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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    Commission File No. 33-37534-NY WESTECH CAPITAL CORP.   DELAWARE
    
    13-3577716(State or other jurisdiction
of incorporation)
    
    (IRS Employer
Identification No.)
 2700 Via Fortuna, Suite 400, Austin, Texas
    
    78746(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code (512) 306-8222 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share   Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X   No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K . [   ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [   ]   No [X] As of March 31, 2004 there were 1,512,024 shares of the Registrants common
stock, $0.001 par value, outstanding. The aggregate market value of common
stock held by non-affiliates as of June 30, 2003 was $39,741 using a market
price of $1.25 as quoted on the over-the-counter bulletin board as of the close
of business on that date. DOCUMENTS INCORPORATED BY REFERENCE  1




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TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    9Item 3.
    
    Legal Proceedings
    
    
    9Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    9PART IIItem 5.
    
    Market for
Registrants Common Equity and Related Stockholder Matters
    
    
    10Item 6.
    
    Selected Financial Data
    
    
    11Item 7.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 8.
    
    Financial Statements and Supplementary Data
    
    
    21Item 9.
    
    Changes in and
Disagreements with Accountants On Accounting and Financial Disclosure
    
    
    21Item 9A.
    
    Controls and Procedures
    
    
    21PART IIIItem 10.
    
    Directors and
Executive Officers of the Registrant
    
    
    21Item 11.
    
    Executive Compensation
    
    
    21Item 12
    
    Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    21Item 13.
    
    Certain Relationships and Related Transactions
    
    
    21Item 14.
    
    Principal Accountant Fees and Services
    
    
    21PART IVItem 15.
    
    Exhibits, Financial
Statement Schedules, and Reports on Form 8-K
    
    
    22Signatures
    
    
    
    
    23Promissory Note AgreementRegistrant's SubsidiariesCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertifications of CEO and CFO




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PART I 
 ITEM 1. BUSINESS GENERAL Westech Capital Corp., a Delaware corporation (Westech), is a holding company
whose only operating subsidiary is Tejas Securities Group, Inc., a Texas
corporation (Tejas ). Tejas is engaged in the business of providing
brokerage and related financial services to institutional and retail customers
nationwide. References to the Company, we, us, our or similar
references within the Form 10-K are to Westech and its subsidiaries. Westech was incorporated as a shell corporation in New York on July 18, 1990,
and made an initial public offering in November 1991. On August 27, 1999,
Westech was acquired by Tejas in a reverse merger. On August 29, 2001, Westech
acquired all of the outstanding minority interest in Tejas. Effective June 29, 2001, Westech completed a 10-for-1 reverse stock split. As a
result of this stock split, earnings (loss) per share amounts and all share
amounts for prior periods have been restated to reflect the shares outstanding
as though the stock split had taken effect in the prior periods. Our business is conducted from our headquarters at 2700 Via Fortuna, Suite 400,
Austin, Texas, with branch offices in Houston, Texas and Tinton Falls, New
Jersey. Tejas is a registered broker-dealer and investment advisor offering:
(i) brokerage services to retail and institutional customers; (ii) high quality
investment research to institutional and retail customers; (iii) market-making
activities in stocks traded on the Nasdaq National Market System and other
national exchanges; and (iv) investment banking services. The New Jersey
branch office provides additional market making services and municipal debt
trading activity for the Texas offices. Development of Business Tejas was formed as a Texas corporation in March 1994. Initially, Tejas focus
was to provide institutional money managers and mutual funds high quality
investment research covering large U.S. based companies which were believed to
be overly leveraged or which were in default or in bankruptcy. Tejas believes
these companies were not followed closely by a large number of research
analysts. Tejas used this opportunity to establish itself as a source of high
quality research products and trading support. Tejas took advantage of its
initial research success and expanded its research coverage to special
situation equities. The demand for Tejas research by individuals led to the
expansion of our client base to include retail accounts. Tejas also offers
retail and institutional clients access to mortgage backed and municipal debt
securities. Tejas ended the year 2003 with its third straight year of profitability.
Tejas ability to generate profits was due to improvements in the overall U.S.
economy as well as a greater diversification of revenue generating products.
While the majority of Tejas revenues are still derived from the sale of
distressed securities, Tejas realized increases in municipal and government
securities sales as well as market making profits. In February 2004, the Company received a $2,500,000 loan from a bank for
operating and financing purposes. With the proceeds from this loan, the
Company repaid two previous loans from the bank in the amounts of $1,150,000
and approximately $400,000. The remaining balance was used to provide
additional operating opportunities for Tejas. The Company has applied for listing on the American Stock Exchange. Currently
the application is pending and we can provide no assurances that the
application will be approved. 1




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Products and Services We provide our customers with a broad range of products and services generally
categorized into two business segments: brokerage services and investment
banking. See Note 17 to the consolidated financial statements for segment
disclosures. Brokerage Services We provide brokerage services to approximately 5,000 retail customers and 500
institutional customers. We offer customers the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. We provide our customers with the
ability to receive stock quotes and access research on the Internet through our
website (www.tejassec.com). Our marketing strategy emphasizes our high level
of service and unique knowledge of the companies covered by our research
department. We generated $29,260,473, $19,467,276 and $25,615,989 in commission revenues
for the years ended 2003, 2002 and 2001, respectively, or 110%, 92% and 101% of
total revenue (before giving effect to trading losses), respectively. Research The cornerstone of our business is our research and trading capabilities.
Currently, our research department consists of five analysts with proven
expertise in special situation equity research and in distressed securities
research. The analyst group has the background to analyze many industries, but
has a primary focus on telecommunications and technology. We believe that the
rapid changes in each of these industries provide excellent investment
opportunities. We anticipate that we will continue to devote a substantial
portion of our resources to support our research department. Market Making In August 1999, the National Association of Securities Dealers, Inc. (NASD)
approved Tejas to make markets in Nasdaq securities. Making markets in
securities facilitates the execution of securities transactions for our
customers. As of the date of filing this Form 10-K, Tejas acted as a market
maker for approximately 170 public corporations whose stocks are traded on the
Nasdaq National Market System, up from approximately 100 public corporations in
2002. The increase in the number of public corporations that Tejas makes
markets for is due to the addition of the New Jersey branch. Generally, we do not maintain inventories of securities for sale to our
customers. However, we do engage in certain principal transactions where, in
response to a customer order, we will go at risk to the marketplace in an
attempt to capture the spread between the bid and offer. Most of our larger
competitors are engaged in similar market making activities. We believe we can
maintain better control and be assured of proper executions of customer trades
by providing these market making services directly to our customers. Investment Banking In the past, we raised capital for corporations through public and private
offerings of securities either as a syndicate member or as a managing
underwriter. We also provided advisory services for companies involved in
merger and acquisition activities. As a result of the economic downturn that
began in early 2000, the rate of business development in central Texas and
nationwide declined substantially, which negatively impacted our ability to
generate investment banking revenues. We continue to review investment banking
opportunities from time to time; however, we will not devote substantial
resources to this business segment unless there is a significant increase in
investment banking activities in our region. We generated $72,799, $335,663 and $316,927 in investment banking revenues for
the years ended 2003, 2002 and 2001, respectively, or 1%, 2% and 1% of total
revenue, respectively. 2




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Margin Loans We derive a portion of our income from fees generated on margin loans made to
our customers and financed through our clearing organization. A margin account
allows the customer to deposit less than the full cost of the securities
purchased while the clearing organization lends the balance of the purchase
price to the customer, secured by the purchased securities. The amount of the
loan is subject to the margin regulations (Regulation T) of the Board of
Governors of the Federal Reserve System and our internal policies. In most
transactions, Regulation T limits the amount loaned to a customer for the
purchase of a particular security to 50% of the purchase price. Customers are
charged interest on the amount borrowed to finance their margin transactions
ranging from 0.25% below to 2.75% above the broker call rate, which is the rate
at which brokers can generally obtain financing using margined and firm owned
securities as collateral. We earn a fee equal to 50% of the interest charged
on customer margin loans. As of December 31, 2003, the total of all customer
securities pledges on debit balances and held in active margin accounts was
approximately $4.5 million. CUSTOMERS Historically, our customer base has been comprised of predominately large
institutional customers and high net-worth retail customers. These customers
demand high quality research and sophisticated trading capabilities. We
believe that we have served the needs of this segment of our customer base
well, resulting in increased trading volume. We believe that the increase in
the scope of our research services should increase customer satisfaction and
increase our revenues from institutional customers and high net-worth retail
customers. EMPLOYEES On December 31, 2003, we had 58 employees, which was approximately the same
number as on December 31, 2002. Of these employees, 28 work in sales, 9 in
trading, 6 in research and investment banking and the remaining employees
perform management and administrative functions. It is our goal to use the
sales support functions that are currently in place to support additional sales
staff. We believes that taking advantage of the infrastructure currently in
place will allow an increase in productivity in the sales area with minimal
additional support cost. COMPETITION All aspects of our business are highly competitive. In our general brokerage
activities, we compete directly with numerous other broker-dealers, many of
which are large well-known firms with substantially greater financial and
personnel resources. Many of our competitors employ extensive advertising and
actively solicit potential clients in order to increase business. In addition,
brokerage firms compete by furnishing investment research publications to
existing clients, the quality and breadth of which are considered important in
the development of new business and the retention of existing clients. We also
compete with a number of smaller regional brokerage firms in Texas and the
southwestern United States. Since the adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and
thrift institutions have been able to engage in traditional brokerage and
investment banking services. Competition among financial services firms also
exists for investment representatives and other personnel. The securities industry has become considerably more concentrated and more
competitive since Tejas was founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than those of ours. 3




