##### Table of Contents



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
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 Commission File No. 000-29235
 TEJAS INCORPORATED
 
  DELAWARE
    
    13-3577716(State or other jurisdiction of incorporation)
    
    (IRS Employer Identification No.)
  
   
 Common Stock, par value $0.001 per share
 o þ
 o þ
 þ o
 o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    18Item 1B.
    
    Unresolved Staff Comments
    
    
    18Item 2.
    
    Properties
    
    
    18Item 3.
    
    Legal Proceedings
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    19Item 6.
    
    Selected Financial Data
    
    
    21Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    
    31Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    31Item 9A.
    
    Controls and Procedures
    
    
    31Item 9B.
    
    Other Information
    
    
    31PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    32Item 11.
    
    Executive Compensation
    
    
    32Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    32Item 13.
    
    Certain Relationships and Related Transactions
    
    
    32Item 14.
    
    Principal Accountant Fees and Services
    
    
    32PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    32SubsidiariesConsent of PMB Helin Donovan, LLPCertification of CEO under Rules 13a-14/15d-14Certification of CFO under Rules 13a-14/15d-14Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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PART I
 
 ITEM 1. BUSINESS
 GENERAL
   
    
    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.
    
    
    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
    
    increasing the number of securities in which we make an active trading market.
   3




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Brokerage Services
  Investment Banking
  Recent Developments
  Industry Overview
  
    
    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.
   4




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Our Market Opportunity
  Our Targeted Addressable Market Continues to Grow As Our Research Coverage Expands to New
Industries
  Default Rates are at Historic Lows, Creating Potential Opportunities for Distressed Debt
  Our Research Department Fully Investigates the Details of Each Investment Situation
  Our Extensive Bankruptcy Coverage Allows Us to Identify Distressed Opportunities Regardless of Size
  5




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Largest Bankruptcies 1980-Present
 Company
    
    Bankruptcy Filing Date
    
    Total Pre-Bankruptcy AssetsWorldcom, Inc.
    
    
    7/21/02
    
    
    $
    103.9Enron Corp.
    
    
    12/2/01
    
    
    
    63.4Conseco, Inc.
    
    
    12/18/02
    
    
    
    61.4Texaco, Inc.
    
    
    4/12/87
    
    
    
    35.9Financial Corp. of America
    
    
    9/9/88
    
    
    
    33.9Refco Inc.
    
    
    10/17/05
    
    
    
    33.3Global Crossing, Ltd.
    
    
    1/28/02
    
    
    
    30.2Pacific Gas and Electric Co.
    
    
    4/6/01
    
    
    
    29.8Calpine Corp.
    
    
    12/20/05
    
    
    
    27.2UAL Corp.
    
    
    12/9/02
    
    
    
    25.2Delta Air Lines, Inc.
    
    
    9/14/05
    
    
    
    21.8Adelphia Communications
    
    
    6/25/02
    
    
    
    21.5M Corp.
    
    
    3/31/89
    
    
    
    20.2Mirant Corp.
    
    
    7/14/03
    
    
    
    19.4Delphi Corp.
    
    
    10/8/05
    
    
    
    16.6
 
 
  Our Competitive Strengths
 Highly Regarded Investment Research
  Experienced Professionals
  Focus on Under-Covered Securities
  Entrepreneurial Culture
  6




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Our Growth Strategies
  Expand Research Coverage to Other Industries Outside Our Current Focus
  Capitalize on Trading Resources By Increasing the Size of Brokered Transactions
  Expand Investment Banking Efforts to Include Additional Capabilities
  Develop Direct Investment Operations for Participation in Investment Banking Transactions
  Grow Through Acquisitions
  Diversify Revenues
  7




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Revenues and Industry Segments
  Clients
  Employees
  Competition
     Securities Industry Practices/Regulation
  8




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Net Capital Requirements
    FORWARD-LOOKING STATEMENTS AND RISK FACTORS
    Our Ability To Retain Our Executive Management Team And To Recruit And Retain Key Employees Is
Critical To The Success Of Our Business.
  9




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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.
  
    
    fluctuations in the debt and equity markets;
    
    our ability to identify investment opportunities for our trading accounts and our clients accounts;
    
    general economic and market conditions which impact the number of distressed securities
opportunities that are available to us and our clients; and
    
    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.
   A Key Part Of Our Business Strategy Involves Acquisitions; However, Such Acquisitions May Not
Achieve All Intended Benefits.
  
    
    diversion of managements attention from our existing business;
    
    increased competition for acquisitions which may increase the price of our acquisitions; and
    
    our failure to discover material liabilities during the due diligence process,
including the failure of prior owners of any acquired businesses or their employees to
comply with applicable laws or regulations or their failure to fulfill their contractual
obligations.
  We May Have Difficulty Integrating The Operations Of Any Companies We Acquire, Which May Adversely
Affect Our Results Of Operations.
  10




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
    
    the integration of personnel with disparate business backgrounds;
    
    the transition of new information systems;
    
    the coordination of geographically dispersed organizations;
    
    the loss of key employees of acquired companies;
    
    the reconciliation of different corporate cultures; and
    
    the synchronization of disclosure and financial reporting controls of acquired
companies with our controls and, where applicable, improvement of the acquired companys
controls.
  We Invest Our Own Principal Capital In Equities And Debt Securities That Expose Us To Risk Of
Capital Loss.
   If Institutional Investors Conduct Less Business With Us, Our Revenues May Be Harmed.
  We Specialize In A Few Discrete Sectors, And Any Downturn In Business In Those Sectors Could
Adversely Affect Our Revenues.
  11




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Failure Of Third-Party Vendors To Provide Critical Services Could Harm Our Business.
  Credit Risk Exposes Us To Losses Caused By Financial Or Other Problems Experienced By Third
Parties.
   Employee And Consultant Misconduct Could Harm Our Businesses And Is Difficult To Detect And Deter.
  We Must Maintain Certain Net Capital Requirements That Could Slow Our Expansion Plans Or Prevent
Payments Of Dividends.
  12




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We May Experience Reduced Revenues Due To Declining Market Volume, Securities Prices And Liquidity,
Which Can Also Cause Counterparties To Fail To Perform.
  Our Trading Systems May Fail, Resulting In Service Interruptions.
  Lack Of Liquidity At Our Clearing Organization May Impair Our Business.
  Our Business Is Highly Competitive.
  13




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We Are Subject To Market Forces Beyond Our Control.
  We Are Subject To Strict Government Regulation And The Failure To Comply Could Result In
Disciplinary Actions.
    14




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We Are Subject to Increased Use of Legal Proceedings, Which May Negatively Impact Our Business.
    No Active Public Market For Our Common Stock Currently Exists And None May Develop.
  Our Chairman Will Have Significant Influence Over Matters Requiring Stockholder Or Board Approval.
  Investments By Our Executive Officers And Employees May Conflict With The Interests Of Holders Of
Our Securities.
  15




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Our Common Stock Price May Be Volatile, Which Would Adversely Affect The Value Of Your Shares.
  
    
    variations in quarterly operating results;
    
    our announcements of significant contracts, milestones, acquisitions, or sales;
    
    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
    
    fluctuation in stock market price and volume.
   Future Sales Of Our Common Stock Could Adversely Affect Its Price
   We Do Not Expect To Pay Cash Dividends On Our Common Stock For The Foreseeable Future.
  Our By-Laws Could Make It More Difficult For A Third Party To Acquire Us.
  16




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EXECUTIVE OFFICERS OF THE REGISTRANT.
  Name
    
    Age
    
    PositionJohn J. Gorman
    
    
    46
    
    
    Director and ChairmanMark M. Salter
    
    
    47
    
    
    Chief Executive OfficerKurt J. Rechner
    
    
    46
    
    
    President, Chief Operating Officer, Chief Financial Officer, Treasurer and SecretaryKurt E. Morales
    
    
    41
    
    
    Director of Accounting
 John J. Gorman.
 Mark M. Salter.
 Kurt J. Rechner, CPA, CFA.
 Kurt E. Morales, CPA.
 AVAILABLE INFORMATION
  17




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ITEM 1A. RISK FACTORS
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  18




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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
   High
    
    Low2006 Price RangeFirst Quarter
    
    $
    8.25
    
    
    $
    6.20Second Quarter
    
    
    7.75
    
    
    
    3.45Third Quarter
    
    
    4.00
    
    
    
    3.00Fourth Quarter
    
    
    4.20
    
    
    
    3.052005 Price RangeFirst Quarter
    
    $
    20.00
    
    
    $
    15.75Second Quarter
    
    
    19.20
    
    
    
    11.25Third Quarter
    
    
    16.45
    
    
    
    10.60Fourth Quarter
    
    
    12.00
    
    
    
    6.40
 DIVIDEND POLICY
  RECENT SALES OF UNREGISTERED STOCK
  EQUITY COMPENSATION PLANS
  (a)
    
    (b)
    
    (c)Number of Shares ofOur Common StockNumber of Shares of
    
    
    
    
    
    Remaining AvailableOur Common Stock
    
    
    
    
    
    for Future Issuanceto be Issued Upon
    
    Weighted Average
    
    Under EquityExercise of
    
    Exercise Price of
    
    Compensation PlansOutstanding
    
    Outstanding
    
    (exceeding securitiesOptions, Warrants
    
    Options, Warrants
    
    reflected inPlan Category
    
    and Rights
    
    and Rights
    
    column (a))Equity compensation plans approved by our security
holders
    
    
    1,230,835
    
    
    $
    9.65
    
    
    
    512,600Total
    
    
    1,230,835
    
    
    $
    9.65
    
    
    
    512,600
 19




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PERFORMANCE GRAPH
 
 
 
 (1)
    
    Assumes $100.00 invested on December 31, 2001 and dividends reinvested. Historical
performance does not predict future results.
 (2)
    
    Our peer group for the 2006 fiscal year consists of First Albany Companies Inc., Paulson
Capital Corp., MCF Corporation, Evercore Partners, Inc., Sanders Morris Harris Group, Inc.,
and Cowen Group, Inc.
 20




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ITEM 6. SELECTED FINANCIAL DATA
  AS OF AND FOR THE YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002STATEMENT OF OPERATIONS DATA:Commissions
    
    $
    15,192,207
    
    
    $
    17,139,488
    
    
    $
    20,945,763
    
    
    $
    29,260,473
    
    
    $
    19,467,276Underwriting and investment banking income
    
    
    1,914,720
    
    
    
    16,436,706
    
    
    
    18,339,975
    
    
    
    72,799
    
    
    
    335,663Net dealer inventory and investment income (loss)
    
    
    1,090,273
    
    
    
    (5,800,745
    )
    
    
    9,087,139
    
    
    
