Commissioner
and served from January 1993 to January 1999. He served as the Commission's
20
<PAGE> 22
Chairman in 1995. During the late 1980's and early 1990's, Mr. Williamson served
under the Bush administration at the U.S. Department of Interior as the Director
of Minerals Management Service. Under President Bush, he managed mineral leases
on the nation's 1.4 billion-acre continental shelf and oversaw an annual budget
of almost $200 million. During the 1980's, Mr. Williamson served under the
Reagan administration as a principle advisor to the U.S. Secretary of Energy in
the creation and formation of a national energy policy. Mr. Williamson began his
career with the firm of Turpin, Smith, Dyer & Saxe, and in 1985 established the
Law Offices of Barry Williamson and founded an independent oil and gas company.
Mr. Williamson graduated from the University of Arkansas with a B.A. in
Political Science in 1979, and received his J.D. degree from the University of
Arkansas Law School in 1982.
CLARK N. WILSON. Mr. Wilson became a Director of the Company in October 1999.
Mr. Wilson is the President and Chief Executive Officer of Clark Wilson Homes,
Inc., a subsidiary of Capital Pacific Holdings. Previously, Mr. Wilson was the
President of Doyle Wilson Homebuilder, Inc., serving in that position in 1992.
Mr. Wilson served as Vice President of Doyle Wilson homebuilder, Inc. from 1986
to 1992. Mr. Wilson took Doyle Wilson Homebuilder, Inc. through a turbulent
market and formed Clark Wilson Acceptance Corporation in 1989 as a finance
corporation, personally financing over $35,000,000 of construction loans for
Doyle Wilson Homebuilder, Inc. Mr. Wilson has won numerous MAX awards between
1994 and 1998, including the MAX Award for Grand Builder of the Year and best
Quality Project in 1994. Mr. Wilson is a Life Member of the National Association
of Homebuilders Spike Club. Mr. Wilson attended Amarillo College and the
University of Texas at Austin, and has nearly twenty-five years of experience in
the homebuilding industry.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company served as a member of the compensation or
similar committee or Board of Directors of any other entity, other than the
Company's subsidiaries, of which an executive officer served on the Compensation
Committee or Board of Directors of the Company.
ITEM 6. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICER COMPENSATION
The following executive officers of the Company received cash compensation in
the form of salary, bonus or commissions in excess of $100,000 during 1998, 1997
and 1996. None of the executive officers received any stock awards during the
years ended December 31, 1998, 1997 or 1996.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
NAME AND PRINCIPAL
POSITION YEAR SALARY BONUS FORGIVEN DEBT COMMISSIONS
--------------------- ------ --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
John J. Gorman 1998 $ 125,000 $ 0 $ 135,114 $ 709,309
Chairman and Chief 1997 0 261,000 0 643,688
Executive Officer 1996 0 0 0 790,272
----------------- ---- --------- --------- --------- ----------
Jay W. Van Ert 1998 183,333 0 0 47,255
Director and President 1997 120,000 75,000 0 44,010
1996 172,500 0 0 53,090
---- --------- --------- --------- ----------
Gregory D. Woodby 1998 100,000 500 0 76,748
Secretary and Treasurer 1997 85,000 40,000 0 59,481
1996 75,000 35,000 0 42,395
---- --------- --------- --------- ----------
Joseph F. Moran 1998 0 0 0 1,023,280
Managing Director 1997 0 0 0 977,890
and Vice Chairman 1996 330,000 0 0 659,303
----------------- ---- --------- --------- --------- ----------
</TABLE>
DIRECTOR COMPENSATION
Prior to the Merger, the directors of the Company did not receive compensation
for their service on the Board of Directors. Following the Merger, the initial
directors of the Company requested that Mr. Wilson and Mr. Williamson serve as
directors. As part of their incentive to join the Board, Mr. Wilson and Mr.
Williamson were each provided with options to purchase 100,000 shares of Common
Stock. The options are exercisable at $2.00 per share and expire on August 27,
2004. The options vest over a three-year period, commencing on August 27, 1999.
Currently no other directors of the Company receive any form of cash or non-cash
compensation for fulfilling their roles on the Board of Directors of the
Company.
21
<PAGE> 23
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SALE LEASEBACK
In September 1997, Tejas Securities entered into a sale-leaseback transaction
with Sandy Hook Management, a company owned by Charles H. Mayer, a member of the
Board of Directors. Sandy Hook Management purchased the assets for $204,267 from
Tejas Securities. Tejas Securities purchased the assets from June 1995 through
September 1997 for a total cost of $272,072. The book value of the assets as of
the date of the transaction was determined in accordance with generally accepted
accounting principles, including depreciation calculated by the straight-line
method. The previous Chief Financial Officer of Tejas Securities (Richard
Williams) made the determination of the book value. Under the terms of this
transaction, Tejas Securities agreed to lease the furniture and fixtures
commencing in October 1998 through September 2000. Tejas Securities makes
monthly lease payments of $6,372 to Sandy Hook Management and has an option to
purchase the furniture and fixtures at a discounted price in September 2000.
SUBORDINATED DEBT
Tejas Securities issued subordinated debt in September 1998 in exchange for
$500,000 from Clark Wilson, a current member of the Board of Directors. The
transaction is described in Item 2. Financial Information - "Liquidity and
Capital Resources."
Tejas Securities completed the second issuance of subordinated debt in June 1999
in exchange for $500,000 from Clark Wilson. The transaction is described in Item
2. Financial Information - "Liquidity and Capital Resources."
TSG INTERNET FUND I, LTD.
In April 1999, John J. Gorman, Jay W. Van Ert, Joseph F. Moran, Clark N. Wilson
and Gregory D. Woodby, along with three other owners of less than 5% of Tejas
Securities, established TSG Capital, LLC (the "General Partner"), a Texas
limited liability company, for the purpose of acting as general partner of TSG
Internet Fund I, LTD. (the "Fund"), a Texas limited partnership. In addition to
the investment in the General Partner, Messrs. Gorman, Van Ert, Moran and Wilson
invested as limited partners in the Fund. Their contributions were as follows:
Mr. Gorman $200,000; Mr. Van Ert $120,520; Mr. Moran $200,000; and Mr. Wilson
$100,000. John Ohmstede, a beneficial owner of more than 5% of Tejas Securities,
also invested $200,000 in the Fund as a limited partner through a Trust. The
total capital contribution by the General Partner was less than $50,000.
TSG Capital, LLC acts as the general partner of the Fund and has no other
operations. The managers and principal executive officers include Jay W. Van Ert
and A. Reed Durant who are also officers of the Company, Tejas Holding and Tejas
Securities. The General Partner receives a management fee equal to .375% of the
average monthly net asset value of the Fund after the end of each fiscal
quarter. In addition, the General Partner receives a performance fee equal to
20% of the annual net profits of the Fund after the end of each fiscal year.
Tejas Securities receives a monthly management fee in exchange for providing
services to the General Partner for investment management, compliance and
accounting and reporting. In order to facilitate the closing of the Fund, Tejas
Securities advanced to the General Partner $357,099, of which $286,719 was
repaid to Tejas Securities, as investor funds became available. The remaining
balance of $70,380 is included as a receivable from an affiliate on the
statement of financial condition of Tejas Securities.
The Fund engaged Tejas Securities to solicit subscriptions for the initial
$2,500,000 private placement of limited partnership interests in the Fund. In
exchange for acting as the placement agent, Tejas Securities received a
placement agent fee equal to 5% of the total initial capital contributions to
the Fund. The total placement agent fee equaled $136,025 and was paid in May
1999.