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The securities industry has experienced commission discounting by
broker-dealers competing for retail brokerage business. The continuation of
such discounting and an increase in the number of new and existing firms
offering discounts could adversely affect our retail equity business. However,
we have historically derived the majority of our commission revenue from
institutional customers that tend to purchase larger blocks of securities than
individual customers. Transactions with institutional customers have not been
subject to the same level of discounting that brokerage firms experience with
retail customers due to the size of the transactions. In addition, we have
concentrated our research efforts on debt securities, which have not
experienced as significant of discounting as equity securities. SECURITIES INDUSTRY PRACTICES Tejas is registered as a broker-dealer with the Securities and Exchange
Commission (the SEC) and the NASD. Tejas is registered as a securities
broker-dealer in 39 states and the District of Columbia. Tejas is also a
member of the Securities Investors Protection Corporation, which provides
Tejas customers with insurance protection for amounts of up to $500,000 each,
with a limitation of $100,000 on claims for cash balances. Tejas has also
acquired an additional $1,500,000 in insurance coverage through Seabury &
Smith, as added protection for individual customers securities, covering all
clients of Tejas institutional and retail customers. Tejas is subject to extensive regulation by federal and state laws. The SEC is
the federal agency charged with administration of the federal securities laws.
Much of the regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules, subject to
approval by the SEC, which govern the industry and conduct periodic reviews of
member broker-dealers. Securities firms are also subject to regulation by
state securities commissions in the states in which they do business. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension, or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulation and discipline of broker-dealers is the protection of customers
and the securities markets, rather than protection of creditors and
shareholders of broker-dealers. See Forward-Looking Statements and Risk
Factors below. NET CAPITAL REQUIREMENTS Tejas is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or
Dealers (the Rule), which establishes minimum net capital requirements for
broker-dealers. The Rule is designed to measure financial integrity and
liquidity in order to assure the broker-dealers financial stability within the
securities market. The net capital required under the Rule depends in part
upon the activities engaged in by the broker-dealer. In computing net capital under the Rule, various adjustments are made to
exclude assets not readily convertible into cash and to reduce the value of
other assets, such as a broker-dealers position in securities. A deduction is
made against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with the Rule could require intensive
use of capital and could limit our ability to pay dividends to our
stockholders. Failure to comply with the Rule could require the Company to
infuse additional capital into Tejas, could limit the ability of Tejas to pay
its debts and/or interest obligations, and may subject Tejas to certain
restrictions which may be imposed by the SEC, the NASD, and other regulatory
bodies. Moreover, in the event that the Company could not or elected not to
infuse the additional capital or otherwise bring Tejas into compliance, Tejas
would ultimately be forced to cease operations. See Forward-Looking
Statements and Risk Factors below. At December 31, 2003 and 2002 Tejas elected to use the alternative method
permitted by the Rule, which requires it to maintain minimum net capital, as
defined in the Rule, equal to the greater of $250,000 in both 2003 and 2002 or
2% of aggregate debit balances arising from customer transactions, as defined
in the Rule. At December 31, 2003, Tejas had net capital of $924,132, which
was $674,132 in excess of the minimum amount required. At December 31, 2002,
Tejas had net capital of $945,765, which was $695,765 in excess of the minimum
amount required. 4




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FORWARD-LOOKING STATEMENTS AND RISK FACTORS From time to time, we make statements (including some contained in this report)
which predict or forecast future events or results, which depend on future
events for their accuracy, which embody projections or that otherwise contain
forward-looking information. These statements may relate to anticipated
revenues or earnings per share, anticipated changes in our business or our
ability to successfully respond to such changes, the adequacy of our capital
and liquidity, the adequacy of our reserves for contingencies, including
litigation, or expectations regarding future financial market conditions. The
statements include those that are preceded by, followed by or that include the
words believes, expects, anticipates, intends, estimates, may or
similar expressions. We caution readers that any forward-looking information provided by us or on
our behalf is not a guarantee of future performance. Actual results may differ
materially as a result of various factors, many of which are outside of our
control, including the factors discussed below, those discussed under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations  Critical Accounting Policies and Quantitative and
Qualitative Disclosure About Market Risk, and those discussed in our periodic
reports filed with and available from the SEC. All forward-looking statements speak only as of the date on which they are made
and we undertake no obligation to update them to reflect events or
circumstances occurring after the date on which they were made or to reflect
the occurrence of unanticipated events. Failure To Effectively Manage A Changing Business Could Result In Outdated
Services. Our business and operations have changed substantially since we began offering
brokerage services, and we expect the pace of change in the brokerage business
to continue. This rapid change places significant demands on our
administrative, operational, financial and other resources. Failure to
properly manage these changes could result in our services becoming outdated,
which would have a material adverse effect on our business, financial condition
and operating results. Failure Of Third-Party Vendors To Provide Critical Services Could Harm Our
Business. We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, and market makers. While we have selected these
third-party vendors carefully, we do not control their actions. Any problems
caused by these third parties, including as a result of their not providing us
their services for any reason or their performing their services poorly, could
have a material adverse effect on our business, financial condition and
operating results. We Are Subject To Market Forces Beyond Our Control Which Could Impact Us More
Severely Than Our Competitors. We, like other securities firms, are directly affected by economic and
political conditions, broad trends in business and finance and changes in
volume and price levels of securities transactions. In recent years, the U.S.
securities markets have experienced significant volatility. Over the past few
years, the stock markets have suffered major declines and advances that has
increased the volatility of our revenues. If our trading volume decreases, our
revenues decline. Also, when trading volume is low, our profitability is
adversely affected because our overhead remains relatively fixed, despite lower
compensation costs associated with commission revenues. Severe market
fluctuations in the future could have a material adverse effect on our
business, financial condition and operating results. Although we have
diversified our product and service revenue streams, some of our competitors
with more diverse product and service offerings might withstand such a downturn
in the securities industry better than we would. 5




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Our Customers May Default On Their Margin Accounts, Effectively Passing Their
Losses On To Us. Our customers sometimes purchase securities on margin through our clearing
organization; therefore we are subject to risks inherent in extending credit.
This risk is especially great when the market is rapidly declining. In such a
decline, the value of the collateral securing the margin loans could fall below
the amount of a customers indebtedness. Specific regulatory guidelines
mandate the amount that can be loaned against various security types. We
rigorously adhere to these guidelines and in a number of instances exceed those
requirements. Independent of our review, our corresponding clearing
organization independently maintains a credit review of our customer accounts.
If customers fail to honor their commitments, the clearing organization would
sell the securities held as collateral. If the value of the collateral were
insufficient to repay the loan, a loss would occur, which we may be required to
fund. Any such losses could have a material adverse effect on our business,
financial condition and operating results. We Are Subject To Strict Government Regulation And The Failure To Comply Could
Result In Disciplinary Actions. The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. See - Securities Industry Practices above.
Broker-dealers are subject to regulations covering all aspects of their
business. The SEC, NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or
expel a broker-dealer or any of its officers or employees. Our ability to
comply with all applicable laws and rules is largely dependent on our
establishment and maintenance of a system to ensure compliance with these laws
and rules, as well as our ability to attract and retain qualified compliance
personnel. We could be subject to disciplinary or other actions due to claimed
noncompliance in the future, which could have a material adverse effect on our
business, financial condition and operating results. In addition, our operations and profitability may be affected by additional
legislation, changes in rules promulgated by the SEC, NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, and state securities commissions, or changes in
the interpretation or enforcement of existing laws and rules. The NASD regulates all of our marketing activities. The NASD can impose
certain penalties for violations of its advertising regulations, including
censures or fines, suspension of all advertising, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer or
any of its officers or employees. Tejas compliance officer reviews all
marketing materials prior to release in an effort to ensure compliance with
NASD regulations. There can be no assurance that other federal, state or foreign agencies will
not attempt to regulate our business. If such regulations are enacted, our
business or operations might be rendered more costly or burdensome, less
efficient, or even commercially impossible to continue, or such regulations
could otherwise have a material adverse effect on our business, financial
condition and operating results. We Must Maintain Certain Net Capital Requirements That Could Slow Our Expansion
Plans Or Prevent Payments Of Dividends. The SEC, NASD and various other regulatory agencies have stringent rules with
respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets
minus liabilities), less deductions for certain types of assets. If a firm
fails to maintain the required net capital, it may be subject to suspension or
revocation of registration by the SEC and suspension or expulsion by the NASD,
and could ultimately lead to the firms liquidation. If such net capital rules
are changed or expanded, or if there is an unusually large charge against net
capital, operations that require the intensive use of capital would be limited.
Such operations may include trading activities and the financing of customer
account balances. Also, our ability to pay dividends, repay debt and redeem 6




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or purchase shares of our outstanding stock could be severely restricted. A
large operating loss or charge against net capital could adversely affect our
ability to expand or even maintain our present levels of business, which could
have a material adverse effect on our business, financial condition and
operating results. Our Business Is Highly Competitive. We encounter intense competition in our business, and we compete directly with
numerous securities firms and banks, many of which have substantially greater
capital and other resources. The Gramm-Leach-Bliley Act, signed into law on
November 12, 1999, allows for affiliations among banks, securities firms and
insurance companies by means of a financial holding company. In addition,
commercial banks have the possibility of engaging in a broad range of
non-banking activities through operating subsidiaries. Such activities include
all financial activities, including broker/dealer activities, with the
exception of insurance underwriting and real estate investment or development. During the past few years, a number of banks acquired securities firms and, in
so doing, gained increased entry into the securities industry. These
acquisitions have brought entirely new sources of capital into the securities
industry, resulting in more formidable competition. Additionally, competition among securities firms and other competitors for
successful sales representatives, securities traders, securities analysts,
stock loan professionals and investment bankers is intense and continuous. We compete with other securities firms and with banks, insurance companies and
other financial institutions principally on the basis of service, product
selection, price, location and reputation in local markets. We operate at a
price disadvantage to discount brokerage firms that do not offer equivalent
services. We Are Controlled By A Single Stockholder. Mr. Gorman, our Chairman and Chief Executive Officer, beneficially owns over
50% of the outstanding shares of our Common Stock. As the Companys largest
stockholder, Mr. Gorman is likely to be able to maintain effective control of
the Company including the ability to elect a majority of the Board of
Directors. The ownership by Mr. Gorman of shares of Common Stock may
discourage or prevent unsolicited mergers, acquisitions, tender offers, proxy
contests or changes of incumbent management, even when stockholders other than
Mr. Gorman consider such a transaction or event to be in their best interest.
Accordingly, holders of Common Stock may be deprived of an opportunity to sell
their shares at a premium over the trading price of the shares. Our Trading Systems May Fail, Resulting In Service Interruptions. We receive and process trade orders through internal trading software and
touch-tone telephones and we depend heavily on the integrity of the electronic
systems supporting this type of trading. Heavy stress placed on our systems
during peak trading times could cause our systems to operate too slowly or
fail. If our systems or any other systems in the trading process slow down
significantly or fail even for a short time, our customers would suffer delays
in trading, potentially causing substantial losses and possibly subjecting us
to claims for such losses or to litigation claiming fraud or negligence.
During a systems failure, we may be able to take orders by telephone; however,
only associates with securities brokers licenses can accept telephone orders,
and an adequate number of associates may not be available to take customer
calls in the event of a systems failure. In addition, a hardware or software
failure, power or telecommunications interruption or natural disaster could
cause a system failure. Any systems failure that interrupts our operations
could have a material adverse effect on our business, financial condition and
operating results. 7




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No Active Public Market For Our Common Stock Currently Exists And None May
Develop. An active public market for our common stock does not currently exist. Over
80% of our issued common stock is held by fewer than ten individuals. Until a
broader distribution of our common stock is made no active public market will
develop. Executive Officers of the Registrant The following information sets forth certain information with respect to our
executive officers. Their respective backgrounds are described below. Name
    