    (2,793,103
    )
    
    
    1,296,933Other income
    
    
    656,584
    
    
    
    608,046
    
    
    
    307,419
    
    
    
    43,591
    
    
    
    135,055Total revenues
    
    
    18,853,784
    
    
    
    28,383,495
    
    
    
    48,680,296
    
    
    
    26,583,760
    
    
    
    21,234,927Commissions, employee compensation and benefits
    
    
    18,782,596
    
    
    
    22,756,977
    
    
    
    23,140,948
    
    
    
    19,140,520
    
    
    
    15,667,467Clearing and floor brokerage
    
    
    929,981
    
    
    
    741,817
    
    
    
    652,037
    
    
    
    589,913
    
    
    
    412,657Communications and occupancy
    
    
    1,685,574
    
    
    
    2,068,129
    
    
    
    1,903,404
    
    
    
    2,100,250
    
    
    
    1,631,136Professional fees
    
    
    1,891,098
    
    
    
    3,202,822
    
    
    
    7,874,990
    
    
    
    949,313
    
    
    
    704,718Other
    
    
    3,965,707
    
    
    
    5,607,761
    
    
    
    3,042,605
    
    
    
    2,274,380
    
    
    
    2,230,697Total expenses
    
    
    27,254,956
    
    
    
    34,377,506
    
    
    
    36,613,984
    
    
    
    25,054,376
    
    
    
    20,646,675Income (loss) from continued operations before income taxes
    
    
    (8,401,172
    )
    
    
    (5,994,011
    )
    
    
    12,066,312
    
    
    
    1,529,384
    
    
    
    588,252Income tax expense (benefit) from continued operations
    
    
    (2,760,679
    )
    
    
    (2,171,990
    )
    
    
    4,784,908
    
    
    
    682,254
    
    
    
    298,200Net income (loss) from continued operations
    
    $
    (5,640,493
    )
    
    $
    (3,822,021
    )
    
    $
    7,281,404
    
    
    $
    847,130
    
    
    $
    290,052Loss from discontinued operations before income taxes
    
    $
    (36,444,683
    )
    
    $
    (931,322
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    0Income tax expense (benefit) from discontinued operations
    
    
    1,269,734
    
    
    
    (269,424
    )
    
    
    0
    
    
    
    0
    
    
    
    0Net loss from discontinued operations
    
    $
    (37,714,417
    )
    
    $
    (661,898
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    0Total net income (loss)
    
    $
    (43,354,910
    )
    
    $
    (4,483,919
    )
    
    $
    7,281,404
    
    
    $
    847,130
    
    
    $
    290,052Earnings (loss) from continued operations per share:Basic
    
    $
    (0.80
    )
    
    $
    (0.63
    )
    
    $
    2.41
    
    
    $
    0.28
    
    
    $
    0.10Diluted
    
    $
    (0.80
    )
    
    $
    (0.63
    )
    
    $
    2.06
    
    
    $
    0.27
    
    
    $
    0.10Earnings (loss) from discontinued operations per share:Basic
    
    $
    (5.25
    )
    
    $
    (0.11
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    0Diluted
    
    $
    (5.25
    )
    
    $
    (0.11
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    0Total earnings (loss) per share:Basic
    
    $
    (6.05
    )
    
    $
    (0.74
    )
    
    $
    2.41
    
    
    $
    0.28
    
    
    $
    0.10Diluted
    
    $
    (6.05
    )
    
    $
    (0.74
    )
    
    $
    2.06
    
    
    $
    0.27
    
    
    $
    0.10Weighted average shares outstanding:Basic
    
    
    7,181,060
    
    
    
    6,097,903
    
    
    
    3,025,048
    
    
    
    3,024,048
    
    
    
    3,024,048Diluted
    
    
    7,181,060
    
    
    
    6,097,903
    
    
    
    3,540,392
    
    
    
    3,127,752
    
    
    
    3,051,406STATEMENT OF FINANCIAL CONDITION DATA:Cash and cash equivalents
    
    $
    2,429,026
    
    
    $
    1,644,176
    
    
    $
    1,959,719
    
    
    $
    551,857
    
    
    $
    750,746Receivable from clearing organization
    
    
    116,259
    
    
    
    316,604
    
    
    
    3,737,741
    
    
    
    0
    
    
    
    0Securities owned
    
    
    19,708,338
    
    
    
    23,819,028
    
    
    
    15,956,971
    
    
    
    5,601,782
    
    
    
    5,985,305Other investment
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,155,000
    
    
    
    1,250,000Property and equipment
    
    
    6,749,668
    
    
    
    6,680,058
    
    
    
    265,238
    
    
    
    329,651
    
    
    
    333,800Goodwill and intangible assets
    
    
    138,215
    
    
    
    138,215
    
    
    
    138,215
    
    
    
    138,215
    
    
    
    138,215Other assets
    
    
    2,608,982
    
    
    
    3,127,305
    
    
    
    464,972
    
    
    
    579,948
    
    
    
    816,872Assets of subsidiary to be disposed
    
    
    0
    
    
    
    45,278,080
    
    
    
    0
    
    
    
    0
    
    
    
    0Total assets
    
    $
    31,750,488
    
    
    $
    81,003,466
    
    
    $
    22,522,856
    
    
    $
    8,356,453
    
    
    $
    9,274,938Accounts payable, accrued expenses and other liabilities
    
    $
    2,598,398
    
    
    $
    4,615,481
    
    
    $
    8,986,909
    
    
    $
    2,376,535
    
    
    $
    2,380,552Securities sold, not yet purchased
    
    
    3,110,165
    
    
    
    0
    
    
    
    90,838
    
    
    
    221,279
    
    
    
    985,210Payable to clearing organization
    
    
    2,616,279
    
    
    
    610,446
    
    
    
    0
    
    
    
    742,334
    
    
    
    971,651Notes payable
    
    
    3,822,612
    
    
    
    3,906,695
    
    
    
    2,800,000
    
    
    
    1,655,100
    
    
    
    2,423,450Liabilities of subsidiary to be disposed
    
    
    0
    
    
    
    332,335
    
    
    
    0
    
    
    
    0
    
    
    
    0Total liabilities
    
    
    12,147,454
    
    
    
    9,464,957
    
    
    
    11,877,747
    
    
    
    4,995,248
    
    
    
    6,760,863Total stockholders equity
    
    
    19,603,034
    
    
    
    71,538,509
    
    
    
    10,645,109
    
    
    
    3,361,205
    
    
    
    2,514,075Total liabilities and stockholders equity
    
    $
    31,750,488
    
    
    $
    81,003,466
    
    
    $
    22,522,856
    
    
    $
    8,356,453
    
    
    $
    9,274,938
 21




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Company Overview
  
    
    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.
   Brokerage Services
  Investment Banking
  Recent Developments
  Business Environment
   22




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Critical Accounting Policies and Estimates
  Revenue Recognition
    Fair Value of Securities
  Receivable (Payable) to Clearing Organization
  Goodwill and Other Intangible Assets
 
 23




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Components of Revenues
   Components of Expenses
       24




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Results of Continued Operations
 Fiscal Year Ended December 31, 2006, 2005 and 2004
        25




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Results of Discontinued Operations
 Fiscal Year Ended December 31, 2006, 2005 and 2004
  26




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Liquidity and Capital Resources
     Cash Flows From Operating Activities
       27




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Cash Flows from Investing Activities
   Cash Flows from Financing Activities
      28




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Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsNotes Payable
    
    $
    3,823,000
    
    
    $
    88,000
    
    
    $
    196,000
    
    
    $
    3,539,000
    
    
    $
    Operating Lease Obligations
    
    
    4,951,000
    
    
    
    1,563,000
    
    
    
    1,628,000
    
    
    
    684,000
    
    
    
    1,076,000Capital Lease Obligations
    
    
    143,000
    
    
    
    45,000
    
    
    
    86,000
    
    
    
    12,000
    
    
    
    Total Contractual Cash Obligations
    
    $
    8,917,000
    
    
    $
    1,696,000
    
    
    $
    1,910,000
    
    
    $
    4,235,000
    
    
    $
    1,076,000
   Effects Of Inflation
  Recently Issued Accounting Pronouncements
  29




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##### Table of Contents



Accounting for Uncertainty in Income Taxes  An
Interpretation of FASB Statement No. 109 Accounting for Income Taxes
    Fair Value Measurements.
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115. Accounting for
Certain Investments in Debt and Equity Securities,
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   30




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  31




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 1
    
    Financial StatementsSee Financial Statements attached hereto.2.
    
    ExhibitsIncorporated by reference to the Exhibit Index at the end of this report.
 32




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##### Table of Contents



TEJAS INCORPORATEDBy:
    
    /s/ Mark M. SalterMark M. SalterChief Executive Officer
   Signature
    
    Title
    
    Date/s/ John J. Gorman
    
    Chairman of the Board
    
    March 30, 2007John J. Gorman/s/ Mark M. Salter
    
    Chief Executive Officer
    
    March 30, 2007Mark M. Salter
    
    (Principal Executive Officer)/s/ Kurt J. Rechner
    
    President, Chief Operating
    
    March 30, 2007Kurt J. Rechner
    
    Officer, Chief Financial
Officer (Principal Financial
Officer), Treasurer and
Secretary/s/ Kurt E. Morales
    
    Director of Accounting
    
    March 30, 2007Kurt E. Morales
    
    (Principal Accounting Officer)/s/ Michael F. Dura
    
    Vice-Chairman of the Board
    
    March 30, 2007Michael F. Dura/s/ Clark N. Wilson
    
    Director
    
    March 30, 2007Clark N. Wilson/s/ William A. Inglehart
    
    Director
    
    March 30, 2007William A. Inglehart/s/ Dennis G. Punches
    
    Director
    
    March 30, 2007Dennis G. Punches/s/ Charles H. Mayer
    
    Director
    
    March 30, 2007Charles H. Mayer/s/ Barry A. Williamson
    
    Director
    
    March 30, 2007Barry A. Williamson
 33




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TEJAS INCORPORATED AND SUBSIDIARIES




---



##### Table of Contents



TEJAS
INCORPORATED AND SUBSIDIARIES
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    1Consolidated Statements of Financial Condition as of December 31, 2006 and 2005
    
    
    2Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    3Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2005
and 2004
    
    
    4Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    7




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/s/ PMB Helin Donovan, LLP 
 1




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
 
   2006
    
    
    2005AssetsCash and cash equivalents (includes $77,094 of cash related to
subsidiary to be disposed at December 31, 2005)
    
    $
    2,429,026
    
    
    
    1,644,176Receivable from clearing organization
    
    
    116,259
    
    
    
    316,604Receivables from employees
    
    
    197,425
    
    
    
