<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
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WESTECH CAPITAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
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
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 31, 2000, the
Registrant had the following number of shares of common stock, $0.001 par value
per share, outstanding: 12,661,343.
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<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
ASSETS (UNAUDITED) 1999
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 541,956 2,732,175
Receivable from clearing broker, partially restricted 7,141,316 4,640,052
Receivables from employees and stockholders 436,208 627,454
Securities owned, at market value 3,289,970 6,207,748
Other investments 124,776 932,253
Furniture and equipment, net 638,592 323,281
Deferred tax asset, net 97,372 54,086
Prepaid expenses and other assets 1,101,176 597,053
----------- -----------
Total assets $13,371,366 16,114,102
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,736,332 2,905,020
Securities sold, not yet purchased 2,263,436 187,940
Payable to clearing broker 3,653,715 6,196,059
Subordinated debt 1,000,000 1,000,000
----------- -----------
Total liabilities 8,653,483 10,289,019
----------- -----------
Minority interest in subsidiary 864,851 976,725
Stockholders' equity:
Common stock, $0.001 par value
50,000,000 shares authorized; 12,661,343 and
12,537,218 issued at June 30, 2000 and
December 31, 1999, respectively 12,661 12,537
Additional paid in capital 1,925,328 1,669,473
Retained earnings 1,915,043 3,166,348
----------- -----------
Total stockholders' equity 3,853,032 4,848,358
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity $13,371,366 16,114,102
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 3
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 3,850,318 10,483,819 12,367,096 15,465,352
Underwriting and investment banking income 358,035 165,766 1,429,200 165,766
Net dealer inventory and investment income (loss), net
of trading interest expense of $(16,305) and $188,787
for the three months ended June 30, 2000 and 1999
$527,967 and $207,373 for the six months ended
June 30, 2000 and 1999, respectively (2,744,407) 1,558,070 (2,674,017) 3,353,091
Other income 109,207 34,417 154,477 43,193
------------ ------------ ------------ ------------
Total revenues 1,573,153 12,242,072 11,276,756 19,027,402
------------ ------------ ------------ ------------
Expenses:
Commissions, employee compensation and benefits 2,713,496 9,841,579 9,024,515 12,488,565
Clearing and floor brokerage 296,207 133,436 673,536 232,403
Communications and occupancy 515,206 281,884 992,817 551,683
Professional fees 758,759 122,235 1,127,164 189,345
Interest 36,747 18,432 65,418 32,610
Other 722,191 437,113 1,489,387 793,622
------------ ------------ ------------ ------------
Total expenses 5,042,606 10,834,679 13,372,837 14,288,228
------------ ------------ ------------ ------------
Income (loss) before income tax expense (benefit)
and minority interest (3,469,453) 1,407,393 (2,096,081) 4,739,174
Income tax expense (benefit) (1,217,003) 556,000 (684,203) 1,865,424
------------ ------------ ------------ ------------
Income (loss) before minority interest (2,252,450) 851,393 (1,411,878) 2,873,750
Minority interest (342,820) -- (160,573) --
------------ ------------ ------------ ------------
Net income (loss) $ (1,909,630) 851,393 (1,251,305) 2,873,750
============ ============ ============ ============
Earnings (loss) per share:
Basic $ (0.15) 0.07 (0.10) 0.23
============ ============ ============ ============
Diluted $ (0.15) 0.07 (0.10) 0.23
============ ============ ============ ============
Weighted average shares outstanding:
Basic 12,608,935 12,537,218 12,573,076 12,264,850
============ ============ ============ ============
Diluted 15,257,686 12,537,218 12,573,076 12,264,850
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,251,305) 2,873,750
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Deferred tax expense (benefit) (43,286) 178,500
Depreciation and amortization expense 68,233 28,596
Minority interest (110,573) --
Increase in receivable from clearing broker (2,501,264) (9,933,894)
Decrease (increase) in receivable from employees and stockholders 191,246 (4,092)
Decrease (increase) in securities owned 2,917,778 (10,006,324)
Decrease in other investments 807,477 --