During the fourth quarter of 1999, the Fund was reopened and approximately $3.5
million in additional funds were invested bring the total under management to
approximately $10 million. During the first quarter of 2000, Tejas anticipate
it will purchase the interests of Messrs. Gorman, Van Ert, Moran, Woodby and
the other owners of equity in TSG Capital, LLC at cost. Tejas will then assume
operation of the Fund.
EMPLOYEE CASH ADVANCES
Tejas Securities makes cash advances to certain employees from time to time,
which are typically secured and repaid from commissions. During 1998, Tejas
Securities forgave approximately $135,000 in advances receivable from John J.
Gorman as described in Note 8 to the accompanying 1998 Financial Statements.
SALE OF STOCK TO EMPLOYEES
In April 1999, Tejas Securities issued an additional 1,006,975 shares of its
common stock with a value of $704,833 to employees and management of Tejas
Securities. Of the shares issued, 410,000 shares were issued to directors or
executive officers of Tejas Securities
22
<PAGE> 24
at a purchase price of $0.70 per share. The transaction was recorded as a stock
subscription receivable, and was collected in full by August 1999. The following
reflects the April 1999 issuance of common stock to directors or executive
officers of Tejas Securities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
DIRECTOR/EXECUTIVE
OFFICER SHARES SUBSCRIBED SUBSCRIPTION PRICE
------------------ ----------------- ----------------------
<S> <C> <C>
John J. Gorman 100,000 $ 70,000
Jay W. Van Ert 100,000 $ 70,000
Joseph F. Moran 100,000 $ 70,000
Gregory D. Woodby 60,000 $ 42,000
A. Reed Durant 25,000 $ 17,500
John F. Garber 25,000 $ 17,500
-------------- ------- ---------
</TABLE>
John J. Gorman was named to the Board of Directors of Lincoln Heritage
Corporation in August 1999. Currently, Mr. Gorman owns common stock and stock
purchase warrants with a combined value in excess of $60,000. Tejas Securities
acted as managing underwriter in Lincoln Heritage's IPO and currently owns less
than 5% of the common equity of Lincoln Heritage.
ITEM 8. LEGAL PROCEEDINGS.
In June 1999, Starlight Entertainment, Inc., has submitted a claim in an
arbitration proceeding for damages in the amount of $6,800,000 for the failed
underwriting of a public offering of Starlight's common stock. The amount of
Starlight's claim is based upon the gross receipts that were expected from the
proposed public offering less the underwriting commission plus attorney's fees.
The Company's counsel has reviewed the complaint and is preparing an answer with
respect to the arbitration. Management does not believe this matter will produce
any material adverse consequences to the Company.
There are no other liabilities arising from claims or legal actions that
management believes would have a significant adverse effect on the financial
condition or results of operations of Tejas Securities.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
THE RELATED SHAREHOLDER MATTERS.
The Company's stock has not traded on an exchange or bulletin board since its
inception. The Company is in the process of registering its securities and
receiving approval to trade on the American Stock Exchange. There are no high
and low bid quotations available on the Company for the most recent fiscal year.
The Company has not paid cash or stock dividends and has no present plan to pay
any such dividends. Currently, the Company intends to reinvest its earnings in
order to facilitate expansion. The likelihood of future dividends will be
decided by the Board of Directors and will be based upon the Company's future
earnings, financial condition and capital requirements. Tejas Securities paid
$83,546 and $49,602 in shareholder distributions for the years ending December
31, 1997 and 1996, respectively, at which time it was an S corporation.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Certain securities sold by the registrant during the last three years have not
been registered under the Securities Act. The holders of the securities referred
to below agreed to take their securities for investment and not with a view to
the distribution thereof. The certificates representing the securities contained
legends identifying certain restrictions on the transferability thereof. The
following information gives effect to the 2.4825 for one stock exchange
effective as of August 27, 1999.
COMMON STOCK
The following sets forth information pertaining to sales of Common Stock by the
registrant during the last three years. There were no underwriting discounts or
commissions on the sale of the Common Stock. Exemption from registration of the
shares of Common Stock listed below is claimed under Section 4(2) of the
Securities Act.
<TABLE>
<CAPTION>
PURCHASER DATE SHARES CONSIDERATION
---------------- ------------ ---------- --------------------------
<S> <C> <C> <C>
John J. Gorman August, 1999 5,781,936 2,329,078 shares of Tejas
Holding common stock
Joseph F. Moran August, 1999 2,482,621 1,000,049 shares of Tejas
Holding common stock
Jay W. Van Ert August, 1999 1,145,495 461,428 shares of Tejas
Holding common stock
John R. Ohmstede August, 1999 789,435 318,000 shares of Tejas
Holding common stock
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
PURCHASER DATE SHARES CONSIDERATION
---------------- ------------ ---------- --------------------------
<S> <C> <C> <C>
John J. Glade August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Michael Hidalgo August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Jon S. McDonald August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Britt Rodgers August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Bob Sternberg August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Mike Wolf August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Gregory D. Woodby August, 1999 248,250 100,000 shares of Tejas
Holding common stock
Lawrence Kaplan December, 1998 91,507 $10,000 cash
Lawrence Kaplan March, 1998 91,507 $10,000 cash
Lawrence Kaplan July, 1997 91,507 $10,000 cash
</TABLE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company's authorized capital stock consists of 50,000,000 shares of common
stock, $.001 par value per share.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share held of record in
the election of members of the Company's Board of Directors and for all other
matters submitted to a vote of shareholders.
Shareholders are entitled to receive, when and if declared by the Board of
Directors, dividends and other distributions in cash, stock or property from the
Company's assets or funds legally available for those purposes. The Common Stock
does not have any sinking fund provisions, redemption provisions, or preemptive
rights. All outstanding shares of Common Stock are fully paid and
non-assessable. In the event of the Company's liquidation, dissolution or
winding up, holders of Common Stock are entitled to share ratably in the assets
available for distribution.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer at 370 17th Street, Denver, Colorado.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The general corporate law of New York, the jurisdiction in which the Company
is incorporated, provides, under certain circumstances, for indemnification of
the directors or officers of a New York corporation for expenses incurred in
connection with the defense of any action, suit or proceeding, in relation to
certain matters brought against them as such directors and officers. Article 5
of the Company's Bylaws provide indemnification of directors and officers under
certain circumstances. In addition, the Company maintains insurance policies
which insure its officers and directors against certain liabilities.
Those provisions may be sufficiently broad to indemnify officers and
directors for liabilities under the securities laws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are itemized under Item 15. Financial
Statements and Exhibits.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE> 26
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER DESCRIPTION OF EXHIBITS*
------ ------ ---------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 NASD Subordinated Loan Agreement, Form
SL-1, dated October 13, 1998, between
Clark N. Wilson and the Company
4.2 NASD Subordinated Loan Agreement, Form
SL-1, dated June 4, 1999, between Clark
N. Wilson and the Company
4.3 Shareholder Agreement, dated November
23, 1999, between John Ohmstede, John
Glade, Michael Hidalgo, Jon McDonald,
Britt Rodgers, Bob Sternberg, Mike
Wolf, Greg Woodby and the Company
4.4 Certificate of Incorporation
incorporated herein by reference
4.5 Bylaws incorporated herein by reference
10.1 Agreement, dated June 5, 1997, with
Schroder Wertheim & Co. Incorporated
10.2 Westech Capital Corp. 1999 Stock Option
Plan
10.3 Form of Incentive Stock Option
Agreement
10.4 Form of Nonqualified Stock Option
Agreement
10.5 Lease Agreement, effective as of
September 30, 1999, by and between
The Company and Desta Two Partnership,
Ltd.