    Age
    
    PositionJohn J. Gorman
    
    
    43
    
    
    Director, Chairman and Chief Executive OfficerCharles H. Mayer
    
    
    56
    
    
    Director, President and Chief Operating OfficerKurt J. Rechner
    
    
    43
    
    
    Chief Financial Officer, Secretary and TreasurerA. Reed Durant
    
    
    49
    
    
    Director of ComplianceJohn F. Garber
    
    
    34
    
    
    Director of Finance
 JOHN J. GORMAN. Mr. Gorman became our Chairman of the Board of Directors and
Chief Executive Officer in August 1999. He has been the Chairman and Chief
Executive Officer of Tejas since July 1997. Mr. Gorman has over 19 years of
experience in the brokerage industry. Mr. Gorman became a principal of Tejas
on April 18, 1995. From 1988 until joining Tejas, Mr. Gorman worked at APS
Financial Inc. as a Senior Vice President. Mr. Gorman served primarily in a
broker capacity at APS Financial Inc., a broker-dealer in Austin, Texas. Mr.
Gorman has held positions at APS Financial Inc., Landmark Group, Shearson
Lehman and Dean Witter. Mr. Gorman is the nephew of Charles H. Mayer through
marriage. Mr. Gorman received his B.B.A. from Southern Methodist University in
1983. CHARLES H. MAYER. Mr. Mayer joined us in September 1999 as the Chief Operating
Officer and a Director. Mr. Mayer became our President in December 2000. From
1995 until he joined us, Mr. Mayer was self-employed and managed personal
investments in a number of companies not related to the securities industry.
From 1990 to 1995, Mr. Mayer was a Managing Director and the Chief Information
Officer with CS First Boston. Other experience includes 21 years in senior
positions with Morgan Stanley, Tech Partners, Salomon Brothers, Lehman Brothers
and the Federal Reserve Bank of New York. Mr. Mayer earned a BBA and MBA from
Seton Hall University. KURT J. RECHNER, CPA, CFA. Mr. Rechner became our Chief Financial Officer in
January 2000, our Treasurer in September 2000 and our Secretary in September
2002. Mr. Rechner has spent the past 22 years in the financial services
industry. Prior to joining us, Mr. Rechner was employed from 1997 through 1999
as an Executive Vice President, Finance & Operations, CFO for Xerox Federal
Credit Union. From May 1995 to 1997 Mr. Rechner was the Chief Executive
Officer for Prism Capital Management, LLC, which managed a global fixed income
hedge fund. From 1990 through May 1995, Mr. Rechner was the Senior Vice
President of Accounting and Finance for Security Service Federal Credit Union.
Mr. Rechner earned a B.S. in Business Administration from the University of
Illinois in 1984 and an M.B.A. from Trinity University in 1985. Mr. Rechner
also holds the professional designations of Certified Public Accountant and
Chartered Financial Analyst. A. REED DURANT. Mr. Durant became our Director of Compliance in August 1999.
Mr. Durant joined Tejas in November 1998 as the Compliance Director. From
January 1996 until joining Tejas, Mr. Durant worked as Senior Compliance
Examiner for the NASD in the Regulation and Enforcement area. From 1988 until
joining the NASD, Mr. Durant worked at Principal Financial Securities. Mr.
Durant brings over 22 years experience in the securities industry, including 8
years as Compliance Director of a 400-broker, 30-branch NYSE member firm. Mr.
Durant graduated from Texas Tech University with a BA in economics. 8




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##### Table of Contents



JOHN F. GARBER, CPA. Mr. Garber became our Director of Finance in August 1999.
Mr. Garber joined Tejas in October 1998 as Director of Finance. From April
1999 until joining Tejas, Mr. Garber was employed as the Controller for
Loewenbaum & Co. Inc., an Austin based broker-dealer. Prior to joining
Loewenbaum & Co., Inc. in April 1998, he was employed by KPMG LLP from 1995 to
1998 in the financial assurance department. Mr. Garber graduated from the
University of Florida in 1992 with a B.S.B.A. in Finance. Mr. Garber holds the
professional designation of Certified Public Accountant. AVAILABLE INFORMATION We file annual, quarterly, and current reports, proxy statements, and other
documents with the SEC under the Securities Exchange Act of 1934 (the Exchange
Act.). You may read and copy any materials that are on file with the SEC at
the SECs public reference room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the public reference
room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website
that contains these SEC filings. You can obtain these filings at the SECs
website at http://www.sec.gov. We also make available free of charge on or through our website
(http://www.tejassec.com) our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as
soon as reasonably practicable after we electronically file such materials
with, or furnish it to, the SEC. 
 ITEM 2. PROPERTIES The Companys headquarters are located at 2700 Via Fortuna, Suite 400, Austin,
Texas. The Company leases space for its offices in Austin, Texas, Houston,
Texas and Tinton Falls, New Jersey, which consist of approximately 24,700
square feet, 5,400 square feet and 1,900 square feet, respectively. Future
commitments associated with the leases are included in Note 18 to the
Consolidated Financial Statements. These leases are for terms of four years,
three years and five years, respectively, and contain renewal options. The
Company subleased approximately 40% of its space in the Austin location during
2003. The Company also has leased space of approximately 2,500 square feet in
Atlanta, Georgia, with a lease term expiring in 2005. In September 2002, the
Company subleased approximately 85% of its Atlanta, Georgia office space. The
Company subleased the remaining 15% of its Atlanta, Georgia office space in
March 2003. 
 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than litigation
incidental to our business, which the Company believes will not have a material
adverse affect, to which the Company or any of its subsidiaries is a party or
of which any of their property is the subject. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS RECENT STOCK PRICES The Companys common stock trades under the symbol WSTH on the
over-the-counter electronic bulletin board. The trading does not constitute a
well-established public trading market for our common stock. On December 31,
2003, there were in excess of 350 holders of record of the Companys common
stock and we believe in excess of 5 beneficial holders of the Companys common
stock. The following table sets forth for the periods indicated the high and
low market prices for our common stock, which reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions. The Company has not paid cash or stock
dividends and has no present plan to pay any such dividends. The payment of
future dividends will be decided by our Board of Directors and will be based
upon the Companys future earnings, financial condition and capital
requirements. Our current loan agreement prohibits us from paying any
dividends. 1st Qtr.
    
    2nd Qtr.
    
    3rd Qtr.
    
    4th Qtr.2003:Stock Price RangeHigh
    
    $
    1.25
    
    
    $
    1.25
    
    
    $
    10.00
    
    
    $
    9.00Low
    
    $
    1.25
    
    
    $
    1.25
    
    
    $
    1.25
    
    
    $
    5.002002:Stock Price RangeHigh
    
    $
    5.00
    
    
    $
    3.00
    
    
    $
    2.25
    
    
    $
    2.25Low
    
    $
    3.50
    
    
    $
    1.50
    
    
    $
    1.50
    
    
    $
    1.25
 RECENT SALES OF UNREGISTERED STOCK None. 10




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The summary statement of operations data and the summary statement of financial
condition data as of and for each of the years in the five-year period ended
December 31, 2003 is as follows. Historical financial results may not be
indicative of future performance of the Company or its affiliates. AS OF AND FOR THE YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999STATEMENT OF OPERATIONS DATA:Commissions
    
    $
    29,260,473
    
    
    $
    19,467,276
    
    
    $
    25,615,989
    
    
    $
    16,818,686
    
    
    $
    25,291,212Investment banking
    
    
    72,799
    
    
    
    335,663
    
    
    
    316,927
    
    
    
    1,831,326
    
    
    
    925,616Trading income (loss)
    
    
    (2,793,103
    )
    
    
    1,296,933
    
    
    
    (630,687
    )
    
    
    (4,076,629
    )
    
    
    3,475,539Other
    
    
    43,591
    
    
    
    135,055
    
    
    
    25,920
    
    
    
    135,902
    
    
    
    740,342Total revenue
    
    
    26,583,760
    
    
    
    21,234,927
    
    
    
    25,328,149
    
    
    
    14,709,285
    
    
    
    30,432,709Employee compensation
    
    
    19,140,520
    
    
    
    15,667,467
    
    
    
    18,666,284
    
    
    
    13,954,116
    
    
    
    19,992,928Other expenses
    
    
    5,913,856
    
    
    
    4,979,208
    
    
    
    5,352,183
    
    
    
    7,618,831
    
    
    
    4,802,555Total expenses
    
    
    25,054,376
    
    
    
    20,646,675
    
    
    
    24,018,467
    
    
    
    21,572,947
    
    
    
    24,795,483Income (loss) before income taxes
and minority interest
    
    
    1,529,384
    
    
    
    588,252
    
    
    
    1,309,682
    
    
    
    (6,863,662
    )
    
    
    5,637,226Income tax expense (benefit)
    
    
    682,254
    
    
    
    298,200
    
    
    
    495,474
    
    
    
    (2,214,012
    )
    
    
    2,201,598Minority interest
    
    
    0
    
    
    
    0
    
    
    
    (18,814
    )
    
    
    (650,510
    )
    
    
    297,285Net income (loss)
    
    $
    847,130
    
    
    $
    290,052
    
    
    $
    833,022
    
    
    $
    (3,999,140
    )
    
    $
    3,138,343Earnings (loss) per share:Basic
    
    $
    0.56
    
    
    $
    0.19
    
    
    $
    0.62
    
    
    $
    (3.17
    )
    
    $
    2.51Diluted
    
    $
    0.54
    
    
    $
    0.19
    
    
    $
    0.53
    
    
    $
    (3.17
    )
    
    $
    2.25Weighted average shares outstanding:Basic
    
    
    1,512,024
    
    
    
    1,512,024
    
    
    
    1,348,097
    
    
    
    1,261,721
    
    
    
    1,250,119Diluted
    
    
    1,563,876
    
    
    
    1,525,703
    
    
    
    1,546,112
    
    
    
    1,261,721
    
    
    
    1,529,197STATEMENT OF FINANCIAL CONDITION
DATA:Cash and cash equivalents
    
    $
    551,857
    
    
    $
    750,746
    
    
    $
    547,761
    
    
    $
    482,562
    
    
    $
    2,732,175Deposit with clearing organization
    
    
    0
    
    
    
    0
    
    
    
    260,471
    
    
    
    250,000
    
    
    
    100,000Receivable from clearing
organization
    
    
    0
    
    
    
    0
    
    
    
    1,905,338
    
    
    
    735,616
    
    
    
    63,620Securities owned
    
    
    5,601,782
    
    
    
    5,985,305
    
    
    
    3,011,667
    
    
    
    2,433,022
    
    
    
    6,207,748Other assets
    
    
    2,202,814
    
    
    
