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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K þ  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934  OR o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
   Commission File No. 000-29235 TEJAS INCORPORATED 
  DELAWARE
    
    
    
    13-3577716(State or other jurisdiction
of incorporation)
    
    
    
    (IRS Employer
Identification No.)
 2700 Via Fortuna, Suite 400, Austin, Texas 78746 
  Registrants telephone number, including area code (512) 306-8222 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share
(Title of Class) 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K .o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ As of February 28, 2005 there were 4,686,048 shares of the Registrants common stock, $0.001 par
value, outstanding. The aggregate market value of common stock held by non-affiliates as of June
30, 2004 was $3,996,490 using a market price of $5.00 as quoted on the over-the-counter bulletin
board as of the close of business on that date. DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5.
    
    Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    31Item 9A.
    
    Controls and Procedures
    
    
    31Item 9B.
    
    Other InformationPART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    31Item 11.
    
    Executive Compensation
    
    
    31Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    31Item 13.
    
    Certain Relationships and Related Transactions
    
    
    31Item 14.
    
    Principal Accountant Fees and Services
    
    
    31PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    32Promissory NoteSubsidiaries of the RegistrantConsent of KPMG LLPConsent of Ernst & Young LLPConsent of Helin Donovan Trubee & Wilkinson, LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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PART I 
 ITEM 1. BUSINESS GENERAL We are a holding company whose primary operating subsidiary is Tejas Securities Group, Inc., a
Texas corporation. We were incorporated in New York on July 18, 1990, and made an initial public
offering in November 1991. We were acquired by Tejas Securities in a reverse merger effected on
August 27, 1999. On October 3, 2000, we changed our state of incorporation to Delaware. On December
9, 2004, we changed our name from Westech Capital Corp. to Tejas Incorporated. Our primary offices
are located in Austin, Texas. We are a full service brokerage and investment banking firm that focuses on the following:  
    proprietary research on distressed debt and special situation securities;
    trading and other brokerage services to value-based institutional and retail investors
active in fixed income and equity instruments; and
    corporate finance and strategic advisory services to middle-market companies within our
target industries. The cornerstone of our business is our research coverage. Currently, our research department
consists of analysts with expertise in distressed debt and special situation securities. The
analyst group has a background in analyzing many industries, but primarily focuses on wireless and
wire-line telecommunications, cable, satellite, transportation, energy and municipal securities. We
believe that the rapid changes with respect to distressed debt and special situation securities in
several of these sectors provide excellent investment opportunities that are overlooked or
misunderstood by traditional Wall Street brokerage firms and are not a focus of many existing and
emerging boutique investment banks. We anticipate that we will continue to devote a substantial
portion of our resources to support and grow our research department. We commit extensive time and effort to performing due diligence and understanding the fundamentals
of the businesses and industries under coverage. We believe our research performance is driven by
understanding the complexities of particular events such as bankruptcy proceedings and changes in
the regulatory environment. Our research recommendations are typically long term in nature due to
the complexities of the bankruptcy and restructuring process of distressed and special situation
companies. We cover approximately 30 companies and continue to closely monitor other potential
research issues. Notable companies that we have covered include Nextwave Telecom, Arch Paging,
Global Crossing, RCN Communications, CAI Wireless, Motient Corp., Pegasus Communications, MCI
WorldCom and United Airlines. We believe our clients appreciate our research and choose to do
business with us because of this added value. We have increased our revenues over the last decade by:  
    recruiting experienced industry professionals with established client and industry
relationships typically from well-known industry competitors;
    increasing the number of companies under coverage by our research analysts;
    increasing and expanding our participation in investment banking transactions;
    expanding the number and enhancing the penetration of institutional investors to which
we market our investment research, sales and trading products and services; and 1




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
    increasing the number of securities in which we make an active trading market. We are devoted to maintaining an entrepreneurial culture, characterized by experienced
professionals, a focus on maximizing our clients returns, and broad-based employee ownership. Our
employees currently own approximately 67% of our common stock on a fully diluted basis, and we
anticipate that they will continue to maintain a substantial ownership position in our equity. We provide brokerage services to approximately 500 institutional clients and a network of retail
clients. The majority of our brokerage revenues are derived from research driven recommendations.
We offer clients the ability to buy and sell fixed income products, equity securities, security
options, mutual funds and other investment securities. Our fixed income products include distressed
corporate bonds, bank notes issued by distressed companies, mortgage-backed derivative products,
municipal bonds, and government and government-backed securities. Through our Austin operations, we
are a market maker for approximately 35 public companies whose stocks are traded on the Nasdaq
Stock Market. We are also a dealer in New York Stock Exchange listed securities and other
non-listed securities. In 2004, we began to focus more attention on our investment banking efforts, particularly in
assisting public companies raise capital. Through this renewed focus, we acted as placement agent
for seven private investment in public equity, or PIPE, transactions, and one exit convertible bond
financing during 2004. These transactions raised approximately $401 million, which included one of
the largest all equity domestic PIPE transactions in 2004. We have provided bankruptcy and
restructuring advisory services in order to enhance returns for our clients, though this activity
has not generated any advisory fees to date. We believe, however, that providing these services
will help build client relationships and, in the future, we will generate revenues from these and
other types of advisory services. Industry Overview In the last decade, the U.S. securities industry has been characterized and influenced by the
following trends:  
    increased levels of industry consolidation, particularly involving smaller regional
investment banks that primarily provided investment banking and brokerage services to
middle-market companies and their institutional investors;
    the tendency for global competitors and acquired firms, once part of larger
organizations, to focus on larger market capitalization companies and larger transactions;
and
    the emergence of smaller boutique investment banking firms focused exclusively on
growth industries, particularly technology and healthcare. In recent years there have been a number of acquisitions of U.S. brokerage and investment banking
firms that offer similar products and services to those that we provide. Most of these firms were
acquired by larger financial services institutions, including U.S. and international depository
institutions, insurance companies and investment banking firms. These larger financial institutions have generally allocated capital and resources toward larger
market capitalization companies and transactions. This shift of focus away from smaller market
capitalization companies has led to a decline in service to these companies, including investment
banking and research coverage, and as a result such companies have reduced access to capital.
Additionally, although the number of investment funds and total assets under management focusing on
small- and middle-capitalization companies has grown considerably during the last decade, according
to Morning Star, managers of these funds have fewer sources of independent research upon which to
base investment decisions. Today, New York Stock Exchange listed and Nasdaq National Market
companies with market capitalizations between $100 million and $500 million receive, on average,
research coverage from only 2




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2.5 analysts while companies with a market capitalization of between $5 and $20 billion receive, on
average, research coverage from 15.0 analysts. The United States securities industry has also been subjected to increased regulation and
governmental scrutiny. The New York Attorney General commenced an investigation into certain
research and capital markets practices of several investment banking firms, of which we were not a
target. This and subsequent investigations culminated in a punitive settlement, which included
certain mandated changes in business practices. As a result, we and other firms not subject to this
settlement have, nonetheless, amended certain business practices to conform with these mandates.
Many larger firms have restructured their research departments and reduced coverage and market
making activities for companies whose market capitalization is below certain thresholds. Research
and capital markets resources previously dedicated to smaller market capitalization companies were
either reassigned to larger companies or eliminated. These circumstances have contributed to both
companies in, and investors focused on, the growth and middle-market sectors seeking the services
of boutique investment banking professionals who have a high degree of applicable industry
knowledge. To facilitate access to capital markets and to industry and company specific research, smaller
boutique financial services firms have emerged to offer investment banking and research support to
small- and middle-market capitalization companies. Within the past five years, a number of
investment banking and research firms have been established to serve the smaller and more illiquid
companies that do not offer enough new issue and trading volume to be serviced by a larger
investment bank. However, we believe the main focus of these boutique firms has centered primarily
on the growth sectors of technology and healthcare. Few of these boutique investment banking and
research based firms focus on value-based investments, particularly distressed and special
situation companies. Our Market Opportunity We believe that, as a full service brokerage firm and strategically positioned investment bank well
recognized for its focus on distressed debt and special situation securities, the market
opportunity available to us is significant due to the following factors:  
    Our targeted addressable market continues to grow as our research coverage expands to
new industries.
    High yield issuance remains robust, creating a steady supply of distressed debt.
    Returns in the distressed marketplace have improved significantly in recent years.
    Our research department fully investigates the details of each investment situation.
    Our extensive bankruptcy coverage allows us to identify distressed opportunities
regardless of size. Our Competitive Strengths Highly Regarded Investment Research We believe that we are widely recognized for the quality of the distressed debt and special
situation securities research we provide to our institutional and retail clients. Our research
department analyzes each aspect of an issuers business, develops strong professional relationships
with management and related industry professionals, and effectively communicates the situation to
the investor community. Our analysts attend management and industry presentations to further their
understanding of an issuers business. Many of the companies under research coverage have been
followed by our research staff for several years, enhancing our understanding of the issuer.
Rather than cover a large number of investment opportunities, our analysts focus on their
industries of expertise in order to provide meaningful insight into the investment situation. 3




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Experienced Professionals We believe that our team of professionals has diverse and extensive experience in the financial
services industry. Our sales and trading professionals have developed long-term client
relationships with hedge funds, pension funds, state and local municipalities, banks, insurance
companies and high net worth individuals. We strive to provide each of our clients with compelling
and in-depth research reports, along with access to state-of-the-art trading systems and execution
for equities and fixed income securities. This has resulted in us maintaining a core group of
institutional accounts, of which the top 20 institutional clients accounted for 38% of our total
commission revenues in 2004 and 2003, as well as retail clients. We believe our strong
relationships and excellent performance have led our institutional clients to request that we
provide additional investment opportunities in such areas as investment banking and restructuring
transactions. Our executive management team, consisting of our Chairman, Chief Executive Officer, President and
Chief Operating Officer and Chief Financial Officer, has over 70 years of experience in diverse
sectors of the securities industry and embodies the entrepreneurial spirit on which we are based.
Most of the members of our executive management team assume multiple duties and are actively
involved in revenue producing activities. Focus on Under-Covered Securities Our analysts target distressed debt and special situation securities of small- and middle-market
capitalization companies for which limited coverage currently exists. The businesses covered by our
research analysts are, on average, actively covered by only 2.1 other analysts. In many cases, our
coverage of these businesses gives us a competitive advantage when dealing with larger and better
capitalized competitors who have not dedicated the research resources necessary to understand these
businesses. Furthermore, we believe that our institutional and retail accounts consider us as the
primary source of information and trading in complex bankruptcy situations. Many boutique
investment banks focus on growth industries, leaving distressed and special situation securities
under-covered. Entrepreneurial Culture We have fully embraced an entrepreneurial culture. Our employees own approximately 67% of our
common stock on a fully diluted basis, which, when coupled with our highly competitive compensation
packages, enables our employees to directly benefit from their individual production as well as our
overall performance. Every employee has the incentive to generate ideas and communicate them to
management to maximize client returns and our revenues. Many of our employees invest their personal
capital in the investment opportunities marketed to our clients. We believe these aspects of our
culture have led to a very low turnover rate that was approximately 5% in 2004. The executive
management team, combined with the top ten revenue producers for 2003 and 2004, have been employed
by us, on average, approximately six and a half years each. We believe that our entrepreneurial
culture allows us to attract top revenue producers, as evidenced by the fact that two of the top
ten revenue producers for 2003 and 2004 have been employed by us for less than three years. We
believe that we maintain a culture that allows us to both retain our top revenue producers as well
as to recruit additional sales staff capable of producing consistent revenues. Our Growth Strategies Our goal is to become a leading provider of quality research, trading and investment banking
services to our clients. In order to achieve this goal, we plan on implementing the following
strategies: Expand Research Coverage to Other Industries Outside Our Current Focus Due to our present size and available resources, we are currently limited in our ability to provide
research coverage on distressed and special situation companies outside of our core industries. The
number of 4




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companies and industries under coverage has a direct impact on commission and trading revenues. We
plan to add additional research staff to provide research coverage of products such as distressed
mortgage- and asset-backed securities as well as to cover additional industries such as general
industrials, media and retail. We believe this will enable us to expand our sales force, as
potential sales professionals would be attracted to our expanded product offering. These research
staff additions will allow us to provide complementary research capabilities that we believe will
generate additional revenues from an existing and expanded client base. Capitalize on Trading Resources By Increasing the Size of Brokered Transactions Historically, our modest capital base combined with the lack of leverage provided by our clearing
organization has inhibited our ability to acquire securities related to our research. With
additional capital, we believe we will have the ability to conduct larger transactions and realize
greater revenues on the securities that we broker. With expanded capital for inventory positions,
we will be better situated to recruit distressed trading professionals who specialize in trading
larger blocks of distressed and special situation securities. Expand Investment Banking Efforts to Include Additional Capabilities In 2004, we began to utilize our expertise, industry contacts and business experience to grow our
investment banking practice. These investment banking clients are requesting additional services
from us, including acquisition and restructuring advisory services. As a result, we plan to hire
experienced investment banking professionals to exploit these opportunities. Develop Direct Investment Operations for Participation in Investment Banking Transactions Short term bridge financings are often associated with PIPEs or other security transactions. With
additional capital, we may offer, in addition to services as placement agent, bridge financing to
our investment banking client base. Also, we may have the opportunity from time to time to take a
proprietary equity position in future distressed or special situations, which we believe will
increase our investment banking revenues. Grow Through Acquisitions In the past, we have entertained several potential acquisition candidates but our balance sheet and
thinly traded common stock have limited our ability to use our equity as consideration in these
potential transactions and has prevented us from completing these transactions. An expanded capital
base and increased liquidity in our common stock would improve our ability to seek out
complementary businesses. Diversify Revenues While a majority of our revenues have traditionally been generated from the distressed debt and
special situation security trading, we are continuing to diversify our revenue base by growing our
government, mortgage-backed and municipal securities trading activity and building our investment
banking revenues. Because these revenue streams are driven by different market factors, cycle
timing for each is different, thus decreasing the volatility of the overall revenues. In addition,
expanding our research breadth will enable us to address a greater range of industries, helping
mitigate industry-specific volatility. Revenues and Industry Segments The information required by Regulation S-K Items 101(b) and 101(d) related to financial information
about segments and financial information about sales is contained in Note 16 of our consolidated
financial statements, which are included in this Annual Report on Form 10-K. 5




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Clients Historically, our client base has been comprised of predominately large institutional clients such
as money managers, mutual funds, hedge funds, private and public pension funds, banks, insurance
companies, savings associations, state and municipal funds and high net-worth retail clients with a
particular focus on value. These clients demand high quality research and sophisticated trading
capabilities. We believe that we have served the needs of this segment of our client base as
evidenced by increased volume with these clients. We believe that the increase in the scope of our
research services should increase client satisfaction and increase our revenues from institutional
clients and high net-worth retail clients. During 2004, we had two investment banking clients that
provided approximately 29% of our total revenues. Employees As of December 31, 2004, we had 61 employees. Of these employees, 28 work in sales, ten in trading,
four in research and three in investment banking, with the remaining employees performing
management and administrative functions. We believe that this support structure is sufficient to
support additional sales, investment banking and research staff. Competition All aspects of our business are highly competitive. In our investment banking activities, we
compete with large Wall Street investment banks as well as regional boutique banks that offer
private placement services to small- and middle-market companies. We compete for these investment
banking transactions on the basis of our relationships with the issuers and potential investors,
our experience in the industry and transactional fees. 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. We compete for brokerage transactions on
the basis of our research ideas, our experience in the industry, our ability to execute
transactions and the strength of our relationships with our clients. Many of our competitors for
brokerage service and investment banking transactions 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. The securities industry has become considerably more concentrated and more competitive since we
were founded, as numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. In addition, companies not engaged primarily in the securities
business, but with substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital resources than ours. 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, thus increasing
competition in the securities industry and potentially increasing the rate of consolidation in the
securities industry. We also compete with other securities firms for successful sales representatives, securities
traders, securities analysts and investment bankers. Competition for qualified employees in the
financial services industry is intense. Our continued ability to compete effectively depends on our
ability to attract new employees and to retain and motivate our existing employees. Securities Industry Practices/Regulation Tejas Securities is registered as a broker-dealer with the Securities and Exchange Commission and
the NASD. Tejas Securities is registered as a securities broker-dealer in 39 states and the
District of Columbia. Tejas Securities is also a member of the Securities Investors Protection
Corporation, which provides Tejas Securities clients with insurance protection for amounts of up
to $500,000 each, with a limitation of $100,000 on claims for cash balances. Tejas Securities has
also acquired an additional $1,500,000 in 6