    122,684Federal income taxes receivable
    
    
    1,750,015
    
    
    
    1,995,480Securities owned, at fair value
    
    
    19,708,338
    
    
    
    23,819,028Property and equipment, net
    
    
    6,749,668
    
    
    
    6,680,058Goodwill
    
    
    138,215
    
    
    
    138,215Prepaid expenses and other assets
    
    
    661,542
    
    
    
    1,009,141Assets of subsidiary to be disposed
    
    
    
    
    
    
    45,278,080Total assets
    
    $
    31,750,488
    
    
    
    81,003,466Liabilities and Stockholders EquityAccounts payable, accrued expenses and other liabilities
    
    $
    2,388,903
    
    
    
    3,263,714Securities sold, not yet purchased
    
    
    3,110,165
    
    
    
    Payable to clearing organization
    
    
    2,616,279
    
    
    
    610,446Deferred tax liability, net
    
    
    209,495
    
    
    
    1,351,767Notes payable
    
    
    3,822,612
    
    
    
    3,906,695Liabilities of subsidiary to be disposed
    
    
    
    
    
    
    332,335Total liabilities
    
    
    12,147,454
    
    
    
    9,464,957Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value, 100,000 shares authorized
Series A convertible preferred stock, 1,000 shares issued and
outstanding at December 31, 2006 and 2005
    
    
    1
    
    
    
    1Common stock, $0.001 par value
30,000,000 shares authorized; 4,825,613 and 7,860,508
issued and outstanding at December 31, 2006 and 2005,
respectively
    
    
    8,179
    
    
    
    7,861Additional paid in capital
    
    
    69,839,835
    
    
    
    67,622,120Retained earnings (deficit)
    
    
    (39,546,383
    )
    
    
    3,908,527Treasury stock, at cost, 3,352,895 shares
    
    
    (10,698,598
    )
    
    
    Total stockholders equity
    
    
    19,603,034
    
    
    
    71,538,509Total liabilities and stockholders equity
    
    $
    31,750,488
    
    
    
    81,003,466
  2




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
 
   2006
    
    
    2005
    
    
    2004Revenue:Commissions from agency transactions
    
    $
    4,928,381
    
    
    
    6,218,258
    
    
    
    5,574,850Commissions from principal transactions
    
    
    10,263,826
    
    
    
    10,921,230
    
    
    
    15,370,913Underwriting and investment banking income
    
    
    1,914,720
    
    
    
    16,436,706
    
    
    
    18,339,975Net dealer inventory and investment income (loss),
net of trading interest expense of $502,945, $244,674
and $38,776, respectively
    
    
    1,090,273
    
    
    
    (5,800,745
    )
    
    
    9,087,139Other income
    
    
    656,584
    
    
    
    608,046
    
    
    
    307,419Total revenue
    
    
    18,853,784
    
    
    
    28,383,495
    
    
    
    48,680,296Expenses:Commissions, employee compensation
and benefits
    
    
    18,782,596
    
    
    
    22,756,977
    
    
    
    23,140,948Clearing and floor brokerage
    
    
    929,981
    
    
    
    741,817
    
    
    
    652,037Communications and occupancy
    
    
    1,685,574
    
    
    
    2,068,129
    
    
    
    1,903,404Professional fees
    
    
    1,891,098
    
    
    
    3,202,822
    
    
    
    7,874,990Interest, including $0, $73,425 and $48,493,
respectively, to related parties
    
    
    262,693
    
    
    
    289,093
    
    
    
    177,705Other
    
    
    3,703,014
    
    
    
    5,318,668
    
    
    
    2,864,900Total expenses
    
    
    27,254,956
    
    
    
    34,377,506
    
    
    
    36,613,984Income (loss) before income tax expense (benefit) from
continued operations
    
    $
    (8,401,172
    )
    
    
    (5,994,011
    )
    
    
    12,066,312Income tax expense (benefit) from continued
operations
    
    
    (2,760,679
    )
    
    
    (2,171,990
    )
    
    
    4,784,908Net income (loss) from continued operations
    
    $
    (5,640,493
    )
    
    
    (3,822,021
    )
    
    
    7,281,404Loss before income tax expense (benefit) from discontinued
operations (including loss from goodwill impairment of
$22,050,056 and loss on disposal of $12,579,938 included
in the year ended December 31, 2006)
    
    $
    (36,444,683
    )
    
    
    (931,322
    )
    
    
    Income tax expense (benefit) from discontinued
operations
    
    
    1,269,734
    
    
    
    (269,424
    )
    
    
    Net loss from discontinued operations available to common
stockholders
    
    $
    (37,714,417
    )
    
    
    (661,898
    )
    
    
    Total net income (loss)
    
    $
    (43,354,910
    )
    
    
    (4,483,919
    )
    
    
    7,281,404Less:Dividends on Series A convertible preferred stock
    
    
    (100,000
    )
    
    
    (26,370
    )
    
    
    Net income (loss) from continued operations available to
common stockholders
    
    $
    (5,740,493
    )
    
    
    (3,848,391
    )
    
    
    7,281,404Total net income (loss) available to common stockholders
    
    $
    (43,454,910
    )
    
    
    (4,510,289
    )
    
    
    7,281,404Earnings (loss) from continued operations per share of
common stock:Basic
    
    $
    (0.80
    )
    
    
    (0.63
    )
    
    
    2.41Diluted
    
    $
    (0.80
    )
    
    
    (0.63
    )
    
    
    2.06Earnings (loss) from discontinued operations per share of
common stock:Basic
    
    $
    (5.25
    )
    
    
    (0.11
    )
    
    
    Diluted
    
    $
    (5.25
    )
    
    
    (0.11
    )
    
    
    Total Earnings (loss) per share of common stock:Basic
    
    $
    (6.05
    )
    
    
    (0.74
    )
    
    
    2.41Diluted
    
    $
    (6.05
    )
    
    
    (0.74
    )
    
    
    2.06Weighted average common shares outstanding:Basic
    
    
    7,181,060
    
    
    
    6,097,903
    
    
    
    3,025,048Diluted
    
    
    7,181,060
    
    
    
    6,097,903
    
    
    
    3,540,392
  3




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
 
   Shares Outstanding
    
    
    
    
    
    
    
    
    
    
    AdditionalTreasury
    
    
    Preferred
    
    
    Common
    
    
    Preferred
    
    
    Common
    
    
    Paid in
    
    
    Retained
    
    
    TreasuryShares
    
    
    Shares
    
    
    Shares
    
    
    Stock
    
    
    Stock
    
    
    Capital
    
    
    Earnings (Deficit)
    
    
    Stock
    
    
    TotalBalance 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
    
    
    
    
    
    
    
    10,645,109Issuance of common stock from option exercise
    
    
    
    
    
    
    
    
    
    
    16,565
    
    
    
    
    
    
    
    17
    
    
    
    140,518
    
    
    
    
    
    
    
    
    
    
    
    140,535Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    4,817,895
    
    
    
    
    
    
    
    4,818
    
    
    
    64,225,161
    
    
    
    
    
    
    
    
    
    
    
    64,229,979Issuance of preferred stock
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    999,999
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Tax impact of stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,175
    
    
    
    
    
    
    
    
    
    
    
    33,175Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,370
    )
    
    
    
    
    
    
    (26,370
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,483,919
    )
    
    
    
    
    
    
    (4,483,919
    )Balance at December 31, 2005
    
    
    
    
    
    
    1,000
    
    
    
    7,860,508
    
    
    $
    1
    
    
    
    7,861
    
    
    
    67,622,120
    
    
    
    3,908,527
    
    
    
    
    
    
    
    71,538,509Issuance of common stock from option exercise
    
    
    
    
    
    
    
    
    
    
    238,000
    
    
    
    
    
    
    
    238
    
    
    
    297,262
    
    
    
    
    
    
    
    
    
    
    
    297,500Stock based compensation
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80
    
    
    
    1,967,820
    
    
    
    
    
    
    
    
    
    
    
    1,967,900Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    
    
    
    
    (100,000
    )Purchase of treasury stock
    
    
    195,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (672,281
    )
    
    
    (672,281
    )Common stock and options received from sale
of subsidiary
    
    
    3,157,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,367
    )
    
    
    
    
    
    
    (10,026,317
    )
    
    
    (10,073,684
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,354,910
    )
    
    
    
    
    
    
    (43,354,910
    )Balance at December 31, 2006
    
    
    3,352,895
    
    
    
    1,000
    
    
    
    8,178,508
    
    
    $
    1
    
    
    
    8,179
    
    
    
    69,839,835
    
    
    
    (39,546,383
    )
    
    
    (10,698,598
    )
    
    
    19,603,034
  4




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
 
   2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (43,354,910
    )
    
    
    (4,483,919
    )
    
    
    7,281,404Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:Deferred tax expense (benefit)
    
    
    (1,197,584
    )
    
    
    (293,927
    )
    
    
    1,452,263Depreciation and amortization expense
    
    
    726,220
    
    
    
    1,375,097
    
    
    
    123,017Stock based compensation expense
    
    
    1,967,900
    
    
    
    
    
    
    
    Non-cash compensation expense
    
    
    
    
    
    
    
    
    
    
    83,640Goodwill impairment
    
    
    22,050,056
    
    
    
    
    
    
    
    Loss on sale of discontinued operations
    
    
    12,579,938
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Receivable from clearing organization
    
    
    200,345
    
    
    
    3,421,137
    
    
    
    (3,737,741
    )Receivables from employees
    
    
    (74,741
    )
    
    
    (102,684
    )
    
    
    73,583Federal income tax receivable/payable, net
    
    
    78,235
    
    
    
    (3,645,950
    )
    
    
    1,828,318Securities owned
    
    
    4,110,690
    
    
    
    (8,362,057
    )
    
    
    (10,355,189
    )Other investment
    
    
    
    
    
    
    
    
    
    
    1,155,000Prepaid expenses and other assets
    
    
    (44,597
    )
    
    
    (187,012
    )
    
    
    (259,898
    )Accounts payable, accrued expenses and other
liabilities
    
    
    (368,493
    )
    
    
    (3,189,893
    )
    
    
    3,577,186Payable to clearing organization
    
    
    2,005,833
    
    
    
    610,446
    
    
    
    (742,334
    )Securities sold, not yet purchased
    
    
    3,110,165
    
    
    
    (90,838
    )
    
    
    (130,441
    )Net cash (used in) provided by operating activities
    
    
    1,789,057
    
    
    
    (14,949,600
    )
    
    
    348,808Cash flows from investing activities:Purchase of business, net of cash acquired
    
    
    
    
    
    
    (5,210,332
    )
    
    
    Cash disbursed in sale of subsidiary
    
    
    (17,746
    )
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    (377,430
    )
    