    2,538,887
    
    
    
    1,515,271
    
    
    
    3,397,959
    
    
    
    2,534,127Total assets
    
    $
    8,356,453
    
    
    $
    9,274,938
    
    
    $
    7,240,508
    
    
    $
    7,299,159
    
    
    $
    11,637,670Accounts payable, accrued expenses
and other liabilities
    
    $
    2,376,535
    
    
    $
    2,380,552
    
    
    $
    3,183,904
    
    
    $
    1,869,821
    
    
    $
    2,905,020Securities sold, not yet purchased
    
    
    221,279
    
    
    
    985,210
    
    
    
    332,581
    
    
    
    446,078
    
    
    
    187,940Payable to clearing organization
    
    
    742,334
    
    
    
    971,651
    
    
    
    0
    
    
    
    456,660
    
    
    
    1,719,627Notes payable
    
    
    1,655,100
    
    
    
    2,423,450
    
    
    
    500,000
    
    
    
    2,250,000
    
    
    
    0Subordinated debt
    
    
    0
    
    
    
    0
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    1,000,000Total liabilities
    
    
    4,995,248
    
    
    
    6,760,863
    
    
    
    5,016,485
    
    
    
    6,022,559
    
    
    
    5,812,587Minority interest
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    377,382
    
    
    
    976,725Common stock
    
    
    1,512
    
    
    
    1,512
    
    
    
    1,512
    
    
    
    1,266
    
    
    
    12,537Additional paid in capital
    
    
    2,222,281
    
    
    
    2,222,281
    
    
    
    2,222,281
    
    
    
    1,730,744
    
    
    
    1,669,473Retained earnings (deficit)
    
    
    1,137,412
    
    
    
    290,282
    
    
    
    230
    
    
    
    (832,792
    )
    
    
    3,166,348Total stockholders equity
    
    
    3,361,205
    
    
    
    2,514,075
    
    
    
    2,224,023
    
    
    
    899,218
    
    
    
    4,848,358Total liabilities and stockholders
equity
    
    $
    8,356,453
    
    
    $
    9,274,938
    
    
    $
    7,240,508
    
    
    $
    7,299,159
    
    
    $
    11,637,670
 11




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COMPANY OVERVIEW General We are primarily engaged in the business of offering (1) brokerage services to
retail and institutional customers, (2) high quality investment research to
institutional and retail customers, (3) market-making activities in stocks
traded on the Nasdaq National Market and other national exchanges, and (4)
investment banking services. All of these activities are highly competitive. While our brokerage commissions revenue is dependent on trading volume, which
may fluctuate significantly, our overhead remains relatively fixed. Thus, if
our trading volume decreases, our profitability is adversely affected despite
lower compensation costs associated with the lower trading volume.
Consequently, net-operating results can vary significantly from period to
period. Our business is also subject to substantial governmental regulations
and changes in legal, regulatory, and compliance requirements that may have a
substantial impact on our business and results of operations. For a discussion
of risks associated with our business, see Forward-Looking Statements and Risk
Factors in Part I and see Item 7A of this Form 10-K. Brokerage Services We provide brokerage services to approximately 5,000 retail customers and 500
institutional customers. We offer customers the ability to buy and sell
securities, security options, mutual funds, index funds, fixed income products,
annuities and other investment securities. Commission revenue from customer
security transactions, as well as the related compensation expense, is recorded
on a trade date basis. Research We have a research department dedicated to the analysis and performance of
markets/industry conditions. Currently, our research department consists of
five analysts with proven expertise in special situation equity research and in
distressed securities research. This analyst group has the background to
analyze many industries, but has a primary focus on telecommunications and
technology. Market Making We are a market maker for approximately 170 public companies whose stocks are
traded on the Nasdaq National market. Generally, we do not maintain
inventories of securities for sale to our customers. However, we do engage in
certain principal transactions where, in response to a customer order, we will
go at risk to the marketplace in an attempt to capture the spread between the
bid and offer. When we enter into securities transactions for our own account, we recognize
realized gains and losses upon the completion of trades and unrealized gains
and losses based upon a mark to market of securities held by us. Securities
with readily determinable market values are marked to market based on quoted
market prices. Securities with limited market activity for which quoted market
prices are not readily determinable are based on our managements best
estimate, which may include dealer price quotations and price quotations for
similar instruments traded. Investment Banking Our investment banking services primarily relate to helping companies raise
capital through public or private offerings of securities as a syndicate member
or a managing underwriter and providing advisory services for companies
involved in mergers and acquisitions. Investment banking revenues include
fees, 12




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##### Table of Contents



net of syndicate expenses, arising from securities offerings where we act as a
syndicate member or managing underwriter and fees earned from providing merger
and acquisition advisory services. Margin Loans We extend credit to our customers, which is financed through our clearing
organization, to help facilitate customer securities transactions. This
credit, which earns interest income, is known as margin lending. In margin
transactions, the client pays a portion of the purchase price of securities,
and we make a loan (financed by our clearing organization) to the client for
the balance, collateralized by the securities purchased or by other securities
owned by the client. In permitting clients to purchase on margin, we are subject to the risk of a
market decline, which could reduce the value of our collateral below the
clients indebtedness. Agreements with margin account clients permit our
clearing organization to liquidate our clients securities with or without
prior notice in the event of an insufficient amount of margin collateral.
Despite those agreements, our clearing organization may be unable to liquidate
clients securities for various reasons including the fact that the pledged
securities may not be actively traded, there is an undue concentration of
certain securities pledged, or a trading halt is issued with regard to pledged
securities. CRITICAL ACCOUNTING POLICIES We have identified the policies and estimates set forth below as critical to
our operations and the understanding of our results of operations. The impact
of these policies is further discussed throughout Managements Discussion and
Analysis of Financial Condition and Results of Operations, where these policies
affect our reported amounts. Our significant accounting policies are described
in Note 2 in the Notes to Consolidated Financial Statements. Fair Value of Securities We routinely purchase and sell securities for our proprietary accounts and our
customers, including employees. Financial securities used in our trading
activities are recorded at fair value, with unrealized gains and losses
reflected in investment income. Securities with readily determinable market
values are based on quoted market prices. Many of the securities held are
those of distressed companies in which there may be limited market activity.
The value of securities with limited market activity for which quoted market
values are not readily determinable are based on our managements best
estimate, which may include dealer price quotations and price quotations for
similar instruments traded. In addition, changes in the market prices of
securities (and changes in our estimates of market values of securities) could
result in losses to us. For a further discussion of this market risk,
including the effects of a hypothetical 10% decline in prices, see Item 7A of
this Form 10-K. Receivable (Payable) to Clearing Organization We utilize our equity in securities owned at our clearing organization to
facilitate the purchase of additional securities for trading purposes. The
value of the equity at the clearing organization is primarily affected by
realized trading gains and losses, unrealized gains and losses, the purchase
and sale of accrued interest on debt securities, and cash withdrawals and
deposits at the clearing organization. As a result of this activity, including
the purchase and sale of securities, we may have either a receivable or payable
balance to the clearing organization. In the event that we have a payable
balance to the clearing organization, we may be restricted in our ability to
withdraw funds from the clearing organization to cover routine operating
expenses. Additionally, if the value of the equity at the clearing
organization is insufficient to cover the margin requirements on the value of
the securities borrowed, we may be required to either liquidate our holdings at
the clearing organization or provide additional funds to cover margin
requirements. For these reasons, we carefully monitor our receivable or
payable balance so that we can provide sufficient funds for operations. 13




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES As a broker-dealer, we are required to maintain a certain level of liquidity or
net capital in accordance with NASD regulations. Factors affecting our
liquidity include the value of securities held in trading accounts, the value
of non-current assets, the amount of unsecured receivables, and the amount of
general business liabilities, excluding amounts payable to its clearing broker
and NASD approved subordinated debt. Our inventory balance fluctuates daily based on the current market value and
types of securities held. We typically invest in securities in which we provide
research coverage. The types of securities may include publicly traded debt,
equity, options and private security issuances. As a market maker, we provide
bid and ask quotes on certain equity securities on the NASDAQ market. Market values for some of the distressed securities may not be easily
determinable depending upon the volume of securities traded on open markets,
the operating status of the companies or the types of securities issued by
companies. If the underlying securities of a company become illiquid, our
liquidity may be affected depending on the value of the securities involved.
During times of general market declines, we may experience market value losses,
which ultimately affects our liquidity through our broker-dealer net capital
requirements. In addition, we may decide not to liquidate our security
holdings to increase cash availability if our management believes a market
turnaround is likely in the near term or if our management believes the
securities are undervalued in the current market. We utilize the equity in securities owned at our clearing organization to fund
operating and investing activities. The value of the equity at the clearing
organization is also used to secure temporary financing for the purchase of
investments in our trading accounts. The value of our equity balance held at
the clearing organization may fluctuate depending on factors such as the market
valuation of securities held in our trading accounts, realized trading profits,
commission revenue, cash withdrawals and clearing costs we are charged for
conducting our trading activities. As a result of this activity, we may have
either a receivable or payable balance to the clearing organization. As of
December 31, 2003, we had a payable balance due to the clearing organization of
$742,334. Cash Flows From Operating Activities Net cash provided by (used in) operating activities was $640,070, $(710,296)
and $1,897,460 in 2003, 2002 and 2001, respectively. The net cash provided by
(used in) operating activities is impacted primarily by the brokerage operating
activities and changes in the brokerage-related assets and liabilities. In 2003, the primary uses of cash were from the $229,317 decrease in the
payable to clearing organization and the $763,931 decrease in securities sold,
not yet purchased. The primary source of cash was from the $383,523 decrease
in securities owned. The net effect of these transactions on cash flows from
operating activities was $609,725 in cash used in operations, with the
remaining increase consisting of $847,130 in net income plus changes in other
asset and liability accounts. During 2002, the primary uses of cash were from the increase in securities
owned, increase in other investments, and the decrease in accounts payable,
accrued expenses and other liabilities. Securities owned increased by
$2,973,638, which were financed primarily through the increase in the net
payable to clearing organization. Other investments increased by $1,250,000 as
we were required to collateralize one of our notes payable to a bank with a
certificate of deposit. Accounts payable, accrued expenses and other
liabilities decreased by $803,352 from the prior year as a result of reduced
bonuses and commissions payable at year-end compared with December 31, 2001.
The primary sources of cash consisted of the net increase in the net payable to
clearing organization of $2,876,989 and the increase in securities sold, not
yet purchased of $652,629. The net effect of these transactions on cash flows
from operating activities was $1,497,372 in cash used in operations, with the
remaining increase consisting of $290,052 in net income plus changes in other
asset and liability accounts. During 2001, the primary use of cash resulted from the $1,626,382 decrease in
the net payable to clearing organization. Our increased commission revenue and
decrease in investment losses allowed us to increase 14