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insurance coverage through Seabury & Smith, as added protection for individual clients securities,
covering all of Tejas Securities institutional and retail clients. Tejas Securities is subject to extensive regulation by federal and state laws. The SEC is the
federal agency charged with administration of the federal securities laws. Much of the regulation
of broker-dealers, however, has been delegated to self-regulatory organizations, principally the
NASD and the national securities exchanges. These self-regulatory organizations adopt rules,
subject to approval by the SEC, which govern the industry and conduct periodic reviews of member
broker-dealers. Securities firms are also subject to regulation by state securities commissions in
the states in which they do business. The SEC, self-regulatory organizations, and state securities
commissions may conduct administrative proceedings which can result in censure, fine, suspension,
or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and
discipline of broker-dealers is the protection of clients and the securities markets, rather than
protection of creditors and stockholders of broker-dealers. Tejas Securities was recently fined
$55,000 by the NASD in connection with a routine annual examination and our former compliance
officer received a 30-day suspension from the NASD for trading prior to the issuance of a research
report. As a result of the most recent changes in the regulatory environment, Tejas Securities restructured
its compliance department. In May 2004, it hired a new compliance director who had previously
served as an examiner for the NASD office in Dallas, Texas. Additionally, in March 2004, it engaged
an outside consultant who had previously served as the head of the NASD office in Dallas, Texas.
Through these additions and through a review of our internal supervisory procedures, we believe
that Tejas Securities will be better situated to address compliance matters affecting us on a going
forward basis. Net Capital Requirements Tejas Securities is subject to SEC Rule 15c3-1, or 15c3-1, which establishes minimum net capital
requirements for broker-dealers. 15c3-1 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 15c3-1 depends in part upon the activities engaged in by the broker-dealer. In computing net capital under 15c3-1, 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 15c3-1 could require intensive use
of capital and could limit our ability to pay dividends to our stockholders. Failure to comply with
15c3-1 could require us to capitalize Tejas Securities with additional cash equity investments,
could limit the ability of Tejas Securities to pay its debts or interest obligations and may
subject Tejas Securities to certain restrictions which may be imposed by the SEC, the NASD, and
other regulatory bodies. Moreover, in the event that we could not or elected not to put additional
capital or otherwise bring Tejas Securities into compliance, Tejas Securities would ultimately be
forced to cease operations. At December 31, 2004, Tejas Securities elected to use the alternative method permitted by 15c3-1,
which requires it to maintain minimum net capital, as defined in 15c3-1, equal to the greater of
$250,000 or 2% of aggregate debit balances arising from client transactions, as defined in 15c3-1.
At December 31, 2004, Tejas Securities had net capital of $3,637,595, which was $3,194,434 in
excess of the minimum amount required. 7




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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 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. Risks Related to Our Business Our Ability To Retain Our Executive Management Team And To Recruit And Retain Key Employees Is
Critical To The Success Of Our Business. Our ability to successfully execute our business model depends, among other things, upon the
personal reputation, judgment, business generation capabilities and project execution skills of our
executive management and key employees, including, in particular, John J. Gorman, our Chairman. We
depend on the personal reputations and relationships that our executives and employees have with
our clients to obtain and maintain investment banking engagements and brokerage accounts.
Accordingly, the retention of these executives and employees is particularly important to our
future success. The departure or other loss of any such member of our executive management team or
key employees, each of whom manages substantial client relationships and possesses substantial
experience and expertise, could harm our ability to secure and successfully complete investment
banking engagements and generate brokerage commissions. Many of the investors in our brokerage and investment banking transactions, and many of our other
clients, have retained us because of Mr. Gormans involvement. Consequently, if Mr. Gorman were to
leave our employ for any reason, these investors and other clients may terminate their relationship
with us. Such a situation would harm our business and could impair our market value. There Is No Consistent Pattern In Our Financial Results From Quarter To Quarter And Year To Year,
Which May Result In Volatility In The Value Of Our Common Stock. We experience variations in revenues and profits during the year and from year to year. These
variations can generally be attributed to:  
    fluctuations in the debt and equity markets;
    our ability to identify investment opportunities for our trading accounts and our clients accounts;
    general economic and market conditions which impact the number of distressed securities
opportunities that are available to us and our clients; and 8




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
    our investment banking revenues being largely earned upon the successful completion of
transactions, the timing of which is uncertain and subject to the volatility of the capital
markets. We also invest in securities for our proprietary accounts and receive securities as a portion of
our fees in connection with a number of our investment banking engagements. Changes in the market
prices of these securities, and changes in our estimates of market values of these securities,
could result in losses to us. The fair value of these securities directly impacts our net dealer
inventory and investment income in our consolidated statements of operations. Other variable factors bearing on our revenues include fluctuations in the level of institutional
brokerage transactions, variations in personnel expenses and costs incurred in pursuing investment
banking and restructuring opportunities and new brokerage clients. To the extent that the market
price of our common stock bears a relationship to our revenues and profits, the value of our common
stock may decline because of these fluctuations. We Invest Our Own Principal Capital In Equities And Debt Securities That Expose Us To Risk Of
Capital Loss. We use a portion of our own capital in a variety of principal investment activities, each of which
involves risks of illiquidity, loss of principal and revaluation of assets. At December 31, 2004,
our principal investments represented approximately $8,916,000 invested in securities that had
limited marketability, and approximately $7,041,000 invested in marketable securities in long
positions and approximately $91,000 invested in marketable securities in short positions.
Additionally, we may on occasion concentrate our securities holdings to one or two positions based
upon our research and potential for market appreciation. At December 31, 2004, approximately 68% of
the market value our securities holdings were concentrated in two companies. We face the risk of
greater valuation losses by not adequately diversifying our investment portfolio. We may purchase equity securities and debt securities in companies that require additional capital
to complete a capital restructuring. The distressed companies in which we invest may not be able to
raise sufficient capital to complete their restructurings. Market values for some of the distressed
securities may not be easily determinable depending upon the volume of securities traded on open
markets, the operating status of the companies or the types of securities issued by companies. If
the underlying securities of a company become illiquid, our liquidity may be affected depending on
the value of the securities involved. During times of general market decline, we may experience
market value losses, which ultimately affect our liquidity through our broker-dealer net capital
requirements. In addition, we may decide not to liquidate our security holdings to increase cash
availability if our management believes a market turnaround is likely in the near term or if our
management believes the securities are undervalued in the current market. If Institutional Investors Conduct Less Business With Us, Our Revenues May Be Harmed. Mutual funds, hedge funds and other institutional investors purchase a significant portion of the
securities offered by issuers in the private investment in public equity, or PIPE, offerings for
which we act as private placement agent. Additionally, institutional investors make up a
significant amount of our commission revenues. If institutional investors conduct less business
with us, our revenues may suffer. Institutional investors may reduce their transaction volume with
us for a number of reasons, including, among others, a decrease in the flow of funds into
institutional investors, new regulations governing institutional investors, increased competition
in our businesses and redeployment of institutional assets toward opportunities we do not offer. We Specialize In A Few Discrete Sectors, And Any Downturn In Business In Those Sectors Could
Adversely Affect Our Revenues. We focus our brokerage and investment banking activities in relatively few sectors, such as
wireless and wire-line telecommunications, cable, satellite, transportation, energy and municipal
securities. Consequently, a general decline in the market for securities of companies within any
such industry could 9




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result in fewer brokerage and investment banking opportunities for us, and could reduce our
revenues. The market for securities offerings in each of the sectors in which we focus may also be
subject to industry-specific risks. In the event that one or more of our core industries
experiences an extended period of economic decline, the number of investment banking opportunities
available to us as well as the volume of securities traded in these industries may decline. As a
result, any decline in our core industry markets could result in fewer investment banking
engagements for our investment banking team and a decline in the amount of commission revenues
generated by our brokers. In addition, our research coverage and brokerage activities focus primarily on distressed debt and
special situation securities. A sustained period of macroeconomic growth could limit the number of
distressed and special situation opportunities that our research analysts find attractive which
could, in turn, reduce our brokerage activity. A material reduction of our brokerage activity would
have a material adverse effect on our results of operations. Our Business Is Highly Competitive. All aspects of our business are highly competitive. In our investment banking activities, we
compete with large Wall Street investment banks as well as regional boutique banks that offer
private placement services to small- and middle-market companies. We compete for these investment
banking transactions on the basis of our relationships with the issuers and potential investors,
our experience in the industry and transactional fees. 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. We compete for brokerage transactions on
the basis of our research ideas, our experience in the industry, our ability to execute
transactions and the strength of our relationships with our clients. Many of our competitors for
brokerage service and investment banking transactions 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. The securities industry has become considerably more concentrated and more competitive since we
were founded, as numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. In addition, companies not engaged primarily in the securities
business, but with substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital resources than ours. 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, thus increasing
competition in the securities industry and potentially increasing the rate of consolidation in the
securities industry. We also compete with other securities firms for successful sales representatives, securities
traders, securities analysts and investment bankers. Competition for qualified employees in the
financial services industry is intense. Our continued ability to compete effectively depends on our
ability to attract new employees and to retain and motivate our existing employees. If any of our
executive management team members or key employees were to leave our firm to join an existing
competitor or to form a competing company, some of our clients could choose to use the services of
that competitor instead of our services. There is no guarantee that the compensation arrangements
we have entered into with the members of our executive management team and key employees will
prevent them from resigning to join our competitors or that the non-competition agreements would be
upheld if we were to seek to enforce our rights under those agreements. Any material change in our competitors business practices may place us at a competitive
disadvantage and could impair our ability to generate fees and commissions at an effective level,
reduce our market share for investment banking or brokerage services and negatively affect our
ability to hire and retain superior personnel. 10




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We Are Subject To Market Forces Beyond Our Control. 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 have increased the
volatility of our revenues. If our trading volume decreases, our revenues resulting from trading
commissions will 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. 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, our clearing organization, market data providers such as
Bloomberg and Reuters, and market makers. We have no control over these third party service
providers. As our business grows, we cannot assure you that the technology and services we require
from third parties will be available. While we have had only short intermittent disruptions in
service from these providers historically, any more significant problems caused by these third
parties, including their not providing services for any reason for significant periods or their
performing their services poorly, could have a material adverse effect on our business, financial
condition and operating results and could cause us to be unable to timely and accurately process
our clients transactions or maintain complete and accurate records of such transactions. Credit Risk Exposes Us To Losses Caused By Financial Or Other Problems Experienced By Third
Parties. Credit risk in our business arises principally from our trading and market-making activities.
Credit risk refers to the risk that third parties that owe us money, securities or other assets
will not perform their obligations, such as delivering securities or payments. These third parties
include our trading counterparties, clients, clearing agents, exchanges, clearing houses and other
financial intermediaries as well as issuers whose securities we hold. These parties may default on
their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons.
Credit risk may arise, for example, from our holding securities of third parties, executing
securities trades that fail to settle at the required time due to non-delivery by the counterparty
or systems failure by clearing agents, exchanges, clearing houses or other financial
intermediaries, and extending credit to our clients through bridge or margin loans or other
arrangements. In the event that our clients or counterparties default on their obligations to us,
we, in turn, may not be able to fulfill our obligations to others. Any default by us on our
obligations to others may harm our business. Further, our clients sometimes purchase securities on margin through our clearing organization. We
are therefore 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 clients indebtedness. Specific regulatory guidelines
mandate the amount that can be loaned against various security types. If clients 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. We have also experienced insignificant losses due to client fraud. Any material
losses from client failures, including fraud, could have a material adverse effect on our cash flow
from operations. We Are Subject To Strict Government Regulation And The Failure To Comply Could Result In
Disciplinary Actions. The securities industry in the United States is subject to extensive regulation under both federal
and state laws. Broker-dealers and investment advisors are subject to regulations covering all
aspects of their business. Our business and industry have changed substantially since we began
offering brokerage services, and we expect the pace of change in the brokerage industry to
continue. Recently, the brokerage industry 11




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has experienced a great deal of negative exposure due to insider trading, research improprieties,
mutual fund trading improprieties and a lack of investor confidence in the industry as a whole. As
a result, regulatory agencies and the U.S. government have intervened in an attempt to resolve
these various issues. The demands placed upon our personnel and financial resources may be too
significant for us to quickly adapt to a changing environment and may impact our ability to provide
our current services or to expand our services. The Securities and Exchange Commission, or SEC, the National Association of Securities Dealers, or
NASD, the Board of Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations and state securities commissions can censure, fine, issue
cease-and-desist orders or suspend or expel a broker-dealer or any of its officers or employees.
Our ability to comply with all applicable laws and rules is largely dependent on our establishment
and maintenance of a system to ensure compliance with these laws and rules, as well as our ability
to attract and retain qualified compliance personnel. The NASD, in particular, extensively regulates our 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. In addition to certain immaterial corrective
actions required of us by the NASD in connection with its routine annual examinations of our books
and records, including trading records, we were recently fined $55,000 by the NASD and our former
compliance officer received a 30-day suspension from the NASD for trading prior to the issuance of
a research report and we agreed to hire a consultant to help improve our compliance policies. In
connection with a previous audit by the NASD, our chief financial officer and our former compliance
officer each received a 10-day suspension relating to self-clearing of securities sold by us. We
could be subject to additional 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 including, but not
limited to, existing regulations which restrict communications between our research analysts and
our other departments. We cannot assure you that such future regulations will not require us to
implement additional compliance policies and that such policies will not materially increase our
compliance expenses. Employee Misconduct Could Harm Our Businesses And Is Difficult To Detect And Deter. There have been a number of highly publicized cases involving fraud or other misconduct by
employees in the financial services industry in recent years and we run the risk that employee
misconduct could occur at our company. Misconduct by employees could include binding us to
transactions that exceed authorized limits or present unacceptable risk, or hiding from us
unauthorized or unsuccessful activities, which, in either case, may result in unknown and unmanaged
risks or losses. Misconduct by employees could also involve the improper use or disclosure of
confidential information, which could result in regulatory sanctions and serious harm to our
reputation or financial condition. Our investment banking business often requires that we observe
confidences of the greatest significance to our clients, improper use of which may harm our clients
and violate the terms of our agreements with our clients. Any breach of our clients confidences
may impair our ability to attract and retain investment banking clients. It is not always possible
to deter employee misconduct, and the precautions that we take to detect and prevent this activity
may not be effective in all cases. We Are Subject to Increased Use of Legal Proceedings, Which May Negatively Impact Our Business. Substantial legal liability or a significant regulatory action against us could have a material
adverse financial effect or cause significant harm to our reputation, which in turn could harm our
business prospects. Participants in the securities industry have faced increasing litigation and
arbitration based on a 12




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number of legal theories. Investors in the United States have been subjected to corporate fraud and
bankruptcies, volatile investment markets, biased investor research, mutual fund trading
irregularities and other negative images of the investment securities industry. As a result of
these incidents in the securities industry, many investors have experienced significant losses in
personal wealth. As a broker-dealer, we are exposed to client lawsuits and arbitration should an
investor lose money in an investment that we may recommend. In July 2004, we settled a client
complaint related to previous investment losses incurred by the client for $185,000. We face significant legal risks in our businesses, and the volume and amount of damages claimed in
litigation, arbitrations, regulatory enforcement actions and other adversarial proceedings against
financial services firms are increasing. These risks include potential liability under securities
and other laws for materially false or misleading statements made in connection with securities or
other transactions, potential liability for the fairness opinions and other advice we provide to
participants in corporate transactions and disputes over the terms and conditions of complex
trading arrangements. We are also subject to claims arising from disputes with employees under various circumstances;
these risks may be difficult to assess or quantify and their existence and magnitude may remain
unknown for substantial periods of time. In addition, legal or regulatory matters involving our
directors, officers or employees in their individual capacities may create exposure for us because
we may be obligated or may choose to indemnify the affected individuals against liabilities and
expenses they incur in connection with such matters to the extent permitted under applicable law. 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 we fail to maintain the required net capital, we may be subject to suspension or
revocation of registration by the SEC and suspension or expulsion by the NASD, and could ultimately
lead to our liquidation. If such net capital rules are changed or expanded, or if there is an
unusually large charge against net capital, our operations that require the intensive use of
capital, such as our ability to purchase investment securities and conduct underwriting activities,
would be limited. Such operations may include trading activities and the financing of client
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. We May Experience Reduced Revenues Due To Declining Market Volume, Securities Prices And Liquidity,
Which Can Also Cause Counterparties To Fail To Perform. Our revenues may decrease in the event of a decline in the market volume of securities
transactions, securities prices or liquidity of the securities for which we make a market. Declines
in the volume of securities transactions and in market liquidity generally result in lower revenues
from trading activities and commission. Lower price levels of securities may also result in a
reduction in our revenues from corporate finance fees, as well as losses from declines in the
market value of securities held by us in our trading accounts. Sudden sharp declines in market
values of securities can result in illiquid markets and the failure of counterparties to perform
their obligations, as well as increases in claims and litigation, including arbitration claims from
clients. In such markets, we may incur reduced revenues or losses in our principal trading,
market-making, investment banking and advisory services activities. 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 13