    
    (6,687,829
    )
    
    
    (58,604
    )Net cash used in investing activities
    
    
    (395,176
    )
    
    
    (11,898,161
    )
    
    
    (58,604
    )Cash flows from financing activities:Payments on capital lease
    
    
    (50,166
    )
    
    
    (48,884
    )
    
    
    (29,742
    )Payment of accrued dividend on preferred stock
    
    
    (100,000
    )
    
    
    (1,370
    )
    
    
    Proceeds from notes payable, net of repayment
    
    
    (84,084
    )
    
    
    2,106,695
    
    
    
    144,900Proceeds from notes payable to stockholder
    
    
    
    
    
    
    
    
    
    
    1,000,000Payments for purchase of treasury stock
    
    
    (672,281
    )Proceeds from issuance of common stock
    
    
    297,500
    
    
    
    24,475,777
    
    
    
    2,500Net cash provided by (used in) financing activities
    
    
    (609,031
    )
    
    
    26,532,218
    
    
    
    1,117,658
 5




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
   2006
    
    
    2005
    
    
    2004Net change in cash and cash
equivalents
    
    $
    784,850
    
    
    
    (315,543
    )
    
    
    1,407,862Cash and cash equivalents at beginning of year (includes $77,094
of cash related to subsidiary to be disposed for 2006)
    
    
    1,644,176
    
    
    
    1,959,719
    
    
    
    551,857Cash and cash equivalents at end of year (includes $77,094 of
cash related to subsidiary to be disposed for 2005)
    
    $
    2,429,026
    
    
    
    1,644,176
    
    
    
    1,959,719Supplemental disclosures:Interest paid
    
    $
    258,178
    
    
    
    296,843
    
    
    
    177,704Taxes paid
    
    $
    133,995
    
    
    
    1,750,000
    
    
    
    1,142,171
     
 
     6




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
 
   (1)
    
    Organization and Basis of PresentationTejas Incorporated, a Delaware corporation (Tejas), is a financial services holding company
whose primary wholly owned operating subsidiaries are Tejas Securities Group, Inc., a Texas
corporation (TSG) and TI Building Partnership, Ltd., a Texas limited partnership (TI
Building). TSG is engaged in the business of providing brokerage and related financial
services to institutional and retail customers nationwide. TI Building owns and manages the
real estate in which Tejas and TSG are headquartered. In addition, prior to October 1, 2006,
Tejas owned Capital & Technology Advisors, Inc., a Delaware corporation (C&TA). C&TA is an
advisory and consulting firm that provides operational and financial restructuring services
for companies primarily within the telecommunications and technology industries. Tejas sold
C&TA effective October 1, 2006, as further described below.Tejas was incorporated as a shell corporation in New York on July 18, 1990, and made an
initial public offering in November 1991. On August 27, 1999, Tejas was acquired by TSG in a
reverse merger. On August 29, 2001, Tejas acquired all of the outstanding minority interest
in TSG.On November 8, 2004, Tejas 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 common stock.On February 3, 2005, Tejas issued 1,600,000 shares of its common stock through a secondary
public offering. On February 25, 2005, the underwriter for the secondary public offering
exercised their option to purchase an additional 60,000 shares of Tejas common stock.On June 6, 2005, Tejas shareholders approved a proposal to amend Tejas Certificate of
Incorporation to authorize the issuance of up to 100,000 shares of preferred stock upon terms
to be established by Tejas board of directors and to increase the number of shares of common
stock which Tejas has the authority to issue from 10,000,000 to 30,000,000. On June 29, 2005,
Tejas filed a Certificate of Amendment to the Certificate of Incorporation to affect these
measures. On August 9, 2005, Tejas board of directors designated 1,000 shares of Tejas
authorized preferred stock as Series A Convertible Preferred Stock pursuant to a Certificate
of Designations for Series A Convertible Preferred Stock.On July 1, 2005, Tejas completed its acquisition of C&TA, a privately-held, full-service
advisory and consulting firm based in Albany, New York. Pursuant to an Agreement and Plan of
Merger by and among Tejas, Tejas Acquisition Corp. (the Merger Sub), C&TA, and each of
Niskayuna Development LLC, Wayne Barr, Jr., Shawn ODonnell, Patrick Doyle and John P. Bade
(together, Niskayuna and such individuals, the Shareholders), the Merger Sub merged with and
into C&TA and the surviving entity became a wholly-owned subsidiary of Tejas.On October 1, 2006, Tejas completed its sale of C&TA back to the original Shareholders of
C&TA. The consideration paid by the Shareholders to Tejas consisted of 3,157,895 shares of
Tejas common stock, which was the Tejas stock portion of the consideration paid by Tejas for
C&TA in connection with Tejas acquisition of C&TA in July 2005 (the Original Acquisition).
In addition, as part of the sale, Tejas agreed to cancel the remaining balance of receivables
due from C&TA. The sale was consummated on October 1, 2006. Accordingly, we have included
our consulting segment in discontinued operations in the accompanying consolidated financial
statements.
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TEJAS INCORPORATED AND SUBSIDIARIES
   On April 6, 2006, Tejas authorized a stock repurchase program for up to $5 million of its
outstanding common stock. Shares may be repurchased in open market transactions, private
transactions or otherwise at such times and at such prices, as the officers of Tejas believe
appropriate and in the best interest of Tejas.Tejas and TSG business is conducted from their headquarters at 8226 Bee Caves Road, Austin,
Texas. TSG
maintains a branch office in Clayton, Missouri. TSG is a registered broker-dealer and
investment advisor offering: (i) brokerage services to retail and institutional customers;
(ii) high quality investment research to institutional and retail customers; (iii)
market-making activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services.References to the Company within the accompanying notes to the consolidated financial
statements are to Tejas and its subsidiaries.(2)
    
    Summary of Significant Accounting Policies
 (a)
    
    Principles of ConsolidationThe accompanying consolidated financial statements reflect the consolidated accounts of
the Company and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.(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 revenues and related expenses from customer security transactions are
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 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 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)
    
    Underwriting and 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
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TEJAS INCORPORATED AND SUBSIDIARIES
   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.
Investment banking transactions may be completed on a best efforts or firm commitment
basis.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.(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) in the accompanying consolidated
statements of operations. 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. Buildings and building improvements are amortized using the
straight-line method over 10 to 40 years.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.
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TEJAS INCORPORATED AND SUBSIDIARIES
   (h)
    
    Goodwill and Other Intangible AssetsGoodwill represents the excess of costs over fair value of assets of businesses acquired
and was recorded in connection with the Companys acquisition of C&TA in July 2005 and
the minority interest purchase of TSG 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.
Intangible assets determined to have finite lives are amortized over their expected
lives.Business acquisitions typically result in goodwill and other intangible assets, and the
recorded values of those assets may become impaired in the future. The determination of
the value of such intangible assets requires the Company to make estimates and
assumptions that affect the Companys consolidated financial statements. Management
assesses potential impairments of goodwill on an annual basis or when there are events or
changes in circumstances that indicate that the carrying amount of goodwill and other
intangible assets may not be recovered. Managements judgments regarding the existence of
impairment indicators and future cash flows related to intangible assets are based on
operational performance of the acquired businesses, market conditions and other factors.
Future events could cause management to conclude that goodwill and other intangible
assets associated with the acquired businesses are impaired. Any resulting impairment
loss could have an adverse impact on the Companys results of operations.(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, 2006 or 2005.(j)
    
    Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax benefits or 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 the year that includes the enactment date.(k)
    
    EstimatesThe preparation of financial statements in conformity accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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TEJAS INCORPORATED AND SUBSIDIARIES
   (l)
    
    Stock-Based CompensationThe Company implemented Statement of Financial Accounting Standards No. 123R (SFAS
123R), Share-Based Payment, on January 1, 2006. SFAS 123R requires 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 (with limited exceptions).
That cost is recognized over the period during which an employee is required to provide
service in exchange for the award  the requisite service period (usually the vesting
period). SFAS 123R applies to the portion of outstanding awards for which the requisite
service has not been rendered and all awards granted after the required effective date
and to awards modified, repurchased, or cancelled after that date. The impact that this
statement will have on the Companys consolidated financial statements is dependent upon
the levels of equity-based awards granted in the future. For all periods prior to
January 1, 2006, the Company accounted for stock based compensation under Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employee.The pro forma disclosures below use the fair value method of SFAS 123 to measure
compensation expense for stock-based employee compensation plans. There was no stock
based employee compensation costs included in the determination of net income (loss) as
reported for the years ended December 31, 2005 and 2004.
 Year Ended December 31,2005
    
    2004Net income (loss) available to
common stockholders as reported
for basic
    
    $
    (4,510,289
    )
    
    
    7,281,404Deduct or add stock-based
compensation expense
determined under the fair
value based method
    
    
    (245,777
    )
    
    
    (27,959
    )Pro forma net income (loss)
available to common stockholders
for basic
    
    $
    (4,756,066
    )
    
    
    7,253,445Net income (loss) available to
common stockholders as reported for
diluted (Note 15)
    
    $
    (4,510,289
    )
    
    
    7,313,409Deduct or add stock-based
compensation expense
determined under the fair
value based method
    
    
    (245,777
    )
    
    
    (27,959
    )Pro forma net income (loss)
available to common stockholders
for diluted
    
    $
    (4,756,066
    )
    
    
    7,285,450
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TEJAS INCORPORATED AND SUBSIDIARIES
   2005
    
    2004Earnings (loss) per share of common
stock as reported:Basic
    
    $
    (0.74
    )
    
    
    2.41Diluted
    
    $
    (0.74
    )
    
    
    2.07Pro forma earnings (loss) per
share of common stock:Basic
    
    $
    (0.78
    )
    
    
    2.40Diluted
    
    $
    (0.78
    )
    
    
    2.06
 (m)
    