21.1 Registrant's Subsidiaries
27.1 Financial Data Schedule
99.1 Articles of Incorporation of Tejas
Securities Group, Inc.
99.2 Bylaws of Tejas Securities Group, Inc.
99.3 Articles of Incorporation of Tejas
Securities Group Holding Company
99.4 Bylaws of Tejas Securities Group
Holding Company
</TABLE>
* All exhibits have been filed previously.
25
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
TEJAS SECURITIES GROUP, INC.
FINANCIAL STATEMENTS:
Independent Auditors' Report....................................................... F-1
Statements of Financial Condition.................................................. F-2
Statements of Operations........................................................... F-3
Statements of Stockholders' Equity................................................. F-4
Statements of Cash Flows........................................................... F-5
Notes to Financial Statements...................................................... F-6
WESTECH CAPITAL CORP.
INTERIM FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition as of
September 30, 1999 and December 31, 1999 (Unaudited)........................... F-14
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)........................................ F-15
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)........................................ F-16
Notes to Consolidated Financial Statements......................................... F-17
PRO FORMA FINANCIAL STATEMENTS:
Unaudited Pro Forma Combined Financial Information................................. F-20
Pro Forma Combined Statement of Financial Condition as of December
31, 1998 (unaudited)........................................................... F-21
Pro Forma Combined Statement of Operations for the Year Ended December 31, 1998
(unaudited).................................................................... F-22
Pro Forma Combined Statement of Financial Condition as of June 30, 1999
(unaudited).................................................................... F-23
Pro Forma Combined Statement of Operations for the Six Months Ended
June 30, 1999 (unaudited)...................................................... F-24
Notes to Unaudited Pro Forma Combined Financial Information........................ F-25
</TABLE>
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tejas Securities Group, Inc:
We have audited the accompanying statements of financial condition of Tejas
Securities Group, Inc. (the "Corporation") as of December 31, 1998 and 1997, and
the related statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tejas Securities Group, Inc. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Austin, Texas
February 12, 1999
F-1
<PAGE> 29
TEJAS SECURITIES GROUP, INC.
Statements of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 201,312 170,474
Receivable from clearing brokers, partially restricted 1,468,424 825,707
Securities owned 1,539,424 634,419
Furniture and equipment, net 209,431 59,057
Deferred tax assets 178,500 --
Other assets 345,136 284,921
------------ ------------
Total assets $ 3,942,227 1,974,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 577,736 141,330
Subordinated debt 500,000 --
Payable to clearing organization 1,459,678 608,848
------------ ------------
Total liabilities 2,537,414 750,178
------------ ------------
Stockholders' equity:
Preferred stock, no par value, convertible
1,000,000 shares authorized in 1998; none issued
and outstanding -- --
Common stock, no par value
10,000,000 shares authorized; 4,679,152 and
3,858,887 shares issued and outstanding in 1998
and 1997, respectively 1,473,071 946,878
Subscriptions receivable (96,263) (100,000)
Treasury stock, at cost, 141,113 shares in 1997 -- (47,805)
Retained earnings 28,005 425,327
------------ ------------
Total stockholders' equity 1,404,813 1,224,400
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 3,942,227 1,974,578
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 30
TEJAS SECURITIES GROUP, INC.
Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Commissions $ 7,932,780 4,810,520 3,648,255
Underwriting and investment banking income 2,584,770 752,554 --
Net dealer inventory and investment income (299,166) 924,587 567,537
Other income 23,530 9,248 41,720
------------ ------------ ------------
Total revenue 10,241,914 6,496,909 4,257,512
------------ ------------ ------------
Expenses:
Commissions 5,921,426 3,165,701 1,797,637
Other employee compensation and benefits 2,085,937 1,293,719 1,651,063
General and administrative 2,795,773 1,544,446 1,015,567
------------ ------------ ------------
Total expenses 10,803,136 6,003,866 4,464,267
------------ ------------ ------------
Income (loss) before income tax expense (benefit) (561,222) 493,043 (206,755)
Income tax expense (benefit):
Federal:
Current -- -- --
Deferred (178,500) -- --
State 14,600 19,008 --
------------ ------------ ------------
(163,900) 19,008 --
------------ ------------ ------------
Net income (loss) $ (397,322) 474,035 (206,755)
============ ============ ============
Pro forma earnings (loss) per share (note 11):
Basic earnings (loss) per share:
Net income (loss) $ (0.04) 0.04 (0.03)
============ ============ ============
Weighted average shares outstanding 9,435,429 8,416,728 5,189,072
============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) $ (0.04) 0.04 (0.03)
============ ============ ============
Weighted average shares outstanding 9,435,429 8,416,728 5,189,072
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 31
TEJAS SECURITIES GROUP, INC.
Statements of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COMMON SUBSCRIPTIONS TREASURY RETAINED
SHARES STOCK RECEIVABLE STOCK EARNINGS TOTAL
---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,987,096 $ 549,760 -- (133,240) 291,195 707,715
Stock issuances 1,103,467 171,424 -- -- -- 171,424
Treasury stock sales 909,437 21,336 -- 133,240 -- 154,576
Stockholder contributions -- 122,491 -- -- -- 122,491
Stockholder distributions -- -- -- -- (49,602) (49,602)
Net loss -- -- -- -- (206,755) (206,755)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 4,000,000 865,011 -- -- 34,838 899,849
Treasury stock purchases (540,686) -- -- (183,166) -- (183,166)
Treasury stock sales 399,573 81,867 (100,000) 135,361 -- 117,228
Stockholder distributions -- -- -- -- (83,546) (83,546)
Net income -- -- -- -- 474,035 474,035
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 3,858,887 946,878 (100,000) (47,805) 425,327 1,224,400
Stock issuances 679,152 475,405 -- -- -- 475,405
Treasury stock sales 141,113 50,788 -- 47,805 -- 98,593
Subscription collected -- -- 3,737 -- -- 3,737
Net loss -- -- -- -- (397,322) (397,322)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 4,679,152 $1,473,071 (96,263) -- 28,005 1,404,813
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 32
TEJAS SECURITIES GROUP, INC.
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (397,322) 474,035 (206,755)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Deferred tax benefit (178,500) -- --
Depreciation expense 38,110 39,834 30,783
Increase in receivable from clearing brokers (642,717) (374,350) (116,176)
Decrease (increase) in other assets (126,324) (2,980) 3,803
Decrease (increase) in receivables from employees
and shareholders 135,949 (262,448) 150,000
Decrease (increase) in other receivables (69,840) 85,510 (85,510)
Decrease (increase) in trading account securities (905,005) 317,673 (952,092)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 436,406 102,850 (6,383)
Increase (decrease) in payable to clearing organization 850,830 (398,666) 1,007,514
------------ ------------ ------------
Net cash used by operating activities (858,413) (18,542) (174,816)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of furniture and equipment -- 204,268 --
Purchase of furniture and equipment (188,484) (140,933) (82,477)
------------ ------------ ------------
Net cash provided (used) by investing activities (188,484) 63,335 (82,477)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable
and subordinated debt 1,000,000 250,000 --
Principal payments on notes payable (500,000) (433,166) --
Sale of treasury stock 98,593 117,228 154,576
Stockholder distributions paid -- (83,546) (49,602)
Stockholder contributions -- -- 122,491
Subscription collected 3,737 -- --
Proceeds from stock issuances 475,405 -- 171,424
------------ ------------ ------------
Net cash provided (used) by financing activities 1,077,735 (149,484) 398,889
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 30,838 (104,691) 141,596
Cash and cash equivalents at beginning of year 170,474 275,165 133,569
------------ ------------ ------------
Cash and cash equivalents at end of year $ 201,312 170,474 275,165
============ ============ ============
Supplemental disclosures:
Interest paid $ 65,427 97,219 12,946
Taxes paid $ 23,738 22,829 1,518
</TABLE>
In 1997, the Corporation assumed $183,166 of stockholder obligations in return
for 540,686 shares of its common stock.
