ITEM 1. BUSINESS
GENERAL
Westech Capital Corp., a Delaware corporation (“Westech”), is a holding company whose only operating subsidiary is Tejas Securities Group, Inc., a Texas corporation (“Tejas “). Tejas is engaged in the business of providing brokerage and related financial services to institutional and retail customers nationwide. References to “the Company,” “we,” “us,” “our” or similar references within the Form 10-K are to Westech and its subsidiaries.
Westech was incorporated as a shell corporation in New York on July 18, 1990, and made an initial public offering in November 1991. On August 27, 1999, Westech was acquired by Tejas in a reverse merger. On August 29, 2001, Westech acquired all of the outstanding minority interest in Tejas.
Effective June 29, 2001, Westech completed a 10-for-1 reverse stock split. As a result of this stock split, earnings (loss) per share amounts and all share amounts for prior periods have been restated to reflect the shares outstanding as though the stock split had taken effect in the prior periods.
Our business is conducted from our headquarters at 2700 Via Fortuna, Suite 400, Austin, Texas, with branch offices in Houston, Texas and Tinton Falls, New Jersey. Tejas 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. The New Jersey branch office provides additional market making services and municipal debt trading activity for the Texas offices.
Development of Business
Tejas was formed as a Texas corporation in March 1994. Initially, Tejas’ focus was to provide institutional money managers and mutual funds high quality investment research covering large U.S. based companies which were believed to be overly leveraged or which were in default or in bankruptcy. Tejas believes these companies were not followed closely by a large number of research analysts. Tejas used this opportunity to establish itself as a source of high quality research products and trading support. Tejas took advantage of its initial research success and expanded its research coverage to special situation equities. The demand for Tejas’ research by individuals led to the expansion of our client base to include retail accounts. Tejas also offers retail and institutional clients access to mortgage backed and municipal debt securities.
Tejas ended the year 2003 with its third straight year of profitability. Tejas’ ability to generate profits was due to improvements in the overall U.S. economy as well as a greater diversification of revenue generating products. While the majority of Tejas’ revenues are still derived from the sale of distressed securities, Tejas realized increases in municipal and government securities sales as well as market making profits.
In February 2004, the Company received a $2,500,000 loan from a bank for operating and financing purposes. With the proceeds from this loan, the Company repaid two previous loans from the bank in the amounts of $1,150,000 and approximately $400,000. The remaining balance was used to provide additional operating opportunities for Tejas.
The Company has applied for listing on the American Stock Exchange. Currently the application is pending and we can provide no assurances that the application will be approved.
Products and Services
We provide our customers with a broad range of products and services generally categorized into two business segments: brokerage services and investment banking. See Note 17 to the consolidated financial statements for segment disclosures.
Brokerage Services
We provide brokerage services to approximately 5,000 retail customers and 500 institutional customers. We offer customers the ability to buy and sell securities, security options, mutual funds, index funds, fixed income products, annuities and other investment securities. We provide our customers with the ability to receive stock quotes and access research on the Internet through our website (www.tejassec.com). Our marketing strategy emphasizes our high level of service and unique knowledge of the companies covered by our research department.
We generated $29,260,473, $19,467,276 and $25,615,989 in commission revenues for the years ended 2003, 2002 and 2001, respectively, or 110%, 92% and 101% of total revenue (before giving effect to trading losses), respectively.
Research
The cornerstone of our business is our research and trading capabilities. Currently, our research department consists of five analysts with proven expertise in special situation equity research and in distressed securities research. The analyst group has the background to analyze many industries, but has a primary focus on telecommunications and technology. We believe that the rapid changes in each of these industries provide excellent investment opportunities. We anticipate that we will continue to devote a substantial portion of our resources to support our research department.
Market Making
In August 1999, the National Association of Securities Dealers, Inc. (“NASD”) approved Tejas to make markets in Nasdaq securities. Making markets in securities facilitates the execution of securities transactions for our customers. As of the date of filing this Form 10-K, Tejas acted as a market maker for approximately 170 public corporations whose stocks are traded on the Nasdaq National Market System, up from approximately 100 public corporations in 2002. The increase in the number of public corporations that Tejas makes markets for is due to the addition of the New Jersey branch.