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##### Table of Contents



our cash balances on deposit at the clearing organization. In addition, the
increased revenues allowed us to increase our security holdings by $578,645.
The primary sources of cash related to the receipt of income tax refunds for
prior year carrybacks and the reduction in cash paid due to the increase in
accounts payable and accrued expenses related to year-end bonus accruals. The
net effect of these transactions on cash flows from operating activities was
$916,297 in cash availability, with the remaining $981,163 increase consisting
of $833,022 in net income plus changes in other asset and liability accounts. We anticipate that a significant portion of the cash provided from our future
operating activities will be used to reduce our overall debt structure. Future
operating cash flows may also be used to facilitate additional investing
activities. Cash Flows From Investing Activities Net cash used in investing activities was $56,239, $10,169 and $77,261 in 2003,
2002 and 2001, respectively. In 2003, we purchased $56,239 of property and
equipment in the ordinary course of business. During 2002, the Company
purchased $10,169 of property and equipment in the ordinary course of business.
During 2001, the Company purchased $77,261 of property and equipment in the
ordinary course of business. Cash Flows From Financing Activities Net cash (used in) provided by financing activities was $(782,720), $923,450
and $(1,755,000) in 2003, 2002 and 2001, respectively. On February 17, 2004, the Company entered into an agreement with a bank to
borrow $2,500,000 for operating and financing purposes. The Company used a
portion of the proceeds to repay the March 2002 and the June 2003 loan
agreements in full. The loan is due on demand or by February 15, 2007 if no
demand is made. The loan accrues interest at prime plus 2% and is to be paid
in equal monthly payments of $70,000, plus accrued interest, commencing on
March 15, 2004. The loan is secured by the common stock of the Companys
primary operating subsidiary, Tejas Securities, as well as the personal
guaranty of an officer of the Company. On March 4, 2004, Tejas Securities
redeemed the $1,150,000 certificate of deposit held as collateral against the
March 2002 loan. The loan agreement contains covenants that, among other
things, limit our ability to incur debt and liens, limit our ability to pay
dividends, and restrict our ability to make loans or investments or incur
obligations as a guarantor or surety. In June 2003, the Company entered into an agreement with a bank to borrow
$805,000 for refinancing purposes. The loan was due on demand or by December
1, 2004 if no demand was made. The loan accrued interest at prime plus 1.5%
and was to be paid in equal monthly installments of $50,000, plus accrued
interest, commencing on July 1, 2003. The balance of the loan agreement was
$505,050 as of December 31, 2003. In March 2002, the Company entered into a term loan agreement with a bank to
borrow $2,500,000 for operating purposes. The loan was originally due and
payable on demand or by March 15, 2003 if no demand was made. The loan accrued
interest at 5.5% per annum. The Company purchased a certificate of deposit in
the amount of $2,500,000 as collateral for the loan. During 2002, the Company
repaid $1,100,000 of the loan from the bank through its own financing
arrangements. The bank in turn released from collateralization $1,100,000 of
the certificate of deposit to the Company, of which $1,000,000 was used for
operations, including repayment of $500,000 of the Companys subordinated debt.
The remaining $100,000 was not redeemed and was included in other investments
at December 31, 2002. In addition, the Company repaid $250,000 of a loan from
the bank through the redemption of $250,000 of the certificate of deposit
during 2002. As of December 31, 2002, the term loan agreement balance was
$1,150,000, which was collateralized by the certificate of deposit in the
amount of $1,250,000 (which was included as other investments in the
accompanying consolidated statements of financial condition). On March 15,
2003, the Company extended the maturity date of the loan to March 15, 2004. 15




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##### Table of Contents



General Our primary sources of cash are cash flows from operations and borrowings. Our
cash flows from operations and our ability to make scheduled payments of
principal and interest on, or to refinance, our indebtedness will depend on our
future performance, which is subject to the risks discussed in Part I and Item
7A of this Form 10-K. Likewise, our ability to borrow will depend on these
factors.
Based upon the current level of our operations, we believe that cash flows from
our operations and available cash, together with borrowings, will be adequate
to meet our future liquidity needs for both the short term and for at least the
next several years. However, there can be no assurance that our business will
generate sufficient cash flows from operations or that future borrowings will
be available in an amount sufficient to enable us to service our indebtedness
or to fund our other liquidity needs. As of December 31, 2003, our contractual cash obligations and the periods in
which payments under such cash obligations are due are as follows: Payments Due by PeriodLess than
    
    1-3
    
    3-5
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsNotes Payable
    
    $
    1,655,100
    
    
    
    1,655,100
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    3,701,000
    
    
    
    1,463,000
    
    
    
    1,973,000
    
    
    
    265,000
    
    
    
    Capital Lease Obligations
    
    
    82,000
    
    
    
    34,000
    
    
    
    48,000
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    $
    5,438,100
    
    
    
    3,152,100
    
    
    
    2,021,000
    
    
    
    265,000
    
    
    
    
 As of December 31, 2003, we had two promissory note agreements with First
United Bank, one of which had an outstanding principal balance of $505,050 and
the other $1,150,000. In February 2004, we entered into a new $2.5 million
promissory note agreement with First United. We used the proceeds of this loan
to repay the two previous outstanding loans and for working capital purposes.
This new loan is due on demand or by February 2007 if no demand is made. In
addition, the loan is to be paid in equal monthly installments of $70,000, plus
accrued interest, and is secured by a pledge of the stock of our subsidiaries
and a personal guarantee of our chairman of the board and chief executive
officer. The loan agreement contains covenants that, among other things, limit
our ability to incur debt or liens, limit our ability to pay dividends, and
restrict our ability to make loans or investments or incur obligations as a
guarantor or surety. Our operating lease obligations relate primarily to our office leases and
immaterial office equipment. For a discussion of these office leases, see Item
2 of this Form 10-K. Our capital lease obligations relate primarily to office equipment. Off Statement of Financial Condition Risk For a discussion of our margin lending, see General-Margin Loans under this
Item 7. As of December 31, 2003, the total of all customer securities pledges
on debit balances held in margin accounts was approximately $4.5 million. We are responsible to our clearing organization for payment of all transactions
executed both on our behalf and on behalf of our customers. Therefore, we are
exposed to off statement of financial condition risk in the event a customer
cannot fulfill its commitment and the clearing organization must purchase or
sell a financial instrument at prevailing market prices. We and our clearing
organization seek to control risk associated with customer transactions through
daily monitoring to assure margin collateral is maintained under regulatory and
internal guidelines. 16




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##### Table of Contents



We are exposed should Correspondent Services Corporation, our clearing
organization, be unable to fulfill its obligations for securities transactions. The Company deposits its cash with financial institutions. Periodically such
balances exceed applicable FDIC insurance limits. Securities Owned and Securities Sold, Not Yet Purchased In entering into securities transactions for our own account, we may take long
or short positions in securities. These positions are reported on our
consolidated balance sheets at fair value. These investments are subject to
the risk of failure of the issuer and the risk of changes in market value based
on the ability to trade such securities on the open market and the issuers
performance. For a discussion of our market risk, see Item 7A of this Form
10-K. Contingencies We are involved in various claims and legal actions that have arisen in the
ordinary course of business. It is our managements opinion that liabilities,
if any, arising from these actions will not have a material adverse effect on
our consolidated financial position or results of operations. In October 2001, an officer of ours purchased a liability of ours in the amount
of approximately $121,000 originally payable to a third party. The liability
originated from the merger transaction between Westech and Tejas and is now
payable to the officer upon our successful listing on a national exchange. Results Of Operations A material portion of the Companys commission revenues are generated by the
brokering of securities from United States domiciled companies that are rated
below investment grade and classified as distressed. The Company dedicates the
majority of its in-house research to analyzing distressed companies, which, in
turn, helps facilitate the brokering of these distressed securities. Customer securities transactions executed through the Companys proprietary
trading accounts have been reclassified as commissions from principal
transactions to conform with the presentation used in December 31, 2003
financial statements. 17




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##### Table of Contents



The following table presents additional information regarding the results of
operations as presented in Item 6. Year Ended December 31,2003
    
    2002
    
    2001(000s)
    
    % Change
    
    (000s)
    
    % Change
    
    (000s)Revenues:Commissions  Agency
    
    $
    1,835
    
    
    
    20
    
    
    
    1,530
    
    
    
    877
    
    
    
    157Commissions  Principal
    
    
    27,426
    
    
    
    53
    
    
    
    17,937
    
    
    
    (30
    )
    
    
    25,459Underwriting and investment banking
    
    
    73
    
    
    
    (78
    )
    
    
    336
    
    
    
    6
    
    
    
    317Net dealer inventory and
investment income (loss)
    
    
    (2,793
    )
    
    
    (315
    )
    
    
    1,297
    
    
    
    306
    
    
    
    (631
    )Other income
    
    
    44
    
    
    
    (68
    )
    
    
    135
    
    
    
    419
    
    
    
    26$
    26,584
    
    
    
    25
    
    
    
    21,235
    
    
    
    (16
    )
    
    
    25,328Expenses:Commissions, employee
compensation and benefits
    
    $
    19,141
    
    
    
    22
    
    
    
    15,667
    
    
    
    (16
    )
    
    
    18,666Clearing and floor brokerage
    
    
    590
    
    
    
    43
    
    
    
    413
    
    
    
    
    
    
    
    413Communications and occupancy
    
    
    2,100
    
    
    
    29
    
    
    
    1,631
    
    
    
    (1
    )
    
    
    1,646Professional
    
    
    949
    
    
    
    35
    
    
    
    705
    
    
    
    (40
    )
    
    
    1,169Other
    
    
    2,274
    
    
    
    2
    
    
    
    2,231
    
    
    
    5
    
    
    
    2,124$
    25,054
    
    
    
    21
    
    
    
    20,647
    
    
    
    (14
    )
    