    Recent Accounting PronouncementsIn July 2006, the Financial Accounting Standards Board (FASB) issued FIN No. 48,
Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.The evaluation of a tax position in accordance with FIN 48 is a two-step process. The
first step is a recognition process whereby the enterprise determines whether it is more
likely than not that a tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the technical merits
of the position. In evaluating whether a tax position has met the more-likely-than-not
recognition threshold, the enterprise should presume that the position will be examined
by the appropriate taxing authority that has full knowledge of all relevant information.
The second step is a measurement process whereby a tax position that meets the
more-likely-than-not recognition threshold is calculated to determine the amount of
benefit to recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate
settlement.The provisions of FIN 48 are effective for the Company on January 1, 2007. The provisions
of FIN 48 are to be applied to all tax positions upon initial adoption of this standard.
Only tax positions that meet the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of FIN 48.
The adoption of FIN 48 is not expected to have a significant impact on the Companys
consolidated financial statements.In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108. SAB 108 allows for the adjustment of the cumulative effect of prior
year immaterial errors in assets and liabilities as of the beginning of the fiscal year,
with an offsetting adjustment to the opening balance of retained earnings. The Company
adopted SAB 108 for its annual financial statements for the year ended December 31, 2006.
No adjustment was made to the consolidated financial statements as the result of adoption
of SAB 108.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.SFAS No. 157
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TEJAS INCORPORATED AND SUBSIDIARIES
   defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for the Company on January 1, 2008. The Company is evaluating
the impact that SFAS No. 157 will have on its consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115.SFAS
No. 159 permits an entity to measure financial instruments and certain other items at
estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the
amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities,applies to all entities that own trading and available-for-sale securities.
The fair value option created by SFAS No. 159 permits an entity to measure eligible items
at fair value as of specified election dates. The fair value option (a) may generally be
applied instrument by instrument, (b) is irrevocable unless a new election date occurs,
and (c) must be applied to the entire instrument and not to only a portion of the
instrument. SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (i) makes that choice in the first 120 days
of that year, (ii) has not yet issued financial statements for any interim period of such
year, and (iii) elects to apply the provisions of SFAS No. 157. The Company is evaluating
the impact that SFAS No. 157 will have on its consolidated financial statements.
 (3)
    
    Receivables From and Payables To Clearing OrganizationAt December 31, 2006 and 2005, the Company had net receivables from and payables to its
clearing organization consisting of the following:
 2006
    
    
    2005Receivable:Receivable from clearing organization
    
    $
    59,599
    
    
    
    Fees and commissions receivable
    
    
    56,660
    
    
    
    316,604$
    116,259
    
    
    
    316,604Payable:Payable to clearing organization
    
    $
    2,616,279
    
    
    
    610,446
 (4)
    
    Receivables from EmployeesOn occasion, the Company makes unsecured advances to employees in months when their commission
payout does not meet a predetermined amount and for other reasons deemed hardships by the
Company. These advances are to be repaid through reductions of future commissions or bonuses
or through regular salary withholdings. At December 31, 2006 and 2005, the balance of
advances due to the Company was $2,807 and $631, respectively.In November 2005, the Company received a $100,000 unsecured note from an employee as part of
an employment agreement. The note does not bear interest and was due and payable in sixteen
monthly installments of $6,250 beginning in February 2006. In September 2006, the employee
left the Company and the employees new employer assumed $75,000 of the unpaid balance of the
note. The Company forgave approximately $14,000 of the
note as part of the assumption by the new employer. This note is
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TEJAS INCORPORATED AND SUBSIDIARIES
   included in other assets in
the accompanying statements of financial condition.In March 2006, the Company received a $50,000 unsecured note from an employee. The note does
not bear interest and was due and payable on September 1, 2006. The note was delinquent at,
and subsequent to, September 1, 2006 and in November 2006, the Company increased the balance
of the remaining note by $21,000 and extended the due date for the remaining balance until
paid in full under a structured payment plan. The balance of the note was $45,000 as of
December 31, 2006.In July 2006, the Company received a $40,000 unsecured note from an employee. The note does
not bear interest and is to be paid in monthly installments of $500 with any discretionary
bonuses used to offset the balance until paid in full. The note is due and payable in full on
July 1, 2007. The balance of the note was $30,100 as of December 31, 2006.In November 2006, the Company received a $40,000 unsecured note from an employee. The note
does not bear interest and is due and payable in 7 and 41 monthly installments of $500 and
$890, respectively. The balance of the note was $39,000 as of December 31, 2006.These note receivables are included in receivables from employees in the accompanying
consolidated statements of financial condition.(5)
    
    Securities Owned and Securities Sold, Not Yet PurchasedAt December 31, 2006 and 2005, securities owned and sold, not yet purchased consisted of the
following:
 2006
    
    
    2005Sold,
    
    
    
    
    
    
    Sold,not yet
    
    
    
    
    
    
    not yetOwned
    
    
    purchased
    
    
    Owned
    
    
    purchasedState and municipal
obligations
    
    $
    964,634
    
    
    
    
    
    
    
    
    
    
    
    US Government bonds
    
    
    4,241,410
    
    
    
    3,096,515
    
    
    
    1,495,265
    
    
    
    Corporate bonds and
notes
    
    
    4,790,689
    
    
    
    12,375
    
    
    
    6,421,559
    
    
    
    Equity securities
    
    
    6,728,455
    
    
    
    1,275
    
    
    
    9,843,204
    
    
    
    Warrants
    
    
    2,983,150
    
    
    
    
    
    
    
    6,059,000
    
    
    
    $
    19,708,338
    
    
    
    3,110,165
    
    
    
    23,819,028
    
    
    
    
 At December 31, 2006 and 2005, the unrealized gain (loss) associated with securities owned and
securities sold, not yet purchased, was $(227,860) and $(5,558,826), respectively.Approximately 19% of the value of total assets as of December 31, 2006 related to equity
securities and warrants in three companies. Approximately 15% of the value of total assets as
of December 31, 2005 related to equity securities and warrants in five companies, a portion of
which was sold subsequent to year end.
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TEJAS INCORPORATED AND SUBSIDIARIES
   (6)
    
    Property and EquipmentProperty and equipment consists of the following:
 December 31,2006
    
    
    2005Furniture and equipment
    
    $
    863,720
    
    
    
    765,650Land
    
    
    762,236
    
    
    
    762,236Buildings
    
    
    4,607,170
    
    
    
    4,607,170Building and leasehold improvements
    
    
    1,605,994
    
    
    
    1,307,5567,839,120
    
    
    
    7,442,612Accumulated depreciation and
amortization
    
    
    (1,089,452
    )
    
    
    (762,554
    )$
    6,749,668
    
    
    
    6,680,058
 (7)
    
    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, 2006 and 2005, the Company had accrued approximately $510,000 and $607,000,
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, 2006 and 2005 were $556,000 and $365,000, respectively.
During 2004, an officer of the Company received approximately $183,000 as part of his
contractual compensation which was based on the Companys operating performance. No such
compensation was paid during 2006 and 2005. Management of the Company reviews both
contractual and discretionary bonus amounts, with discretionary bonus amounts approved by the
Compensation Committee of the Company.(8)
    
    Notes PayableOn February 22, 2005, the Company purchased an office building through its wholly-owned
subsidiary, TI Building. The office building was purchased at a price of approximately
$3,470,000, with $2,200,000 being financed through a financial institution. Pursuant to the
terms of the promissory note, this loan 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 on the note shall be due and payable. A mortgage on the building and the
associated real property secures the repayment of such borrowing. In connection with this
acquisition, the Companys Chairman agreed to (1) indemnify the financial institution against
any losses incurred by the financial institution 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 the Companys performance under certain provisions of the deed of trust
entered into in connection with such financing. The balance of the promissory note was
$2,130,956 and $2,171,522 at December 31, 2006 and 2005, respectively. The Company paid
approximately $127,000 and $99,000 in interest during 2006 and 2005, respectively, in relation
to this promissory note.On May 10, 2005, the Company borrowed $1,760,000 from a financial institution to finance in
part the purchase price of an office building through its wholly-owned subsidiary, TI
Building. Pursuant to the
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TEJAS INCORPORATED AND SUBSIDIARIES
   terms of a promissory note, the loan accrues interest at a rate of
6.75% per annum, with monthly installments of $13,388 through May 2010, at which time the
outstanding principal and accrued interest on the note shall be due and payable. A mortgage
on the building and the associated real property secures the repayment of such borrowing. The
balance of the promissory note was $1,691,655 and $1,735,173 at December 31, 2006 and 2005,
respectively. The Company paid approximately $120,000 and $69,000 in interest during 2006 and
2005, respectively, in relation to this promissory note.(9)
    
    Notes Payable to StockholdersOn 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 made quarterly interest payments at a rate of 10% per annum. The promissory
note was unsecured. The maturity date of the note was December 1, 2005, at which time all
remaining unpaid principal and interest was due. The promissory note was convertible at any
time into common stock of the Company in an amount equal to the unpaid principal divided by
the conversion price of
$5.00 per share. The promissory note originally required the Company to designate a series of
preferred stock by July 1, 2005, which the promissory note could be convertible into at any
time. The Company amended the terms of the promissory note so that the Lender could convert
the promissory note into the Companys Series A Convertible Preferred Stock in an amount equal
to the unpaid principal divided by a conversion price of $1,000 per share. The promissory note
was convertible until the note was repaid. The Company has also granted the Chief Executive
Officer, through the Lender, certain piggyback registration rights for the shares into which
the preferred stock may be converted. On September 26, 2005, the Lender converted the
promissory note into 1,000 shares of Series A convertible preferred stock. The Company paid
approximately $99,000 and $23,000 in interest during 2005 and 2004, respectively, in relation
to this promissory note.(10)
    
    Preferred StockOn June 6, 2005, the Companys shareholders approved a proposal to amend its Certificate of
Incorporation to authorize the issuance of up to 100,000 shares of preferred stock upon terms
to be established by the Companys board of directors. On June 29, 2005, the Company filed a
Certificate of Amendment to the Certificate of Incorporation to affect these measures. On
August 9, 2005, the Companys board of directors designated 1,000 shares of its authorized
preferred stock as Series A Convertible Preferred Stock pursuant to a Certificate of
Designations for Series A Convertible Preferred Stock. On September 26, 2005, Salter Family
Partners, Ltd., a family partnership controlled by Mark M. Salter, the Companys Chief
Executive Officer, converted a $1,000,000 promissory note into 1,000 shares of Series A
convertible preferred stock, par value $0.001 per share. The terms of the Series A
convertible preferred stock include: a cumulative dividend of 10% payable on a quarterly
basis; a mandatory conversion feature to convert the preferred stock into the Companys common
stock in the event the common stock trades above $10.00 per share for ten consecutive trading
days; a liquidation preference over the Companys common stock equal to the conversion price,
and; the right for Salter Family Partners, Ltd. to convert the preferred stock into the
Companys common stock on a one-for-two hundred basis, which is consistent with the $5.00 per
share conversion price under the original convertible note agreement (Note 9). The preferred
stock is also subject to anti-dilution provisions and the right to vote the preferred stock on
an as converted basis with the Companys common stock.
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TEJAS INCORPORATED AND SUBSIDIARIES
   (11)
    