Generally, we do not maintain inventories of securities for sale to our customers. However, we do engage in certain principal transactions where, in response to a customer order, we will go at risk to the marketplace in an attempt to capture the spread between the bid and offer. Most of our larger competitors are engaged in similar market making activities. We believe we can maintain better control and be assured of proper executions of customer trades by providing these market making services directly to our customers.
Investment Banking
In the past, we raised capital for corporations through public and private offerings of securities either as a syndicate member or as a managing underwriter. We also provided advisory services for companies involved in merger and acquisition activities. As a result of the economic downturn that began in early 2000, the rate of business development in central Texas and nationwide declined substantially, which negatively impacted our ability to generate investment banking revenues. We continue to review investment banking opportunities from time to time; however, we will not devote substantial resources to this business segment unless there is a significant increase in investment banking activities in our region.
We generated $72,799, $335,663 and $316,927 in investment banking revenues for the years ended 2003, 2002 and 2001, respectively, or 1%, 2% and 1% of total revenue, respectively.
Margin Loans
We derive a portion of our income from fees generated on margin loans made to our customers and financed through our clearing organization. A margin account allows the customer to deposit less than the full cost of the securities purchased while the clearing organization lends the balance of the purchase price to the customer, secured by the purchased securities. The amount of the loan is subject to the margin regulations (“Regulation T”) of the Board of Governors of the Federal Reserve System and our internal policies. In most transactions, Regulation T limits the amount loaned to a customer for the purchase of a particular security to 50% of the purchase price. Customers are charged interest on the amount borrowed to finance their margin transactions ranging from 0.25% below to 2.75% above the broker call rate, which is the rate at which brokers can generally obtain financing using margined and firm owned securities as collateral. We earn a fee equal to 50% of the interest charged on customer margin loans. As of December 31, 2003, the total of all customer securities pledges on debit balances and held in active margin accounts was approximately $4.5 million.
CUSTOMERS
Historically, our customer base has been comprised of predominately large institutional customers and high net-worth retail customers. These customers demand high quality research and sophisticated trading capabilities. We believe that we have served the needs of this segment of our customer base well, resulting in increased trading volume. We believe that the increase in the scope of our research services should increase customer satisfaction and increase our revenues from institutional customers and high net-worth retail customers.
EMPLOYEES
On December 31, 2003, we had 58 employees, which was approximately the same number as on December 31, 2002. Of these employees, 28 work in sales, 9 in trading, 6 in research and investment banking and the remaining employees perform management and administrative functions. It is our goal to use the sales support functions that are currently in place to support additional sales staff. We 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 our business are highly competitive. In our general brokerage activities, we compete directly with numerous other broker-dealers, many of which are large well-known firms with substantially greater financial and personnel resources. Many of our competitors employ extensive advertising and actively solicit potential clients in order to increase business. In addition, brokerage firms compete by furnishing investment research publications to existing clients, the quality and breadth of which are considered important in the development of new business and the retention of existing clients. We also compete with a number of smaller regional brokerage firms in Texas and the southwestern United States.
Since the adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift institutions have been able to engage in traditional brokerage and 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 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 ours.
The securities industry has experienced commission discounting by broker-dealers competing for retail brokerage business. The continuation of such discounting and an increase in the number of new and existing firms offering discounts could adversely affect our retail equity business. However, we have historically derived the majority of our commission revenue from institutional customers that tend to purchase larger blocks of securities than individual customers. Transactions with institutional customers have not been subject to the same level of discounting that brokerage firms experience with retail customers due to the size of the transactions. In addition, we have concentrated our research efforts on debt securities, which have not experienced as significant of discounting as equity securities.
SECURITIES INDUSTRY PRACTICES
Tejas is registered as a broker-dealer with the Securities and Exchange Commission (the “SEC”) and the NASD. Tejas is registered as a securities broker-dealer in 39 states and the District of Columbia. Tejas is also a member of the Securities Investors Protection Corporation, which provides Tejas’ customers with insurance protection for amounts of up to $500,000 each, with a limitation of $100,000 on claims for cash balances. Tejas has also acquired an additional $1,500,000 in insurance coverage through Seabury & Smith, as added protection for individual customers’ securities, covering all clients of Tejas’ institutional and retail customers.