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time, our clients 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 system failure, we may be able to take orders by telephone; however, only associates with
a securities brokers license can accept telephone orders, and an adequate number of associates may
not be available to take client calls in the event of a system 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 result in our losing clients or
being subject to lawsuits resulting from such system failures. Lack Of Liquidity At Our Clearing Organization May Impair Our Business. We utilize our equity in securities owned at our clearing organization to facilitate the purchase
of additional securities for trading purposes. The value of the equity at the clearing organization
is primarily affected by realized trading gains and losses, unrealized gains and losses, the
purchase and sale of accrued interest on debt securities, and cash withdrawals and deposits at the
clearing organization. As a result of this activity, including the purchase and sale of securities,
we may have either a receivable or payable balance to the clearing organization. In the event that
we have a payable balance to the clearing organization, we may be restricted in our ability to
withdraw funds from the clearing organization to cover routine operating expenses. Additionally, if
the value of the equity at the clearing organization is insufficient to cover the margin
requirements on the value of the securities borrowed, we may be required to either liquidate our
holdings at the clearing organization or provide additional funds to cover margin requirements. As
of December 31, 2004, we had a receivable balance due from our clearing organization of $3,737,741. 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. Our common stock is
currently offered on the OTC Bulletin Board and is subject to increased volatility due to the lack
of trading volume and liquidity for potential investors. Although we have applied for the listing of our common stock on the NASDAQ SmallCap Market, there
can be no guarantee that our application will be accepted or that if our application is accepted,
we will experience any increase in our liquidity. Our Common Stock Price May Be Volatile, Which Would Adversely Affect The Value Of Your Shares. The market price of our common stock has in the past been, and may be in the future continue to be,
volatile. A variety of events may cause the market price of our common stock to fluctuate
significantly, including:  
    variations in quarterly operating results;
    our announcements of significant contracts, milestones, acquisitions;
    our relationships with other companies;
    our ability to obtain needed capital commitments;
    additions or departures of key personnel;
    sales of common stock, conversion of securities convertible into common stock, exercise
of options and warrants to purchase common stock or termination of stock transfer
restrictions;
    general economic conditions, including conditions in the securities brokerage and
investment banking markets;
    changes in financial estimates by securities analysts; and 14




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
    fluctuation in stock market price and volume. Many of these factors are beyond our control. Any one of the factors noted herein could have an
adverse effect on the value of our common stock. In addition, the stock market in recent years has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity securities of many
companies and that often have been unrelated to the operating performance of such companies. These
market fluctuations have adversely impacted the price of our common stock in the past and may do so
in the future. We Do Not Expect To Pay Cash Dividends On Our Common Stock For The Foreseeable Future. We have never paid cash dividends on our common stock and do not anticipate that any cash dividends
will be paid on the common stock for the foreseeable future. The payment of any cash dividend by us
will be at the discretion of our board of directors and will depend on, among other things, our
earnings, capital, regulatory requirements and financial condition. The terms of any future
indebtedness of Tejas Securities may restrict Tejas Securities ability to distribute earnings or
to make payments to us. Future Sales Of Our Common Stock Could Adversely Affect Its Price Sales of substantial amounts of common stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the common stock and our ability to raise capital.
We may issue additional common stock in future financing transactions or as incentive compensation
for our executive management and other key personnel, consultants and advisors. Issuing any equity
securities would be dilutive to the equity interests represented by our then-outstanding shares of
common stock. The market price for our common stock could decrease as the market takes into account
the dilutive effect of any of these issuances. Finally, if we file a registration statement to raise additional capital, some of our existing
stockholders hold piggyback registration rights that, if exercised, will require us to include
their shares in the registration statement, which could adversely affect our ability to raise
needed capital. Our Chairman Will Have Significant Influence Over Matters Requiring Stockholder Or Board Approval. As of February 28, 2005, our Chairman, John J. Gorman, beneficially owned or controlled
approximately 38.5% of our outstanding common stock. Accordingly, Mr. Gorman will have substantial
influence over the outcome of corporate actions requiring director or stockholder approval,
including the election of directors, any merger, consolidation or sale of all or substantially all
of our assets and any other significant corporate transaction. Mr. Gorman may also delay or prevent
a change of control of us, even if such change of control would benefit our other stockholders. Our By-Laws Could Make It More Difficult For A Third Party To Acquire Us. Our by-laws are designed to make it difficult for a third party to acquire control of us, even if a
change of control would be beneficial to stockholders. Our by-laws do not permit any person other
than the board of directors or certain executive officers to call special meetings of the
stockholders. In addition, we must receive a stockholders proposal for an annual meeting within a
specified period for that proposal to be included on the agenda. Because stockholders do not have
the power to call meetings and are subject to timing requirements in submitting stockholder
proposals for consideration at an annual or special meeting, any third-party takeover not supported
by the board of directors would be subject to significant delays and difficulties. Investments By Our Executive Officers And Employees May Conflict With The Interests Of Holders Of
Our Securities. 15




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From time to time, we may invest in private or public companies in which our executive officers are
also investors or for which we provide investment banking services, publish research or act as a
market maker. In 1999 and 2000, we managed an investment vehicle called TSG Internet Fund I, in
which our employees were permitted to become investors. We have not organized any other such
investment vehicle, though we may do so in the future. There is a risk that, as a result of such
investment or profit interest, our officers or employees may take actions that conflict with the
best interests of us or the holders of our common stock. 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
    
    PositionJohn J. Gorman
    
    
    44
    
    
    Director and ChairmanMark M. Salter
    
    
    45
    
    
    Chief Executive OfficerKurt J. Rechner
    
    
    44
    
    
    President, Chief Operating Officer and
SecretaryJohn F. Garber
    
    
    35
    
    
    Chief Financial Officer and Treasurer
 John J. Gorman.Mr. Gorman became our Chairman of the board of directors in August 1999. He
was our Chief Executive Officer from August 1999 through June 2004. He has been the Chairman of
Tejas Securities since July 1997. Mr. Gorman has over 18 years of experience in the brokerage
industry. Mr. Gorman became a principal of Tejas Securities on April 18, 1995. From 1988 until
joining Tejas Securities, Mr. Gorman worked at APS Financial Inc., a broker-dealer in Austin,
Texas, as a Senior Vice President. Mr. Gorman served primarily in a broker capacity at APS
Financial Inc. 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 and is the son-in-law of William A.
Inglehart, both members of our board of directors. Mr. Gorman received his B.B.A. from Southern
Methodist University in 1983. Mark M. Salter.Mr. Salter became our Chief Executive Officer and Director of Sales and
Trading in June 2004. Prior to that, Mr. Salter managed the investment grade, government and
mortgage-backed bond area for us since May 2000. Mr. Salter joined us from Amherst Securities where
he was Director of Fixed Income Securities from October 1995 to May 2000. Mr. Salter has been in
the securities industry since 1981 and has been involved in fixed income sales and trading for over
21 years. Mr. Salter holds a B.A. in Economics from York University in Toronto, Canada. Kurt J. Rechner, CPA, CFA.Mr. Rechner became our President and Chief Operating Officer in
June 2004, our Treasurer in September 2000 and our Secretary in September 2002. Prior to that, Mr.
Rechner was our Chief Financial Officer from January 2000 to June 2004. Mr. Rechner has spent the
past 21 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. John F. Garber, CPA.Mr. Garber became our Chief Financial Officer in June 2004 and our
Treasurer in February 2005. Prior to that, Mr. Garber served as our Director of Finance since
August 1999. Mr. Garber joined Tejas Securities in October 1998 as Director of Finance. From April
1998 until joining Tejas Securities, Mr. Garber was employed as the Controller for Loewenbaum & Co.
Inc., an Austin based broker-dealer. Prior to joining Loewenbaum & Co., Inc., he was employed by
KPMG LLP from 1995 to 1998 as a supervising auditor in the financial assurance department. Mr.
Garber graduated from the University of Florida in 1992 with a B.S. and B.A. in Finance. Mr. Garber
holds the professional 16




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designation of Certified Public Accountant. In 2003, Mr. Garber received a 10-day suspension
from the NASD relating to self-clearing securities sold by us. 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. PROPERTIES Our headquarters are located at 2700 Via Fortuna, Suite 400, Austin, Texas. We lease space for our
offices in Austin, Texas, and Tinton Falls, New Jersey, which consist of approximately 24,700
square feet and 1,900 square feet, respectively. Future commitments associated with the leases are
included in Note 17 to the Consolidated Financial Statements. These leases are for terms of four
years and five years, respectively, and contain renewal options. We subleased approximately 40% of
our space in the Austin location during 2003 and 2004. On October 15, 2004, we entered into a purchase agreement with Charles H. Mayer, a member of our
board of directors, whereby Mr. Mayer would purchase our New Jersey operations by December 31,
2004. Mr. Mayer has exercised his right to extend the purchase date to June 30, 2005, subject to
the payment to us of the $10,000 option exercise price. As part of our agreement with Mr. Mayer,
his company, Seton Securities, Inc., entered into a sublease agreement with us for the New Jersey
office space for the remaining lease term. The sublease agreement will take effect upon closing the
purchase agreement. On February 22, 2005, we purchased an office building through our newly formed wholly-owned
subsidiary, TI Building Partnership, Ltd. We plan on relocating our Austin, Texas headquarters
during 2005 to the new Austin location. The office building was purchased at a price of
approximately $3,470,000, with $2,200,000 being financed through Community Credit Union. Pursuant
to the terms of a promissory note, this borrowing accrues interest at a rate of 5.75% per annum,
with monthly installments of $13,840 through February 2011, at which time the outstanding principal
and accrued interest shall be due and payable. 
 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES RECENT STOCK PRICES Our common stock trades under the symbol TEJS on the OTC Bulletin Board. The trading does not
constitute a well-established public trading market for our common stock. As of February 28, 2005
there were approximately 470 holders of record of our common stock. The following table sets forth for the periods indicated the high and low bid prices at closing for
our common stock for the periods indicated for 2003 and 2004 as reported on the OTC Bulletin Board
by Bloomberg LP. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions. High
    
    
    Low2004 Price RangeFirst Quarter
    
    $
    2.50
    
    
    $
    2.00Second Quarter
    
    
    5.00
    
    
    
    2.00Third Quarter
    
    
    9.00
    
    
    
    5.00Fourth Quarter
    
    
    18.00
    
    
    
    8.002003 Price RangeFirst Quarter
    
    $
    0.63
    
    
    $
    0.63Second Quarter
    
    
    0.63
    
    
    
    0.63Third Quarter
    
    
    3.00
    
    
    
    0.63Fourth Quarter
    
    
    1.98
    
    
    
    1.98
 DIVIDEND POLICY We have never paid cash dividends and have no present plan to pay any such dividends. Currently,
we intend to reinvest our earnings in order to facilitate expansion. On November 8, 2004, our
board of directors declared a two-for-one stock dividend, which was paid on November 22, 2004. Any
future dividends will be decided by our board of directors and will be based upon our future
earnings, financial condition and capital requirements. RECENT SALES OF UNREGISTERED STOCK None. 
 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations. The
selected consolidated financial data for the years ended December 31, 2000 and 2001 are derived
from our audited consolidated financial statements and notes to the consolidated financial
statements, and are not included in this Form 10-K. The selected consolidated financial data for
the years ended December 31, 2002, 2003 and 2004 are derived from our audited consolidated
financial statements and notes to the consolidated financial statements, which are included
elsewhere in this Form 10-K. Historical financial results may not be indicative of our future
performance and interim results may not be reflective of the results for the fiscal year. 18




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AS OF AND FOR THE YEAR ENDED DECEMBER 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000STATEMENT OF OPERATIONS DATA:Commissions
    
    $
    20,945,763
    
    
    $
    29,260,473
    
    
    $
    19,467,276
    
    
    $
    25,615,989
    
    
    $
    16,818,686Underwriting and investment banking
income
    
    
    18,339,975
    
    
    
    72,799
    
    
    
    335,663
    
    
    
    316,927
    
    
    
    1,831,326Net dealer inventory and investment
income (loss)
    
    
    9,087,139
    
    
    
    (2,793,103
    )
    
    
    1,296,933
    
    
    
    (630,687
    )
    
    
    (4,076,629
    )Other income
    
    
    307,419
    
    
    
    43,591
    
    
    
    135,055
    
    
    
    25,920
    
    
    
    135,902Total revenues
    
    
    48,680,296
    
    
    
    26,583,760
    
    
    
    21,234,927
    
    
    
    25,328,149
    
    
    
    14,709,285Commissions, employee compensation
and benefits
    
    
    23,140,948
    
    
    
    19,140,520
    
    
    
    15,667,467
    
    
    
    18,666,284
    
    
    
    13,954,116Clearing and floor brokerage
    
    
    652,037
    
    
    
    589,913
    
    
    
    412,657
    
    
    
    412,819
    
    
    
    965,889Communications and occupancy
    
    
    1,903,404
    
    
    
    2,100,250
    
    
    
    1,631,136
    
    
    
    1,645,693
    
    
    
    2,033,463Professional fees
    
    
    7,874,990
    
    
    
    949,313
    
    
    
    704,718
    
    
    
    1,169,474
    
    
    
    1,868,244Other
    
    
    3,042,605
    
    
    
    2,274,380
    
    
    
    2,230,697
    
    
    
    2,124,197
    
    
    
    2,751,235Total expenses
    
    
    36,613,984
    
    
    
    25,054,376
    
    
    
    20,646,675
    
    
    
    24,018,467
    
    
    
    21,572,947Income (loss) before income taxes
and minority interest
    
    
    12,066,312
    
    
    
    1,529,384
    
    
    
    588,252
    
    
    
    1,309,682
    
    
    
    (6,863,662
    )Income tax expense (benefit)
    
    
    4,784,908
    
    
    
    682,254
    
    
    
    298,200
    
    
    
    495,474
    
    
    
    (2,214,012
    )Minority interest
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (18,814
    )
    
    
    (650,510
    )Net income (loss)
    
    $
    7,281,404
    
    
    $
    847,130
    
    
    $
    290,052
    
    
    $
    833,022
    
    
    $
    (3,999,140
    )Earnings (loss) per share:Basic
    
    $
    2.41
    
    
    $
    0.28
    
    
    $
    0.10
    
    
    $
    0.31
    
    
    $
    (1.58
    )Diluted
    
    $
    2.07
    
    
    $
    0.27
    
    
    $
    0.10
    
    
    $
    0.26
    
    
    $
    (1.58
    )Weighted average shares outstanding:Basic
    
    
    3,025,048
    
    
    
    3,024,048
    
    
    
    3,024,048
    
    
    
    2,696,194
    
    
    
    2,523,442Diluted
    
    
    3,540,392
    
    
    
    3,127,752
    
    
    
    3,051,406
    
    
    
    3,092,224
    
    
    
    2,523,442STATEMENT OF FINANCIAL CONDITION
DATA:Cash and cash equivalents
    
    $
    1,959,719
    
    
    $
    551,857
    
    
    $
    750,746
    
    
    $
    547,761
    
    
    $
    482,562Deposit with clearing organization
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    260,471
    
    
    
    250,000Receivable from clearing
organization
    
    
    3,737,741
    
    
    
    0
    
    
    
    0
    
    
    
    1,905,338
    
    
    
    735,616Securities owned
    
    
    15,956,971
    
    
    
    5,601,782
    
    
    
    5,985,305
    
    
    
    3,011,667
    
    
    
    2,433,022Other investment
    
    
    0
    
    
    
    1,155,000
    
    
    
    1,250,000
    
    
    
    0
    
    
    
    0Property and equipment
    
    
    265,238
    
    
    
    329,651
    
    
    
    333,800
    
    
    
    478,086
    
    
    
    540,477Other assets
    
    
    603,187
    
    
    
    718,163
    
    
    
    955,087
    
    
    
    1,037,185
    
    
    
    2,857,482Total assets
    
    $
    22,522,856
    
    
    $
    8,356,453
    
    
    $
    9,274,938
    
    
    $
    7,240,508
    
    
    $
    7,299,159Accounts payable, accrued expenses
and other liabilities
    
    $
    8,986,909
    
    
    $
    2,376,535
    
    
    $
    2,380,552
    
    
    $
    3,183,904
    
    
    $
    1,869,821Securities sold, not yet purchased
    
    
    90,838
    
    
    
    221,279
    
    
    
    985,210
    
    
    
    332,581
    
    
    
    446,078Payable to clearing organization
    
    
    0
    
    
    
    742,334
    
    
    
    971,651
    
    
    
    0
    
    
    
    456,660Notes payable
    
    
    2,800,000
    
    
    
    1,655,100
    
    
    
    2,423,450
    
    
    
    500,000
    
    
    
    2,250,000Subordinated debt
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,000,000
    
    
    
    1,000,000Total liabilities
    
    
    11,877,747
    
    
    
    4,995,248
    
    
    
    6,760,863
    
    
    
    5,016,485
    
    
    
    6,022,559Minority interest
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    377,382Total stockholders equity
    
    
    10,645,109
    
    
    
    3,361,205
    
    
    
    2,514,075
    
    
    
    2,224,023
    
    
    