In 1997, the Corporation issued 100,000 shares of common stock in exchange for a
$100,000 note receivable.
See accompanying notes to financial statements.
F-5
<PAGE> 33
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
(1) ORGANIZATION AND BASIS OF PRESENTATION
Tejas Securities Group, Inc. (the Corporation) was incorporated on March
2, 1994 under the laws of the State of Texas. The Corporation is
registered as a broker and dealer in securities with the National
Association of Securities Dealers, Inc. and clears its transactions on a
fully disclosed basis through Schroder & Co., Inc. The Corporation
maintains offices in Austin, Texas; New York, New York and Atlanta,
Georgia.
Effective May 1, 1998 the Corporation increased authorized shares of
common stock to 10,000,000 shares and authorized 1,000,000 shares of
convertible preferred stock. Also, effective May 1, 1998, the Corporation
declared a stock split. Owners of the 21,543 shares issued and
outstanding as of May 1, 1998 received new shares equal to their current
ownership percentages, resulting in 4,000,000 shares of common stock
issued as a result of the stock split. The effects of the stock split
have been given retroactive effect in the accompanying financial
statements.
The 1,000,000 convertible preferred shares may be issued from time to
time and will have the designations, preferences, voting powers,
relative, participating, optional or other special rights and privileges
and the qualifications, limitations, and restrictions as determined by
the Board.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS
Securities transactions and the related commission revenue and expense
are recorded on a trade date basis.
The Corporation does not carry or clear customer accounts, and all
customer transactions are executed and cleared with other brokers on a
fully disclosed basis. These brokers have agreed to maintain such records
of the transaction effected and cleared in the customers' accounts as are
customarily made and kept by a clearing broker pursuant to the
requirements of Rules 17a-3 and 17a-4 of the Securities and Exchange
Commission, and to perform all services customarily incident thereto.
INVESTMENT BANKING
Investment banking revenues include gains, losses, and fees, net of
syndicate expenses, arising from securities offerings in which the
Corporation acts as an underwriter or agent. Investment banking revenues
also include fees earned from providing merger-and-acquisition and
advisory services. Investment banking management fees are recorded on
offering date, sales concessions on settlement date, and underwriting
fees at the time the underwriting is completed and the income is
reasonably determinable.
SECURITIES OWNED
Long and short positions in securities are reported at market value. The
difference between cost and market has been included in net dealer
inventory and investment income. These investments are subject to the
risk of failure of the issuer and the risk of changes in market value
based on the ability to trade such securities on the open market.
F-6
<PAGE> 34
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets.
REPURCHASE AND RESALE AGREEMENTS
Repurchase and resale agreements are treated as financing transactions
and are carried at the amounts at which the securities will be
subsequently reacquired or resold as specified in the respective
agreements. There were no repurchase or resale agreements outstanding at
December 31, 1998, 1997 and 1996.
FEDERAL INCOME TAXES
Effective January 1, 1998, the Corporation elected to be taxed as a C
Corporation under the provisions of the Internal Revenue Code.
For the year ended December 31, 1998, income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date. There were no significant deferred tax asset
or deferred tax liabilities as of January 1, 1998.
Prior to January 1, 1998, the Corporation elected to be taxed as an S
corporation under the provisions of Subchapter S of the Internal Revenue
Code. As a result, all Federal income tax expense and liability was paid
by the shareholders of the Corporation for the years ended December 31,
1997 and 1996, respectively. The amounts included as income tax expense
in the accompanying statement of operations for the year ended December
31, 1997 is a result of the income component of the Texas franchise tax
which is computed at approximately 4.5% of income before income taxes.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
STOCK-BASED COMPENSATION
The Corporation measures compensation expense for options granted using
the intrinsic value method. The Corporation provides pro forma
disclosures of net income (loss) and earnings (loss) per share as if the
fair value method had been applied.
F-7
<PAGE> 35
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
(3) NET CAPITAL REQUIREMENTS
The Corporation, as a registered fully licensed broker and dealer in
securities, is subject to the Securities and Exchange Commission Uniform
Net Capital Rule (Rule 15c3-1). Under this rule, the Corporation is
required to maintain a minimum "net capital" to satisfy rule 15c3-1. The
minimum "net capital" requirement for the Corporation was $100,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. "Net
capital" at December 31, 1998 aggregated $842,544. "Net capital" at
December 31, 1997 aggregated $703,302. "Net capital" at December 31, 1996
aggregated $385,677.
(4) LEASE COMMITMENTS
The Corporation leases its office facilities and certain office equipment
under operating leases. The future minimum payments due under these
operating leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 743,970
2000 581,851
2001 398,763
2002 366,354
2003 256,347
Thereafter 132,523
-----------
$ 2,479,808
===========
</TABLE>
Rent expense amounted to approximately $515,000, $265,000 and $92,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
On September 30, 1997, the Corporation entered into a sale-leaseback
transaction with a related party, whereby the Corporation sold furniture
and fixtures for their book value of approximately $204,000. As part of
this transaction, the Corporation agreed to lease the furniture and
fixtures commencing on October 1, 1998 through September 30, 2000.
Payments of $6,373 per month are due under the lease agreement and are
included in the above schedule.
(5) PROFIT SHARING AND STOCK OPTION PLANS
PROFIT SHARING PLAN
In January 1997, the Corporation instituted a profit sharing plan under
section 401(k) of the Internal Revenue Code. The plan allows all
employees who are over 21 years old to defer a predetermined portion of
their compensation for federal income tax purposes. Contributions by the
Corporation are discretionary. For the years ended December 31, 1998 and
1997, the Corporation made approximately $84,000 and $7,000,
respectively, of contributions to the plan.
STOCK OPTIONS
The Corporation grants options to employees for its common stock. As
provided by Financial Accounting Standards Board Statement No. 123, the
Corporation elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plans.
F-8
<PAGE> 36
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
During 1995, options for up to 2 percent of total shares issued and
outstanding were granted for employees who met certain requirements for
two years. In addition, employees who met certain other requirements for
two years could purchase up to 5 percent of the total shares issued and
outstanding. One employee exercised the options in 1997, and purchased 3
percent of the total shares issued and outstanding. No compensation cost
was recognized for the options granted.
During 1996, two employees were granted options, vesting in 1997, to
purchase up to 2 percent and 1 percent of total shares issued and
outstanding. The option for 1 percent was exercised in 1997 and resulted
in the purchase of 40,000 shares. The other option was revoked by the
employee upon delivery of stock by a shareholder. No compensation cost
was recognized for the options granted.
During 1997, three employees were granted options, vesting in 1997, to
purchase up to 5 percent, 2.5 percent and 1 percent, respectively, of the
total shares issued and outstanding on the grant date. Two of the options
were fully exercised during 1997, resulting in the purchase of 140,000
shares. For the remaining option, one-half of the 5 percent option (or
2.5 percent) was exercised resulting in the purchase of 100,000 shares.
The remaining options total 100,000 shares at a price of $0.50 per share
and expires in September 1999. No compensation cost was recognized for
the options granted. During 1998, no options were exercised, and no new
options were granted.
Had the Corporation recorded compensation expense related to these
options under the fair value method, compensation expense would have
increased by approximately $8,000 and $4,000 for the years ended December
31, 1997 and 1996, respectively. Compensation expense was estimated in
accordance with the provisions of Financial Accounting Standards Board
Statement No. 123, using a 7.25 percent risk-free rate and an expected
dividend of 8 percent per year. The compensation expense for each option
grant was individually calculated.