Tejas 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.
NET CAPITAL REQUIREMENTS
Tejas 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 our ability to pay dividends to our stockholders. Failure to comply with the Rule could require the Company to infuse additional capital into Tejas, could limit the ability of Tejas to pay its debts and/or interest obligations, and may subject Tejas 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 into compliance, Tejas would ultimately be forced to cease operations. See “Forward-Looking Statements and Risk Factors” below.
At December 31, 2003 and 2002 Tejas elected to use the alternative method permitted by the Rule, which requires it to maintain minimum net capital, as defined in the Rule, equal to the greater of $250,000 in both 2003 and 2002 or 2% of aggregate debit balances arising from customer transactions, as defined in the Rule. At December 31, 2003, Tejas had net capital of $924,132, which was $674,132 in excess of the minimum amount required. At December 31, 2002, Tejas had net capital of $945,765, which was $695,765 in excess of the minimum amount required.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
From time to time, we make statements (including some contained in this report) which predict or forecast future events or results, which depend on future events for their accuracy, which embody projections or that otherwise contain “forward-looking information.” These statements may relate to anticipated revenues or earnings per share, anticipated changes in our business or our ability to successfully respond to such changes, the adequacy of our capital and liquidity, the adequacy of our reserves for contingencies, including litigation, or expectations regarding future financial market conditions. The statements include those that are preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “may” or similar expressions.
We caution readers that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially as a result of various factors, many of which are outside of our control, including the factors discussed below, those discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” and “Quantitative and Qualitative Disclosure About Market Risk,” and those discussed in our periodic reports filed with and available from the SEC.
All forward-looking statements speak only as of the date on which they are made and we undertake no obligation to update them to reflect events or circumstances occurring after the date on which they were made or to reflect the occurrence of unanticipated events.
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.
Failure Of Third-Party Vendors To Provide Critical Services Could Harm Our Business.
We rely on a number of third parties to assist in the processing of our transactions, including online and Internet service providers, back office processing organizations, and market makers. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could have a material adverse effect on our business, financial condition and operating results.
We Are Subject To Market Forces Beyond Our Control Which Could Impact Us More Severely Than Our Competitors.
We, like other securities firms, are directly affected by economic and political conditions, broad trends in business and finance and changes in volume and price levels of securities transactions. In recent years, the U.S. securities markets have experienced significant volatility. Over the past few years, the stock markets have suffered major declines and advances that has increased the volatility of our revenues. If our trading volume decreases, our revenues decline. Also, when trading volume is low, our profitability is adversely affected because our overhead remains relatively fixed, despite lower compensation costs associated with commission revenues. Severe market fluctuations in the future could have a material adverse effect on our business, financial condition and operating results. Although we have diversified our product and service revenue streams, 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.
Our customers sometimes purchase securities on margin through our clearing organization; 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 securing the margin loans could fall below the amount of a customer’s indebtedness. Specific regulatory guidelines mandate the amount that can be loaned against various security types. We rigorously adhere to these guidelines and in a number of instances exceed those requirements. Independent of our review, our corresponding clearing organization independently maintains a credit review of our customer accounts. If customers fail to honor their commitments, the clearing organization would sell the securities held as collateral. If the value of the collateral were insufficient to repay the loan, a loss would occur, which we may be required to fund. Any such losses 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 their business.
The SEC, 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 system to ensure compliance with these laws and rules, 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.
In addition, our operations and profitability may be affected by additional legislation, changes in rules promulgated by the SEC, NASD, the Board of Governors of the Federal Reserve System, the various stock exchanges and other self-regulatory organizations, and state securities commissions, or changes in the interpretation or enforcement of existing laws and rules.
The NASD regulates all of our marketing activities. The NASD can impose certain penalties for violations of its advertising regulations, including censures or fines, suspension of all advertising, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or any of its officers or employees. Tejas’ compliance officer reviews all marketing materials prior to release in an effort 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 might be rendered more costly or burdensome, less efficient, or even commercially impossible to continue, or such regulations could otherwise have a material adverse effect on our business, financial condition and operating results.