    
    24,018
 The increase in agency commissions during 2003 was due to the overall increase
in the equity markets along with the addition of an institutional equity broker
during the current year. The increase in agency commissions during 2002 was
due to the addition of an institutional equity broker. The increase in principal commission revenues during 2003 was due to the
overall increase in the equity and corporate debt markets. With the
combination of low interest rates, lower corporate tax rates, and overall
economic growth, many corporations continued with restructuring plans and
generated positive growth during 2003. The business sectors in which the
Company routinely follows experienced substantial increases in their equity and
debt valuations, which generated increased opportunities for customer trading
activities. The decrease in commission revenues during 2002 was due to
continued uncertainty in the U.S. economy and abroad. Many of the Companys
customers sought safety by reducing their investment exposure. A combination
of low interest rates, increased corporate bond defaults and instability in the
equity markets were compelling reasons for investors to increase their cash
positions by reducing their investment holdings. Underwriting and investment banking revenues experienced a significant decrease
during 2003 as the Company did not receive any success fees on advisory
engagements. The Company had one advisory engagement in 2002, which generated
the slight increase from 2001. The Company did not direct any additional
resources to investment banking activities in 2003 from 2002. Net dealer inventory and investment income includes profits on proprietary
trading, market making activities and trading interest income and expense. Net
dealer inventory and investment income decreased during 2003. While the
Company was successful in generating increased commission revenues on
distressed companies securities, the Company purchased a number of debt
securities for its own account that performed negatively. Net dealer inventory
and investment income increased during 2002 due to increased trading activity
in distressed corporate debt securities. While many of the Companys customers
reduced their investment exposure, the Companys trading desk was able to
generate positive returns from the markets volatility. Other income decreased during 2003 due to a loss on the disposal of fixed
assets. Other income increased during 2002 due to interest receipts on a
certificate of deposit held in other investments (See Liquidity and Capital
Resources  Cash Flows From Financing Activities, above, and Note 6 to the
consolidated financial statements) and management support revenues pursuant to
a service agreement with Firstmark Corp., which 18




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##### Table of Contents



was terminated during August 2002 (see Note 21 to the consolidated financial statements). Commissions, employee compensation and benefits increased during 2003 due to an
increase in commission expense resulting directly from our increased commission
revenues. The Companys bonus expense during 2003 was lower than in the
previous year due to a reduction in bonuses paid to John Gorman. Commissions,
employee compensation and benefits decreased during 2002 as a function of
decreased revenues and profitability of the Company. The Companys commission
expense ratio was higher in 2002 as compared to 2003 due to incentives paid to
new institutional brokers during the year. Additionally, the Company incurred
higher bonus expense as a percentage of revenues during 2002 as compared to
2003 as the Company paid retention bonuses to key management and research
personnel in 2002. Clearing and floor brokerage costs for 2003 increased due to increased market
making activity, which began in the fourth quarter of 2002. Additionally, the
Company did not receive any order flow rebates for 2003 trading activity.
Clearing and floor brokerage costs for 2002 were consistent with 2001 amounts
despite the decrease in revenues. The Company increased market making
activities during the fourth quarter of 2002, and generated insignificant
amounts of revenues from those activities. Communications and occupancy charges increased in 2003 primarily from the March
2003 expiration of a sublease agreement for a portion of the Austin office
location. The Company was previously receiving approximately $45,000 per month
in sublease revenue. Communications and occupancy charges decreased slightly
during 2002 as the Company realized a full year of sublease receipts versus the
prior year. Professional fees increased during 2003 due to the settlement of three customer
claims against the Company. Professional fees decreased during 2002 due to a
reduction in legal fees associated with a reduction in claims and legal actions
against the Company. Other expenses increased modestly during 2003 primarily from increases in
entertainment costs, which was partially offset by a decrease in fixed asset
rental costs. The increase in other expenses during 2002 was due to an
increase in insurance and regulatory costs. Income tax expense increased during 2003 due to the increase in pre-tax
earnings for the year. The Companys effective tax rate was 45% for 2003.
Income tax expense decreased in 2002 due a reduction in pre-tax earnings from
2001 amounts. The Companys effective tax rate was 51% for 2002. The
Companys effective tax rate exceeds the statutory rate due to the effects of
state income taxes and non-deductible meals and entertainment expenses. Effects Of Inflation The effects of inflation have been minimal on the results of operations and the
financial condition of the Company in recent years. However, the rising cost
of labor and competitive market for brokers could affect general and
administrative costs in the near term. Recently Issued Accounting Pronouncements In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
the consolidated financial statements. 19




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Companys principal business activities are, by their nature, risky and
volatile and are directly affected by economic and political conditions and
broad trends in business and finance in the national and international markets.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially affect the Companys business. Managing risk is
critical to the Companys profitability and to reducing the likelihood of
earnings volatility. The Companys risk management policies and procedures have
been established to continually identify, monitor and manage risk. The major
types of risk that the Company faces include credit risk, operating risk and
market risk. Credit risk is the potential for loss due to a customer or counterparty failing
to perform its contractual obligation. The Company clears its securities
transactions through a clearing organization. Under the terms of the clearing
agreement, the clearing organization has the right to charge the Company for
its losses that result from its customers failure to fulfill their contractual
obligations. In order to mitigate risk, the Companys policy is to monitor the
credit standing of its customers and maintain collateral to support customer
margin balances. Further, significant portions of the Companys assets are held
at its clearing organization, Correspondent Services Corporation. Therefore,
the Company could incur substantial losses if its clearing organization were to
become insolvent or otherwise unable to meet its financial obligations.
Correspondent Services Corporation has in excess of $200 million in capital and
has historically met all of its obligations to the Company. Operating risk arises from the daily conduct of the Companys business and
relates to the potential for deficiencies in control processes and systems,
mismanagement of Company activities or mismanagement of customer accounts by
its employees. The Company relies heavily on computer and communication systems
in order to conduct its brokerage activities. Third party vendors, such as the
clearing organization and news and quote providers, provide many of the systems
critical to the Companys business. The Companys business could be adversely
impacted if any of these systems were disrupted. The Company mitigates the risk
associated with systems by hiring experienced personnel, and providing
employees with alternate means of acquiring or processing information. In order
to mitigate the risk associated with mismanagement of Company activities or
customer accounts, the Company utilizes compliance and operations personnel to
review the activities of administrative and sales personnel. In addition, the
activities of management are actively reviewed by other members of management
on a regular basis and by the Board of Directors. The Companys primary market risk exposure is to market price changes and the
resulting risk of loss that may occur from the potential change in the value of
a financial instrument as a result of price volatility or changes in liquidity
for which the Company has no control. Securities owned by the Company are
either related to daily trading activity or the Companys principal investing
activities. Market price risk related to trading securities is managed
primarily through the daily monitoring of funds committed to the various types
of securities owned by the Company and by limiting exposure to any one
investment or type of investment. However, the Company will on occasion
concentrate its securities holdings to one or two positions based upon its
research and potential for market appreciation. Approximately 78% of the value
of securities owned as of December 31, 2003 related to a single security which
was sold subsequent to year-end at a gain. The Companys trading securities were $5,601,782 in long positions and $221,279
in short positions at December 31, 2003. These trading securities may be
exchange listed, Nasdaq, other over-the-counter securities, or securities in
which there is limited market activity on both long and short positions. The
potential loss in fair value, using a hypothetical 10% decline in prices, is
estimated to be $582,000 as of December 31, 2003. A 10% hypothetical decline
was used to represent a significant and plausible market change. The Companys investment securities are typically those reported on by the
Companys research analysts. These positions often consist of high-yield debt
securities and the related equity securities. The Company monitors this risk by
maintaining current operating and financial data on the companies involved, and
projecting future valuations based upon the occurrence of critical future
events. Any transactions involving the investment securities are typically
based upon the recommendations of the Companys research analysts 20




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##### Table of Contents



versus current market performance. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is set forth in Item 15 of this report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE The Company filed a Report on Form 8-K dated May 13, 2003 reporting a change in its independent public accountants to Ernst & Young LLP from KPMG LLP. There were no disagreements with accountants on accounting and financial disclosure for the year ended December 31, 2003. 
 ITEM 9A. CONTROLS AND PROCEDURES At December 31, 2003, under the supervision and with the participation of our
management, including our Chief Executive Officer, Chief Financial Officer and
Director of Finance, we evaluated the effectiveness of our disclosure controls
and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act
of 1934, as amended). Based on this evaluation, our Chief Executive Officer,
Chief Financial Officer and Director of Finance concluded that, as of December
31, 2003, our disclosure controls and procedures were effective. There have been no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, such internal control
over financial reporting. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2004 annual meeting of
stockholders, except for the information regarding our executive officers,
which is presented in Part I of this Form 10-K. The information required by
this item contained in our definitive proxy statement is incorporated herein by
reference. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2004 annual meeting of
stockholders and is incorporated herein by reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2004 annual meeting of
stockholders and is incorporated herein by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2004 annual meeting of
stockholders and is incorporated herein by reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2004 annual meeting of
stockholders and is incorporated herein by reference. 21




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)
    
    
    1.
    
    
    Financial StatementsSee Financial Statements attached hereto.2.
    
    
    ExhibitsIncorporated by reference to the Exhibit Index at the end of this
report.(B)
    
    
    
    
    
    Reports on Form 8-KNone.
 22




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. WESTECH CAPITAL CORP.By:
    /s/ Charles H. MayerCharles H. Mayer, President, ChiefOperating Officer and Director Date: April 7, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated: Signature
    
    Title
    
    Date/s/ John J. GormanJohn J. Gorman
    
    Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
    
    April 7, 2004/s/ Charles H. MayerCharles H. Mayer
    
    President, Chief Operating
Officer and Director
    
    April 7, 2004/s/ Kurt J. RechnerKurt J. Rechner
    
    Chief Financial Officer,
(Principal Financial Officer)
Treasurer and Secretary
    
    April 7, 2004/s/ John F. GarberJohn F. Garber
    
    Director of Finance (Principal
Accounting Officer)
    
    April 7, 2004/s/ Barry A. WilliamsonBarry A. Williamson
    
    Director
    
    April 7, 2004/s/ Clark N. WilsonClark N. Wilson
    
    Director
    
    April 7, 2004/s/ William A. InglehartWilliam A. Inglehart
    
    Director
    
    April 7, 2004
 23




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Consolidated Financial StatementsYears Ended December 31, 2003, 2002 and 2001(With Report of Independent Auditors Thereon)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES Index PageReport of Independent Auditors
    
    
    1Independent Auditors Report
    
    
    2Financial Statements:Consolidated Statements of Financial Condition as of December 31, 2003 and 2002
    
    
    3Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
    
    
    4Consolidated Statements of Stockholders Equity for the years ended December 31, 2003, 2002
and 2001
    
    
    5Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    
    6Notes to Consolidated Financial Statements
    
    
    8




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##### Table of Contents



Report of Independent Auditors The Board of Directors and Shareholders
Westech Capital Corp. and Subsidiaries We have audited the accompanying statement of financial condition of Westech
Capital Corp. and Subsidiaries (the Company) as of December 31, 2003, and the
related statement of operations, stockholders equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion. In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of Westech Capital Corp. and
Subsidiaries at December 31, 2003, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States. /s/ Ernst & Young LLP


Austin, Texas
March 4, 2004





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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders
Westech Capital Corp.: We have audited the accompanying consolidated statement of financial condition of Westech Capital Corp.
and subsidiaries (the Company) as of December 31, 2002, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years in the twoyear period
ended December 31, 2002. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westech Capital
Corp. and subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. /s/ KPMG LLP Austin, Texas
March 15, 2003