A summary of the Corporation's stock option and warrant activity, and
related information for the years ended December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 100,000 $0.50 120,000 $0.10 120,000 $0.10
Granted 0 $0.00 459,946 $0.56 0 $0.00
Exercised 0 $0.00 (360,000) $0.49 0 $0.00
Forfeited 0 $0.00 (119,946) $0.36 0 $0.00
Outstanding - end of year 100,000 $0.50 100,000 $0.50 120,000 $0.10
Exercisable - end of year 100,000 $0.50 100,000 $0.50 120,000 $0.10
</TABLE>
F-9
<PAGE> 37
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 0 $0.00 0 $0.00 0 $0.00
Granted 112,500 $2.65 0 $0.00 0 $0.00
Outstanding - end of year 112,500 $2.65 0 $0.00 0 $0.00
Exercisable - end of year 112,500 $2.65 0 $0.00 0 $0.00
</TABLE>
F-10
<PAGE> 38
(6) OFF STATEMENT of FINANCIAL CONDITION RISK
The Corporation is responsible to its clearing broker for payment of all
transactions executed both on its behalf and on behalf of its customers.
Therefore, the Corporation is exposed to off statement of financial
condition risk in the event a customer cannot fulfill its commitment and
the clearing broker must purchase or sell a financial instrument at
prevailing market prices. The Corporation and its clearing broker seek to
control risk associated with customer transactions through daily
monitoring to assure margin collateral is maintained under regulatory and
internal guidelines.
The Corporation's due from clearing brokers represents amounts on deposit
with Schroder & Co., Inc. The Corporation is exposed should Schroder &
Co., Inc. be unable to fulfill its obligations for securities
transactions. Schroder & Co., Inc. requires the Corporation to maintain
$100,000 in its account at all times.
The Corporation deposits its cash with financial institutions.
Periodically such balances exceed applicable FDIC insurance limits.
The Corporation had revenues from two accounts which exceeded 10% of
total revenue during 1996. The Corporation had revenues from three
accounts which exceeded 10% percent of total revenue during 1997. No
individual account exceeded 10% percent of total revenue in 1998.
F-11
<PAGE> 39
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
(7) SUBORDINATED DEBT
The Corporation has $500,000 in debt subordinated to claims of general
creditors as of December 31, 1998. The subordinated debt is due November
1, 2001 and bears interest at 11.5 percent. Interest is paid monthly. As
a condition of the loan agreement, the Corporation issued to the lender
warrants to purchase 112,500 shares of common capital stock of the
Corporation, exercisable at a price of $2.65 per share of common stock.
The warrants expire on November 12, 2003. As of December 31, 1998, none
of the warrants had been exercised.
The subordinated borrowings are available in computing net capital under
the SEC's uniform net capital rule. To the extent that such borrowings
are required for the Corporation's continued compliance with minimum net
capital requirements, they may not be repaid. It is the Corporation's
intention not to renew the secured demand note collateralizing agreements
due on November 1, 2001.
(8) RECEIVABLE FROM EMPLOYEE AND STOCKHOLDER
A $300,000 advance was made during 1995 as an incentive for an employee
accepting a position with the Corporation. Under the terms of the
agreement, the advance was forgiven if the employee was still employed
with the Corporation on certain trigger dates. During 1995, $150,000 of
the note receivable was forgiven and included in other employee
compensation and benefits in the accompanying statements of operations.
The remainder of the receivable was forgiven and expensed during 1996.
The Corporation makes advances to certain employees in months when their
commission payout does not meet a predetermined amount. As of December
31, 1998, approximately $126,500 had been advanced to employees under
this agreement. As of December 31, 1997 approximately $44,000 had been
advanced to employees and $219,000 to the Corporation's Chairman of the
Board under this agreement. These receivables are to be repaid through
reductions of future commissions.
During 1998, the Corporation forgave approximately $135,000 in advances
receivable from its Chairman of the Board and approximately $163,000 in
advances receivable from employees. The amounts forgiven are included in
commission expense in the accompanying financial statements.
The Corporation received a $100,000 note from an employee in
consideration for the issuance of common stock. The note bears no
interest and is due and payable on December 31, 1999. This amount has
been recorded as stock subscriptions receivable in the accompanying
financial statements. During 1998, the Corporation collected $3,737 of
the subscriptions receivable, resulting in a balance of $96,263 in
subscriptions receivable as of December 31, 1998.
(9) INCOME TAX
Income tax benefit for the year ended December 31, 1998 differs from the
amount computed by applying the U.S. Federal income tax rate of 34
percent to pretax loss as a result of the following:
<TABLE>
<S> <C>
Computed "expected" benefit $ 190,815
Meals and entertainment (34,325)
State Franchise tax (14,600)
Other 22,010
---------
$ 163,900
=========
</TABLE>
F-12
<PAGE> 40
TEJAS SECURITIES GROUP, INC.
Notes to Financial Statements
- - --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 145,700
Other 32,800
---------
Gross deferred tax assets 178,500
Valuation allowance --
---------
Net deferred tax asset $ 178,500
=========
</TABLE>
There were no significant deferred tax liabilities at December 31, 1998.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not the Corporation will realize the benefits of these
deductible differences net of the existing valuation allowances at
December 31, 1998.
At December 31, 1998, the Corporation has net operating loss
carryforwards for Federal income tax purposes of approximately $381,000
which are available to offset future Federal taxable income, if any,
through 2018. Additionally, the Corporation has state net operating loss
carryforwards available.
(10) CONTINGENCIES AND COMMITMENTS
The Corporation is involved in various claims and legal actions that have
arisen in the ordinary course of business. It is management's opinion
that liabilities, if any, arising from these actions would not have a
significant adverse effect on the financial condition and results of
operations of the Corporation.
(11) INDUSTRY SEGMENT DATA
The Corporation has two reportable segments: brokerage services and
investment banking. The primary operating segment, brokerage services,
includes both sales and trading activities of the broker-dealer and
encompasses both retail and institutional customer accounts. These
segments require the commitment of significant human capital and
financial resources, as well as industry specific skills. The investment
banking segment participates in underwriting of corporate securities as
managing underwriter and as a syndicate member.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Corporation
evaluates performance based on profit or loss from operations before
income taxes.
The following table presents segment revenues, profits and assets for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
------------------------- ---------------- ---------------- -----------
Investment
Brokerage Banking Total
------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues from external
customers $ 6,957,349 $ 2,584,770 $ 9,542,119
------------------------- ---------------- ---------------- -----------
Interest revenue 699,795 0 699,795
------------------------- ---------------- ---------------- -----------
Interest expense 65,427 0 65,427
------------------------- ---------------- ---------------- ------------
Depreciation and
amortization 37,995 115 38,110
------------------------- ---------------- ---------------- ------------
Segment profit (loss) (1,892,566) 1,331,344 (561,222)
------------------------- ---------------- ---------------- ------------
------------------------- ---------------- ---------------- ------------
Segment assets 3,940,960 1,267 3,942,227
------------------------- ---------------- ---------------- ------------
Expenditures for
segment assets 187,102 1,382 188,484
------------------------- ---------------- ---------------- ------------
</TABLE>
The following table presents segment revenues, profits and assets for the year
ended December 31, 1997.