We Must Maintain Certain Net Capital Requirements That Could Slow Our Expansion Plans Or Prevent Payments Of Dividends.
The SEC, 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 pay dividends, repay debt and redeem
or purchase shares of our outstanding stock could be severely restricted. A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business, which could have a material adverse effect on our business, financial condition and operating results.
Our Business Is Highly Competitive.
We encounter intense competition in our business, and we compete directly with numerous securities firms and banks, many of which have substantially greater capital and other resources. The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, allows for affiliations among banks, securities firms and insurance companies by means of a financial holding company. In addition, commercial banks have the possibility of engaging in a broad range of non-banking activities through operating subsidiaries. Such activities include all financial activities, including broker/dealer activities, with the exception of insurance underwriting and real estate investment or development.
During the past few years, a number of banks acquired securities firms and, in so doing, gained increased entry into the securities industry. These acquisitions have brought entirely new sources of capital into the securities industry, resulting in more formidable competition.
Additionally, competition among securities firms and other competitors for successful sales representatives, securities traders, securities analysts, stock loan professionals and investment bankers is intense and continuous.
We compete with other securities firms and with banks, insurance companies and other financial institutions principally on the basis of service, product selection, price, location and reputation in local markets. We operate at a price disadvantage to discount brokerage firms that do not offer equivalent services.
We Are Controlled By A Single Stockholder.
Mr. Gorman, our Chairman and Chief Executive Officer, beneficially owns over 50% of the outstanding shares of our Common Stock. As the Company’s largest stockholder, Mr. Gorman is likely to be able to maintain effective control of the Company including the ability to elect a majority of the Board of Directors. The ownership by Mr. Gorman of shares of Common Stock may discourage or prevent unsolicited mergers, acquisitions, tender offers, proxy contests or changes of incumbent management, even when stockholders other than Mr. Gorman consider such a transaction or event to be in their best interest. Accordingly, holders of Common Stock may be deprived of an opportunity to sell their shares at a premium over the trading price of the shares.
Our Trading Systems May Fail, Resulting In Service Interruptions.
We receive and process trade orders through internal trading software and touch-tone telephones and 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.
No Active Public Market For Our Common Stock Currently Exists And None May Develop.
An active public market for our common stock does not currently exist. Over 80% of our issued common stock is held by fewer than ten individuals. Until a broader distribution of our common stock is made no active public market will develop.
Executive Officers of the Registrant
The following information sets forth certain information with respect to our executive officers. Their respective backgrounds are described below.
Name
Age
Position
John J. Gorman
Director, Chairman and Chief Executive Officer
Charles H. Mayer
Director, President and Chief Operating Officer
Kurt J. Rechner
Chief Financial Officer, Secretary and Treasurer
A. Reed Durant
Director of Compliance
John F. Garber
Director of Finance
JOHN J. GORMAN. Mr. Gorman became our Chairman of the Board of Directors and Chief Executive Officer in August 1999. He has been the Chairman and Chief Executive Officer of Tejas since July 1997. Mr. Gorman has over 19 years of experience in the brokerage industry. Mr. Gorman became a principal of Tejas on April 18, 1995. From 1988 until joining Tejas, Mr. Gorman worked at APS Financial Inc. as a Senior Vice President. Mr. Gorman served primarily in a broker capacity at APS Financial Inc., a broker-dealer in Austin, Texas. Mr. Gorman has held positions at APS Financial Inc., Landmark Group, Shearson Lehman and Dean Witter. Mr. Gorman is the nephew of Charles H. Mayer through marriage. Mr. Gorman received his B.B.A. from Southern Methodist University in 1983.
CHARLES H. MAYER. Mr. Mayer joined us in September 1999 as the Chief Operating Officer and a Director. Mr. Mayer became our President in December 2000. From 1995 until he joined us, 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 a Managing Director and the 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.