    899,218Total liabilities and stockholders
equity
    
    $
    22,522,856
    
    
    $
    8,356,453
    
    
    $
    9,274,938
    
    
    $
    7,240,508
    
    
    $
    7,299,159
 19




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company Overview We are a full service brokerage and investment banking firm that focuses on the following:  
    proprietary research on distressed debt and special situation securities;
    trading and other brokerage services to value-based institutional and retail investors
active in fixed income and equity instruments; and
    corporate finance and strategic advisory services to middle-market companies within our
target industries. The cornerstone of our business is our research coverage. Currently, our research department
consists of analysts with expertise in distressed debt and special situation securities. The
analyst group has a background in analyzing many industries, but primarily focuses on wireless and
wire-line telecommunications, cable, satellite, transportation, energy, and municipal securities.
We anticipate that we will continue to devote a substantial portion of our resources to support and
grow our research department. We conduct our business through two operating segments: our full service brokerage segment and our
investment banking segment. Our brokerage segment, which includes all trading for our clients and
for our own proprietary account as well as our inventory positions and market making activities, is
categorized as a separate business segment from investment banking because these aforementioned
activities are all interrelated and service a different client base. Investment banking requires a
different skill set and knowledge base and engagements are with the issuers, not the investors.
Each segment reports to a different individual on the management team in order to maintain the
necessary regulatory separation. Brokerage Services We provide brokerage services to approximately 500 institutional clients and a network of retail
clients. The majority of our brokerage revenues are derived from research driven recommendations.
For the fiscal years ended December 31, 2004, 2003 and 2002, our full service brokerage segment
contributed to our total revenues $30,340,321, $26,510,961 and $20,899,264, respectively. Investment Banking In 2004, we began to focus more attention on our investment banking efforts, particularly in
assisting public companies raise capital. For the fiscal years ended December 31, 2004, 2003 and
2002, our investment banking segment contributed to our total revenues $18,339,975, $72,799 and
$335,663, respectively. Recent Developments On October 15, 2004, we entered into a purchase agreement with Charles H. Mayer, a member of our
board of directors, whereby Mr. Mayer would purchase our New Jersey operations by December 31,
2004, subject to Mr. Mayers option to extend the closing deadline for six months in exchange for a
one-time payment to us of $10,000. Mr. Mayer has exercised his right to extend the purchase date to
June 30, 2005, subject to the payment to us of the $10,000 option exercise price. As part of our
agreement with Mr. Mayer, his company, Seton Securities, Inc., entered into a sublease agreement
with us for the New Jersey office space for the remaining lease term. The sublease agreement will
take effect upon closing the purchase agreement. The sale is for nominal consideration. Our New
Jersey operations generated approximately $1,272,000 in gross revenues for the year ended December
31, 2004 and approximately $1,017,000 in gross revenues for the year ended December 31, 2003.
Income (loss) before income tax expense for our New 20




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Jersey operations was approximately $171,000 for the year ended December 31, 2004 and $(42,000) for
the year ended December 31, 2003. Further, as a result of the sale of our New Jersey operations to
Mr. Mayer, we expect our market making activity to decline. Currently, our Austin operations make
markets for approximately 35 public companies whose stocks are traded on the Nasdaq Stock Market.
By contrast, our New Jersey operations make markets for approximately 139 companies whose stocks
are traded on the Nasdaq Stock Market. We also anticipate that our related expenses, such as
clearing and floor brokerage expenses, will decline. On February 3, 2005, we issued 1,600,000 shares of our common stock through a public offering. As
a result of this offering, we received approximately $23,629,000 in net proceeds. On February 25,
2005, the underwriter for the offering, C.E. Unterberg, Towbin, exercised their option to purchase
an additional 60,000 shares of our common stock. As a result of the option exercise, we received
approximately $888,000 in additional net proceeds. On February 10, 2005, we repaid the remaining balance of $1,730,000, plus interest, from the
February 2004 term loan agreement with First United Bank with proceeds from the February 3, 2005
public offering. On February 22, 2005, we purchased an office building through our newly formed wholly-owned
subsidiary, TI Building Partnership, Ltd. We plan on relocating our Austin, Texas headquarters
during 2005 to the new Austin location. The office building was purchased at a price of
approximately $3,470,000, with $2,200,000 being financed through Community Credit Union, or CCU.
Pursuant to the terms of a promissory note, this borrowing accrues interest at a rate of 5.75% per
annum, with monthly installments of $13,840 through February 2011, at which time the outstanding
principal and accrued interest shall be due and payable. In connection with this acquisition, John
J. Gorman, our Chairman of the Board, agreed to (1) indemnify CCU against any losses incurred by
CCU as a result of any violations of environmental laws or certain building laws related to such
real property and (2) provide a limited guarantee of our performance under certain provisions of
the deed of trust entered into in connection with such financing. Business Environment Performance in the financial services industry is highly correlated to the overall strength of the
economy and financial market activity. Our profitability is sensitive to a variety of factors,
including interest rate trends, the performance of public equity markets and the demand for
investment banking services. Overall market conditions have been and may continue to be affected by political events,
legislative and regulatory developments and related changes in investor sentiments. Some of the
more recent uncertainties that have affected overall market conditions are terrorist acts,
geo-political events and corporate accounting restatements. These factors, which are unpredictable
and beyond our control, may cause our earnings to fluctuate from period to period. Critical Accounting Policies and Estimates We have identified the policies and estimates set forth below as critical to our operations and the
understanding of our results of operations. Revenue Recognition Agency commission revenues and related expenses from customer security transactions are recorded on
a trade date basis. Customer security transactions that are executed through our proprietary
trading account are recorded on a trade date basis as principal commission revenues. The related
expenses are also recorded on a trade date basis. Net dealer inventory and investment income (loss) results from securities transactions entered into
for our account. Net dealer inventory and investment income (loss) includes both realized and
unrealized gains and losses, which are recorded on a trade date basis. 21




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We do 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. Fair Value of Securities We routinely purchase and sell securities for our proprietary accounts and our clients, including
employees. Financial securities used in our trading activities are recorded at fair value, with
unrealized gains and losses reflected in investment income. Securities with readily determinable
market values are based on quoted market prices. Many of the securities held are those of
distressed companies in which there may be limited market activity. The value of securities with
limited market activity for which quoted market values are not readily determinable are based on
our managements best estimate, which may include dealer price quotations and price quotations for
similar instruments traded. In addition, changes in the market prices of securities (and changes in
our estimates of market values of securities) could result in losses to us. The fair value of
securities directly impacts our net dealer inventory and investment income in our consolidated
statements of operations, included elsewhere in this Form 10-K. Receivable (Payable) to Clearing Organization We utilize our equity in securities owned at our clearing organization to facilitate the purchase
of additional securities for trading purposes. The value of the equity at the clearing organization
is primarily affected by realized trading gains and losses, unrealized gains and losses, the
purchase and sale of accrued interest on debt securities, and cash withdrawals and deposits at the
clearing organization. As a result of this activity, including the purchase and sale of securities,
we may have either a receivable or payable balance to the clearing organization. In the event that
we have a payable balance to the clearing organization, we may be restricted in our ability to
withdraw funds from the clearing organization to cover routine operating expenses. Additionally, if
the value of the equity at the clearing organization is insufficient to cover the margin
requirements on the value of the securities borrowed, we may be required to either liquidate our
holdings at the clearing organization or provide additional funds to cover margin requirements. For
these reasons, we carefully monitor our receivable or payable balance so that we can provide
sufficient funds for operations. Components of Revenues We have two reportable segments: brokerage services and investment banking. Our brokerage services
segment includes revenues from principal and agency commissions, net dealer inventory and
investment income, and other income. Commission revenues include sales commissions and gross
credits earned from executing trades for institutional and retail clients. Net dealer inventory and
investment income includes realized and unrealized gains and losses on securities transactions held
for our own account, including income on securities held as available for sale. Interest income and
expenses associated with securities held by us are also included in net dealer inventory and
investment income. Other income includes revenues associated with the sale of proprietary research
and other miscellaneous receipts. Underwriting and investment banking revenues are fees from acting
as a placement agent for private offerings and retainer fees. Components of our revenues may experience volatility associated with the overall economy and based
on the types of securities that we hold. The securities that we typically trade and invest in
include distressed debt and special situation securities in the wireless and wire-line
telecommunications, cable, satellite, transportation and energy industries, as well as government
and mortgage-backed securities and municipal securities. Distressed securities market opportunities
have historically increased in volume during times of economic turmoil and during times of
increasing interest rates. As companies become over-leveraged or have declining business prospects,
the level of corporate bankruptcies and restructurings increases, resulting in our being able to
identify a greater number of investment opportunities. While it is during these 22




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times that these opportunities have led to increased distressed and special situation commissions,
our equity trading business is negatively impacted by the less robust economic environment. We tend
to see increases in the level of investments in government and mortgage-backed securities, as well
as high-grade municipal securities, during times of decreasing interest rates as investors try to
capture high long-term rates. As the economy recovers, a number of our clients generally begin to
allocate more funds to distressed securities in the hope that the underlying companies will
restructure or emerge from bankruptcy with reduced debt and increased business prospects; however,
the number of distressed and special situation opportunities decreases as the economic environment
improves. Our equity trading commissions are closely tied to the performance of the overall equity
markets and thus increase during times of economic recovery. Our retail clients begin to invest
with more regularity during economic growth periods. Investment banking revenues are directly
related to the overall business environment and fluctuate accordingly. Components of Expenses Commissions, employee compensation and benefits includes base salaries, incentive compensation,
sales commissions, forgiven employee debt, payroll taxes, health insurance and related benefit
expenses. Salaries, payroll taxes and employee benefits are relatively fixed in nature. Sales
commissions and incentive compensation vary based upon revenue production. Clearing and floor brokerage expense includes processing costs associated with executing trades
through our clearing organization and execution fees that we pay to floor brokers and electronic
communication networks. We are an introducing broker-dealer that has engaged a third party clearing
organization to perform all of our clearing functions. The clearing organization processes and
settles our client and our proprietary transactions and maintains the detailed transaction records.
The expenses paid to our clearing organization as well as floor brokers and electronic
communication networks vary with the volume of transactions and commissions we generate. Communications and occupancy charges include rent, telecommunication costs, expenses associated
with news retrieval and price quotation services. These expenses are fixed in nature and are
typically associated with contracts exceeding one year in duration. Professional fees include legal fees, accounting fees, consulting fees and expenses related to
investment banking transactions. These fees vary depending upon the level of our revenue generating
activities. Other expenses include fixed asset rentals, insurance, depreciation, office supplies and travel and
entertainment. The costs associated with fixed assets, insurance and office supplies tend to be
fixed in nature. Travel and entertainment expenses are variable in nature, and are often based upon
revenue production. Our effective tax rate tends to differ from the federal statutory rate as a result of estimated
state franchise taxes and non-refundable expenses. We tend to incur non-deductible expenses in the
course of our operating activities, particularly with respect to our investment banking activities,
including meal and entertainment expenses. As our investment banking activities increase, our
non-deductible expenses may increase as well. In addition, any fines levied against us by the NASD
or other regulatory organizations are also non-deductible. 23




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Results of Operations Fiscal Year Ended December 31, 2004, 2003 and 2002 Total Revenues Our total revenues were $48,680,2956 for the year ended December 31, 2004, which was an increase of
$22,096,536 or 83% from $26,583,760 for the year ended December 31, 2003. Total revenues for the
year ended December 31, 2003 increased $5,348,833 or 25% from $21,234,927 for the year ended
December 31, 2002. Commission revenues were $20,945,763 for the year ended December 31, 2004, which was a decrease of
$8,314,710 from $29,260,473 for the year ended December 31, 2003. Commission revenues for the year
ended December 31, 2003 increased $9,793,197 from $19,467,276 for the year ended December 31, 2002.
The decrease during 2004 resulted primarily from a decrease in distressed securities commissions
and government agency securities commissions. As interest rates have remained low in the United
States and the general economy has improved, we have identified fewer attractive distressed
situations and, as a result, our commission revenues have decreased. The increase during 2003 was
due to increased equity and debt valuations in the business sectors we routinely follow, which
generated increased opportunities for client trading activities and our related commissions.
Commission revenues decreased to 43.0% of total revenues for the year ended December 31, 2004 and
increased to 110.1% of total revenues for the year ended December 31, 2003 from 91.7% of total
revenues for the year ended December 31, 2002. Underwriting and investment banking revenues were $18,339,975 for the year ended December 31, 2004,
which was an increase of $18,267,176 from $72,799 for the year ended December 31, 2003.
Underwriting and investment banking revenues for the year ended December 31, 2003 decreased
$262,864 from $335,663 for the year ended December 31, 2002. The increase during 2004 was due to
the receipt of fees paid upon the completion of seven private placements for which we acted as
placement agent. The decrease during 2003 resulted from our not receiving any success fees on
investment banking engagements. Underwriting and investment banking revenues increased to 37.7% of
total revenues for the year ended December 31, 2004 and decreased to 0.3% of total revenues for the
year ended December 31, 2003 from 1.6% of total revenues for the year ended December 31, 2002. Net dealer inventory and investment income (loss) was $9,087,139 for the year ended December 31,
2004, which was an increase of $11,880,242 from $(2,793,103) for the year ended December 31, 2003.
Net dealer inventory and investment income (loss) for the year ended December 31, 2003 decreased
$4,090,035 from $1,296,933 for the year ended December 31, 2002. The increase during 2004 resulted
from increased valuations of distressed corporate debt securities and warrants received in
connection with underwriting and investment banking activities. The decrease during 2003 resulted
from decreased valuations of a number of distressed corporate debt securities held in our
proprietary account. Net unrealized trading gains for the year ended December 31, 2004 were
$6,557,404. Net realized trading gains for the same period were $2,529,735. Net dealer inventory
and investment income (loss) increased to 18.7% of total revenues for the year ended December 31,
2004 and decreased to (10.5)% of total revenues for the year ended December 31, 2003 from 6.1% of
total revenues for the year ended December 31, 2002. Other income was $307,419 for the year ended December 31, 2004, which was an increase of $263,828
from $43,591 for the year ended December 31, 2003. Other income for the year ended December 31,
2003, decreased $91,464 from $135,055 for the year ended December 31, 2002. The increase during
2004 resulted from earning fees on the sale of our research. The decrease during 2003 resulted
from a loss on the disposal of fixed assets during 2003. Other income increased to 0.6% of total
revenues for the year ended December 31, 2004 and decreased to 0.2% of total revenues for the year
ended December 31, 2003 from 0.6% of total revenues for the year ended December 31, 2002. 24




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Total Expenses Total expenses were $36,613,984 for the year ended December 31, 2004, which was an increase of
$11,559,608 or 46% from $25,054,376 for the year ended December 31, 2003. Total expenses for the
year ended December 31, 2003 increased $4,407,701 or 21% from $20,646,675 for the year ended
December 31, 2002. Total expenses as a percentage of total revenues were 75.2% , 94.2% and 97.2%
for 2004, 2003 and 2002, respectively. Commissions, employee compensation and benefits were $23,140,948 for the year ended December 31,
2004, which was an increase of $4,000,428 from $19,140,520 for the year ended December 31, 2003.
Commissions, employee compensation and benefits for the year ended December 31, 2003 increased
$3,473,053 from $15,667,467 for the year ended December 31, 2002. Commission expense was
$14,059,469 for the year ended December 31, 2004, which was an increase of $366,456 from
$13,693,013 for the year ended December 31, 2003. Commission expense for the year ended December
31, 2003 increased $3,929,932 from $9,763,081 for the year ended December 31, 2002. The increase in
commission expense during 2004 resulted from an increase in underwriting and investment banking
revenues. The increase during 2003 in commission expense resulted from an increase in our
commission revenues, which was partially offset by a decrease in our discretionary bonus expense.
Commissions, employee compensation and benefits as a percentage of total revenues were 47.5%, 72.0%
and 73.8% for 2004, 2003 and 2002, respectively. Clearing and floor brokerage expenses were $652,037 for the year ended December 31, 2004, which was
an increase of $62,124 from $589,913 for the year ended December 31, 2003. Clearing and floor
brokerage expenses for the year ended December 31, 2003 increased $177,256 from $412,657 for the
year ended December 31, 2002. The increase during 2004 resulted from an increase in trading
activity during the 4th quarter of 2004. The increase during 2003 resulted from
increased activity and increased market making activity associated with the addition of our New
Jersey operations in the second half of 2002. Clearing and floor brokerage expenses as a percentage
of total revenues were 1.3%, 2.2% and 1.9% for 2004, 2003 and 2002, respectively. Communications and occupancy charges were $1,903,404 for the year ended December 31, 2004, which
was a decrease of $196,846 from $2,100,250 for the year ended December 31, 2003. Communications
and occupancy charges for the year ended December 31, 2003 increased $469,114 from $1,631,136 for
the year ended December 31, 2002. The decrease during 2004 resulted from reduced telecommunications
and other services related to the termination of a commercial lease. The increase during 2003
resulted primarily from the March 2003 expiration of a sublease agreement for a portion of the
Austin office location. We were previously receiving approximately $45,000 per month in sublease
revenues. Communications and occupancy charges as a percentage of total revenues were 3.9%, 7.9%
and 7.7% for 2004, 2003 and 2002, respectively. Professional fees were $7,874,990 for the year ended December 31, 2004, which was an increase of
$6,925,677 from $949,313 for the year ended December 31, 2003. Professional fees for the year
ended December 31, 2003 increased $244,595 from $704,718 for the year ended December 31, 2002. The
increase during 2004 resulted from additional fees associated with investment banking opportunities
and legal fees relating to client litigation and our secondary public offering. In July 2004, we
settled a client complaint relating to previous investment losses incurred by the client for
$185,000. The increase during 2003 resulted from the settlement of two client claims against us,
including one for $237,500, and the other claim for $125,000. Professional fees as a percentage of
total revenues were 16.2%, 3.6% and 3.3% for 2004, 2003 and 2002, respectively. Other expenses were $3,042,605 for the year ended December 31, 2004, which was an increase of
$768,225 from $2,274,380 for the year ended December 31, 2003. Other expenses for the year ended
December 31, 2003 increased $43,683 from $2,230,697 for the year ended December 31, 2002. The
increase during 2004 resulted from increases in expenses relating to our increased investment
banking activity. The increase during 2003 resulted from increases in client development costs,
which was partially 25