Increase in prepaid expenses and other assets (299,443) (93,600)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (1,168,688) 3,403,684
(Decrease) increase in payable to clearing broker (2,542,344) 11,640,268
Increase in securities sold, not yet purchased 2,075,496 1,050,135
----------- -----------
Net cash used by operating activities (1,856,673) (862,977)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (383,546) (46,646)
----------- -----------
Net cash used by investing activities (383,546) (46,646)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock -- (172,114)
Sale of treasury stock -- 172,114
Proceeds from issuance of subordinated debt -- 500,000
Proceeds from stock issuances 50,000 22,887
Subscription collected -- 519,471
----------- -----------
Net cash provided by financing activities 50,000 1,042,358
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,190,219) 132,735
Cash and cash equivalents at beginning of period 2,732,175 201,312
----------- -----------
Cash and cash equivalents at end of period $ 541,956 334,047
=========== ===========
Supplemental disclosures:
Interest paid $ 557,163 239,983
Taxes paid $ 833,547 502,987
</TABLE>
In May 2000, Tejas Securities forgave a $50,000 subscription receivable from an
employee for common stock of Tejas Securities. The forgiveness of the $50,000 is
recorded as non-cash compensation expense and as a capital contribution to the
minority interest.
In May 2000, an employee of the Company exercised non-qualified stock options
to purchase 124,125 shares of the Company's common stock at $0.40 per share
($50,000 in stock proceeds). As a result of this transaction, the Company
recognized a non-cash increase in additional paid in capital of $204,680.
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(1) General
Westech Capital Corp. ("Westech"), a New York corporation, is a holding company
whose primary operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation ("Tejas Securities"). Tejas Securities is engaged in the business of
providing brokerage and related financial services to institutional and retail
customers nationwide.
Pursuant to an Agreement and Plan of Merger by and among Westech, Tejas
Securities, Tejas Securities Group Holding Company, a Texas corporation ("Tejas
Holding"), and Westech Merger Sub, Inc., a Delaware corporation ("Merger Sub"),
Merger Sub was merged (the "Merger") with and into Tejas Holding and Tejas
Holding (which owns approximately 81% of Tejas Securities) became a wholly-owned
subsidiary of Westech. Under the terms of the Merger, the shareholders of Tejas
Holding exchanged their shares for shares of Westech at a ratio of 2.4825 to
one. The former shareholders of Tejas Holding currently own 95.21% of the issued
and outstanding common stock of Westech, $.001 par value per share.
Tejas Securities is the operating enterprise and the acquiring enterprise for
financial reporting purposes. The historical financial statements of Tejas
Securities (accounting acquirer) are presented as the historical financial
statements of the combined enterprise. The results of operations of Westech (the
acquired enterprise) are included only from the date of acquisition.
The accompanying unaudited consolidated financial statements of Westech, and
subsidiaries (collectively referred to as the "Company") have been prepared in
accordance with the instructions for Form 10Q and, therefore, do not include all
the disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments (consisting of only normal recurring
adjustments) that are necessary in the opinion of management for a fair
presentation of the interim financial statements have been included.
The interim financial information should be read in conjunction with Westech's
1999 Form 10-K. The results of operations for the six months ended June 30, 2000
are not necessarily indicative of the results of the year ending December 31,
2000.
By the fourth quarter of 2000, Westech anticipates submitting to its
shareholders a proposal to change its state of incorporation from New York to
Delaware. Westech does not expect the reincorporation to have any material
effects on it or its subsidiaries.
Tejas Securities' business is conducted out of its primary office in Austin,
Texas and a branch office in Atlanta, Georgia. Subsequent to the second quarter
of 2000 and prior to the filing of this second quarter Report on Form 10-Q,
Tejas Securities expanded its operations by opening an additional branch in
Houston, Texas.