    Business CombinationOn July 1, 2005, the Company completed its acquisition of C&TA. The total consideration paid
by the Company in exchange for the outstanding capital stock of C&TA was approximately $45.4
million, consisting of cash in the amount of $3.0 million, which was paid out of the Companys
cash reserves on the closing date, and 3,157,895 shares of the Companys common stock valued
at $12.63 per share for a total value of $39,894,737. A deposit of $2.0 million had
previously been paid to C&TA as paying agent for the Shareholders in connection with the
execution of the letter of intent relating to the merger. Of the consideration paid by the
Company, 309,316 shares of the Companys common stock was being held in escrow, pursuant to an
escrow agreement, for a period of two years following the closing date, to satisfy possible
indemnification claims made by the Company under the Agreement and Plan of Merger.The allocation of the purchase price was based on an evaluation of the tangible and intangible
assets acquired and liabilities assumed. The fair values of the intangible assets acquired
are based on managements estimate. The excess of the purchase price over the fair value of
net assets acquired (goodwill) reflects the benefits from expansion of the Companys business
segments.
 Non-Compete (2 year useful life)
    
    $
    100,000Revenue backlog (1 year useful life)
    
    
    1,440,000Total intangible assets
    
    
    1,540,000Goodwill
    
    
    44,767,280Total intangible assets acquired
    
    
    46,307,280Deduct liabilities in excess of fair value of net tangible
assets acquired, which approximates book value
    
    
    (365,343
    )Net assets acquired
    
    $
    45,941,937The consideration paid is as follows:Cash deposit paid on May 10, 2005
    
    $
    2,000,000Cash paid on July 1, 2005 from sale of securities owned
    
    
    3,000,000Common stock
    
    
    40,441,937Acquisition costs
    
    
    500,000Total consideration
    
    $
    45,941,937
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TEJAS INCORPORATED AND SUBSIDIARIES
   (12)
    
    Sale of SubsidiaryOn September 29, 2006, the board of directors of Tejas approved the sale of C&TA back to the
original Shareholders in an agreement dated October 1, 2006. The consideration paid by the
Shareholders to Tejas consisted of 3,157,895 shares of Tejas common stock, which was the Tejas
stock portion of the consideration paid by Tejas for C&TA in connection with Tejas
acquisition of C&TA in July 2005. In addition, as part of the sale, Tejas agreed to cancel
the remaining balance of receivables due from C&TA. The sale was recorded on September 29,
2006 and the loss incurred was as follows:
 Fair value of common stock received
    
    $
    10,026,317Return and cancellation of stock options
    
    
    47,366Less net assets sold
    
    
    (22,653,621
    )Net loss on sale of subsidiary
    
    
    (12,579,938
    )Net tax effect from taxable gain on sale of subsidiary
    
    
    (2,024,448
    )Tax effected loss on sale of subsidiary
    
    $
    (14,604,386
    )
 Prior to this transaction, the Company recognized a goodwill impairment of $22,050,056 related
to this investment.(13)
    
    Fair Value of Financial InstrumentsSubstantially all of the Companys financial assets and liabilities are carried at fair 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, 2006 and 2005.(14)
    
    Income TaxesThe Company files a consolidated tax return. Income tax expense (benefit) consists of the
following:
 2006
    
    
    2005
    
    
    2004FederalCurrent
    
    $
    (402,528
    )
    
    
    (1,920,195
    )
    
    
    2,903,318Deferred
    
    
    (1,057,156
    )
    
    
    (222,846
    )
    
    
    1,258,727StateCurrent
    
    
    109,168
    
    
    
    (227,292
    )
    
    
    429,438Deferred
    
    
    (140,429
    )
    
    
    (71,081
    )
    
    
    193,425$
    (1,490,945
    )
    
    
    (2,441,414
    )
    
    
    4,784,908
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TEJAS INCORPORATED AND SUBSIDIARIES
   A reconciliation of expected income tax expense (benefit) (computed by applying the statutory
income tax rate of 34% to income before income tax expense) to total tax expense (benefit) in
the accompanying consolidated statements of operations follows:
 2006
    
    
    2005
    
    
    2004Expected federal income expense
    
    $
    (15,247,591
    )
    
    
    (2,354,613
    )
    
    
    4,102,546Net tax effect of
non-deductible goodwill
impairment and net taxable
gain on sale of subsidiary
    
    
    13,575,303
    
    
    
    
    
    
    
    Meals and entertainment
    
    
    119,606
    
    
    
    104,850
    
    
    
    80,875State income tax
    
    
    (20,632
    )
    
    
    (293,927
    )
    
    
    622,864Other, net
    
    
    82,369
    
    
    
    102,276
    
    
    
    (21,377
    )$
    (1,490,945
    )
    
    
    (2,441,414
    )
    
    
    4,784,908
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2006 and 2005 are as follows:
 2006
    
    
    2005Deferred tax assets:Non-qualified stock option expense
    
    $
    480,562
    
    
    
    874,904Lease termination liability
    
    
    8,547
    
    
    
    205,622Charitable contributions carryforwards
    
    
    249,684
    
    
    
    185,790Net operating loss carryforwards
    
    
    
    
    
    
    48,418Accrued expenses
    
    
    60,643
    
    
    
    274,516Property and equipment
    
    
    72,697
    
    
    
    79,591Net deferred tax asset
    
    
    872,133
    
    
    
    1,668,841Deferred tax liabilities:Unrealized gains on securities held for investment
    
    
    (96,416
    )
    
    
    (1,266,484
    )Non-qualified stock option income
    
    
    (985,212
    )
    
    
    (1,650,595
    )Acquired intangible assets
    
    
    
    
    
    
    (134,280
    )Other
    
    
    
    
    
    
    (24,561
    )Net deferred tax liability
    
    
    (1,081,628
    )
    
    
    (3,075,920
    )Net deferred tax asset attributable to
discontinued operations
    
    
    
    
    
    
    55,312Net deferred tax asset (liability)
    
    $
    (209,495
    )
    
    
    (1,351,767
    )
 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
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TEJAS INCORPORATED AND SUBSIDIARIES
   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.(15)
    
    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 2006, 2005 and 2004, the Company contributed approximately $248,000,
$228,000 and $219,000, 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 2004, options totaling 1,082,000 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 was $7.92 per share. The options were
granted at or above the market value of the Companys common stock.During 2005, options totaling 668,500 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 was $13.18 per share. The options
were granted at or above the market value of the Companys common stock.During 2006, options totaling 80,000 shares were granted to employees under the 1999 Plan.
The options
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TEJAS INCORPORATED AND SUBSIDIARIES
   vest ratably over three years, and expire five years from the date of the grant.
The weighted average purchase price of
the common stock was $6.52 per share. The options were granted at or above the market value
of the Companys common stock.A summary of the Companys stock option and warrant activity, and related information for the
years ended December 31, follows.
 2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding

beginning of year
    
    
    1,703,602
    
    
    $
    5.74
    
    
    
    1,480,000
    
    
    $
    4.69
    
    
    
    644,126
    
    
    $
    1.40Granted
    
    
    80,000
    
    
    $
    6.52
    
    
    
    668,500
    
    
    $
    13.18
    
    
    
    1,082,000
    
    
    $
    7.92Exercised
    
    
    (238,000
    )
    
    $
    1.25
    
    
    
    (16,565
    )
    
    $
    8.48
    
    
    
    (2,000
    )
    
    $
    1.25Forfeited
    
    
    (314,767
    )
    
    $
    7.41
    
    
    
    (428,333
    )
    
    $
    14.71
    
    
    
    (244,126
    )
    
    $
    1.63Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding
 end of
Year
    
    
    1,230,835
    
    
    $
    9.65
    
    
    
    1,703,602
    
    
    $
    6.71
    
    
    
    1,480,000
    
    
    $
    6.13Exercisable
 end
of year
    
    
    1,136,329
    
    
    $
    9.29
    
    
    
    1,146,477
    
    
    $
    5.74
    
    
    
    698,649
    
    
    $
    4.69
 The fair value of options at date of grant was estimated using the Black Scholes
option-pricing model. During 2006, 2005 and 2004, stock options were granted with the
following weighted average assumptions:
 2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.59
    %
    
    
    3.04
    %
    
    
    1.80
    %Expected holding period
    
    5 years
    
    
    5 years
    
    
    5 yearsExpected volatility
    
    
    .365
    
    
    
    .130
    
    
    
    .001Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Weighted average fair value of
options granted during the
period
    
    $
    2.46
    
    
    $
    3.64
    
    
    $
    3.80
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TEJAS INCORPORATED AND SUBSIDIARIES
   The following table summarizes the Companys options outstanding and exercisable options at
December 31, 2006:
 Stock Options Outstanding
    
    Stock Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseExercise Price
    
    Shares
    
    Life
    
    Price
    
    Shares
    
    Price$1.25
    
    
    160,000
    
    
    1.4 years
    
    $
    1.25
    
    
    
    160,000
    
    
    $
    1.25$4.00
    
    
    20,000
    
    
    4.9 years
    
    $
    4.00
    
    
    
    6,666
    
    
    $
    4.00$4.50
    
    
    270,000
    
    
    2.4 years
    
    $
    4.50
    
    
    
    270,000
    
    
    $
    4.50$7.00
    
    
    50,000
    
    
    4.1 years
    
    $
    7.00
    
    
    
    16,665
    
    
    $
    7.00$9.00
    
    
    532,335
    
    
    2.9 years
    
    $
    9.00
    
    
    
    532,335
    
    
    $
    9.00$9.90
    
    
    35,000
    
    
    2.9 years
    
    $
    9.90
    
    
    
    35,000
    
    
    $
    9.90$10.00
    
    
    20,000
    
    
    3.9 years
    
    $
    10.00
    
    
    
    13,333
    
    
    $
    10.00$12.00
    
    
    20,000
    
    
    2.9 years
    
    $
    12.00
    
    
    
    20,000
    
    
    $
    12.00$15.00
    
    
    75,000
    
    
    3.6 years
    
    $
    15.00
    
    
    
    50,000
    
    
    $
    15.00$16.50
    
    
    28,500
    
    
    3.4 years
    
    $
    16.50
    
    
    
    18,998
    
    
    $
    16.50$17.03
    
    
    20,000
    
    
    3.2 years
    
    $
    17.03
    
    
    
    13,332
    
    
    $
    17.031,230,835
    
    
    
    
    
    
    
    
    
    
    
    1,136.329
 (16)
    
    Earnings (Loss) Per Share of Common StockBasic earnings (loss) per share of common stock are based on the weighted average common
            shares outstanding without any dilutive effects considered. Diluted earnings (loss) per share
of common stock reflect dilution from all contingently issuable common shares, including
options and convertible notes issued. Contingently issuable common shares are not included in
the weighted average number of common shares when the inclusion would increase earnings per
share of common stock or decrease the net loss per share of common stock.Earnings (loss) per share of common stock is calculated as follows.
 2006
    