<TABLE>
<CAPTION>
------------------------- ---------------- ---------------- -----------
Investment
Brokerage Banking Total
------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues from external
customers $ 5,558,810 $ 752,554 $ 6,311,364
------------------------- ---------------- ---------------- -----------
Interest revenue 185,545 0 185,545
------------------------- ---------------- ---------------- -----------
Interest expense 97,219 0 97,219
------------------------- ---------------- ---------------- -----------
Depreciation and
amortization 39,834 0 39,834
------------------------- ---------------- ---------------- -----------
Segment profit 225,381 267,662 493,043
------------------------- ---------------- ---------------- -----------
------------------------- ---------------- ---------------- -----------
Segment assets 1,974,578 0 1,974,578
------------------------- ---------------- ---------------- -----------
Expenditures for
segment assets 140,933 0 140,933
------------------------- ---------------- ---------------- -----------
</TABLE>
The following table presents segment revenues, profits and assets for the year
ended December 31, 1996.
<TABLE>
<CAPTION>
------------------------- ---------------- ---------------- -----------
Investment
Brokerage Banking Total
------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues from external
customers $ 4,217,825 $ 0 $ 4,217,825
------------------------- ---------------- ---------------- -----------
Interest revenue 39,687 0 39,687
------------------------- ---------------- ---------------- -----------
Interest expense 12,946 0 12,946
------------------------- ---------------- ---------------- -----------
Depreciation and
amortization 30,783 0 30,783
------------------------- ---------------- ---------------- -----------
Segment profit (loss) (206,755) 0 (206,755)
------------------------- ---------------- ---------------- -----------
------------------------- ---------------- ---------------- -----------
Segment assets 1,945,843 0 1,945,843
------------------------- ---------------- ---------------- -----------
Expenditures for
segment assets 82,477 0 82,477
------------------------- ---------------- ---------------- -----------
</TABLE>
(12) EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
On August 27, 1999, pursuant to an Agreement and Plan of Merger, by and
among the Corporation, Tejas Securities Group Holding Company, a Texas
Corporation ("Tejas Holding"), Westech Capital Corp., a New York
corporation ("Westech"), and Westech Merger Sub, Inc., a Delaware
corporation ("Merger Sub"), the Corporation acquired Westech through a
reverse merger ( the "Merger") of Tejas Holding and Merger Sub. Tejas
Holding and Merger Sub were established for the sole purpose of affecting
this transaction. As a result of the Merger, Tejas Holding became a
wholly owned subsidiary of Westech. Tejas Holding is the holder of
approximately 83% of the outstanding common stock issued by the
Corporation.
After the completion of the Merger, Westech had 12,536,737 shares of
common stock issued and outstanding. Earnings (loss) per share
information is based on pro forma calculations as if the Corporation had
completed the transaction in 1996, reflecting the additional shares
issued as part of the Merger. The historical share amounts prior to the
merger date have been adjusted on a pro forma basis to reflect the
merger transaction utilizing the same exchange ratio (2.4825 to one)
effected by the merger.
Effective January 1, 1998 the Corporation elected to be taxed as a C
corporation under the provisions of the Internal Revenue Code. In prior
years the Corporation had elected S corporation status for Federal
Income Tax purposes. Accordingly, net income (loss) and earnings (loss)
per share information for 1997 and 1996 are based on pro forma
calculations as if the Corporation had been a C corporation for those
years.
Pro forma basic earnings (loss) per share of common stock are computed
by dividing net earnings by the pro forma weighted average number of
common shares outstanding.
Pro forma diluted earnings (loss) per share reflects dilution from
contingently issuable shares, which include options and warrants.
Contingently issuable shares are not included in the pro forma weighted
average number of shares when the inclusion would increase net income
per share or decrease the loss per share.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" is effective for financial statements with fiscal years and
interim periods ending after December 15, 1997 with retroactive statement
for prior periods. SFAS 128 provides for the calculation of Basic and
Dilutive earnings per share. Basic earnings per share includes no
dilution and is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect
potential dilutions of securities that could share in the earnings (loss)
of the Corporation, such as stock options, warrants or convertible
debentures.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
1998 1997 1996
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER
SHARE
Net income (loss) $ (397,322) $ 316,035 $ (140,755)
Shares 9,435,429 8,416,728 5,189,072
Basic earnings (loss) per share $ (0.04) $ 0.04 $ (0.03)
DILUTED EARNINGS (LOSS) PER
SHARE
Net income (loss) $ (397,322) $ 316,035 $ (140,755)
Effect of dilutive securities:
Warrants 0 0 0
Options 0 0 0
Diluted earnings (loss) per share $ (0.04) $ 0.04 $ (0.03)
</TABLE>
Options to purchase 100,000, 100,000 and 120,000 shares of common stock
at December 31, 1998, 1997 and 1996 were not included in the computation
of diluted earnings (loss) per share because the options' exercise price
was greater than the estimated market value per share during the period.
Warrants to purchase 112,500 shares of common stock as of December 31,
1998 were not included in the computation of diluted earnings (loss) per
share because the warrants' exercise price was greater than the estimated
market value per share of common stock for the period. In addition,
Management does not consider these to be "nominal value" contingently
issuable shares and therefore has not considered the amounts in
disclosing pro forma earnings (loss) per share amounts.
F-13
<PAGE> 41
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
-------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 3,784,689 210,841
Receivable from clearing brokers, partially restricted 7,721,748 1,468,424
Securities owned, at market value 12,435,365 1,539,424
Furniture and equipment, net 340,471 209,431
Deferred tax assets -- 182,320
Other assets 747,575 345,136
------------ ------------
Total assets $ 25,029,848 3,955,576
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 3,121,350 579,316
Securities sold, not yet purchased 339,118 --
Payable to clearing organization 13,292,305 1,459,678
Deferred tax liability 1,387,450 --
Subordinated debt 1,000,000 500,000
------------ ------------
Total liabilities 19,140,223 2,538,994
------------ ------------
Minority interests in consolidated subsidiaries 1,025,102 --
Stockholders' equity:
Common stock, $.001 par value 50,000,000 shares authorized;
12,537,218 issued at September 30, 1999 and 12,537,218 shares
issued at December 31, 1998 12,537 12,537
Capital in excess of par value 1,574,858 1,472,303
Subscriptions receivable -- (96,263)
Retained earnings 3,277,128 28,005
------------ ------------
Total stockholders' equity 4,864,523 1,416,582
------------ ------------
Total liabilities and stockholders' equity $ 25,029,848 3,955,576
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 42
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Commissions 20,327,944 5,358,043
Underwriting and investment banking income 220,766 2,309,601
Net dealer inventory and investment income 4,629,052 (452,356)
Other income 219,871 38,304
------------ ------------
Total revenue 25,397,633 7,253,592
------------ ------------
Expenses:
Commissions, employee compensation and 15,492,833 4,850,291
benefits
Clearing and floor brokerage 341,381 304,734
Underwriting expenses -- 423,125
Communications and occupancy 881,410 542,316
Professional fees 855,775 402,177
Interest 397,656 43,730
Other 1,381,040 958,002
------------ ------------
Total expenses 19,350,095 7,524,375
------------ ------------
Income (loss) before income tax expense (benefit)
and minority interest 6,047,538 (270,783)
Income tax expense (benefit) 2,422,324 (54,961)
Minority interest in net income (loss) 376,091 --
------------ ------------
Net income (loss) 3,249,123 (215,822)
============ ============
Basic earnings (loss) per share:
Net income (loss) 0.29 (0.02)
============ ============
Weighted average shares outstanding 11,350,153 9,172,622
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 43
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,249,123 (215,822)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Deferred tax expense (benefit) 1,569,770 (78,664)
Depreciation expense 50,763 25,319
Minority interest in consolidated net 376,091 --
income (loss)
Increase in receivable from clearing brokers (6,253,324) (2,095,953)
Increase in securities owned (10,556,823) (35,467)
Increase in other assets (402,439) (177,959)
Increase in accounts payable, accrued
expenses and other liabilities 2,542,034 774,061
Increase in payable to clearing organization 11,832,627 919,327
------------ ------------
Net cash provided (used) by operating activities 2,407,822 (885,158)
------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (181,803) (146,002)
------------ ------------
Net cash used by investing activities (181,803) (146,002)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable
and subordinated debt 500,000 500,000
Subscriptions collected 96,263 --
Capital contributions 751,566 576,500
------------ ------------
Net cash provided by financing activities 1,347,829 1,076,500
------------ ------------
Net increase in cash and cash equivalents 3,573,848 45,340
Cash and cash equivalents at beginning of period 210,841 170,474
------------ ------------
Cash and cash equivalents at end of period $ 3,784,689 215,814
============ ============
Supplemental disclosures:
Interest paid $ 397,656 43,730
Taxes paid $ 856,369 23,737
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 44
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
(1) General
On August 27, 1999, pursuant to an Agreement and Plan of Merger, by and among
Westech Capital Corp., Tejas Securities Group Holding Company, a Texas
Corporation ("Tejas Holding"), Tejas Securities Group, Inc. ("Tejas
Securities"), and Westech Merger Sub, Inc., a Delaware corporation ("Merger
Sub"), Tejas Securities acquired Westech Capital Corp. through a reverse merger
(the "Merger") of Tejas Holding and Merger Sub. Tejas Holding and Merger Sub
were established for the sole purpose of affecting this transaction. As a result
of the Merger, Tejas Holding became a wholly owned subsidiary of Westech Capital
Corp. Tejas Holding is the holder of approximately 83% of the outstanding common
stock issued by the Tejas Securities. Westech Capital Corp. was previously a
"shell public company" and had no substantial operations. Tejas Securities is
the operating enterprise and is the acquiring enterprise for financial reporting
purposes. The historical financial statements of Tejas Securities (accounting
acquirer) are presented as the historical financial statements of the combined
enterprise. The results of operations of the acquired enterprise (Westech
Capital Corp.) are included in the financial statements of the combined
enterprise only from the date of acquisition. Westech Capital Corp. had no
significant operations from the date of acquisition through September 30, 1999.