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offset by a decrease in fixed asset rental costs. Professional fees as a percentage of total
revenues were 6.3%, 8.6% and 10.5% for 2004, 2003 and 2002, respectively. Income tax expense was $4,784,908 for the year ended December 31, 2004, which was an increase of
$4,102,654 from $682,254 for the year ended December 31, 2003. Income tax expense for the year
ended December 31, 2003 increased $384,054 from $298,200 for the year ended December 31, 2002. The
increase during 2004 resulted from an increase in taxable income during the respective period. The
increase during 2003 resulted from the increase in taxable income during the respective period. Our
effective tax rate was 40% for 2004. Net Income Net income was $7,281,404 for the year ended December 31, 2004, which was an increase of $6,434,274
from $847,130 for the year ended December 31, 2003. Net income for the year ended December 31,
2003 increased $557,078 from $290,052 for the year ended December 31, 2002. The increase during
2004 was largely attributed to the $18,227,176 increase in investment banking activities and
$6,557,404 unrealized gain in securities we held. The increase during 2003 was largely
attributable to the increase in commission revenues of $9,793,197, which was partially offset by
the decrease in net dealer inventory and investment income of $4,090,035. Liquidity and Capital Resources As a broker-dealer, we are required to maintain a certain level of liquidity or net capital in
accordance with NASD regulations. Factors affecting our liquidity include the value of securities
held in trading accounts, the value of non-current assets, the amount of unsecured receivables, and
the amount of general business liabilities, excluding amounts payable to our clearing organization
and NASD approved subordinated debt. Our inventory balance fluctuates daily based on the current market value and types of securities
held. We typically invest in securities in which we provide research coverage. The types of
securities may include publicly traded debt, equity, options and private security issuances. As a
market maker, we provide bid and ask quotes on certain equity securities on the Nasdaq National
Market. Market values for some of the distressed securities may not be easily determinable depending upon
the volume of securities traded on open markets, the operating status of the companies or the types
of securities issued by companies. If the underlying securities of a company become illiquid, our
liquidity may be affected depending on the value of the securities involved. During times of
general market decline, we may experience market value losses, which ultimately affect our
liquidity through our broker-dealer net capital requirements. In addition, we may decide not to
liquidate our security holdings to increase cash availability if our management believes a market
turnaround is likely in the near term or if our management believes the securities are undervalued
in the current market. We utilize the equity in securities owned at our clearing organization to fund operating and
investing activities. The value of the equity at the clearing organization is also used to secure
temporary financing for the purchase of investments in our trading accounts. The value of our
equity balance held at the clearing organization may fluctuate depending on factors such as the
market valuation of securities held in our trading accounts, realized trading profits, commission
revenues, cash withdrawals and clearing costs we are charged for conducting our trading activities.
As a result of this activity, we may have either a receivable or payable balance to the clearing
organization. As of December 31, 2004, we had a receivable balance from the clearing organization
of $3,737,741. Cash Flows From Operating Activities At December 31, 2004, we had cash and cash equivalents and investments on hand of $17,916,690. Net
cash (used in) provided by operating activities was $(710,296), $640,070 and $348,808 in 2002, 2003
and 2004, respectively. The net cash (used in) provided by operating activities is affected
primarily by the brokerage operating activities and changes in the brokerage-related assets and
liabilities. 26




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In 2004, the primary uses of cash were from a $10,355,189 increase in securities owned and a
$4,480,075 increase in the amount receivable from our clearing organization. The primary sources
of cash were from the following: a $3,577,186 increase in accounts payable, accrued expenses and
other liabilities; a $1,155,000 decrease in other investment; a $1,828,318 decrease in federal
income taxes receivable; and a $1,452,263 decrease in deferred tax assets. The net effect of these
transactions on cash flows from operating activities was $6,822,497 in cash used in operations,
with the remaining increase consisting of $7,281,404 in net income plus changes in other asset and
liability accounts. In 2003, the primary uses of cash were from a $229,317 decrease in the amount payable to our
clearing organization and a $763,931 decrease in securities sold and not yet purchased. The primary
source of cash was from a $383,523 decrease in securities owned. The net effect of these
transactions on cash flows from operating activities was $609,725 in cash used in operations, with
the remaining increase consisting of $847,130 in net income plus changes in other asset and
liability accounts. During 2002, the primary uses of cash were from an increase in securities owned, and increase in
other investments, and a decrease in accounts payable, accrued expenses and other liabilities.
Securities owned increased by $2,973,638, which was financed primarily through an increase in the
net payable to our clearing organization. Other investments increased by $1,250,000 as we
collateralized one of our notes payable to a bank with a certificate of deposit. Accounts payable,
accrued expenses and other liabilities decreased by $803,352 from the prior year as a result of
reduced bonuses and commissions payable at year-end compared with December 31, 2001. The primary
source of cash consisted of the net increase in the net payable to clearing organization of
$2,876,989 and the increase in securities sold and not yet purchased of $652,629. The net effect of
these transactions on cash flows from operating activities was $1,497,372 in cash used in
operations, with the remaining increase consisting of $290,052 in net income plus changes in other
asset and liability accounts. Cash Flows from Investing Activities Net cash used in investing activities was $10,169, $56,239 and $58,604 in 2002, 2003 and 2004,
respectively. The changes were primarily due to the purchase and sale of property and equipment in
the ordinary course of business. Cash Flows from Financing Activities Net cash provided by (used in) financing activities was $923,450, $(782,720) and $1,117,658 in
2002, 2003 and 2004, respectively. In March 2002, we entered into a term loan agreement with First United Bank to borrow $2,500,000
for operating purposes. The loan was originally due and payable on demand or by March 15, 2003 if
no demand was made. The loan accrued interest at 5.5% per annum. We purchased a certificate of
deposit in the amount of $2,500,000 as collateral for the loan. During 2002, we repaid $1,100,000
of the loan from the bank through our own financing arrangements. The bank in turn released from
collateralization $1,100,000 of the certificate of deposit to us, of which $1,000,000 was used for
operations, including repayment of $500,000 of our subordinated debt. The remaining $100,000 was
not redeemed and was included in other investments at December 31, 2002. In addition, we repaid
$250,000 of a loan from the bank through the redemption of $250,000 of the certificate of deposit
during 2002. As of December 31, 2002 and 2003, the term loan agreement balance was $1,150,000,
which was collateralized by the certificate of deposit in the amount of $1,250,000. On March 15,
2003, we extended the maturity date of the loan to March 15, 2004. The loan agreement was paid in
full in February 2004. In June 2003, we entered into an agreement with First United Bank to borrow $805,000 for
refinancing purposes. The loan was due on demand or by December 1, 2004 if no demand was made. The
loan accrued interest at prime plus 1.5% and was to be paid in equal monthly installments of
$50,000, plus accrued interest, commencing on July 1, 2003. The balance of the loan agreement was
$505,050 as of December 31, 2003. The loan agreement was paid in full in February 2004. 27




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On February 17, 2004, we entered into an agreement with First United Bank to borrow $2,500,000 for
operating and financing purposes. We used a portion of the proceeds to repay the March 2002 and the
June 2003 loan agreements in full. The loan is due on demand or by February 15, 2007 if no demand
is made. The loan accrues interest at prime plus 2% and is to be repaid in equal monthly payments
of $70,000, plus accrued interest, commencing on March 15, 2004 with a final payment of $50,258.33.
The loan documents require that we maintain a minimum tangible net worth of not less than $2.5
million and contain other covenants that restrict our ability to incur debt, incur liens, sell
assets, pay dividends, engage in different business activities, merge with or acquire other
entities, and make investments or loans. The loan is secured by the common stock of our primary
operating subsidiary, Tejas Securities, as well as the personal guaranty of John J. Gorman, our
Chairman. Under the loan documents, a change of control of 25% or more of our common stock is an
event of default. We have obtained a waiver from First United Bank with respect to this provision
as it applies to our February 2005 secondary stock offering. The balance of the loan was $1,800,000
as of December 31, 2004. The loan agreement was paid in full in February 2005. On July 7, 2004, we entered into a subordinated convertible promissory note agreement with Salter
Family Partners, Ltd., a family limited partnership controlled by Mark M. Salter, our Chief
Executive Officer, to borrow $1,000,000 for operating purposes. Under the terms of the promissory
note, we will make quarterly interest payments at a rate of 10% per annum. The promissory note is
unsecured. The maturity date of the note is December 1, 2005, at which time all remaining unpaid
principal and interest is due. If (i) the closing price of our common stock is less than $1.00 per
share for ten consecutive trading days, (ii) Mr. Salter is no longer employed by us (other than by
death or disability), or (iii) the net liquidating equity of Tejas Securities held at its clearing
organization as of the last business day of a calendar month is less than $2,000,000, then an event
of default will exist under the promissory note and Mr. Salter is entitled to declare the amounts
outstanding under the promissory note immediately due and payable. The promissory note is
convertible at any time into our common stock in an amount equal to the unpaid principal divided by
the conversion price of $5.00 per share. At such time as we are authorized to issue preferred
stock, Mr. Salter may convert the promissory note into our preferred stock in an amount equal to
the unpaid principal divided by the conversion price of $5.00 per share. The promissory note is
convertible until the note is repaid. Although our certificate of incorporation does not authorize
the issuance of preferred stock, we have agreed to take certain actions to amend our certificate of
incorporation to authorize the issuance of shares of preferred stock. We have also granted Mr.
Salter, through Salter Family Partners, Ltd., certain piggyback registration rights for the shares
into which the note may be converted. On February 22, 2005, we borrowed $2.2 million from Commercial Credit Union, or CCU, to finance in
part the purchase price of an office building. The borrowing accrues interest at a rate of 5.75%
per annum, with monthly payments of $13,840 through February 2011, at which time the outstanding
principal and accrued interest shall be due and payable. The building and real property on which
it sits secures the repayment of such borrowing. In connection with this acquisition, John J.
Gorman, our Chairman of the Board, agreed to (1) indemnify CCU against any losses incurred by CCU
as a result of any violations of environmental laws or certain building laws related to such real
property and (2) provide a limited guarantee of our performance under certain provisions of the
deed of trust entered into in connection with such financing. As of December 31, 2004, our contractual cash obligations and the periods in which payments under
such cash obligations were due are as follows: Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsNotes Payable
    
    $
    1,800,000
    
    
    $
    840,000
    
    
    $
    960,000
    
    
    $
    
    
    
    $
    Notes Payable to Stockholder
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    3,113,000
    
    
    
    1,654,000
    
    
    
    1,434,000
    
    
    
    25,000
    
    
    
    Capital Lease Obligations
    
    
    54,000
    
    
    
    34,000
    
    
    
    20,000
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    $
    5,967,000
    
    
    $
    3,528,000
    
    
    $
    2,414,000
    
    
    $
    25,000
    
    
    $
    
 Our primary sources of cash are cash flows from operations and borrowings. Our cash flows from
operations and our ability to make scheduled payments of principal and interest on, or to
refinance, our 28




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indebtedness will depend on our future performance, which is subject to the risks discussed
elsewhere in this Form 10-K. Likewise, our ability to borrow will depend on these factors. Based upon the current level of our operations, we believe that cash flows from our operations and
available cash, together with borrowings, will be adequate to meet our future liquidity needs for
the first six months of the next fiscal year and for at least the next several years. However,
there can be no assurance that our business will generate sufficient cash flows from operations or
that future borrowings will be available in an amount sufficient to enable us to service our
indebtedness or to fund our other liquidity needs. Effects Of Inflation The effects of inflation have been minimal on our results of operations and financial condition in
recent years. However, the rising cost of labor and competitive market for brokers could affect our
general and administrative costs in the near term. Recently Issued Accounting Pronouncements In December 2004, the FASB issued Statement No. 123R, Share-Based Payment, a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation. This Statement eliminates the
alternative to use APB Opinion 25 intrinsic value method of accounting permitted under Statement
No. 123. This Statement revises Statement No. 123 to require public and non-public entities to
measure the cost of employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award. The grant date fair value of employee share options and
other similar instruments will be estimated using option pricing models adjusted for the unique
characteristics of those instruments. The compensation cost of the award will be recognized over
the requisite service period. Statement No. 123R will be adopted by us on July 1, 2005. The full
impact of adoption of Statement No. 123R cannot be predicted at this time because it will depend on
levels of options granted in the future. However, had we adopted Statement No. 123R in prior
periods, the impact of this Statement would have approximated the impact of Statement No. 123 as
described in the disclosure of pro forma net income and earnings per share in Note 2(l) to the
consolidated financial statements. In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based employee compensation. In
addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002 and are included in the
notes to the consolidated financial statements, which are included in this Annual Report on Form
10-K. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the Interpretation. This
Interpretation applies to variable interests in variable interest entities created after January
31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003.
The application of this Interpretation had no effect on the consolidated financial statements. 29




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our principal business activities are, by their nature, risky and volatile and are directly
affected by economic and political conditions and broad trends in business and finance in the
national and international markets. Any one of these factors may cause a substantial decline in the
securities markets, which could materially affect our business. Managing risk is critical to our
profitability and to reducing the likelihood of earnings volatility. Our risk management policies
and procedures have been established to continually identify, monitor and manage risk. The major
types of risk that we face include credit risk, operating risk and market risk. Credit risk is the potential for loss due to a client or counterparty failing to perform its
contractual obligation. We clear our securities transactions through a clearing organization. Under
the terms of the clearing agreement, the clearing organization has the right to charge us for
losses that result from our clients failure to fulfill their contractual obligations. In order to
mitigate risk, our policy is to monitor the credit standing of our clients and maintain collateral
to support client margin balances. Further, significant portions of our assets are held at our
clearing organization. Therefore, we could incur substantial losses if our clearing organization
were to become insolvent or otherwise unable to meet its financial obligations. Our clearing
organization has historically met all of its obligations to us. Operating risk arises from the daily conduct of our business and relates to the potential for
deficiencies in control processes and systems, mismanagement of our activities or mismanagement of
client accounts by our employees. We rely heavily on computer and communication systems in order to
conduct our brokerage activities. Third party vendors, such as the clearing organization and news
and quote providers, provide many of the systems critical to our business. Our business could be
adversely impacted if any of these systems were disrupted. We mitigate the risk associated with
systems by hiring experienced personnel, and providing employees with alternate means of acquiring
or processing information. In order to mitigate the risk associated with mismanagement of our
activities or client accounts, we utilize compliance and operations personnel to review the
activities of administrative and sales personnel. In addition, the activities of management are
actively reviewed by other members of management on a regular basis and by the board of directors. Our primary market risk exposure is to market price changes and the resulting risk of loss that may
occur from the potential change in the value of a financial instrument as a result of price
volatility or changes in liquidity for which we have no control. Securities owned by us are either
related to daily trading activity or our principal investing activities. Market price risk related
to trading securities is managed primarily through the daily monitoring of funds committed to the
various types of securities owned by us and by limiting exposure to any one investment or type of
investment. However, we will on occasion concentrate our securities holdings to one or two
positions based upon our research and potential for market appreciation. Our trading securities were $15,956,971 in long positions and $90,838 in short positions as of
December 31, 2004. These trading securities may be exchange listed, Nasdaq Stock Market, warrants
or over-the-counter, or with 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
$1,605,000 as of December 31, 2004. A 10% hypothetical decline was used to represent a significant
and plausible market change. Our investment securities are typically those reported on by our research analysts. These positions
often consist of high-yield debt securities and the related equity securities. We monitor this risk
by maintaining current operating and financial data on the companies involved, and projecting
future valuations based upon the occurrence of critical future events. Any transactions involving
the investment securities are typically based upon the recommendations of our research analysts
versus current market performance. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is set forth in Item 15 of this report. 30




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company filed a Report on Form 8-K dated October 7, 2004 reporting a change in its independent
public accountants to Helin, Donovan, Trubee & Wilkinson LLP from Ernst & Young LLP. There were no
disagreements with accountants on accounting and financial disclosure for the year ended December
31, 2004. 
 ITEM 9A. CONTROLS AND PROCEDURES At December 31, 2004, under the supervision and with the participation of our management, including
our Chief Executive Officer, President and Chief Financial Officer, 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, President
and Chief Financial Officer concluded that, as of December 31, 2004, 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. 
 ITEM 9B. OTHER INFORMATION None. 
 PART III 
 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 2005 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. EXECUTIVE COMPENSATION The information required by this item will be contained in our definitive proxy statement to be
filed in connection with our 2005 annual meeting of stockholders and is incorporated herein by
reference. 
 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 2005 annual meeting of stockholders and is incorporated herein by
reference. 
 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 2005 annual meeting of stockholders and is incorporated herein by
reference. 
 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 2005 annual meeting of stockholders and is incorporated herein by
reference. 31




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  1.
    Financial Statements
See Financial Statements attached hereto.2.
    Exhibits
Incorporated by reference to the Exhibit Index at the end of this report. 32




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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. TEJAS INCORPORATEDBy:
    
    /s/  Kurt J. RechnerKurt J. Rechner, President and Chief OperatingOfficer
 Date: March 31, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated: Signature
    