Tejas Securities is a registered broker-dealer and investment advisor offering
brokerage services to retail and institutional customers as well as investment
banking services. Through our brokerage service, we provide market-making
activities in stocks traded on the Nasdaq and other OTC securities, execution
services in exchange listed securities, high quality investment research to
institutional and retail customers and asset management services.
4
<PAGE> 6
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(2) Net Capital
Tejas Securities is subject to SEC Rule 15c3-1, Net Capital Requirements for
Brokers or Dealers (the "Rule"), which establishes minimum net capital
requirements for broker-dealers. The Rule is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under the Rule
depends in part upon the activities engaged in by the broker-dealer.
Tejas Securities elects to use the basic method of the Rule, which requires it
to maintain minimum net capital equal to the greater of $250,000 or 6-2/3% of
aggregate indebtedness. As of June 30, 2000, Tejas Securities' net capital of
$2,243,591 was $1,993,591 in excess of the minimum required.
(3) Earnings (Loss) Per Share
After the completion of the Merger, Westech had 12,537,218 shares of common
stock issued and outstanding. Prior to the Merger, Westech completed a stock
split in the form of a stock dividend by issuing 2.28767 new shares of Westech
common stock for each one share of Westech common stock outstanding to
stockholders of record on August 13, 1999, resulting in 599,981 shares
outstanding immediately following the stock split. Under the terms of the
Merger, stockholders of Tejas Holding exchanged their shares for shares of
Westech at a ratio of 2.4825 to one. The effect of this exchange was to issue an
additional 11,937,237 shares of Westech's stock in exchange for 100% of the
outstanding stock of Tejas Holding.
Earnings per share for the period prior to the Merger have been restated to
reflect the post Merger number of shares outstanding.
Basic earnings (loss) per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings (loss) per
share reflects dilution from all contingently issuable shares, including options
issued during the three month and six month periods ended June 30, 2000 and
1999. Contingently issuable shares are not included in the weighted average
number of shares when the inclusion would increase net income per share or
decrease the loss per share.
5
<PAGE> 7
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
Earnings (loss) per share is calculated as follows.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (1,909,630) 851,393 (1,251,305) 2,873,750
Weighted average shares outstanding 12,608,935 12,537,218 12,573,076 12,264,850
Basic earnings (loss) per share $ (0.15) 0.07 (0.10) 0.23
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (1,909,630) 851,393 (1,251,305) 2,873,750
Income impact of assumed conversion of
subsidiary stock and recognition of minority (342,820) -- -- --
interest income
Income (loss) available to common
stockholders after assumed conversions (2,252,450) 851,393 (1,251,305) 2,873,750
Weighted average shares outstanding 12,608,935 12,537,218 12,573,076 12,264,850
Effect of dilutive securities:
Warrants -- -- -- --
Options -- -- -- --
Assumed conversion of subsidiary stock 2,448,158 -- -- --
Application of treasury stock method to
subscriptions receivable 200,593 -- -- --
Weighted average shares outstanding 15,257,686 12,537,218 12,573,076 12,264,850
Diluted earnings (loss) per share $ (0.15) 0.07 (0.10) 0.23
</TABLE>
Warrants to purchase 558,562 shares Westech's common stock at June 30, 1999 were
not included in the computation of diluted earnings (loss) per share because the
warrants' exercise price was greater than the estimated market value per share
of common stock for the period. Westech has not included the dilutive effects of
options to purchase 4,019,187 shares of its common stock at June 30, 2000 in the
computation of diluted earnings (loss) per share because the options were
antidilutive.
Westech has included the dilutive effects of shares of Tejas Securities' common
stock that are convertible into its common stock. Tejas Securities has 1,015,333
shares of its common stock issued and outstanding at June 30, 2000 that are
convertible into common stock of Westech at a ratio of 2.4825 to one (2,448,158
shares on a weighted average basis for the three month period ended June 30,
2000). In addition, Westech has included the dilutive effects of Tejas
Securities' subscriptions receivable based on the treasury stock method. Westech
recognizes the incremental effect on its shares outstanding assuming the
subscriptions receivable are fully paid for and exchanged for its common stock
versus Westech repurchasing those shares using a weighted average market price
for the period. Westech has not included the dilutive effects of shares of Tejas
Securities common stock that are convertible into its common stock and Tejas
Securities' subscriptions receivable for the six months ended June 30, 2000 as
they are antidilutive.