    
    2005
    
    
    2004Basic earnings (loss) per share of common stock:Net income (loss) from continued operations
available to common stockholders
    
    $
    (5,740,493
    )
    
    
    (3,848,391
    )
    
    
    7,281,404Net income (loss) from discontinued operations
available to common stockholders
    
    $
    (37,714,417
    )
    
    
    (661,898
    )
    
    
    Total net income (loss) available to common
stockholders
    
    $
    (43,454,910
    )
    
    
    (4,510,289
    )
    
    
    7,281,404Weighted average common shares outstanding
    
    
    7,181,060
    
    
    
    6,097,903
    
    
    
    3,025,048
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TEJAS INCORPORATED AND SUBSIDIARIES
   2006
    
    
    2005
    
    
    2004Basic earnings (loss) from continued operations
per share of common stock
    
    $
    (0.80
    )
    
    
    (0.63
    )
    
    
    2.41Basic earnings (loss) from discontinued
operations per share of common stock
    
    $
    (5.25
    )
    
    
    (0.11
    )
    
    
    Basic total earnings (loss) per share of common
stock
    
    $
    (6.05
    )
    
    
    (0.74
    )
    
    
    2.41Diluted earnings (loss) per share of common
stock:Net income (loss) from continued operations
available to common stockholders
    
    $
    (5,740,493
    )
    
    
    (3,848,391
    )
    
    
    7,281,404Impact of assumed conversion of convertible debt
    
    
    
    
    
    
    
    
    
    
    32,005Net income (loss) from continued operations
available to common stockholders after assumed
conversion
    
    $
    (5,740,493
    )
    
    
    (3,848,391
    )
    
    
    7,313,409Net income (loss) from discontinued operations
available to common stockholders
    
    $
    (37,714,417
    )
    
    
    (661,898
    )
    
    
    Total net income (loss) available to common
stockholders
    
    $
    (43,454,910
    )
    
    
    (4,510,289
    )
    
    
    7,313,409Weighted average common shares outstanding
    
    
    6,097,903
    
    
    
    6,097,903
    
    
    
    3,025,048Effect of dilutive securities:Options
    
    
    
    
    
    
    
    
    
    
    415,344Restricted stock units
    
    
    
    
    
    
    
    
    
    
    Convertible debt
    
    
    
    
    
    
    
    
    
    
    100,000Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding
after effect of dilutive securities
    
    
    6,097,903
    
    
    
    6,097,903
    
    
    
    3,540,392Diluted earnings (loss) from continued
operations per share of common stock
    
    $
    (0.80
    )
    
    
    (0.63
    )
    
    
    2.07Diluted earnings (loss) from discontinued
operations per share of common stock
    
    $
    (5.25
    )
    
    
    (0.11
    )
    
    
    Diluted total earnings (loss) per share of
common stock
    
    $
    (6.05
    )
    
    
    (0.74
    )
    
    
    2.07
 The Company has included the dilutive effect of 1,480,000 shares of the Companys common stock
for the years ended December 31, 2004 in the computation of diluted earnings (loss) per share.
Of the 1,480,000 options issued by the Company, 415,344 shares are included as dilutive
securities on a weighted average basis for the year ended December 31, 2004 as calculated
under the Treasury Stock method. Options to purchase 1,703,602 shares of the Companys common
stock for the year ended December 31, 2005 were not included in the computation of diluted
earnings (loss) per share because the options were antidilutive. Options to purchase
1,230,835 shares of the Companys common stock for the year ended December 31,
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TEJAS INCORPORATED AND SUBSIDIARIES
   2006 were not
included in the computation of diluted earnings (loss) 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 (loss) 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. Options to purchase 200,000
shares of the Companys common stock under the convertible notes payable and convertible
preferred stock were not included in the computation of diluted earnings (loss) per share for
the year ended December 31, 2005 because the options were antidilutive. Options to purchase
200,000 shares of the Companys common stock under the convertible preferred stock were not
included in the computation of diluted earnings (loss) per share for the year ended December
31, 2006 because the options were antidilutive.(17)
    
    Concentrations and Off Statement of Financial Condition RiskThe Companys customers securities transactions are introduced on a fully disclosed basis
with its clearing organization. The clearing organization carries all of the accounts of the
customers of the Company and is responsible for execution, collection and payment of funds,
and receipt and delivery of securities relative to customer transactions. Off statement of
financial condition risk exists with respect to these transactions due to the
possibility that customers may be unable to fulfill their contractual commitments wherein the
clearing organization may charge any losses it incurs to the Company. The Company seeks to
minimize this risk through procedures designed to monitor the credit worthiness of its
customers and that customer transactions are executed properly by the clearing organization.
Included in the Companys clearing agreement with its clearing organization is an
indemnification clause. This clause relates to instances where the Companys customers fail
to settle security transactions. In the event this occurs, the Company will indemnify the
clearing organization to the extent of the net loss on any unsettled trades. As of December
31, 2006 and 2005, the Company had not been notified by the clearing organization, nor was the
Company otherwise aware of any potential losses relating to this indemnification.The Company has $18,499,268 or approximately 58% of its total assets in securities owned and
receivable due from or held by its clearing organization as of December 31, 2006. The Company
also has $5,726,444 or approximately 47% of its total liabilities in securities sold, not yet
purchased and payable due to its clearing organization as of December 31, 2006.The Company enters into transactions in various financial instruments, including securities
sold, not yet purchased, for trading purposes. Securities sold, not yet purchased represent
obligations of the Company to deliver the underlying securities sold. The Companys
obligation to purchase the security may exceed the amount recognized in the statement of
financial condition. The Company monitors its positions in securities sold, not yet purchased
continuously to reduce the risk of potential losses due to changes in market value.The Company deposits its cash with financial institutions. Periodically such balances exceed
applicable FDIC insurance limits. As of December 31, 2006 and 2005, the Company had balances
of $2,107,100 and $1,690,158, respectively, in excess of FDIC insurance limits.The Company had one investment banking customer that generated approximately 37% of the
Companys total revenue for 2005. The Company had two investment banking customers that
generated approximately
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TEJAS INCORPORATED AND SUBSIDIARIES
   29% of the Companys total revenue for 2004.(18)
    
    Industry Segment DataThe Company has two reportable segments: brokerage services and investment banking. The
brokerage services segment includes sales, trading and market-making activities of the Company
and encompasses both retail and institutional customer accounts. The investment-banking
segment participates in underwriting of corporate securities as a managing underwriter and a
syndicate member, and provides advisory services to companies.The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on profit or loss
from operations before income taxes.The following table presents segment revenues, income (loss) before income tax expense
(benefit), and assets for the year ended December 31, 2006.
 InvestmentBrokerage
    
    Banking
    
    TotalRevenues from external
customers
    
    $
    16,911,677
    
    
    
    1,914,720
    
    
    
    18,826,397Interest revenue
    
    
    530,332
    
    
    
    
    
    
    
    530,332Interest expense
    
    
    765,638
    
    
    
    
    
    
    
    765,638Depreciation and amortization
    
    
    326,898
    
    
    
    
    
    
    
    326,898Income(loss) before income
tax expense (benefit)
    
    
    (7,546,987
    )
    
    
    (854,185
    )
    
    
    (8,401,172
    )Segment assets
    
    
    31,750,488
    
    
    
    
    
    
    
    31,750,488Capital expenditures
(including capital leases)
    
    
    402,347
    
    
    
    
    
    
    
    402,347
 The following table presents segment revenues, income (loss) before income tax expense
(benefit), and assets for the year ended December 31, 2005.
 InvestmentBrokerage
    
    Banking
    
    TotalRevenues from external
customers
    
    $
    11,413,689
    
    
    
    16,436,706
    
    
    
    27,850,395Interest revenue
    
    
    777,774
    
    
    
    
    
    
    
    777,774Interest expense
    
    
    533,737
    
    
    
    
    
    
    
    533,767Depreciation and amortization
    
    
    269,238
    
    
    
    
    
    
    
    269,238Income(loss) before income
tax expense (benefit)
    
    
    (11,949,972
    )
    
    
    5,955,961
    
    
    
    (5,994,011
    )Segment assets
    
    
    35,474,322
    
    
    
    
    
    
    
    35,474,322Capital expenditures
    
    
    6,687,829
    
    
    
    
    
    
    
    6,687,829
 25




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
   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
 (19)
    
    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, 2006 are
as follows:
 Operating
    
    
    Capital2007
    
    $
    1,563,000
    
    
    
    45,0002008
    
    
    1,146,000
    
    
    
    45,0002009
    
    
    482,000
    
    
    
    41,0002010
    
    
    342,000
    
    
    
    12,0002011
    
    
    342,000
    
    
    
    Thereafter
    
    
    1,076,000
    
    
    
    Minimum Commitments
    
    $
    4,951,000
    
    
    
    143,000Less Interest
    
    
    
    
    
    
    (14,000
    )Net Present Value of Capital Lease Obligations
    
    $
    
    
    
    
    129,000
 Office equipment, under capital leases, with a recorded cost of $175,612, net of depreciation
of $35,569 as of December 31, 2006, collateralizes the above capital lease obligations and is
included in the consolidated statements
of financial condition under the caption of Property and Equipment. Depreciation expense
for assets under capital lease was $23,011, $71,511 and $32,239 in 2006, 2005 and 2004,
respectively.In 2005, the Company relocated its Austin, Texas headquarters to buildings owned by its TI
Building subsidiary. Rent expense amounted to approximately $80,400, $1,483,000 and
$1,504,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Rent expense is
reported net of sublease revenue which is disclosed below.In October 2006, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007. The sublease was entered into with a Texas
non-profit organization as a charitable contribution to the organization. As such, no
payments are due under the agreement. The fair market value of rent on the subleased premises
was determined to approximate $8,000 per month. During 2006, the Company recorded
approximately $25,000 of charitable contributions in relation to this sublease
 26




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
   agreement.
These contributions are included in other expenses in the accompanying consolidated statements
of operations.In August 2005, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007. The lease was terminated in September 2006
with no further future minimum payments due. During 2006 and 2005, the Company received
approximately $56,000 and $31,000, respectively, in relation to this sublease agreement.In January 2005, the Company subleased its Houston, Texas office space through August 2006.
The lease went to term with no further future minimum payments due. During 2006 and 2005, the
Company received approximately $32,000 and $44,000, respectively, in relation to this sublease
agreement.In June 2004, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007. The lease was terminated in December 2006 with
no further future minimum payments due. During 2006 and 2005, the Company received
approximately $90,000 and $70,000, respectively, in relation to this sublease agreement.In June 2003, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007. Under the terms of the sublease agreement, the
future minimum payments to be received are approximately $12,000 in 2007. During 2006 and
2005, the Company received approximately $84,000 and $76,000, respectively, in relation to
this sublease agreement.In September 2002, the Company subleased its Atlanta, Georgia office space. The Company
received approximately $63,000 and $91,000 during 2005 and 2004, respectively, in relation to
this sublease agreement. The lease and sublease agreements terminated in 2005.(20)
    