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Financial Condition
December 31, 2003 and 2002 2003
    
    2002AssetsCash and cash equivalents
    
    $
    551,857
    
    
    
    750,746Receivables from employees and stockholders
    
    
    177,223
    
    
    
    263,866Federal income taxes receivable
    
    
    164,147
    
    
    
    202,070Securities owned, at market value
    
    
    5,601,782
    
    
    
    5,985,305Other investment
    
    
    1,155,000
    
    
    
    1,250,000Property and equipment, net
    
    
    329,651
    
    
    
    333,800Deferred tax asset, net
    
    
    53,504
    
    
    
    74,990Goodwill
    
    
    138,215
    
    
    
    138,215Prepaid expenses and other assets
    
    
    185,074
    
    
    
    275,946Total assets
    
    $
    8,356,453
    
    
    
    9,274,938Liabilities and Stockholders EquityAccounts payable, accrued expenses and other liabilities
    
    $
    2,376,535
    
    
    
    2,380,552Securities sold, not yet purchased
    
    
    221,279
    
    
    
    985,210Payable to clearing organization
    
    
    742,334
    
    
    
    971,651Notes payable
    
    
    1,655,100
    
    
    
    1,623,450Notes payable to stockholder
    
    
    
    
    
    
    800,000Total liabilities
    
    
    4,995,248
    
    
    
    6,760,863Commitments and contingenciesStockholders equity:Common stock, $0.001 par value
10,000,000 shares authorized; 1,512,024 issued
and outstanding in 2003 and 2002
    
    
    1,512
    
    
    
    1,512Additional paid in capital
    
    
    2,222,281
    
    
    
    2,222,281Retained earnings
    
    
    1,137,412
    
    
    
    290,282Total stockholders equity
    
    
    3,361,205
    
    
    
    2,514,075Total liabilities and stockholders equity
    
    $
    8,356,453
    
    
    
    9,274,938
 See accompanying notes to consolidated financial statements. 3




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Revenue:Commissions from agency transactions
    
    $
    1,834,822
    
    
    
    1,530,218
    
    
    
    156,627Commissions from principal transactions
    
    
    27,425,651
    
    
    
    17,937,058
    
    
    
    25,459,362Underwriting and investment banking income
    
    
    72,799
    
    
    
    335,663
    
    
    
    316,927Net dealer inventory and investment income
(loss), net of trading interest expense of
$112,348, $51,484 and $120,976,
respectively
    
    
    (2,793,103
    )
    
    
    1,296,933
    
    
    
    (630,687
    )Other income
    
    
    43,591
    
    
    
    135,055
    
    
    
    25,920Total revenue
    
    
    26,583,760
    
    
    
    21,234,927
    
    
    
    25,328,149Expenses:Commissions, employee compensation
and benefits
    
    
    19,140,520
    
    
    
    15,667,467
    
    
    
    18,666,284Clearing and floor brokerage
    
    
    589,913
    
    
    
    412,657
    
    
    
    412,819Communications and occupancy
    
    
    2,100,250
    
    
    
    1,631,136
    
    
    
    1,645,693Professional fees
    
    
    949,313
    
    
    
    704,718
    
    
    
    1,169,474Interest, including $40,543, $106,461 and
$143,266, respectively, to related parties
    
    
    115,571
    
    
    
    212,484
    
    
    
    229,226Other
    
    
    2,158,809
    
    
    
    2,018,213
    
    
    
    1,894,971Total expenses
    
    
    25,054,376
    
    
    
    20,646,675
    
    
    
    24,018,467Income before income tax expense
and minority interest
    
    
    1,529,384
    
    
    
    588,252
    
    
    
    1,309,682Income tax expense
    
    
    682,254
    
    
    
    298,200
    
    
    
    495,474Income before minority interest
    
    
    847,130
    
    
    
    290,052
    
    
    
    814,208Minority interest
    
    
    
    
    
    
    
    
    
    
    (18,814
    )Net income
    
    $
    847,130
    
    
    
    290,052
    
    
    
    833,022Earnings per share:Basic
    
    $
    0.56
    
    
    
    0.19
    
    
    
    0.62Diluted
    
    $
    0.54
    
    
    
    0.19
    
    
    
    0.53Weighted average shares outstanding:Basic
    
    
    1,512,024
    
    
    
    1,512,024
    
    
    
    1,348,097Diluted
    
    
    1,563,876
    
    
    
    1,525,703
    
    
    
    1,546,112
 See accompanying notes to consolidated financial statements. 4




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WESTECH CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2003, 2002 and 2001 AdditionalCommon
    
    Paid in
    
    Retained EarningsShares
    
    Stock
    
    Capital
    
    (Accumulated Deficit)
    
    TotalBalance at December 31, 2000
    
    
    1,266,134
    
    
    $
    1,266
    
    
    
    1,730,744
    
    
    
    (832,792
    )
    
    
    899,218Acquisition of minority
interest
    
    
    245,890
    
    
    
    246
    
    
    
    491,537
    
    
    
    
    
    
    
    491,783Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    833,022
    
    
    
    833,022Balance at December 31, 2001
    
    
    1,512,024
    
    
    
    1,512
    
    
    
    2,222,281
    
    
    
    230
    
    
    
    2,224,023Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290,052
    
    
    
    290,052Balance at December 31, 2002
    
    
    1,512,024
    
    
    
    1,512
    
    
    
    2,222,281
    
    
    
    290,282
    
    
    
    2,514,075Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847,130
    
    
    
    847,130Balance at December 31, 2003
    
    
    1,512,024
    
    
    $
    1,512
    
    
    
    2,222,281
    
    
    
    1,137,412
    
    
    
    3,361,205
 See accompanying notes to consolidated financial statements. 5




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    847,130
    
    
    
    290,052
    
    
    
    833,022Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Deferred tax expense
    
    
    21,486
    
    
    
    9,925
    
    
    
    386,637Depreciation and amortization expense
    
    
    120,642
    
    
    
    132,067
    
    
    
    139,652Non-cash compensation expense
    
    
    99,836
    
    
    
    50,000
    
    
    
    86,500Loss on disposition of property and equipment
    
    
    36,462
    
    
    
    22,388
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    (18,814
    )Changes in operating assets and liabilitiesDeposit with clearing organization
    
    
    
    
    
    
    260,471
    
    
    
    (10,471
    )Receivable from/payable to clearing organization
    
    
    (229,317
    )
    
    
    2,876,989
    
    
    
    (1,626,382
    )Receivable from employees and stockholders
    
    
    (13,193
    )
    
    
    180,240
    
    
    
    (246,406
    )Federal income taxes receivable
    
    
    37,923
    
    
    
    (201,097
    )
    
    
    1,807,241Securities owned
    
    
    383,523
    
    
    
    (2,973,638
    )
    
    
    (578,645
    )Prepaid expenses and other assets
    
    
    90,872
    
    
    
    43,030
    
    
    
    (75,460
    )Other investment
    
    
    95,000
    
    
    
    (1,250,000
    )
    
    
    Accounts payable, accrued expenses and other
liabilities
    
    
    (86,363
    )
    
    
    (803,352
    )
    
    
    1,314,083Securities sold, not yet purchased
    
    
    (763,931
    )
    
    
    652,629
    
    
    
    (113,497
    )Net cash provided by (used in) operating activities
    
    
    640,070
    
    
    
    (710,296
    )
    
    
    1,897,460Cash flows from investing activities:Purchase of property and equipment
    
    
    (56,239
    )
    
    
    (10,169
    )
    
    
    (77,261
    )Net cash used in investing activities
    
    
    (56,239
    )
    
    
    (10,169
    )
    
    
    (77,261
    )Cash flows from financing activities:(Repayment of) proceeds from notes payable
    
    
    31,650
    
    
    
    1,123,450
    
    
    
    (1,000,000
    )(Repayment of) proceeds from notes payable to stockholders
    
    
    (800,000
    )
    
    
    800,000
    
    
    
    (750,000
    )Payments on capital lease
    
    
    (14,370
    )
    
    
    
    
    
    
    Repayment of
subordinated debt - related party
    
    
    
    
    
    
    (1,000,000
    )
    
    
    Purchase of minority interest shares
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Net cash provided by (used in) financing activities
    
    
    (782,720
    )
    
    
    923,450
    
    
    
    (1,755,000
    )
  6
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001 Net change in cash and cash equivalents
    
    $
    (198,889
    )
    
    
    202,985
    
    
    
    65,199Cash and cash equivalents at beginning of year
    
    
    750,746
    
    
    
    547,761
    
    
    
    482,562Cash and cash equivalents at end of year
    
    $
    551,857
    
    
    
    750,746
    
    
    
    547,761Supplemental disclosures:Interest paid
    
    $
    115,571
    
    
    
    212,484
    
    
    
    360,352Taxes paid
    
    $
    571,121
    
    
    
    480,500
    
    
    
    127,500Summary of non-cash transactions:
         See accompanying notes to consolidated financial statements.  7




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (1)
    
    Organization and Basis of PresentationWestech Capital Corp., a Delaware corporation, (Westech Capital Corp.) is
a holding company whose only significant operating subsidiary is Tejas
Securities Group, Inc., a Texas corporation (Tejas Securities). Tejas
Securities is engaged in the business of providing brokerage and related
financial services to institutional and retail customers nationwide.Westech Capital Corp. was incorporated as a shell corporation in New York
on July 18, 1990, and made an initial public offering in November 1991.
Westech Capital Corp. was acquired by Tejas Securities in a reverse merger
(Merger) effected on August 27, 1999. Pursuant to an Agreement and Plan
of Merger, Tejas Securities Group Holding Company (Tejas Holding), a
Texas corporation, holding approximately 81% of Tejas Securities, became a
wholly-owned subsidiary of Westech Capital Corp. In April 2001, Westech
Capital Corp. reincorporated from New York to Delaware. On August 29, 2001,
the minority interest shareholders of Tejas Securities exchanged their shares of Tejas Securities common stock for restricted stock of Westech
Capital Corp. As a result, Westech Capital Corp. owns, directly or through
Tejas Holding, 100% of Tejas Securities.Effective June 20, 2002, Westech Capital Corp. amended its certificate of
incorporation to decrease the number of shares of common stock that it has
the authority to issue from 50,000,000 to 10,000,000.Tejas Securities is registered as a broker and dealer in securities with
the National Association of Securities Dealers, Inc. and clears its
transactions on a fully disclosed basis through Correspondent Services
Corporation. Tejas Securities headquarters are located in Austin, Texas.References to the Company within the accompanying notes to the consolidated
financial statements are to Westech Capital Corp. and subsidiaries.(2)
    