KURT J. RECHNER, CPA, CFA. Mr. Rechner became our Chief Financial Officer in January 2000, our Treasurer in September 2000 and our Secretary in September 2002. Mr. Rechner has spent the past 22 years in the financial services industry. Prior to joining us, Mr. Rechner was employed from 1997 through 1999 as an Executive Vice President, Finance & Operations, CFO for Xerox Federal Credit Union. From May 1995 to 1997 Mr. Rechner was the Chief Executive Officer for Prism Capital Management, LLC, which managed a global fixed income hedge fund. From 1990 through May 1995, Mr. Rechner was the Senior Vice President of Accounting and Finance for Security Service Federal Credit Union. Mr. Rechner earned a B.S. in Business Administration from the University of Illinois in 1984 and an M.B.A. from Trinity University in 1985. Mr. Rechner also holds the professional designations of Certified Public Accountant and Chartered Financial Analyst.
A. REED DURANT. Mr. Durant became our Director of Compliance in August 1999. Mr. Durant joined Tejas in November 1998 as the Compliance Director. From January 1996 until joining Tejas, Mr. Durant worked as Senior Compliance Examiner for the NASD in the Regulation and Enforcement area. From 1988 until joining the NASD, Mr. Durant worked at Principal Financial Securities. Mr. Durant brings over 22 years experience in the securities industry, including 8 years as Compliance Director of a 400-broker, 30-branch NYSE member firm. Mr. Durant graduated from Texas Tech University with a BA in economics.
JOHN F. GARBER, CPA. Mr. Garber became our Director of Finance in August 1999. Mr. Garber joined Tejas in October 1998 as Director of Finance. From April 1999 until joining Tejas, 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 in the financial assurance department. Mr. Garber graduated from the University of Florida in 1992 with a B.S.B.A. in Finance. Mr. Garber holds the professional designation of Certified Public Accountant.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act.”). You may read and copy any materials that are on file with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains these SEC filings. You can obtain these filings at the SEC’s website at http://www.sec.gov.
We also make available free of charge on or through our website (http://www.tejassec.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such materials with, or furnish it to, the SEC.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s headquarters are located at 2700 Via Fortuna, Suite 400, Austin, Texas. The Company leases space for its offices in Austin, Texas, Houston, Texas and Tinton Falls, New Jersey, which consist of approximately 24,700 square feet, 5,400 square feet and 1,900 square feet, respectively. Future commitments associated with the leases are included in Note 18 to the Consolidated Financial Statements. These leases are for terms of four years, three years and five years, respectively, and contain renewal options. The Company subleased approximately 40% of its space in the Austin location during 2003. The Company also has leased space of approximately 2,500 square feet in Atlanta, Georgia, with a lease term expiring in 2005. In September 2002, the Company subleased approximately 85% of its Atlanta, Georgia office space. The Company subleased the remaining 15% of its Atlanta, Georgia office space in March 2003.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than litigation incidental to our business, which the Company believes will not have a material adverse affect, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RECENT STOCK PRICES
The Company’s common stock trades under the symbol “WSTH” on the over-the-counter electronic bulletin board. The trading does not constitute a well-established public trading market for our common stock. On December 31, 2003, there were in excess of 350 holders of record of the Company’s common stock and we believe in excess of 5 beneficial holders of the Company’s common stock. The following table sets forth for the periods indicated the high and low market prices for our common stock, which reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The Company has not paid cash or stock dividends and has no present plan to pay any such dividends. The payment of future dividends will be decided by our Board of Directors and will be based upon the Company’s future earnings, financial condition and capital requirements. Our current loan agreement prohibits us from paying any dividends.
RECENT SALES OF UNREGISTERED STOCK
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The summary statement of operations data and the summary statement of financial condition data as of and for each of the years in the five-year period ended December 31, 2003 is as follows. Historical financial results may not be indicative of future performance of the Company or its affiliates.
ITEM 7.
Item 7. As of December 31, 2003, the total of all customer securities pledges on debit balances held in margin accounts was approximately $4.5 million.
We are responsible to our clearing organization for payment of all transactions executed both on our behalf and on behalf of our customers. Therefore, we are exposed to off statement of financial condition risk in the event a customer cannot fulfill its commitment and the clearing organization must purchase or sell a financial instrument at prevailing market prices. We and our clearing organization seek to control risk associated with customer transactions through daily monitoring to assure margin collateral is maintained under regulatory and internal guidelines.
We are exposed should Correspondent Services Corporation, our clearing organization, be unable to fulfill its obligations for securities transactions.
The Company deposits its cash with financial institutions. Periodically such balances exceed applicable FDIC insurance limits.