6
<PAGE> 8
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(4) Industry Segment Data
Westech has two reportable segments: brokerage services and investment banking.
The primary operating segment, brokerage services, includes sales, trading and
market-making activities and encompasses both retail and institutional customer
accounts. These segments require the commitment of significant human capital and
financial resources, as well as industry specific skills. The investment banking
segment participates in underwriting of corporate securities as managing
underwriter and as a syndicate member. The investment banking segment also
generates corporate advisory fees associated with merger and acquisition
activity. Income associated with other investments accounted for under the
equity method is included in other segment activity for the six months ended
June 30, 2000 and 1999.
The following table presents segment revenues, profits (losses) and assets for
the six months ended June 30, 2000.
<TABLE>
<CAPTION>
Investment
Brokerage Banking Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external
customers $ 10,122,977 1,429,200 154,477 11,706,654
Interest revenue 98,069 -- -- 98,069
Interest expense 593,385 -- -- 593,385
Depreciation 68,233 -- -- 68,233
Segment profit (loss) (2,587,737) 1,181,955 154,477 (1,251,305)
Segment assets 12,825,076 -- 546,290 13,371,366
Capital expenditures 383,546 -- -- 383,546
</TABLE>
The following table presents segment revenues, profits and assets for the six
months ended June 30, 1999.
<TABLE>
<CAPTION>
Investment
Brokerage Banking Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external
customers $ 18,981,943 165,766 43,193 19,190,902
Interest revenue 43,873 -- -- 43,873
Interest expense 239,983 -- -- 239,983
Depreciation and amortization 28,596 -- -- 28,596
Segment profit 2,664,791 165,766 43,193 2,873,750
Segment assets 23,952,422 -- -- 23,952,422
Capital expenditures 46,646 -- -- 46,646
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements and Risk Factors
All statements past and future, written or oral, made by Westech or its
officers, directors, stockholders, agents, representatives or employees,
including without limitation, those statements contained in this Report on Form
10-Q, that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding Westech's
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements may appear in this document or other documents,
reports, press releases, and written or oral presentations made by officers of
Westech to stockholders, analysts, news organizations or others. Readers should
not place undue reliance on forward-looking statements. All forward-looking
statements are based on information available to Westech and the declarant at
the time the forward-looking statement is made, and Westech assumes no
obligation to update any such forward-looking statements. It is important to
note that Westech's actual results could differ materially from those described
in such forward-looking statements. In addition to any risks and uncertainties
specifically identified in connection with such forward-looking statements, the
reader should consult Westech's filings under the Securities Exchange Act of
1934, for factors that could cause actual results to differ materially from
those presented.
Forward-looking statements are necessarily based on various assumptions and
estimates and are inherently subject to various risks and uncertainties,
including risks and uncertainties relating to the possible invalidity of the
underlying assumptions and estimates and possible changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners and competitors and
legislative, judicial and other governmental authorities and officials.
Assumptions relating to the foregoing involve judgements with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of Westech. Any such
assumptions could be inaccurate and, therefore, there can be no assurance that
any forward-looking statements by Westech or its officers, directors,
stockholders, agents, representatives or employees, including those
forward-looking statements contained in this Report on Form 10-Q, will prove to
be accurate.
Results of Operations
The revenues and operating expenses of Westech's operating subsidiary, Tejas
Securities, are influenced by fluctuations in the equity markets, general
economic and market conditions, as well as Tejas Securities' ability to identify
investment opportunities for its trading accounts and its customer accounts.