    Title
    
    Date/s/  John
J. Gorman
    
    Chairman of the Board
    
    March 31, 2005

John J. Gorman/s/  Mark
M. Salter
    
    Chief Executive Officer(Principal Executive Officer)
    
    March 31, 2005Mark M. Salter/s/  Kurt
J. Rechner
    
    President, Chief OperatingOfficer and Secretary
    
    March 31, 2005Kurt J. Rechner/s/  John
F. GarberJohn F. Garber
    
    Chief Financial Officerand
Treasurer (PrincipalFinancial Officer andPrincipal
AccountingOfficer)
    
    March 31, 2005/s/  Barry
A. Williamson
    
    Director
    
    March 31, 2005Barry A. Williamson/s/  Clark
N. Wilson
    
    Director
    
    March 31, 2005Clark N. Wilson/s/  William
A. Inglehart
    
    Director
    
    March 31, 2005William A. Inglehart/s/  Dennis
G. Punches
    
    Director
    
    March 31, 2005Dennis G. Punches
 33




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Signature
    
    Title
    
    DateDirector
    
    March 31, 2005/s/ Charles H. MayerCharles H. Mayer
 34




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Consolidated Financial Statements Years Ended December 31, 2004, 2003 and 2002 (With Reports of Independent Registered Public Accounting Firms Thereon)




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TEJAS INCORPORATEDAND SUBSIDIARIES Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm
    
    
    1Report of Independent Registered Public Accounting Firm
    
    
    2Report of Independent Registered Public Accounting Firm
    
    
    3Consolidated Statements of Financial Condition as of December 31, 2004 and 2003
    
    
    4Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    5Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002
    
    
    6Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    7Notes to Consolidated Financial Statements
    
    
    9




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Tejas Incorporated and Subsidiaries We have audited the accompanying consolidated statement of financial condition of Tejas
Incorporated (formerly Westech Capital Corp.) and Subsidiaries (the Company) as of December 31,
2004, and the related statements 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 the standards of the Public Company Accounting Oversight
Board (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 2004 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Tejas Incorporated and Subsidiaries at December 31,
2004, and the results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles. /s/ Helin, Donovan, Trubee
& Wilkinson, LLP Austin, Texas
February 11, 2005




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Tejas Incorporated and Subsidiaries We have audited the accompanying statement of financial condition of Tejas Incorporated (formerly
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 the standards of the Public Company Accounting Oversight
Board (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 Tejas Incorporated and Subsidiaries at December 31, 2003, and
the results of their operations and their cash flows for the year then ended in conformity with
U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Austin, Texas
March 4, 2004
(except for matters disclosed in Note 1,
paragraphs 2 and 3 as to which the
date is December 9, 2004)




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Tejas Incorporated: We have audited the accompanying consolidated statements of operations, stockholders equity, and
cash flows of Tejas Incorporated (formerly Westech Capital Corp.) and subsidiaries (the Company)
for the year 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (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 consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and the cash flows of Tejas Incorporated and
subsidiaries for the year ended December 31, 2002, in conformity with U.S. generally accepted
accounting principles. /s/ KPMG LLP Austin, Texas
March 15, 2003, except for the second and third   paragraphs
of Note 1, as to which the date is   December 9,
2004.




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TEJAS INCORPORATED AND SUBSIDIARIES 
 Consolidated Statements of Financial Condition December 31, 2004 and 2003 2004
    
    
    2003AssetsCash and cash equivalents
    
    $
    1,959,719
    
    
    
    551,857Receivable from clearing organization
    
    
    3,737,741
    
    
    
    Receivables from employees and stockholders
    
    
    20,000
    
    
    
    177,223Federal income taxes receivable
    
    
    
    
    
    
    164,147Securities owned, at market value
    
    
    15,956,971
    
    
    
    5,601,782Other investment
    
    
    
    
    
    
    1,155,000Property and equipment, net
    
    
    265,238
    
    
    
    329,651Deferred tax asset, net
    
    
    
    
    
    
    53,504Goodwill
    
    
    138,215
    
    
    
    138,215Prepaid expenses and other assets
    
    
    444,972
    
    
    
    185,074Total assets
    
    $
    22,522,856
    
    
    
    8,356,453Liabilities and Stockholders EquityAccounts payable, accrued expenses and other liabilities
    
    $
    5,923,979
    
    
    
    2,376,535Securities sold, not yet purchased
    
    
    90,838
    
    
    
    221,279Payable to clearing organization
    
    
    
    
    
    
    742,334Federal income tax payable
    
    
    1,664,171
    
    
    
    Deferred tax liability, net
    
    
    1,398,759
    
    
    
    Notes payable
    
    
    1,800,000
    
    
    
    1,655,100Notes payable to stockholder
    
    
    1,000,000
    
    
    
    Total liabilities
    
    
    11,877,747
    
    
    
    4,995,248Commitments and contingenciesStockholders equity:Common
stock, $0.001 par value
10,000,000 shares authorized; 3,026,048 and 3,024,048
 issued and outstanding at December 31, 2004 and 2003,
respectively
    
    
    3,026
    
    
    
    3,024Additional
paid in capital
    
    
    2,223,267
    
    
    
    2,220,769Retained earnings
    
    
    8,418,816
    
    
    
    1,137,412Total
stockholders equity
    
    
    10,645,109
    
    
    
    3,361,205Total
liabilities and stockholders equity
    
    $
    22,522,856
    
    
    
    8,356,453
 See accompanying notes to consolidated financial statements. 4




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TEJAS INCORPORATED AND SUBSIDIARIES 
 Consolidated Statements of Operations For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Revenue:Commissions from agency transactions
    
    $
    5,574,850
    
    
    
    1,834,822
    
    
    
    1,530,218Commissions from principal transactions
    
    
    15,370,913
    
    
    
    27,425,651
    
    
    
    17,937,058Underwriting and investment banking income
    
    
    18,339,975
    
    
    
    72,799
    
    
    
    335,663Net dealer inventory and investment income
(loss), net of trading interest expense of
$38,776, $112,348 and $51,484, respectively
    
    
    9,087,139
    
    
    
    (2,793,103
    )
    
    
    1,296,933Other income
    
    
    307,419
    
    
    
    43,591
    
    
    
    135,055Total revenue
    
    
    48,680,296
    
    
    
    26,583,760
    
    
    
    21,234,927Expenses:Commissions, employee compensation
and benefits
    
    
    23,140,948
    
    
    
    19,140,520
    
    
    
    15,667,467Clearing and floor brokerage
    
    
    652,037
    
    
    
    589,913
    
    
    
    412,657Communications and occupancy
    
    
    1,903,404
    
    
    
    2,100,250
    
    
    
    1,631,136Professional fees
    
    
    7,874,990
    
    
    
    949,313
    
    
    
    704,718Interest, including $48,493, $40,543
and $106,461, respectively,
to related parties
    
    
    177,705
    
    
    
    115,571
    
    
    
    212,484Other
    
    
    2,864,900
    
    
    
    2,158,809
    
    
    
    2,018,213Total expenses
    
    
    36,613,984
    
    
    
    25,054,376
    
    
    
    20,646,675Income
before income tax expense
    
    
    12,066,312
    
    
    
    1,529,384
    
    
    
    588,252Income tax expense
    
    
    4,784,908
    
    
    
    682,254
    
    
    
    298,200Net income
    
    $
    7,281,404
    
    
    
    847,130
    
    
    
    290,052Earnings per share:Basic
    
    $
    2.41
    
    
    
    0.28
    
    
    
    0.10Diluted
    
    $
    2.07
    
    
    
    0.27
    
    
    
    0.10Weighted average shares outstanding:Basic
    
    
    3,025,048
    
    
    
    3,024,048
    
    
    
    3,024,048Diluted
    
    
    3,540,392
    
    
    
    3,127,752
    
    
    
    3,051,406
 See accompanying notes to consolidated financial statements. 5




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TEJAS INCORPORATED AND SUBSIDIARIES 
 Consolidated Statements of Stockholders Equity For the Years Ended December 31, 2004, 2003 and 2002 AdditionalCommon
    
    
    Paid inShares
    
    
    Stock
    
    
    Capital
    
    
    Retained Earnings
    
    
    TotalBalance at December 31, 2001
    
    
    3,024,048
    
    
    $
    3,024
    
    
    
    2,220,769
    
    
    
    230
    
    
    
    2,224,023Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290,052
    
    
    
    290,052Balance at December 31, 2002
    
    
    3,024,048
    
    
    
    3,024
    
    
    
    2,220,769
    
    
    
    290,282
    
    
    
    2,514,075Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847,130
    
    
    
    847,130Balance at December 31, 2003
    
    
    3,024,048
    
    
    
    3,024
    
    
    
    2,220,769
    
    
    
    1,137,412
    
    
    
    3,361,205Issuance of common stock from
option exercise
    
    
    2,000
    
    
    
    2
    
    
    
    2,498
    
    
    
    
    
    
    
    2,500Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,281,404
    
    
    
    7,281,404Balance at December 31, 2004
    
    
    3,026,048
    
    
    $
    3,026
    
    
    
    2,223,267
    
    
    
    8,418,816
    
    
    
    10,645,109
 See accompanying notes to consolidated financial statements. 6




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    7,281,404
    
    
    
    847,130
    
    
    
    290,052Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Deferred tax expense
    
    
    1,452,263
    
    
    
    21,486
    
    
    
    9,925Depreciation and amortization expense
    
    
    123,017
    
    
    
    120,642
    
    
    
    132,067Non-cash compensation expense
    
    
    83,640
    
    
    
    99,836
    
    
    
    50,000Loss on disposition of property and equipment
    
    
    
    
    
    
    36,462
    
    
    
    22,388Changes in operating assets and liabilitiesDeposit with clearing organization
    
    
    
    
    
    
    
    
    
    
    260,471Receivable
from/payable to clearing organization
    
    
    (4,480,075
    )
    
    
    (229,317
    )
    
    
    2,876,989Receivable
from employees and stockholders
    
    
    73,583
    
    
    
    (13,193
    )
    
    
    180,240Federal
income tax receivable/payable
    
    
    1,828,318
    
    
    
    37,923
    
    
    
    (201,097
    )Securities owned
    
    
    (10,355,189
    )
    
    
    383,523
    
    
    
    (2,973,638
    )Other investment
    
    
    1,155,000
    
    
    
    95,000
    
    
    
    (1,250,000
    )Prepaid
expenses and other assets
    
    
    (259,898
    )
    
    
    90,872
    
    
    
    43,030Accounts
payable, accrued expenses and other liabilities
    
    
    3,577,186
    
    
    
    (86,363
    )
    
    
    (803,352
    )Securities
sold, not yet purchased
    
    
    (130,441
    )
    
    
    (763,931
    )
    
    
    652,629Net cash
provided by (used in) operating activities
    
    
    348,808
    
    
    
    640,070
    
    
    
    (710,296
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (58,604
    )
    
    
    (56,239
    )
    
    
    (10,169
    )Net cash
used in investing activities
    
    
    (58,604
    )
    
    
    (56,239
    )
    
    
    (10,169
    )Cash flows from financing activities:Payments on capital lease
    
    
    (29,742
    )
    
    
    (14,370
    )
    
    
    Proceeds from notes payable, net
    
    
    144,900
    
    
    
    31,650
    
    
    
    1,123,450Proceeds from (repayment of) notes payable to stockholder
    
    
    1,000,000
    
    
    
    (800,000
    )
    
    
    800,000Repayment of subordinated debt  related party
    
    
    
    
    
    
    
    
    
    
    (1,000,000
    )Proceeds from issuance of common stock
    
    
    2,500
    
    
    
    Net cash
provided by (used in) financing activities
    
    
    1,117,658
    
    
    
    (782,720
    )
    
    
    923,450
 7




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TEJAS INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Net change in cash and cash
equivalents
    
    $
    1,407,862
    
    
    
    (198,889
    )
    
    
    202,985Cash and cash equivalents at beginning of year
    
    
    551,857
    
    
    
    750,746
    
    
    
    547,761Cash and cash equivalents at end of year
    
    $
    1,959,719
    
    
    
    551,857
    
    
    
    750,746Supplemental disclosures:Interest paid
    
    $
    177,704
    
    
    
    115,571
    
    
    
    212,484Taxes paid
    
    $
    1,142,171
    
    
    
    571,121
    
    
    
    480,500
 Summary of non-cash transactions: In July 2004, the Company forgave $5,005 of employee receivables, which has been recorded as
compensation expense. In May 2004, the Company forgave $28,635 of a note receivable from an employee which has been recorded
as compensation expense. In January 2004, March 2003 and March 2002, the Company forgave $50,000, respectively, of an officers
note receivable which has been recorded as compensation expense. In March 2003, the Company forgave a $49,836 receivable from an officer, which has been recorded as
compensation expense. See accompanying notes to consolidated financial statements. 8




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (1)
    Organization and Basis of PresentationTejas Incorporated, a Delaware corporation, 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.Tejas Incorporated was incorporated as Westech Capital Corp. (Westech), a shell
corporation, in New York on July 18, 1990, and made an initial public offering in November
1991. Westech was acquired by Tejas Securities in a reverse merger (Merger) effected on
August 27, 1999. On December 9, 2004, Westech affected its name change through a merger with
its wholly-owned subsidiary, Tejas Incorporated. As a result, Tejas Incorporated is the
surviving holding company and owns 100% of Tejas Securities.On November 8, 2004, Tejas Incorporateds board of directors declared a 100% stock dividend
payable on November 22, 2004 to holders of record as of November 21, 2004. The stock
dividend was paid on November 22, 2004, resulting in the issuance of 1,513,024 shares of
Tejas Incorporateds common stock. As a result of this stock dividend, earnings per share
amounts and all share amounts for prior periods as disclosed on the consolidated statements
of financial condition, consolidated statements of operations, consolidated statements of
stockholders equity, Note 2(l), Note 13, Note 14 and Note 22 have been restated to reflect
the shares outstanding as though the stock dividend had taken effect in the earliest period
presented.On February 3, 2005, Tejas Incorporated issued 1,600,000 shares of its common stock through a
secondary public offering.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 National Financial Services. Tejas Securities headquarters are located in
Austin, Texas.References to the Company within the accompanying notes to the consolidated financial
statements are to Tejas Incorporated and subsidiaries.(2)
    Summary of Significant Accounting Policies  (a)
    Principles of ConsolidationThe accompanying consolidated financial statements reflect the consolidated accounts of
the Company and its subsidiary, Tejas Securities. All significant intercompany accounts
and transactions have been eliminated in consolidation. 9




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TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (b)
    Basis of AccountingThese consolidated financial statements are presented on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles whereby
revenues are recognized in the period earned and expenses when incurred.(c)
    Revenue RecognitionAgency 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.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.(d)
    Investment BankingInvestment 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.The Company periodically receives equity securities, including warrants and options, as
part of its compensation for investment banking engagements. These securities are
valued at the intrinsic value at the time the engagement is completed, and are included
in investment banking revenues. The Company may distribute the equity securities to
its employees either through compensation agreements or by sale, based upon the
intrinsic value.(e)
    Cash and Cash EquivalentsCash and cash equivalents include cash and highly liquid investments with a maturity
at date of purchase of ninety days or less. 10




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (f)
    Securities Owned and Securities Sold, Not Yet PurchasedLong 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. Warrants are valued based upon the value of
the underlying securities. 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.(g)
    Property and EquipmentProperty 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.(h)
    GoodwillGoodwill 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.(i)
    Repurchase and Resale AgreementsRepurchase 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, 2004 or 2003. 11




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (j)
    Federal Income TaxesIncome 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.(k)
    EstimatesThe preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from
those estimates.(l)
    Stock-Based CompensationIn 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, but required the disclosure of the proforma impact of net income as
if the fair value based method had been applied. 12




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TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  The following table illustrates the effect on net income if the fair-value-based method
had been applied to all outstanding and unvested awards in each period. Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income as reported
for basic
    
    $
    7,281,404
    
    
    
    847,130
    
    
    
    290,052Deduct or add stock-based
compensation expense
determined under the fair
value based method
    
    
    (27,959
    )
    
    
    (15,164
    )
    
    
    (50,930
    )Pro forma net income
for basic
    
    $
    7,253,445
    
    
    
    831,966
    
    
    
    239,122Net income as reported
for diluted (Note 14)
    
    $
    7,313,409
    
    
    
    847,130
    
    
    
    290,052Deduct or add stock-based
compensation expense
determined under the fair
value based method
    
    
    (27,959
    )
    
    
    (15,164
    )
    
    
    (50,930
    )Pro forma net income
for diluted
    
    $
    7,285,450
    
    
    
    831,966
    
    
    
    239,122Earnings per share as
reported:Basic
    
    $
    2.41
    
    
    
    0.28
    
    
    
    0.10Diluted
    
    $
    2.07
    
    
    
    0.27
    
    
    
    0.10Pro forma earnings per
share:Basic
    
    $
    2.40
    
    
    
    0.28
    
    
    
    0.08Diluted
    
    $
    2.06
    
    
    
    0.27
    
    
    
    0.08
  The Company had no stock option expense calculated under the provisions of APB. No. 25
for the years ended December 31, 2004, 2003 and 2002. 13