The equity of Tejas Securities is presented as the equity of the combined
enterprise; however, the capital stock account of Tejas Securities has been
adjusted to reflect the par value of the outstanding stock of Westech Capital
Corp. after giving effect to the number of shares used in the business
combination. The difference between the capital stock account of Tejas
Securities and the capital stock account of Westech Capital Corp. (presented as
the capital stock account of the combined enterprise) has been recorded as an
adjustment to capital in excess of par value of the combined enterprise. For
periods prior to August 27, 1999, the equity of the combined enterprise is the
historical equity of Tejas Securities prior to the merger retroactively restated
to reflect the number of shares received in the business combination. Earnings
(loss) per share for periods prior to the business combination have been
restated to reflect the number of equivalent shares received by Tejas
Securities. The accompanying unaudited consolidated financial statements of
Westech Capital Corp., and subsidiaries including its principal operating
subsidiary, Tejas Securities are collectively referred to as the "Company".
(2) Net Capital
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer. As of
September 30, 1999, Tejas Securities' net capital of $2,681,665 was $2,387,170
in excess of the minimum required.
F-17
<PAGE> 45
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(3) Earnings (Loss) Per Share
After the completion of the Merger, the Company had 12,537,218 shares of common
stock issued and outstanding. Prior to the Merger, the Company completed a stock
split in the form of a stock dividend by issuing 2.28767 new shares of the
Company's common stock for each one share of the Company's common stock
outstanding to stockholders of record on August 13, 1999, resulting in 599,981
shares outstanding immediately following the stock split. Under the terms of the
Merger, stockholders of Tejas Holding exchanged their shares for shares of the
Company at a ratio of 2.4825 to one. The effect of this exchange was to issue an
additional 11,937,237 shares of the Company's stock in exchange for 100% of the
outstanding stock of Tejas Holding.
The following calculations of basic earnings (loss) per share are based upon the
weighted average shares outstanding for the nine month periods ended September
30, 1999 and 1998, respectively, giving effect to the Merger on August 27, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
BASIC EARNINGS (LOSS) PER SHARE
<S> <C> <C>
Net income (loss) $ 3,249,123 $ (215,822)
Weighted average shares outstanding 11,350,153 9,172,622
Basic earnings (loss) per share $ 0.29 $ (0.02)
</TABLE>
There were no contingently issuable shares outstanding for the nine months ended
September 30, 1999 and 1998 that would be included in the computation of diluted
earnings (loss) per share. Therefore, the computation of diluted earnings (loss)
per share is not included in the above calculation.
(4) Industry Segment Data
The Company has three reportable segments: brokerage services, investment
banking and market making. The primary operating segment, brokerage services,
includes both sales and trading activities of the broker-dealer and encompasses
both retail and institutional customer accounts. The other operating segments
are strategic units that provide additional services to customers. These
segments require the commitment of significant human capital and financial
resources, as well as industry specific skills. The investment banking segment
participates in underwriting of corporate securities as managing underwriter and
as a syndicate member. The market making segment is utilized to facilitate the
execution of NASDAQ security transactions for the Company's customers. In August
1999, the NASD approved the Company to make markets in NASDAQ securities. The
Company commenced with market making activities subsequent to September 30,
1999. The Company does not rely on any major customers as a source of revenue.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes.
F-18
<PAGE> 46
WESTECH CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
The following table presents segment revenues, profits and assets for the nine
months ended September 30, 1999.
<TABLE>
<CAPTION>
INVESTMENT MARKET
BROKERAGE BANKING MAKING TOTAL
<S> <C> <C> <C> <C>
Revenues from external
customers $23,867,411 $ 220,766 $ -- $24,088,177
Interest revenue 1,309,456 -- -- 1,309,456
Interest expense 397,656 -- -- 397,656
Depreciation and
amortization 50,763 -- -- 50,763
Segment profit 5,826,772 220,766 -- 6,047,538
Segment assets 25,029,848 -- -- 25,029,848
Expenditures for segment
assets 181,803 -- -- 181,803
</TABLE>
The following table presents segment revenues, profits and assets for the nine
months ended September 30, 1998.