Currently, Tejas Securities revenue is derived primarily from principal debt and
equity transactions, which generate both commission revenue and investment
income, as well as from investing excess liquid capital in proprietary
positions. During the second quarter of 2000, Tejas Securities realized
significant trading losses in principal transactions related to its proprietary
accounts. These losses were the result of a severe downturn in the securities
markets which impacted the results of operations for the second quarter and the
six month period ended June 30, 2000.
Westech's total revenues decreased by $7,750,646 or 41% to $11,276,756 for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
Total revenues decreased by $10,668,919 or 87% to $1,573,153 for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999. The
reasons for the decreases are set forth below.
Commission revenues from principal transactions decreased $3,014,582 or 21% to
$11,046,082 and $5,791,841 or 63% to $3,433,466 for the six months and three
months ended June 30, 2000, respectively, compared to the corresponding prior
periods. For the six month and three month periods ended June 30, 2000 and 1999,
commission revenues from agency transactions decreased $188,772 or 13% to
$1,215,915 and $940,763 or 75% to $317,749, respectively. The decrease in agency
commissions and principal commissions relates to the overall downturn in the
capital markets during the second quarter of 2000. Overall, Tejas Securities
realized an increase in agency trades and principal trades due to the increase
in
8
<PAGE> 10
retail brokers employed by Tejas Securities since the first quarter of 1999, the
addition of market making activities and its continued focus on expanding its
products and services. The remaining commissions were the result of portfolio
advisory fees on managed accounts and commissions on insurance contracts.
Underwriting and investment banking revenues increased $1,263,434 or 762% to
$1,429,200 and $192,269 or 116% to $358,035 for the six and three month periods
ended June 30, 2000, respectively, versus $165,766 for the both of the
corresponding periods in 1999. The increase is the result of the
re-establishment of underwriting and syndicate activities beginning in January
2000. Tejas Securities generated $504,021 in private placement fees for the six
months ended June 30, 2000. Fees from syndicate activities increased to $410,177
for the six months ended June 30, 2000. Corporate advisory fees of $515,000 were
also generated during this period.
Net dealer inventory and investment income decreased by $6,027,108 or 180% to
$(2,674,017) for the six months ended June 30, 2000 compared to the same period
in 1999. For the three months ended June 30, 2000, net dealer inventory and
investment income decreased $4,302,477 or 276% to $(2,744,407) from the
corresponding period in the prior year. The decrease in inventory and investment
income resulted from trading activity in proprietary positions which was
adversely affected by a severe decline in market conditions during the second
quarter of 2000.
For the six and three month periods ended June 30, 2000, other income increased
$111,284 or 258% to $154,477 and $74,790 or 217% to $109,207, respectively. The
increase for the six and three month periods ended June 30, 2000 is due to an
increase in asset management income and various miscellaneous receipts.
Total expenses decreased by $915,391 or 6% to $13,372,837 for the six months
ended June 30, 2000. For the three months ended June 30, 2000, total expenses
decreased $5,792,073 or 53% to $5,042,606. Net income (loss) for the six months
decreased by $4,152,055 or 144% to $(1,251,305). Net income (loss) for the three
months ended June 30, 2000 decreased $2,761,023 or 324% to $(1,909,630). The
explanations for the changes are set forth below.
Commissions, employee compensation and benefits decreased $3,464,050 or 28% to
$9,024,515 for the six months ended June 30, 2000. Commissions, employee
compensation and benefits decreased $7,128,083 or 72% to $2,713,496 for the
three months ended June 30, 2000. Commission expense decreased $4,615,628 or 46%
to $5,332,436 for the six months ended June 30, 2000 and decreased $6,966,513 or
87% to $1,006,332 for the three months ended June 30, 2000. These decreases in
commission expense for the two stated periods are primarily attributable to the
market downturn, which occurred in the second quarter. As a result of the
downturn, commission revenues decreased which in turn has a corresponding effect
on commission expense. Another factor contributing to the decreases in
commission expense is the voluntary reduction of commission payout percentages
for John Gorman, CEO and Joseph Moran, Managing Director. General and
administrative salaries and other employee benefits increased due to overall
salary increases and additional hires in the first quarter, including a Chief
Financial Officer and other management level personnel. During the second
quarter, Tejas Securities undertook a thorough review of inefficiencies in
operational support personnel and services. Tejas Securities reduced its total
payroll cost by approximately 25% as a result of this review.