    ContingenciesThe Company is involved in various claims and legal actions, including arbitrations, 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 financial
condition 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.(21)
    
    Net Capital RequirementsTSG, 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, TSG 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 TSG if the resulting net capital ratio would exceed 10 to
1. At December 31,
2006, the minimum net capital requirement for TSG was $250,000. Net capital at December
31, 2006 aggregated $3,218,649. TSGs ratio of aggregate indebtedness to net capital was 0.74
to 1 at December 31, 2006.
 27




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
   (22)
    
    Other Related Party TransactionsThe Company entered into an engagement letter to place up to $7,000,000 principal amount of
debt securities on behalf of a corporation in which one of the Companys directors is a
greater than 10% stockholder and is also the Chairman, Chief Executive Officer and President
of the corporation. The Companys Chairman of the Board is a 10% or greater stockholder in
the corporation. In addition, another of the Companys directors also serves on the board of
the corporation. The transaction was consummated on or about September 12, 2006. Under the
engagement letter, the Company was to receive a cash fee equal to 1% of the principal amount
of debt securities which it placed. On October 13, 2006, the Company received a
non-refundable retainer of $25,000 from the corporation and the cash fee of $70,000 from the
completion of the engagement. Additionally, the Company may be reimbursed for legal fees
incurred and ancillary out of pocket expenses.The Company entered into an engagement letter to place up to $10,000,000 principal amount of
debt securities on behalf of a company in which one of the Companys directors is a greater
than 10% stockholder and is also the Chairman, Chief Executive Officer and President of the
company. The Companys Chairman of the Board is a 10% or greater stockholders in the company.
In addition, another of the Companys former directors also serves on the board of that
company. The transaction was consummated on or about December 19, 2005. As part of the
purchase price, the purchasers exchanged approximately $5,000,000 principal amount of existing
bridge notes, plus accrued interest, which were sold by the company on November 10, 2005, for
which the Company also acted as placement agent. Under the engagement letter, the Company
received a cash fee equal to 3% of the principal amount of debt securities which it placed,
and a ten-year warrant to purchase common stock in the amount of 150,000 shares for each
$2,000,000 principal amount of debt securities placed at an exercise price of $2.00 per share.
On October 26, 2005, the Company received a non-refundable retainer of $125,000 from the
company. In December 2005, the Company received the cash fee of $300,000 upon completion of
the engagement. Additionally, the Company may be reimbursed for legal fees incurred and
ancillary out of pocket expenses.On 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, 2005 and 2004, the
Company had paid Seton approximately $114,000 and $50,000, respectively, 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.
 28




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
   (23)
    
    Quarterly Results (Unaudited)The following tables set forth selected quarterly consolidated statements of operations
information for the years ended December 31, 2006 and 2005.
 First
    
    Second
    
    Third
    
    Fourth2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenue from
continued
operations
    
    $
    11,809,894
    
    
    
    680,347
    
    
    
    (412,482
    )
    
    
    6,776,024Net income (loss)
from continued
operations
available to common
stockholders
    
    
    2,859,155
    
    
    
    (2,970,865
    )
    
    
    (5,134,710
    )
    
    
    (494,819
    )Net income (loss)
from discontinued
operations
available to common
stockholders
    
    
    (22,544,204
    )
    
    
    (299,164
    )
    
    
    (14,870,304
    )
    
    
    Total net income
(loss) available to
common stockholders
    
    
    (19,685,049
    )
    
    
    (3,270,029
    )
    
    
    (20,005,014
    )
    
    
    (494,819
    )Basic earnings
(loss) from
continued
operations per
share of common
stock
    
    
    0.36
    
    
    
    (0.37
    )
    
    
    (0.64
    )
    
    
    (0.10
    )Basic earnings
(loss) from
discontinued
operations per
share of common
stock
    
    
    (2.86
    )
    
    
    (0.04
    )
    
    
    (1.84
    )
    
    
    Basic total
earnings (loss) per
share of common
stock
    
    
    (2.50
    )
    
    
    (0.41
    )
    
    
    (2.48
    )
    
    
    (0.10
    )Diluted earnings
(loss) from
continued
operations per
share of common
stock
    
    
    0.36
    
    
    
    (0.37
    )
    
    
    (0.64
    )
    
    
    (0.10
    )Diluted earnings
(loss) from
discontinued
operations per
share of common
stock
    
    
    (2.86
    )
    
    
    (0.04
    )
    
    
    (1.84
    )
    
    
    Diluted total
earnings (loss) per
share of common
stock
    
    
    (2.50
    )
    
    
    (0.41
    )
    
    
    (2.48
    )
    
    
    (0.10
    )
 29




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##### Table of Contents



TEJAS INCORPORATED AND SUBSIDIARIES
   First
    
    Second
    
    Third
    
    Fourth2005
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenue from
continued
operations
    
    $
    12,754,747
    
    
    
    13,750,133
    
    
    
    2,033,151
    
    
    
    (154,537
    )Net income (loss)
from continued
operations
available to common
stockholders
    
    
    2,342,577
    
    
    
    702,551
    
    
    
    (3,103,239
    )
    
    
    (3,790,279
    )Net income (loss)
from discontinued
operations
available to common
stockholders
    
    
    
    
    
    
    
    
    
    
    167,838
    
    
    
    (829,737
    )Total net income
(loss) available to
common stockholders
    
    
    2,342,577
    
    
    
    702,551
    
    
    
    (2,935,401
    )
    
    
    (4,620,016
    )Basic earnings
(loss) from
continued
operations per
share of common
stock
    
    
    0.59
    
    
    
    0.15
    
    
    
    (0.39
    )
    
    
    (0.78
    )Basic earnings
(loss) from
discontinued
operations per
share of common
stock
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    (0.17
    )Basic total
earnings (loss) per
share of common
stock
    
    
    0.59
    
    
    
    0.15
    
    
    
    (0.37
    )
    
    
    (0.95
    )Diluted earnings
(loss) from
continued
operations per
share of common
stock
    
    
    0.47
    
    
    
    0.13
    
    
    
    (0.39
    )
    
    
    (0.78
    )Diluted earnings
(loss) from
discontinued
operations per
share of common
stock
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    (0.17
    )Diluted total
earnings (loss) per
share of common
stock
    
    
    0.47
    
    
    
    0.13
    
    
    
    (0.37
    )
    
    
    (0.95
    )
 30




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits3.1
    
    Certificate of Incorporation (Incorporated herein by reference to Exhibit 4.1 to the registrants
Current Report on Form 8-K filed on May 2, 2001).3.2
    
    Bylaws (Incorporated herein by reference to Exhibit 4.2 to the registrants Current Report on Form
8-K filed on May 2, 2001).3.3
    
    Certificate of Amendment to Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.3 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
Exhibit 3.4 to the registrants Current Report on Form 8-K filed on June 20, 2002).3.5
    
    Certificate of Ownership and Merger Merging Tejas Incorporated into Westech Capital Corp.
(Incorporated herein by reference to Exhibit 3.5 to the registrants Registration Statement on
Form S-1, filed on December 22, 2004).3.6
    
    Certificate of Amendment to Certificate of Incorporation (Incorporated herein by reference to
Exhibit 99.1 to the registrants Current Report on Form 8-K filed on June 30, 2005).3.7
    
    Certificate of Designations for Series A Convertible Preferred Stock (Incorporated herein by
reference to Exhibit 10.1 to the registrants Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005).10.1
    
    First Amended and Restated Westech Capital Corp. 1999 Stock Option Plan (Incorporated herein by
reference to Exhibit 10.1 to the registrants Annual Report on Form 10-K for the year ended
December 31, 2002).10.2
    
    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
    
    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).10.5
    
    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).10.6
    
    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).10.7
    
    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).10.8
    
    Agreement, dated as of October 15, 2004, between Seton Securities Group, Inc., Charles H. Mayer,
Westech Capital Corp., and Tejas Securities Group, Inc. (Incorporated herein by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed on November 9, 2004).10.9
    
    Agreement Regarding Contract between Blake Byram and TI Building Partnership, Ltd. (Incorporated
herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on
February 18, 2005).10.10
    
    Real Estate Purchase and Sale Agreement, and the first and second amendments thereto, between
Blake Byram and 8226 Bee Caves, Ltd. (Incorporated herein by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed on February 18, 2005).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.11
    
    Promissory Note, dated February 22, 2005, made by TI Building Partnership, Ltd. for the benefit of
Community Credit Union (Incorporated herein by reference to Exhibit 10.16 to the registrants
Annual Report on Form 10-K for the year ended December 31, 2004).10.12
    
    First Amendment to First Amended and Restated Stock Option Plan (Incorporated herein by reference
to Exhibit 10.1 to the registrants Current Report on Form 8-K filed on November 9, 2004).10.13
    
    Piggy-back Registration Rights Agreement, dated as of July 7, 2004, by and 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).10.14
    
    Assignment of Purchase and Sale Agreement between CNW2, Inc. and TI Building Partnership, Ltd.
(Incorporated herein by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K
filed on April 25, 2005).10.15
    
    Purchase and Sale Agreement, between Catalyst Development II, L.P. and CNW2, Inc. (Incorporated
herein by reference to Exhibit 10.2 to the registrants Current Report on Form 8-K filed on April
25, 2005).10.16
    
    Promissory Note, dated May 9, 2005, made by TI Building Partnership, Ltd. for the benefit of First
United Bank (Incorporated herein by reference to Exhibit 10.6 to the registrants Quarterly Report
on Form 10-Q for the quarter ended March 31, 2005).10.17
    
    Non-Compete Agreement, dated as of July 1, 2005, by and between Tejas Incorporated and John Gorman
(Incorporated herein by reference to Exhibit 10.8 to the registrants Current Report on Form 8-K
filed on July 8, 2005).10.18
    
    Employment Agreement dated June 1, 2006 by and between Tejas Incorporated and Kurt E. Morales
(Incorporated herein by reference to Exhibit 10.1 to the registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2006).10.19
    
    Purchase Agreement dated October 1, 2006 by and among Tejas Incorporated, Capital & Technology
Advisors, Inc. and the persons and entities listed on the signature page thereto (Incorporated
herein by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed on
October 5, 2006).21.1*
    
    Subsidiaries of the Registrant23.1*
    
    Consent of PMB Helin Donovan, 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.