Securities Owned and Securities Sold, Not Yet Purchased
In entering into securities transactions for our own account, we may take long or short positions in securities. These positions are reported on our consolidated balance sheets at fair value. 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 and the issuer’s performance. For a discussion of our market risk, see Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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. The Company clears its securities transactions through a clearing organization. Under the terms of the clearing agreement, the clearing organization has the right to charge the Company for its losses that result from its customers’ failure to fulfill their contractual obligations. In order to mitigate risk, the Company’s policy is to monitor the credit standing of its customers and maintain collateral to support customer margin balances. Further, significant portions of the Company’s assets are held at its clearing organization, Correspondent Services Corporation. Therefore, the Company could incur substantial losses if its clearing organization were to become insolvent or otherwise unable to meet its financial obligations. Correspondent Services Corporation has in excess of $200 million in capital and has historically met all of its obligations to the Company.
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 organization 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 the Company are either related to daily trading activity or the Company’s 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. However, the Company will on occasion concentrate its securities holdings to one or two positions based upon its research and potential for market appreciation. Approximately 78% of the value of securities owned as of December 31, 2003 related to a single security which was sold subsequent to year-end at a gain.
The Company’s trading securities were $5,601,782 in long positions and $221,279 in short positions at December 31, 2003. These trading securities may be exchange listed, Nasdaq, other over-the-counter securities, or securities in which there is limited market activity on both long and short positions. The potential loss in fair value, using a hypothetical 10% decline in prices, is estimated to be $582,000 as of December 31, 2003. A 10% hypothetical decline was used to represent a significant and plausible market change.
The Company’s investment securities are typically those reported on by the Company’s 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 the Company’s research analysts
versus current market performance.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 15 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company filed a Report on Form 8-K dated May 13, 2003 reporting a change in its independent public accountants to Ernst & Young LLP from KPMG LLP. There were no disagreements with accountants on accounting and financial disclosure for the year ended December 31, 2003.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
At December 31, 2003, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Director of Finance, we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer, Chief Financial Officer and Director of Finance concluded that, as of December 31, 2003, our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders, except for the information regarding our executive officers, which is presented in Part I of this Form 10-K. The information required by this item contained in our definitive proxy statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 7, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated:
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(With Report of Independent Auditors Thereon)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Index
Report of Independent Auditors
The Board of Directors and Shareholders
Westech Capital Corp. and Subsidiaries
We have audited the accompanying statement of financial condition of Westech Capital Corp. and Subsidiaries (the Company) as of December 31, 2003, and the related statement of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion.
In our opinion, the 2003 financial statements referred to above present fairly, in all material respects, the financial position of Westech Capital Corp. and Subsidiaries at December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Austin, Texas
March 4, 2004
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Westech Capital Corp.:
We have audited the accompanying consolidated statement of financial condition of Westech Capital Corp. and subsidiaries (the Company) as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westech Capital Corp. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Austin, Texas
March 15, 2003
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2003 and 2002
See accompanying notes to consolidated financial statements.
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001
See accompanying notes to consolidated financial statements.
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2003, 2002 and 2001
See accompanying notes to consolidated financial statements.
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
In August 2001, the minority interest shareholders of Tejas Securities exchanged their shares of Tejas Securities common stock for those of the Company at a ratio of .24825 to one. As a result, the Company issued a total of 245,890 shares of its common stock and Tejas Securities became an indirect wholly owned subsidiary. In addition, the Company recognized $138,215 in goodwill.
In March 2001, the Company restructured its line of credit with a bank. In exchange for a $500,000 principal reduction and interest being brought current, the line of credit was converted into a term loan in the amount of $1,000,000. (Note 9)
During 2003, 2002 and 2001, the Company forgave $99,836, $50,000 and $86,500, respectively, of receivables from employees and stockholders, which has been recorded as compensation expense.
During 2003, the Company purchased fixed assets under capital lease with a value of $96,716.
See accompanying notes to consolidated financial statements.
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(1)
Organization and Basis of Presentation
Westech Capital Corp., a Delaware corporation, (“Westech Capital Corp.”) is a holding company whose only significant 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.