Clearing and floor brokerage costs increased $441,133 or 190% to $673,536 and
$162,771 or 122% to $296,207 for the six and three months ended June 30, 2000,
respectively. The overall increase in clearing and floor brokerage costs for
these periods resulted from greater trading activity in the over-the-counter
equity markets and on the national exchanges. Most of the cost increase is
attributed to the market making activities, and the increased activity in both
the retail and institutional equity departments. Tejas Securities' percentage of
revenues derived from equity securities increased during 2000 in comparison to
the volume of fixed income securities being traded.
Communications and occupancy charges increased $441,134 or 80% to $992,817 and
$233,322 or 83% to $515,206 for the six months and three months ended June 30,
2000, respectively. The increases in occupancy charges are the result of the
relocation of Westech's Austin headquarters in January 2000. Communications
charges increased as a function of the 100% net increase in employees since the
first quarter of 1999, plus the addition of market making support systems.
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<PAGE> 11
Professional fees increased $937,819 or 495% to $1,127,164 and $636,524 or 521%
to $758,739 for the six months and three months ended June 30, 2000. Of the
total increases for the periods, approximately $600,000 was accrued legal
expenses relating to the registration of Westech's common stock, legal fees for
the settlement of private equity securities transactions with its customers, and
fees for general legal counsel. Tejas Securities also incurred approximately
$300,000 in marketing costs associated with developing its internet site and
brand awareness. In addition, Westech incurred additional accounting costs
associated with its annual reporting as well as for the registration of its
common stock. The remaining costs during the periods related to consulting fees
incurred during the normal course of business.
Interest expense for the six month and three month periods ended June 30, 2000
increased $32,808 or 101% to $65,418 and $18,315 or 99% to $36,747,
respectively. The increase is due to the addition of $500,000 of subordinated
debt in June 1999 and the $1,500,000 line of credit in May 2000.
Other expenses increased $695,765 or 88% to $1,489,387 and $285,078 or 65% to
$722,191 for the six months and three months ended June 30, 2000. The overall
increase in other expenses during the periods is the result of first quarter
increases in general and administrative services needed to support
administrative infrastructure and the addition of equipment leases for the new
Austin headquarters.
Income tax expense (benefit) decreased $2,549,627 or 137% to $(684,203) and
$1,773,003 or 319% to $(1,217,003) for the six months and three months ended
June 30, 2000. Westech's effective tax rate was 33% and 35% for the six months
and three months ended June 30, 2000, respectively.
Minority interest in net loss for the six months and three months ended June 30,
2000 was $(160,573) and $(342,820), respectively. Minority interest in net loss
was created as a result of the Merger.
Liquidity and Capital Resources
Tejas Securities utilizes the receivable balance from its clearing broker,
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 is also used to secure temporary financing from Schroder &
Co. for the purchase of investments in Tejas Securities' trading accounts. The
receivable balance held at Schroder & Co. may fluctuate depending on factors
such as the market valuation of securities held in Tejas Securities' trading
accounts, realized trading profits, commission revenue, cash withdrawals and
clearing costs charged to Tejas Securities for conducting its trading
activities. The overall growth in the receivable from clearing broker balance
resulted from the proceeds received on the securities sold, not yet purchased
during the three months ended June 30, 2000.
On May 19, 2000, Tejas Securities signed a clearing agreement with First
Clearing Corporation to provide clearing services in the future. Tejas
Securities anticipates completing the transition from Schroder & Co. to First
Clearing Corporation in the third quarter of 2000. The Company does not believe
that this change will have an adverse effect on our financial condition or
results of operations.
In June 2000, the Company obtained a $1,500,000 line of credit to facilitate our
working capital needs. The loan accrues interest at a rate of prime plus one,
with interest due on a quarterly basis. The loan was secured by our ownership of
4,808,555 shares of Tejas Securities common stock and a personal guarantee by
John Gorman, our Chief Executive Officer.