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TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (3)
    Receivables From and Payables To Clearing OrganizationAt December 31, 2004 and 2003, the Company had net receivables from and payables to its
clearing organization consisting of the following: 2004
    
    
    2003Receivable:Receivable from clearing organization
    
    $
    3,610,411
    
    
    
    Fees and commissions receivable
    
    
    127,330
    
    
    
    $
    3,737,741
    
    
    
    Payable:Payable to clearing organization
    
    $
    
    
    
    
    742,334
  (4)
    Receivables from Employees and StockholdersThe Company makes advances to certain employees in months when their commission payout does
not meet a predetermined amount. As of December 31, 2004 and 2003, approximately $0 and
$23,000, respectively, had been advanced to employees under this agreement. These receivables
are to be repaid through reductions of future commissions or bonuses. During 2004 and 2003,
the Company forgave approximately $5,000 and $113,000, respectively, in receivables from
employees. The amounts forgiven are included in compensation expense in the accompanying
consolidated statements of operations.During 1999 the Company received a $200,000 note from an officer and stockholder of the
Company. The note did not bear interest and was due on demand if the officer resigned as an
employee of the Company prior to December 31, 2000. Under the terms of the note, matured
unpaid principal and interest would bear interest at the lesser of 5.55% per annum or the
maximum rate allowed by law from the earlier of December 31, 2000 or the officers voluntary
termination. Effective January 1, 2001, the Company agreed to forgive the note in $50,000
increments beginning in December 2001 and continuing through December 2004, as long as the
officer remained an employee of the Company. Forgiven amounts are included in compensation
expense in the accompanying consolidated statements of operations. The balance of the note was
$0 and $50,000 as of December 31, 2004 and 2003, respectively.During 1999, the Company received a $50,000 note from an employee and stockholder of the
Company to supplement the employees commission payout during 1999. The note bore interest of
8% per annum, and was due and payable on August 27, 2003. The maturity date and remaining
balance of $25,000 of the note was extended for one year in August 2003. The note was secured
by a stock pledge agreement for the employees shares issued by the Company. The balance of
the note, plus accrued interest, was approximately $28,000 as of December 31, 2003. The
remaining balance of the note, plus accrued interest, was forgiven in May 2004 and is included
in compensation expense in the accompanying consolidated statements of operations.In April 2002, the Company received a $25,000 note from an employee and stockholder of the
Company. The note did not bear interest and was due and payable on April 12, 2003. On April
12, 2003, the note began to accrue interest at the lesser of 5.55% per annum or the maximum
rate allowed by law, until paid. The balance of the note, plus accrued interest, was
approximately $26,000 as of December 31, 2003. The remaining balance of the note, plus
accrued interest, was repaid in August 2004. 14




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TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  In November 2003, the Company received a $60,000 note from an employee. The note did not bear
interest and was due and payable on November 20, 2004. On November 20, 2004, the remaining
balance of the note was extended until April 30, 2005. The balance of the note was $20,000
and $50,000 as of December 31, 2004 and 2003, respectively.Notes receivable and related party receivables are included in receivables from employees and
stockholders in the accompanying statements of financial condition.(5)
    Securities Owned and Securities Sold, Not Yet PurchasedAt December 31, 2004 and 2003, securities owned and sold, not yet purchased consisted of the
following: 2004
    
    
    2003Sold,
    
    
    
    
    
    
    Sold,not yet
    
    
    
    
    
    
    not yetOwned
    
    
    purchased
    
    
    Owned
    
    
    purchasedState and municipal obligations
    
    $
    20,000
    
    
    
    59,490
    
    
    
    289,613
    
    
    
    50,806Corporate bonds and
notes
    
    
    23,813
    
    
    
    24,750
    
    
    
    302,714
    
    
    
    Equity securities
    
    
    6,997,658
    
    
    
    6,598
    
    
    
    5,009,455
    
    
    
    170,473Warrants
    
    
    8,915,500
    
    
    
    
    
    
    
    
    
    
    
    $
    15,956,971
    
    
    
    90,838
    
    
    
    5,601,782
    
    
    
    221,279
  At December 31, 2004 and 2003, the unrealized gain associated with securities owned and
securities sold, not yet purchased, was $6,557,404 and $206,943, respectively.Approximately 48% of the value of total assets as of December 31, 2004 related to securities
in two companies, a portion of which was sold subsequent to year end. Approximately 52% of
the value of total assets as of December 31, 2003 related to a single security, which was sold
subsequent to year end.(6)
    Other InvestmentIn March 2002, the Company entered into a term loan agreement with a bank to borrow $2,500,000
for operating purposes of Tejas Securities. The loan was originally due and payable on demand
or by March 15, 2003 if no demand was made. On March 15, 2003, the Company extended the
maturity date of the loan to March 15, 2004. The loan accrued interest at a rate of 5.50% per
annum, and was to be paid on a monthly basis. As of December 31, 2003, the loan balance was
$1,150,000, which was collateralized in a like amount with a certificate of deposit Tejas
Securities purchased as collateral for the loan. The balance of the certificate of deposit as
of December 31, 2003 was $1,155,000 and is included in other investment. The loan balance of
$1,150,100 was repaid in February 2004 at which time the certificate of deposit was redeemed
by Tejas Securities. 15




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (7)
    Property and EquipmentProperty and equipment consists of the following: December 31,2004
    
    
    2003Furniture and equipment
    
    $
    369,422
    
    
    
    310,818Leasehold improvements
    
    
    389,132
    
    
    
    389,132758,554
    
    
    
    699,950Accumulated depreciation and
amortization
    
    
    (493,316
    )
    
    
    (370,299
    )$
    265,238
    
    
    
    329,651
  (8)
    Accrued Commissions and BonusesAccrued commissions and bonuses are included in accounts payable, accrued expenses and other
liabilities in the accompanying consolidated statements of financial condition.As of December 31, 2004 and 2003, the Company had accrued approximately $2,620,000 and
$1,357,000, respectively, in commissions and related payroll taxes payable.The Company pays bonuses to its employees and officers at interim periods and year-end.
Accrued bonuses as of December 31, 2004 and 2003 were $1,500,000 and $365,000, respectively.
During 2004 and 2003, an officer of the Company received approximately $183,000 and $289,000,
respectively, as part of his contractual compensation which was based on the Companys
operating performance. Management of the Company reviews both contractual and discretionary
bonus amounts, with discretionary bonus amounts approved by the Compensation Committee of the
Company.(9)
    Notes PayableIn March 2002, the Company entered into a term loan agreement with a bank to borrow $2,500,000
for operating purposes at Tejas Securities (Note 6). The balance of the loan agreement was
$1,150,100 as of December 31, 2003. In February 2004, the Company repaid the remaining
balance of $1,150,100 with proceeds from the February 2004 term loan agreement with a bank.
The Company paid interest of approximately $9,000 and $51,000 during 2004 and 2003,
respectively, in relation to this loan.On October 30, 2002, the Company entered into a loan agreement with a bank to borrow $500,000
for operating purposes at Tejas Securities. The loan was due on demand or by May 1, 2004 if no
demand was made. The loan accrued interest at prime plus 1.5% and was to be paid in equal
monthly payments commencing on December 1, 2002. The loan was secured by the common stock of
the Companys primary operating subsidiary, Tejas Securities, as well as the personal guaranty
of an officer of the Company. In July 2003, the Company paid the remaining balance of
$305,000 with proceeds from the June 2003 term loan agreement with a bank. The Company paid
interest of approximately $10,000 during 2003 in relation to this loan. 16




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  On June 3, 2003, the Company entered into an agreement with a bank to borrow $805,000 for
refinancing purposes. The loan was due on demand or by December 1, 2004 if no demand was made.
The loan accrued interest at prime plus 1.5% and was to be paid in equal monthly installments
of $50,000, plus accrued interest, commencing on July 1, 2003. The balance on the loan
agreement was $505,050 as of December 31, 2003. In February 2004, the Company repaid the
remaining balance of $405,000 with proceeds from the February 2004 term loan agreement with a
bank. The Company paid interest of approximately $6,000 and $20,000 during 2004 and 2003,
respectively, in relation to this loan.On February 17, 2004, the Company entered into an agreement with a bank to borrow $2,500,000
for operating and financing purposes. The Company used a portion of the proceeds to repay the
March 2002 and the June 2003 loan agreements in full. The loan is due on demand or by
February 15, 2007 if no demand is made. The loan accrues interest at prime plus 2% and is to
be paid in equal monthly payments of $70,000, plus accrued interest, commencing on March 15,
2004. The loan documents require the Company to maintain a minimum tangible net worth of not
less than $2.6 million and contain other covenants that restrict the Companys ability to
incur debt, incur liens, sell assets, pay dividends, engage in different business activities,
merge with or acquire other entities, and make investments or loans. The loan is secured by
the common stock of the Companys primary operating subsidiary, Tejas Securities, as well as
the personal guaranty of an officer of the Company. The balance of the loan was $1,800,000 as
of December 31, 2004. The Company paid approximately $115,000 in interest during 2004 in
relation to this loan.(10)
    Notes Payable to StockholdersOn August 8, 2002, the Company entered into an unsecured promissory note agreement with an
officer of the Company to borrow $1,000,000. Under the terms of the promissory note, the
Company was to make twenty monthly installment payments of $50,000, plus accrued interest,
beginning on September 8, 2002. The promissory note accrued interest at 11.5% per annum. In
June 2003, the Company paid the remaining balance with proceeds from the June 2003 bank loan
agreement. The Company paid interest of approximately $41,000 during 2003 in relation to this
note. 17




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  On July 7, 2004, the Company entered into a subordinated convertible promissory note agreement
with a family limited partnership controlled by the Companys Chief Executive Officer (the
Lender), to borrow $1,000,000 for operating purposes. Under the terms of the promissory
note, the Company will make quarterly interest payments at a rate of 10% per annum. The
promissory note is unsecured. The maturity date of the note is December 1, 2005, at which
time all remaining unpaid principal and interest is due. If (i) the closing price of the
Companys common stock is less than $2.00 per share for ten consecutive trading days, (ii) the
Companys Chief Executive Officer is no longer employed by the Company (other than death or
disability), or (iii) the net liquidating equity of the Company held at its clearing
organization as of the last business day of a calendar month is less than $2,000,000, then an
event of default will exist under the promissory note and the Lender is entitled to declare
the amounts outstanding under the promissory note immediately due and payable. The promissory
note is convertible at any time into common stock of the Company in an amount equal to the
unpaid principal divided by the conversion price of $10.00 per share. At such time as the
Company is authorized to issue preferred stock, the Lender may convert the promissory note
into preferred stock of the Company in an amount equal to the unpaid principal divided by the
conversion price of $10.00 per share. The promissory note is convertible until the note is
repaid. Although the Companys certificate of incorporation does not authorize the issuance
of preferred stock, the Company has agreed to take certain actions to amend its certificate of
incorporation to authorize the Company to issue shares of preferred stock. The Company paid
interest of approximately $23,000 during 2004 in relation to this note. At the time this
promissory note was issued, management performed a valuation of the conversion feature and
determined that the value was minimal. No value has been assigned to the conversion feature
in these consolidated financial statements.(11)
    Fair Value of Financial InstrumentsSubstantially all of the Companys financial assets and liabilities are carried at market
value or at amounts which, because of their short-term nature or because they carry market
rates of interest, approximate current fair value. The Companys notes payable, if
recalculated based on current interest rates, would not significantly differ from the amounts
recorded at December 31, 2004 and 2003.(12)
    Income TaxesThe Company files a consolidated tax return. Income tax expense (benefit) consists of the
following: 2004
    
    
    2003
    
    
    2002FederalCurrent
    
    $
    2,903,318
    
    
    
    576,614
    
    
    
    248,903Deferred
    
    
    1,258,727
    
    
    
    20,584
    
    
    
    13,473StateCurrent
    
    
    429,438
    
    
    
    84,154
    
    
    
    39,372Deferred
    
    
    193,425
    
    
    
    902
    
    
    
    (3,548
    )$
    4,784,908
    
    
    
    682,254
    
    
    
    298,200
 18




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002 A reconciliation of expected income tax expense (computed by applying the statutory income tax
rate of 34% to income before income tax expense) to total tax expense in the accompanying
consolidated statements of operations follows: 2004
    
    
    2003
    
    
    2002Expected federal income expense
    
    $
    4,102,546
    
    
    
    519,991
    
    
    
    200,006Meals and entertainment
    
    
    80,875
    
    
    
    60,634
    
    
    
    46,094State income tax
    
    
    622,864
    
    
    
    85,056
    
    
    
    23,644Other, net
    
    
    (21,377
    )
    
    
    16,573
    
    
    
    28,456$
    4,784,908
    
    
    
    682,254
    
    
    
    298,200
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Deferred tax assets:Capital loss carryforward
    
    $
    51,257
    
    
    
    51,257Accrued expenses
    
    
    1,011,326
    
    
    
    30,147Other
    
    
    
    
    
    
    21,002Gross deferred tax assets
    
    
    1,062,583
    
    
    
    102,406Valuation allowance
    
    
    (48,902
    )
    
    
    (48,902
    )Net deferred tax asset
    
    
    1,013,681
    
    
    
    53,504Deferred tax liabilities:Unrealized gains on securities held for investment
    
    
    (2,235,950
    )
    
    
    Property and equipment
    
    
    (10,200
    )
    
    
    Other
    
    
    (166,290
    )
    
    
    Net deferred tax liability
    
    
    (2,412,440
    )
    
    
    Net deferred tax asset (liability)
    
    $
    (1,398,759
    )
    
    
    53,504
 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, 2004 the Company did not recognize change in valuation
allowance for capital loss carryforwards. At December 31, 2004, the Company had a capital
loss carryforward of approximately $144,000, which expires in 2005. The valuation allowance
is applied against the capital loss carryforward. 19




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (13)
    Profit Sharing and Stock Option PlansProfit Sharing PlanIn 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 2004, 2003 and 2002, the Company contributed approximately $219,000,
$167,000 and $173,000, respectively, to the employee profit sharing plan.Stock Option PlansThe Company established the Tejas Incorporated 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 600,000 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 800,000 shares of the Companys common stock. In September
2004, the board of directors of the Company amended the 1999 Plan to increase the number of
shares available to 2,000,000 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.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 2003, options totaling 200,000 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 weighted average purchase price of the common stock is $1.25 per share. The options were
granted at or above the market value of the Companys common stock.During 2004, options totaling 1,082,000 shares were granted to employees and consultants under
the 1999 Plan. The options vest ratably over three years, and expire five years from the date
of the grant. The weighted average purchase price of the common stock is $7.92 per share.
The options were granted at or above the market value of the Companys common stock. 20




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002 A summary of the Companys stock option and warrant activity, and related information for the
years ended December 31, follows. 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding 
beginning of year
    
    
    644,126
    
    
    $
    1.40
    
    
    
    524,126
    
    
    $
    2.77
    
    
    
    965,838
    
    
    $
    5.73Granted
    
    
    1,082,000
    
    
    $
    7.92
    
    
    
    200,000
    
    
    $
    1.25
    
    
    
    
    
    
    
    Exercised
    
    
    (2,000
    )
    
    $
    1.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (244,126
    )
    
    $
    1.63
    
    
    
    (80,000
    )
    
    $
    10.00
    
    
    
    (441,712
    )
    
    $
    9.24Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding  end of
Year
    
    
    1,480,000
    
    
    $
    6.13
    
    
    
    644,126
    
    
    $
    1.40
    
    
    
    524,126
    
    
    $
    2.77Exercisable  end
of year
    
    
    698,649
    
    
    $
    4.69
    
    
    
    510,786
    
    
    $
    1.43
    
    
    
    524,126
    
    
    $
    2.77
 The weighted average fair value of Company stock options, calculated using the Black
Scholes option pricing model, granted during the years ended December 31, 2004 and 2003 were
$0.54 and $0.17 per option, respectively. The fair value of the options used to compute the pro forma amounts (Note 2(l)) is estimated
using the Black Scholes option-pricing model with the following assumptions: 2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    1.80
    %
    
    
    3.01
    %
    
    
    4.25
    %Expected holding period
    
    5 years
    
    5 years
    
    5 yearsExpected volatility
    
    
    .001
    
    
    
    .001
    
    
    
    .001Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 21




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TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  The following table summarizes the Companys options outstanding and exercisable options at
December 31, 2004: Stock OptionsStock Options Outstanding
    
    
    ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseExercise Price
    
    Shares
    
    
    Life
    
    
    Price
    
    
    Shares
    
    
    Price$  1.25
    
    
    398,000
    
    
    2.4 years
    
    $
    1.25
    
    
    
    337,997
    
    
    $
    1.25$  4.50
    
    
    280,000
    
    
    4.4 years
    
    $
    4.50
    
    
    
    93,333
    
    
    $
    4.50$  9.00
    
    
    747,000
    
    
    4.8 years
    
    $
    9.00
    
    
    
    248,987
    
    
    $
    9.00$  9.90
    
    
    35,000
    
    
    4.8 years
    
    $
    9.90
    
    
    
    11,666
    
    
    $
    9.90$12.00
    
    
    20,000
    
    
    5.0 years
    
    $
    12.00
    
    
    
    6,666
    
    
    $
    12.001,480,000
    
    
    