Westech Capital Corp. was incorporated as a shell corporation in New York on July 18, 1990, and made an initial public offering in November 1991. Westech Capital Corp. was acquired by Tejas Securities in a reverse merger (“Merger”) effected on August 27, 1999. Pursuant to an Agreement and Plan of Merger, Tejas Securities Group Holding Company (“Tejas Holding”), a Texas corporation, holding approximately 81% of Tejas Securities, became a wholly-owned subsidiary of Westech Capital Corp. In April 2001, Westech Capital Corp. reincorporated from New York to Delaware. On August 29, 2001, the minority interest shareholders of Tejas Securities exchanged their shares of Tejas Securities common stock for restricted stock of Westech Capital Corp. As a result, Westech Capital Corp. owns, directly or through Tejas Holding, 100% of Tejas Securities.
Effective June 20, 2002, Westech Capital Corp. amended its certificate of incorporation to decrease the number of shares of common stock that it has the authority to issue from 50,000,000 to 10,000,000.
Tejas Securities is registered as a broker and dealer in securities with the National Association of Securities Dealers, Inc. and clears its transactions on a fully disclosed basis through Correspondent Services Corporation. Tejas Securities’ headquarters are located in Austin, Texas.
References to the Company within the accompanying notes to the consolidated financial statements are to Westech Capital Corp. and subsidiaries.
(2)
Summary of Significant Accounting Policies
(a)
Principles of Consolidation
The accompanying consolidated financial statements reflect the consolidated accounts of the Company and its first and second tier subsidiaries, Tejas Holding and Tejas Securities. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b)
Revenue Recognition
Agency commission revenue and related expense from customer security transactions is recorded on a trade date basis. Customer security transactions that are executed through the Company’s proprietary trading account are recorded on a trade date basis as principal commission revenue. The related expense is also recorded on a trade date basis.
Net dealer inventory and investment income (loss) results from securities transactions entered into for the account of the Company. Net dealer inventory and investment income (loss) includes both realized and unrealized gains and losses, which are recorded on a trade date basis.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
The Company does not carry or clear customer accounts, and all customer transactions are executed and cleared with other brokers on a fully disclosed basis. These brokers have agreed to maintain such records of the transaction effected and cleared in the customers’ accounts as are customarily made and kept by a clearing broker pursuant to the requirements of Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934, as amended, and to perform all services customarily incident thereto.
(c)
Investment Banking
Investment banking revenues include gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as an underwriter or agent. Investment banking revenues also include fees earned from providing merger-and-acquisition and advisory services. Investment banking management fees are recorded on the offering date, sales concessions on the settlement date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable.
(d)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with a maturity at date of purchase of ninety days or less.
(e)
Securities Owned and Securities Sold, Not Yet Purchased
Long and short positions in securities are reported at fair value. Securities with readily determinable market values are based on quoted market prices. Securities with limited market activity for which quoted market values are not readily determinable are based on management’s best estimate which may include dealer price quotations and price quotations for similar instruments traded. The difference between cost and fair value has been included in net dealer inventory and investment income (loss). 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)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Estimated useful lives for equipment approximate those used for federal income tax purposes and range from 3 to 7 years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases.
Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statements of financial condition and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(g)
Goodwill
Goodwill represents the excess of costs over fair value of assets of businesses acquired and was recorded in connection with the Company’s acquisition of the minority interest of Tejas Securities in August, 2001. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually.
(h)
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, 2003 or 2002.
(i)
Federal Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(j)
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
(k)
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148 (“SFAS No. 148”), Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends Financial Accounting Standards Board Statement No. 123 (“SFAS No. 123”), Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation for those companies that have elected to continue to apply Accounting Principles Board Opinion No. 25 (“APB No. 25”), Accounting for Stock Issued to Employees. The Company has elected to continue to apply the provision of APB No. 25 to its stock options. The adoption of SFAS No. 148 did not have an impact on the Company’s consolidated financial statements.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
A reconciliation of expected income tax expense (computed by applying the statutory income tax rate of 34% to income before income tax expense and minority interest) to total tax expense in the accompanying consolidated statements of operations follows:
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences net of the existing valuation allowances. For the year ended December 31, 2003 the Company did not recognize change in valuation allowance for capital loss carryforwards. At December 31, 2003, the Company had a capital loss carryforward of approximately $144,000, which expires in 2005.