On July 27, 2000, the Company filed a Form S-4 registration statement with the
SEC. The Form S-4 will be used by the Company to acquire 100% of the issued and
outstanding common stock of Tejas Securities, through Tejas Holding, at an
exchange ratio of 2.4825 to one.
On June 30, 2000, Tejas Securities entered into an agreement to liquidate the
net assets of Tejas Securities - East, LLC, a wholly-owned subsidiary. The value
of the net liabilities assumed by Tejas Securities was $(3,617) as of June 30,
2000.
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<PAGE> 12
In July 2000, Tejas Securities opened a Houston, Texas branch office to support
its focus on government securities. The expansion into Houston will provide
customers with additional product selection and will allow the Company to
further diversify its proprietary trading positions. The Company anticipates
that the capital outlay associated with this expansion will be minimal.
On June 30, 2000, the Company elected to withdraw $544,615 of its assets from
TSG Internet Fund I, Ltd.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Tejas Securities' principal business activities are, by their nature, risky
and volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect Tejas Securities' business. Managing risk
is critical to Tejas Securities' profitability and to reducing the likelihood of
earnings volatility. The major types of risk that Tejas Securities faces include
credit risk, operating risk and market risk.
Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. Tejas Securities clears its securities
transactions through a clearing broker. Under the terms of the clearing
agreement, the clearing broker has the right to charge Tejas Securities for its
losses that result from its customers' failure to fulfill their contractual
obligations. In order to mitigate risk, Tejas Securities' policy is to monitor
the credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of Tejas Securities' assets are
held at its clearing broker, 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 Tejas Securities' business
and relates to the potential for deficiencies in control processes and systems,
mismanagement of the Company's activities or mismanagement of customer accounts
by its employees. Tejas Securities relies heavily on computer and communication
systems in order to conduct its brokerage activities. Third party vendors, such
as the clearing broker and news and quote providers, provide many of the systems
critical to Tejas Securities' business. Tejas Securities' business could be
adversely impacted if any of these systems were disrupted. Tejas Securities
mitigates the risk associated with systems by hiring experienced personnel, and
providing employees with alternate means of acquiring or processing information.
In order to mitigate the risk associated with mismanagement or customer
accounts, Tejas Securities utilizes compliance and operations personnel to
review the activities of administrative and sales personnel. In addition, the
activities of management are actively reviewed by other members of management on
a regular basis and by the Board of Directors.
Tejas Securities' primary market risk exposure is to market price changes and
the resulting risk of loss that may occur from the potential change in the value
of a financial instrument as a result of price volatility or changes in
liquidity for which Tejas Securities has no control. Securities owned by Tejas
Securities are either related to daily trading activity or Tejas Securities'
principal investing activities. Market price risk related to trading securities
is managed primarily through the daily monitoring of funds committed to the
various types of securities owned by Tejas Securities and by limiting exposure
to any one investment or type of investment.
Tejas Securities' trading securities were $3,829,970 in long positions and
$2,263,436 in short positions at June 30, 2000. These trading securities may be
debt securities, private company securities, exchange listed, Nasdaq or other
over-the-counter securities on both long and short positions. Historically,
Tejas Securities has invested a portion of its assets in high yield securities
of distressed companies, which are closely monitored by Tejas Securities'
research analysts. Valuation of high yield securities may be based upon factors
other than those experienced by the overall equity and debt markets. The
potential loss in fair value of Tejas Securities' trading securities, using a
hypothetical 10% decline in prices, is estimated to be
11
<PAGE> 13
$555,000 as of June 30, 2000. A 10% hypothetical decline was used to represent a
significant and plausible market change.