    
    
    
    
    
    
    
    
    698,649
  (14)
    Earnings Per ShareBasic 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 and convertible notes issued. Contingently issuable shares
are not included in the weighted average number of shares when the inclusion would increase
earnings per share. 22




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  Earnings per share is calculated as follows. 2004
    
    
    2003
    
    
    2002Basic earnings per share:Net income
    
    $
    7,281,404
    
    
    
    847,130
    
    
    
    290,052Weighted average shares outstanding
    
    
    3,025,048
    
    
    
    3,024,048
    
    
    
    3,024,048Basic earnings per share
    
    $
    2.41
    
    
    
    0.28
    
    
    
    0.10Diluted earnings per share:Net income
    
    $
    7,281,404
    
    
    
    847,130
    
    
    
    290,052Impact of assumed conversion of
convertible debt
    
    
    32,005
    
    
    
    
    
    
    
    Income available to common stockholders
after assumed conversions
    
    $
    7,313,409
    
    
    
    847,130
    
    
    
    290,052Weighted average shares outstanding
    
    
    3,025,048
    
    
    
    3,024,048
    
    
    
    3,024,048Effect of dilutive securities:Options
    
    
    415,344
    
    
    
    103,704
    
    
    
    27,358Convertible debt
    
    
    100,000
    
    
    
    
    
    
    
    Weighted average shares outstanding
    
    
    3,540,392
    
    
    
    3,127,752
    
    
    
    3,051,406Diluted earnings per share
    
    $
    2.07
    
    
    
    0.27
    
    
    
    0.10
  The Company has included the dilutive effect of 1,480,000, 644,126 and 444,126 shares of the
Companys common stock for the years ended December 31, 2004, 2003 and 2002, respectively, in
the computation of diluted earnings per share. Of the 1,480,000, 644,126 and 444,126 options
issued by the Company, 415,344, 103,704 and 27,358 shares are included as dilutive securities
on a weighted average basis for the years ended December 31, 2004, 2003 and 2002,
respectively, as calculated under the Treasury Stock method. Options to purchase 80,000 shares
of the Companys common stock for the year ended December 31, 2002 were not included in the
computation of diluted earnings per share because the options were antidilutive.Options to purchase 200,000 shares of the Companys common stock under the convertible notes
payable were included in the computation of diluted earnings per share for the year ended
December 31, 2004. Of the 200,000 shares, 100,000 were included as dilutive securities on a
weighted average basis for the year ended December 31, 2004.(15)
    Off Statement of Financial Condition RiskThe 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. 23




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  The Company is exposed should National Financial Services, 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. As of December 31, 2004 and 2003, the Company had balances
of $1,686,154 and $310,608, respectively, in excess of FDIC insurance limits.The Company had two investment banking customers that generated approximately 29% of the
Corporations total revenue for 2004.(16)
    Industry Segment DataThe 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. 24




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002 The following table presents segment revenues, income before income tax expense, and assets
for the year ended December 31, 2004. InvestmentBrokerage
    
    
    Banking
    
    
    TotalRevenues from external
customers
    
    $
    30,082,476
    
    
    
    18,339,975
    
    
    
    48,422,451Interest revenue
    
    
    296,621
    
    
    
    
    
    
    
    296,621Interest expense
    
    
    216,481
    
    
    
    
    
    
    
    216,481Depreciation and amortization
    
    
    123,017
    
    
    
    
    
    
    
    123,017Income before income tax
expense
    
    
    7,106,849
    
    
    
    4,959,463
    
    
    
    12,066,312Segment assets
    
    
    22,522,856
    
    
    
    
    
    
    
    22,522,856Capital expenditures
    
    
    58,604
    
    
    
    
    
    
    
    58,604
 The following table presents segment revenues, income before income tax expense, and assets
for the year ended December 31, 2003. InvestmentBrokerage
    
    
    Banking
    
    
    TotalRevenues from external
customers
    
    $
    25,558,868
    
    
    
    72,799
    
    
    
    25,631,667Interest revenue
    
    
    1,064,441
    
    
    
    
    
    
    
    1,064,441Interest expense
    
    
    227,919
    
    
    
    
    
    
    
    227,919Depreciation and amortization
    
    
    120,642
    
    
    
    
    
    
    
    120,642Income before income tax
expense
    
    
    1,515,284
    
    
    
    14,000
    
    
    
    1,529,284Segment assets
    
    
    8,356,453
    
    
    
    
    
    
    
    8,356,453Capital expenditures
    
    
    56,239
    
    
    
    
    
    
    
    56,239
 The following table presents segment revenues, income before income tax expense, and assets
for the year ended December 31, 2002. InvestmentBrokerage
    
    
    Banking
    
    
    TotalRevenues from external
customers
    
    $
    20,894,690
    
    
    
    335,663
    
    
    
    21,230,353Interest revenue
    
    
    56,058
    
    
    
    
    
    
    
    56,058Interest expense
    
    
    263,968
    
    
    
    
    
    
    
    263,968Depreciation and amortization
    
    
    132,067
    
    
    
    
    
    
    
    132,067Income before income tax
expense
    
    
    428,375
    
    
    
    159,877
    
    
    
    588,252Segment assets
    
    
    9,274,938
    
    
    
    
    
    
    
    9,274,938Capital expenditures
    
    
    10,169
    
    
    
    
    
    
    
    10,169
 25




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TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (17)
    Lease CommitmentsThe 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, 2004 are
as follows: Operating
    
    
    Capital2005
    
    $
    1,654,000
    
    
    
    34,0002006
    
    
    1,087,000
    
    
    
    20,0002007
    
    
    273,000
    
    
    
    2008
    
    
    74,000
    
    
    
    2009
    
    
    25,000
    
    
    
    Minimum Commitments
    
    $
    3,113,000
    
    
    
    54,000Less Interest
    
    
    
    
    
    
    (2,000
    )Net Present Value of Capital Lease Obligations
    
    
    
    
    
    
    52,000
  Office equipment, under capital leases, with a recorded cost of $96,716, net of depreciation
of $55,534 as of December 31, 2004, collateralizes the above capital lease obligations and is
included in the statements of financial condition under the caption of Property and
Equipment. Depreciation expense for assets under capital lease was $32,239 and $23,295 in
2004 and 2003, respectively.Rent expense amounted to approximately $1,504,000, $1,537,000 and $1,452,000 for the years
ended December 31, 2004, 2003 and 2002, respectively. Rent expense is reported net of sublease
revenue which is disclosed below.In January 2005, the Company subleased its Houston, Texas office space. Under the terms of
the sublease agreement, the future minimum payments to be received are approximately $48,000
in 2005 and $32,000 in 2006.In June 2003, the Company subleased a portion of its Austin, Texas headquarters, furniture and
equipment effective June 15, 2003 through February 2008. Under the terms of the sublease
agreement, the future minimum payments to be received are approximately $106,000 in 2005 and
2006, and approximately $18,000 in 2007. During 2004 and 2003, the Company received
approximately $92,000 and $35,000, respectively, in relation to this sublease agreement.In December 2000, the Company subleased a portion of its Austin, Texas headquarters, furniture
and equipment effective January 1, 2001 through March 2003. The Company received approximately
$182,000 and $660,000 during 2003 and 2002, respectively, in relation to these sublease
agreements.In September 2002, the Company subleased its Atlanta, Georgia office space. Under the terms of
the sublease agreement, the future minimum payments to be received are approximately $63,000
in 2005. The Company received approximately $91,000, $83,000 and $10,000 during 2004, 2003 and
2002, respectively, in relation to this sublease agreement. 26




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (18)
    ContingenciesThe Company is involved in various claims and legal actions that have arisen in the ordinary
course of business. It is managements opinion that liabilities, if any, arising from these
actions will not have a significant adverse effect on the consolidated financial position or
results of operations of the Company.In October 2001, an officer of the Company purchased a liability of the Company in the amount
of approximately $121,000 originally payable to a third party. The liability originated from
the Merger (Note 1) and is now payable to the officer upon the Companys successful listing on
a national exchange.(19)
    Net Capital RequirementsTejas Securities, as a registered fully licensed broker and dealer in securities, is subject
to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1 of the
Securities Exchange Act of 1934, as amended). Under this rule, Tejas Securities is required to
maintain a minimum net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. Rule 15c3-1 also provides that equity
capital may not be withdrawn or cash dividends paid by Tejas Securities if the resulting net
capital ratio would exceed 10 to 1. At December 31, 2004, the minimum net capital
requirement for Tejas Securities was $250,000. Net capital at December 31, 2004 aggregated
$3,637,595. Tejas Securities ratio of aggregate indebtedness to net capital was 1.83 to 1 at
December 31, 2004.(20)
    Other Related Party TransactionsOn October 15, 2004, the Company entered into a purchase agreement with a member of the
Companys board of directors, and Seton Securities Group, Inc. (Seton), a broker-dealer
controlled by that director, whereby the director and Seton would purchase the assets and
operations of the Companys New Jersey branch office by December 31, 2004 for nominal
consideration. As part of the agreement with the director, Seton entered into a sublease
agreement for the New Jersey office space for the remaining lease term. The sublease
agreement will take effect upon the closing of the purchase agreement. The director exercised
an option to extend the closing date to June 30, 2005 in exchange for consideration of $10,000
payable to the Company. Additionally, the Company entered into a memorandum of understanding
whereby the Company would maintain a trading account on behalf of Seton, and the net profits
from the trading account would be paid to Seton. As of December 31, 2004, the Company had
paid Seton approximately $50,000, which represented the net profit on the trading account.The employees, officers and management of the Company may maintain personal accounts with the
Company. When the Company executes securities transactions on behalf of its employees,
officers and management, those transactions are executed at current market prices, plus
execution costs. All officers of the Company, one of which is a majority owner, routinely
conduct such transactions for their own accounts, and management of the Company deems the
transactions to be arms length transactions. The majority owner of the Company also makes
many of the proprietary trading decisions for the Company, including securities transactions
between that individual and the Company. 27




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (21)
    Subsequent EventsOn February 22, 2005, the Company purchased an office building through its newly formed
wholly-owned subsidiary, TI Building Partnership, Ltd. The Company plans on relocating its
Austin, Texas headquarters during 2005 to the new Austin location. The office building was
purchased at a price of approximately $3,470,000, with $2,200,000 being financed through a
credit union. The loan agreement accrues interest at a rate of 5.75% per annum, with monthly
installments of $18,840 through February 2011, at which time the outstanding principal and
accrued interest shall be due and payable.On February 3, 2005, the Company issued 1,600,000 shares of its common stock through a
secondary public offering. As a result of the offering, the Company received approximately
$23,629,000 in net proceeds. On February 25, 2005, the underwriter for the secondary public
offering exercised their option to purchase an additional 60,000 shares of the Companys
common stock. As a result of the option exercise, the Company received approximately $888,000
in net proceeds.On February 10, 2005, the Company repaid the remaining balance of $1,730,000, plus interest,
from the February 2004 term loan agreement with a bank with proceeds from the February 2005
secondary public offering.(22)
    Quarterly Results (Unaudited)The following tables set forth selected quarterly consolidated statements of operations
information for the years ended December 31, 2004 and 2003. First
    
    
    Second
    
    
    Third
    
    
    Fourth2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenue
    
    $
    6,033,379
    
    
    
    7,527,704
    
    
    
    4,998,715
    
    
    
    30,120,498Income (loss) before income tax
expense (benefit)
    
    
    259,124
    
    
    
    1,219,540
    
    
    
    (814,973
    )
    
    
    11,402,621Net income (loss)
    
    
    144,336
    
    
    
    718,129
    
    
    
    (538,550
    )
    
    
    6,957,489Basic earnings (loss) per share:Net income (loss)
    
    
    0.05
    
    
    
    0.24
    
    
    
    (0.18
    )
    
    
    2.30Diluted earnings (loss) per share:Net income (loss)
    
    
    0.04
    
    
    
    0.24
    
    
    
    (0.18
    )
    
    
    1.98
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenue
    
    $
    9,374,121
    
    

    
    5,657,298
    
    
    
    5,615,273
    
    
    
    5,937,068Income before income tax expense
    
    
    818,481
    
    
    
    104,474
    
    
    
    300,792
    
    
    
    305,637Net income
    
    
    485,629
    
    
    
    53,791
    
    
    
    169,856
    
    
    
    137,854Basic earnings per share:Net income
    
    
    0.16
    
    
    
    0.02
    
    
    
    0.06
    
    
    
    0.04Diluted earnings per share:Net income
    
    
    0.16
    
    
    
    0.02
    
    
    
    0.05
    
    
    
    0.04
 28




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##### Table of Contents



(a) Exhibits: ExhibitNumber
    
    Description of Exhibits1.0
    
    Form of Underwriting Agreement between Tejas Incorporated and C.E.
Unterberg, Towbin, LLC (incorporated herein by reference to Exhibit 1.0 of
the registrants Amendment No. 1 to Registration Statement on Form S-1,
filed on January 20, 2005)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))3.3
    
    Certificate of Amendment to Certificate of Incorporation (Incorporated
herein by reference to the registrants Current Report on Form 8-K filed
on June 25, 2001)3.4
    
    Certificate of Amendment to Certificate of Incorporation (Incorporated
herein by reference to the registrants Current Report on Form 8-K filed
on June 20, 2002)3.5
    
    Certificate of Ownership and Merger Merging Tejas International into
Westech Capital Corp. (incorporated by reference to Exhibit 3.5 of the
registrants Registration Statement on Form S-1, filed on December 22,
2004)4.1
    
    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))10.1
    
    First Amended and Restated Westech Capital Corp. 1999 Stock Option Plan10.2
    
    Form of Incentive Stock Option Agreement (Incorporated herein by reference
to Exhibit 10.3 to the registrants Registration Statement on Form
10-12(g)) (File No. 000-29235)10.3
    
    Form of Nonqualified Stock Option Agreement (Incorporated herein by
reference to Exhibit 10.4 to the registrants Registration Statement on
Form 10-12(g)) (File No. 000-29235)10.4
    
    Lease Agreement, effective as of September 30, 1999, by and between
Westech Capital Corp. and Desta Two Partnership, Ltd. (Incorporated herein
by reference to Exhibit 10.5 to the registrants Registration Statement on
Form 10-12(g)) (File No. 000-29235)10.5
    
    Employment and Confidentiality Agreement, dated as of August 30, 1999,
between Tejas Securities Group, Inc. and Charles Mayer (Incorporated
herein by reference to Exhibit 10.6 to the registrants Annual Report on
Form 10-K for the year ended December 31, 1999)10.6
    
    Employment and Confidentiality Agreement, dated as of June 1, 2004,
between Westech Capital Corp. and Kurt J. Rechner (Incorporated herein by
reference to Exhibit 10.3 to the registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2004)10.7
    
    Employment and Confidentiality Agreement, dated as of June 1, 2004,
between Westech Capital Corp. and John F. Garber (Incorporated herein by
reference to Exhibit 10.4 to the registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2004)10.8
    
    Modification of employment agreement between Charles H. Mayer and Tejas
Securities Group, Inc., dated January 1, 2001 (Incorporated herein by
reference to Exhibit 10.19 to the registrants Annual Report on Form 10-K
for the year ended December 31, 2000)10.9
    
    Agreement, dated December 3, 2001, with Correspondent Services Corporation
(Incorporated herein by reference to Exhibit 10.9 to the registrants
Annual Report on Form 10-K for the year ended December 31, 2001)10.10
    
    Promissory note agreement dated February 17, 2004 between First United
Bank and the Company10.11
    
    Employment and Confidentiality Agreement, dated as of June 1, 2004,
between Westech Capital Corp. and Mark M. Salter (Incorporated herein by
reference to Exhibit 10.2 to the registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2004)10.12
    
    Promissory note agreement dated July 7, 2004 between Westech Capital Corp.
and Salter Family Partners, Ltd. (Incorporated herein by reference to
Exhibit 10.1 to the registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004)10.13
    
    Agreement, dated as of October 15, 2004, between Westech Capital Corp. and
Charles H. Mayer (Incorporated herein by reference to the registrants
Current Report on Form 8-K filed on November 8, 2004)
 1




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.14
    
    Agreement Regarding Contract between Blake Byram and TI Building
Partnership, Ltd. (incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed on February 18, 2005)10.15
    
    Real Estate Purchase and Sale Agreement, and the first and second
amendments thereto, between Blake Byram and 8226 Bee Caves, Ltd.
(incorporated by reference to Exhibit 10.2 of the Registrants Current
Report on Form 8-K filed on February 18, 2005)10.16*
    
    Promissory Note, dated February 22, 2005, made by TI Building Partnership,
Ltd. for the benefit of Community Credit Union21.1*
    
    Subsidiaries of the Registrant23.1*
    
    Consent of KPMG LLP, Independent Registered Public Accounting Firm23.2*
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm23.3*
    
    Consent of Helin Donovan Trubee & Wilkinson, LLP, Independent Registered
Public Accounting Firm31.1*
    
    Certification of Chief Executive
Officer under Securities Exchange Act Rules 13a-14 or 15d-1431.2*
    
    Certification of Chief Financial
Officer under Securities Exchange Act Rules 13a-14 or 15d-1432.1*
    
    Certifications of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certifications of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement. 2