(14)
Profit Sharing and Stock Option Plans
Profit Sharing Plan
In 1997, the Company 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 Company are discretionary. During 2003 and 2002, the Company contributed approximately $167,000 and $173,000, respectively, to the employee profit sharing plan. No contributions were made for 2001.
Stock Option Plans
The Company established the Westech Capital Corp. 1999 Stock Option Plan (“the 1999 Plan”) for employees, directors and consultants of the Company and its subsidiaries on October 15, 1999. Under the 1999 Plan, the Company was originally authorized to grant up to 300,000 shares of the Company’s common stock through incentive stock options or nonqualified stock options. In August 2000, the board of directors of the Company amended the 1999 Plan to increase the number of shares available to 400,000 shares of the Company’s common stock. The exercise price of each incentive stock option is determined by the Compensation Committee of the Company, and shall not be less than 100% of the fair market value of the stock on the grant date. Incentive stock options awarded to ten-percent owners of the Company’s common stock shall not have an exercise price of less than 110% of the fair market value of the stock on the grant date. Incentive stock options may only be granted to employees of the Company or a subsidiary.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
Options become exercisable as determined at the date of the grant by the Compensation Committee or the Board, in the case of non-employee directors. No option under the 1999 Plan shall be exercisable after the expiration of ten years from the date of the grant. Options granted to a ten-percent owner of the Company shall not be exercisable after the expiration of five years from the date of the grant. The aggregate fair market value of stock purchased under the 1999 Plan by an employee during any calendar year shall not exceed $100,000. In the event that the purchased stock exceeds $100,000, the excess amount shall constitute a nonqualified stock option.
During 2001, options totaling 160,000 shares were granted to employees under the 1999 Plan. The options vested immediately, and expire five years from the date of the grant. The purchase price of the common stock is $2.50 per share. The options were granted at or above the market value of the Company’s common stock.
During 2003, options totaling 100,000 shares were granted to employees under the 1999 Plan. The options vest ratably over three years, and expire five years from the date of the grant. The purchase price of the common stock is $2.50 per share. The options were granted at or above the market value of the Company’s common stock.
A summary of the Company’s stock option and warrant activity, and related information for the years ended December 31, follows.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(15)
Earnings Per Share
Basic earnings per share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflect dilution from all contingently issuable shares, including options issued during 2003, 2002 and 2001. Contingently issuable shares are not included in the weighted average number of shares when the inclusion would increase earnings per share.
Earnings per share is calculated as follows.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(16)
Off Statement of Financial Condition Risk
The Company is responsible to its clearing organization for payment of all transactions executed both on its behalf and on behalf of its customers. Therefore, the Company is exposed to off statement of financial condition risk in the event a customer cannot fulfill its commitment and the clearing organization must purchase or sell a financial instrument at prevailing market prices. The Company and its clearing organization seek to control risk associated with customer transactions through daily monitoring to assure margin collateral is maintained under regulatory and internal guidelines.
The Company is exposed should Correspondent Services Corporation, the Company’s clearing organization, be unable to fulfill its obligations for securities transactions.
The Company deposits its cash with financial institutions. Periodically such balances exceed applicable FDIC insurance limits.
(17)
Industry Segment Data
The Company has two reportable segments: brokerage services and investment banking. The primary operating segment, brokerage services, includes sales, trading and market-making activities of the Company and encompasses both retail and institutional customer accounts. These segments require the commitment of significant human capital and financial resources, as well as industry specific skills. The investment banking segment participates in underwriting of corporate securities as managing underwriter and as a syndicate member, and provides advisory services to companies.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes.
The following table presents segment revenues, income before income tax expense, and assets for the year ended December 31, 2003.
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
The following table presents segment revenues, income (loss) before income tax expense and minority interest, and assets for the year ended December 31, 2001.
(18)
Lease Commitments
The Company leases its office facilities and certain office equipment under operating and capital leases. The future minimum payments due under these leases as of December 31, 2003 are as follows:
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(Continued)
WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
* Filed herewith.
+ Management contract or compensatory plan or arrangement.