Tejas Securities' investment securities are typically those reported on by Tejas
Securities' research analysts. These positions often consist of high-yield debt
securities and the related equity securities, and other equity positions of
telecommunication and technology related companies. Westech monitors this risk
by maintaining current operating and financial data on the companies involved,
and projecting future valuations based upon the occurrence of critical future
events.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, Starlight Entertainment, Inc. submitted an arbitration claim
against us and a former employee before the NASD. Starlight alleged that we and
our former employee failed to act diligently in bringing to market Starlight's
planned 1998 initial public offering. Starlight was seeking approximately
$225,000 in out-of-pocket expenses incurred in the offering, as well as the
anticipated $6,800,000 proceeds of the offering. The amount of Starlight's claim
was based upon the gross receipts that were expected from the proposed offering
less the underwriting commission plus attorney's fees. On July 21, 2000, we
reached an oral agreement with Starlight Entertainment, Inc. to settle this
matter for $50,000. The final settlement was accrued for as of June 30, 2000 and
was paid on July 28, 2000.
On June 12, 2000, J. Michael Sargeant, a former employee, filed suit in the
Texas State District Court alleging that we breached his employment contract by
terminating him without good cause. Mr. Sargeant has alleged damages of less
than $500,000. We believe this complaint to be without merit and intend to
defend this matter vigorously. We do not believe this matter will produce any
material adverse consequences to us.
There are no other liabilities arising from claims or legal actions that we
believe would have a significant adverse effect on our financial condition or
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
Exhibit list
b) Current reports on Form 8-K
On July 17, 2000, the Company filed an amendment to the Form 8-K filed
on September 8, 1999.
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<PAGE> 14
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Westech Capital Corp.
Date: August 14, 2000
/s/ JAY VAN ERT
--------------------------------------
Jay Van Ert
President
/s/ KURT RECHNER
--------------------------------------
Kurt Rechner
Chief Financial Officer
/s/ JOHN GARBER
--------------------------------------
John Garber
Director of Finance (Principal
Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger (Incorporated herein by reference
to Exhibit 1.1 to the registrant's Current Report on Form
8-K/A filed on October 22, 1999)
3.1 Certificate of Incorporation (Incorporated herein by reference
to Exhibit 3.1 to the registrant's Registration Statement on
Form 10-12(g) (File No. 000-29235))
3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
4.1 NASD Subordinated Loan Agreement, Form SL-1, dated October 13,
1998, between Clark N. Wilson and the Company (Incorporated
herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))
4.2 NASD Subordinated Loan Agreement, Form SL-1, dated June 4,
1999, between Clark N. Wilson and the Company (Incorporated
herein by reference to Exhibit 4.2 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))
4.3 Shareholder Agreement, dated November 23, 1999, between John
Ohmstede, John Glade, Michael Hidalgo, Jon McDonald, Britt
Rodgers, Bob Sternberg, Mike Wolf, Greg Woodby and the Company
(Incorporated herein by reference to Exhibit 4.3 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
4.4 Certificate of Incorporation (Incorporated herein by reference
to Exhibit 3.1 above)
4.5 Bylaws (Incorporated herein by reference to Exhibit 3.2 above)
10.13* Clearing Agreement, dated May 19, 2000, between First Clearing
Corporation and Tejas Securities Group, Inc.
27.1* Financial Data Schedule
99.1 Articles of Incorporation of Tejas Securities Group, Inc.
(Incorporated herein by reference to Exhibit 99.1 to the
registrant's Registration Statement on Form 10-12(g) (File No.
000-29235))
99.2 Bylaws of Tejas Securities Group, Inc. (Incorporated herein by
reference to Exhibit 99.2 to the registrant's Registration
Statement on Form 10-12(g) (File No. 000-29235))
99.3 Articles of Incorporation of Tejas Securities Group Holding
Company (Incorporated herein by reference to Exhibit 99.3 to
the registrant's Registration Statement on Form 10-12(g) (File
No. 000-29235))
99.4 Bylaws of Tejas Securities Group Holding Company (Incorporated
herein by reference to Exhibit 99.4 to the registrant's
Registration Statement on Form 10-12(g) (File No. 000-29235))
</TABLE>
* Filed herewith.