<TABLE>
<CAPTION>
INVESTMENT MARKET
BROKERAGE BANKING MAKING TOTAL
<S> <C> <C> <C> <C>
Revenues from external
customers $ 4,672,833 $2,309,601 $ -- $6,982,434
Interest revenue 271,158 -- -- 271,158
Interest expense 43,730 -- -- 43,730
Depreciation and
amortization 25,319 -- -- 25,319
Segment profit (loss) (1,557,227) 1,286,444 -- (270,783)
Segment assets 5,401,897 1,336 -- 5,403,233
Expenditures for segment
assets 144,620 1,382 -- 146,002
</TABLE>
F-19
<PAGE> 47
PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
ASSETS Securities(1) Westech (2) Adjustments(3) Combined
------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 201,312 9,529 -- $ 210,841
Receivable from clearing brokers, partially restricted 1,468,424 -- -- 1,468,424
Securities owned 1,539,424 -- -- 1,539,424
Furniture and equipment, net 209,431 -- -- 209,431
Deferred tax assets 178,500 -- 3,820 (5) 182,320
Other assets 345,136 -- -- 345,136
----------- ----------- ----------- -----------
$ 3,942,227 9,529 3,820 $ 3,955,576
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 577,736 1,580 -- $ 579,316
Subordinated debt 500,000 -- -- 500,000
Payable to clearing organization 1,459,678 -- -- 1,459,678
----------- ----------- ----------- -----------
Total liabilities 2,537,414 1,580 -- 2,538,994
----------- ----------- ----------- -----------
Minority interests in consolidated subsidiaries -- -- 240,917 (4) 240,917
Stockholders' equity:
Preferred stock -- -- -- (6) --
Common stock 1,473,071 599 (1,461,134)(6) 12,536
Capital in excess of par value -- 7,350 1,128,757 (6) 1,136,107
Subscriptions receivable (96,263) -- 96,263 (6) --
Retained earnings 28,005 -- (983)(6) 27,022
----------- ----------- ----------- -----------
Total stockholders' equity 1,404,813 7,949 (237,097) 1,175,665
----------- ----------- ----------- -----------
$ 3,942,227 9,529 3,820 $ 3,955,576
=========== =========== =========== ===========
</TABLE>
F-20
<PAGE> 48
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
Securities Westech(2) Adjustments(3) Combined
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 7,932,780 -- -- $ 7,932,780
Underwriting and investment banking income 2,584,770 -- -- 2,584,770
Net dealer inventory and investment income (299,166) -- -- (299,166)
Other income 23,530 -- -- 23,530
------------ ------------ ------------ ------------
Total revenue 10,241,914 -- -- 10,241,914
------------ ------------ ------------ ------------
Expenses:
Commissions, employee compensation and benefits 5,921,426 -- -- 5,921,426
Other employee compensation and benefits 2,085,937 -- -- 2,085,937
General and administrative 2,692,236 10,753 -- 2,702,989
------------ ------------ ------------ ------------
Total expenses 10,699,599 10,753 -- 10,710,352
Depreciation and amortization 38,110 -- -- 38,110
------------ ------------ ------------ ------------
Operating income (495,795) (10,753) -- (506,548)
Interest expense 65,427 -- -- 65,427
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (561,222) (10,753) -- (571,975)
Income taxes (163,900) 680 (3,820)(5) (167,040)
Minority interest in loss -- -- (68,141)(4) (68,141)
------------ ------------ ------------ ------------
Net loss $ (397,322) (11,433) 71,961 $ (336,794)
============ ============ ============ ============
Basic earnings per share:
Net loss $ (0.03)
============
Weighted average shares outstanding 12,536,737
============
Diluted earnings per share:
Net loss $ (0.03)
============
Weighted average shares outstanding 12,536,737
============
</TABLE>
F-22
<PAGE> 49
PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
ASSETS Securities Westech(2) Adjustments(3) Combined
------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 334,047 6,498 -- $ 340,545
Receivable from clearing brokers, partially restricted 11,439,542 -- -- 11,439,542
Securities owned 11,545,748 -- -- 11,545,748
Furniture and equipment, net 226,933 -- -- 226,933
Other assets 406,152 -- -- 406,152
------------ ------------ ------------ ------------
$ 23,952,422 6,498 -- $ 23,958,920
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 2,782,845 3,382 -- $ 2,786,227
Securities sold, not yet purchased 1,050,135 -- -- 1,050,135
Payable to clearing organization 13,099,946 -- -- 13,099,946
Subordinated debt 1,000,000 -- -- 1,000,000
Deferred tax liability 1,198,575 -- (1,896)(5) 1,196,679
------------ ------------ ------------ ------------
Total liabilities 19,131,501 3,382 (1,896) 19,132,987
------------ ------------ ------------ ------------
Minority interests in consolidated subsidiaries -- -- 826,760 (4) 826,760
Stockholders' equity:
Preferred stock, no par value, convertible -- -- -- (6) --
Common stock 2,200,841 599 (2,188,904)(6) 12,536
Capital in excess of par value -- 2,517 1,581,103 (6) 1,583,620
Subscriptions receivable (281,675) -- 281,675 (6) --
Retained earnings 2,901,755 -- (498,738)(6) 2,403,017
------------ ------------ ------------ ------------
Total stockholders' equity 4,820,921 3,116 (824,864) 3,999,173
------------ ------------ ------------ ------------
$ 23,952,422 6,498 -- $ 23,958,920
============ ============ ============ ============
</TABLE>
F-23
<PAGE> 50
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Tejas Acquisition Pro Forma
Securities Westech(2) Adjustments(3) Combined
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Commissions $15,465,352 -- -- $15,465,352
Underwriting and investment banking income 165,766 -- -- 165,766
Net dealer inventory and investment income 3,516,592 -- -- 3,516,592
Other income 87,065 -- -- 87,065
----------- ----------- ----------- -----------
Total revenue 19,234,775 -- -- 19,234,775
----------- ----------- ----------- -----------
Expenses:
Commissions 9,948,064 -- -- 9,948,064
Other employee compensation and benefits 2,540,501 -- -- 2,540,501
General and administrative 1,737,909 4,833 -- 1,742,742
----------- ----------- ----------- -----------
Total expenses 14,226,474 4,833 -- 14,231,307
Depreciation and amortization 29,144 -- -- 29,144
----------- ----------- ----------- -----------
Operating income 4,979,157 (4,833) -- 4,974,324
Interest expense 239,983 -- -- 239,983
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest 4,739,174 (4,833) -- 4,734,341
Income taxes 1,865,424 -- (1,896)(5) 1,863,528
Minority interest in income -- -- 492,851 (4) 492,851
----------- ----------- ----------- -----------
Net income (loss) $ 2,873,750 (4,833) (490,955) $ 2,377,962
=========== =========== =========== ===========
Basic earnings per share:
Net income $ 0.19
===========
Weighted average shares outstanding 12,536,737
===========
Diluted earnings per share:
Net income $ 0.19
===========
Weighted average shares outstanding 12,536,737
===========
</TABLE>
F-24
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) Balances were obtained from the 1998 audited financial statements of
Tejas Securities.
(2) Includes the account balances and results of Westech's operations
beginning January 1, 1998 prior to the Company's acquisition.
(3) Includes pro forma adjustments relating to the acquisition of Westech,
including provisions for income taxes on the consolidated entity,
restatement of Westech's equity and adjustments to record the minority
interest in Tejas Securities.
(4) To reflect the minority interest in Tejas Securities resulting from the
merger transaction, which approximates 17% of the outstanding common
stock of Tejas Securities. Of the 5,803,888 shares of common stock issued
and outstanding for Tejas Securities, 995,333 non accredited
stockholders' shares were not exchanged for shares of Tejas Holding.
These remaining 995,333 shares represent the minority interest in Tejas
Securities. See note 6 below.
(5) To record the adjustment for the provision for income taxes on the
combined entity. The pro forma adjustment is based on the income
(loss) before income taxes and minority interest, and the effective tax
rate in effect for the period.
(6) The pro forma acquisition adjustments reflect the exchange of 4,808,555
shares representing 83% of Tejas Securities common stock for Tejas
Holding common stock on a one-for-one basis. Concurrently, shareholders
of Tejas Holding exchanged their 4,808,555 shares of common stock for
11,937,237 shares of Westech common stock with a par value of $.001 per
share. As a result of this transaction, Westech's shareholders' pro forma
equity would be comprised of the following:
<TABLE>
<S> <C>
December 31, 1998:
Common stock $ 12,536
Capital in excess of par value 1,136,107
Retained earnings 27,022
June 30, 1999:
Common stock $ 12,536
Capital in excess of par value 1,583,620
Retained earnings 2,403,017
</TABLE>
F-25
<PAGE> 52
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 5, 2000 WESTECH CAPITAL CORPORATION
By: /s/ JAY W. VAN ERT
Jay W. Van Ert, President