    Summary of Significant Accounting Policies  (a)
    
    Principles of ConsolidationThe accompanying consolidated financial statements reflect the
consolidated accounts of the Company and its first and second tier
subsidiaries, Tejas Holding and Tejas Securities. All significant
intercompany accounts and transactions have been eliminated in
consolidation.(b)
    
    Revenue RecognitionAgency commission revenue and related expense from customer security
transactions is recorded on a trade date basis. Customer security
transactions that are executed through the Companys proprietary
trading account are recorded on a trade date basis as principal
commission revenue. The related expense is also recorded on a trade
date basis.Net dealer inventory and investment income (loss) results from
securities transactions entered into for the account of the Company.
Net dealer inventory and investment income (loss) includes both
realized and unrealized gains and losses, which are recorded on a trade
date basis.  8
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The Company does not carry or clear customer accounts, and all customer
transactions are executed and cleared with other brokers on a fully
disclosed basis. These brokers have agreed to maintain such records of
the transaction effected and cleared in the customers accounts as are
customarily made and kept by a clearing broker pursuant to the
requirements of Rules 17a-3 and 17a-4 of the Securities Exchange Act of
1934, as amended, and to perform all services customarily incident
thereto.(c)
    
    Investment BankingInvestment banking revenues include gains, losses, and fees, net of
syndicate expenses, arising from securities offerings in which the
Company acts as an underwriter or agent. Investment banking revenues
also include fees earned from providing merger-and-acquisition and
advisory services. Investment banking management fees are recorded on
the offering date, sales concessions on the settlement date, and
underwriting fees at the time the underwriting is completed and the
income is reasonably determinable.(d)
    
    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.(e)
    
    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. The difference between cost
and fair value has been included in net dealer inventory and investment
income (loss). These investments are subject to the risk of failure of
the issuer and the risk of changes in market value based on the ability
to trade such securities on the open market.(f)
    
    Property and EquipmentProperty and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets. Estimated useful lives for equipment approximate
those used for federal income tax purposes and range from 3 to 7 years.
Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the improvements or
the terms of the related leases.Long-lived assets, such as property and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the statements of financial condition and
reported at the lower of the carrying amount or fair value less costs
to sell, and would no longer be depreciated.  9
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (g)
    
    GoodwillGoodwill represents the excess of costs over fair value of assets of
businesses acquired and was recorded in connection with the Companys
acquisition of the minority interest of Tejas Securities in August,
2001. Goodwill and other intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life
are not amortized, but instead tested for impairment at least annually.(h)
    
    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, 2003 or 2002.(i)
    
    Federal Income TaxesIncome taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.(j)
    
    EstimatesThe preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.(k)
    
    Stock-Based CompensationIn December 2002, the Financial Accounting Standards Board issued SFAS
No. 148 (SFAS No. 148), Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement No. 123.
SFAS No. 148 amends Financial Accounting Standards Board Statement No.
123 (SFAS No. 123), Accounting for Stock-Based Compensation,to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirement of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the fair value based
method of accounting for stock-based employee compensation for those
companies that have elected to continue to apply Accounting Principles
Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to
Employees.The Company has elected to continue to apply the provision
of APB No. 25 to its stock options. The adoption of SFAS No. 148 did
not have an impact on the Companys consolidated financial statements.  10
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The following table illustrates the effect on net income (loss) if the
fair-value-based method had been applied to all outstanding and
unvested awards in each period. Year Ended December 31,2003
    
    2002
    
    2001Net income as reported
for basic
    
    $
    847,130
    
    
    
    290,052
    
    
    
    833,022Deduct or add stock-based
compensation expense
determined under the fair
value based method
    
    
    (15,164
    )
    
    
    (50,930
    )
    
    
    (178,775
    )Pro forma net income
for basic
    
    $
    831,966
    
    
    
    239,122
    
    
    
    654,247Net income as reported
For diluted (Note 15)
    
    $
    847,130
    
    
    
    290,052
    
    
    
    814,208Deduct or add stock-based
compensation expense
determined under the fair
value based method
    
    
    (15,164
    )
    
    
    (50,930
    )
    
    
    (178,775
    )Pro forma net income
For diluted
    
    $
    831,966
    
    
    
    239,122
    
    
    
    635,433Earnings per share as
reported:Basic
    
    $
    0.56
    
    
    
    0.19
    
    
    
    0.62Diluted
    
    $
    0.54
    
    
    
    0.19
    
    
    
    0.53Pro forma earnings per
share:Basic
    
    $
    0.55
    
    
    
    0.16
    
    
    
    0.49Diluted
    
    $
    0.53
    
    
    
    0.16
    
    
    
    0.41
  The Company had no stock option expense calculated under the provisions
of APB. No. 25 for the years ended December 31, 2003, 2002 and 2001.(l)
    
    ReclassificationsCertain reclassifications have been made to prior year balances to
conform to current year presentation.  11
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (3)
    
    Receivables From and Payables To Clearing OrganizationAt December 31, 2003 and 2002, the Company had net payables to its clearing
organization consisting of the following: 2003
    
    2002Payable:Payable to clearing organization
    
    $
    742,334
    
    
    
    971,651
  (4)
    
    Receivables from Employees and StockholdersThe Company makes advances to certain employees and officers in months when
their commission payout does not meet a predetermined amount. As of
December 31, 2003 and 2002, approximately $23,000 and $63,000,
respectively, had been advanced to employees under this agreement. These
receivables are to be repaid through reductions of future commissions or
bonuses. During 2003, the Company forgave approximately $113,000 in
receivables from employees and officers. During 2002, the Company forgave
approximately $17,000 in receivables from employees. The amounts forgiven
are included in compensation expense in the accompanying consolidated
statements of operations.During 1999 the Company received a $200,000 note from an officer of the
Company. The note bears no interest and was due on demand if the officer
resigned as an employee of the Company prior to December 31, 2000. Under
the terms of the note, matured unpaid principal and interest shall bear
interest at the lesser of 5.55% per annum or the maximum rate allowed by
law from the earlier of December 31, 2000 or the officers voluntary
termination. Effective January 1, 2001, the Company agreed to forgive the
note in $50,000 increments beginning in December 2001 and continuing
through December 2004, as long as the officer remains an employee of the
Company. Forgiven amounts are included in compensation expense in the
accompanying consolidated statements of operations. The balance of the
note was $50,000 as of December 31, 2003.During 1999, the Company received a $50,000 note from an employee and
stockholder of the Company to supplement the employees commission payout
during 1999. The note bears interest of 8% per annum, and was due and
payable on August 27, 2003. The maturity date of the note was extended for
one year in August 2003. During 2001, the Company forgave $25,000 of the
note, which is included in compensation expense in the accompanying
consolidated statements of operations. The note is secured by a stock
pledge agreement for the employees shares issued by the Company. The
balance of the note, plus accrued interest, was approximately $28,000 as of
December 31, 2003.The Company had notes receivable, and related interest accrued, from other
employees and related parties of the Company totaling $7,500 as of December
31, 2000. The notes had terms which either required settlement by
pre-determined dates or which allowed the notes to be forgiven based on
pre-determined conditions, which were based on employee compensation
arrangements. The remaining balance of $7,500 was forgiven during 2001.In April 2002, the Company received a $25,000 note from an employee. The
note accrues no interest and was due and payable on April 12, 2003. On
April 12, 2003, the note began to accrue interest at the lesser of 5.55%
per annum or the maximum rate allowed by law, until paid. The balance of
the note, plus accrued interest, was approximately $26,000 as of December
31, 2003.  12
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  In November 2003, the Company received a $60,000 note from an employee.
The note accrues no interest and is due and payable on November 20, 2004.
The balance of the note was $50,000 as of December 31, 2003.Notes receivable and related party receivables are included in receivables
from employees and stockholders in the accompanying statements of financial
condition.(5)
    
    Securities Owned and Securities Sold, Not Yet PurchasedAt December 31, 2003 and 2002, securities owned and sold, not yet purchased
consisted of the following: 2003
    
    2002Sold,
    
    
    
    
    
    Sold,not yet
    
    
    
    
    
    not yetOwned
    
    purchased
    
    Owned
    
    purchasedState and municipal
obligations
    
    $
    289,613
    
    
    
    50,806
    
    
    
    1,511,086
    
    
    
    20,844US Government bonds
    
    
    
    
    
    
    
    
    
    
    275,550
    
    
    
    608,864Corporate bonds and
notes
    
    
    302,714
    
    
    
    
    
    
    
    2,890,959
    
    
    
    177,940Equity securities
    
    
    5,009,455
    
    
    
    170,473
    
    
    
    1,307,710
    
    
    
    177,562$
    5,601,782
    
    
    
    221,279
    
    
    
    5,985,305
    
    
    
    985,210
  At December 31, 2003 and 2002, the unrealized gain (loss) associated with
securities owned and securities sold, not yet purchased, was $206,943 and
$(788,379), respectively.Approximately 78% of the value of securities owned as of December 31, 2003
related to a single security which was sold subsequent to year end at a
gain.(6)
    
    Other InvestmentIn March 2002, the Company entered into a term loan agreement with a bank
to borrow $2,500,000 for operating purposes of Tejas Securities. The loan
was originally due and payable on demand or by March 15, 2003 if no demand
was made. The loan accrues interest at a rate of 5.50% per annum, and is
to be paid on a monthly basis. The Company paid approximately $51,000 and
$85,000 in interest related to this for the years ended December 31, 2003
and 2002, respectively. Tejas Securities purchased a certificate of
deposit in a like amount as collateral for the loan, of which the balance
as of December 31, 2003 and 2002 of $1,155,000 and $1,250,000,
respectively, is included in other investment. During 2002, the Company
repaid $1,100,000 of the loan from the bank through its own financing
arrangements. The bank in turn released from collateralization $1,100,000
of the certificate of deposit to Tejas Securities, of which $1,000,000 was
used for operations of the Company, including repayment of $500,000 of the
Companys subordinated debt (Note 11). The remaining $100,000 was not
redeemed and is included in other investment at December 31, 2002. In
addition, the Company repaid $250,000 of a loan from the bank through the
redemption of $250,000 of the certificate of deposit during 2002. In
February 2003, the Company redeemed $95,000 of the certificate of deposit.
As of December 31, 2003 and 2002, the term loan agreement balance is
$1,150,000, which is collateralized in a like amount with the certificate
of deposit. On March 15, 2003, the Company extended the maturity date of
the loan to March 15, 2004.  13
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (7)
    
    Property and EquipmentProperty and equipment consists of the following: December 31,2003
    
    2002Furniture and equipment
    
    $
    310,818
    
    
    
    394,559Leasehold improvements
    
    
    389,132
    
    
    
    346,244699,950
    
    
    
    740,803Accumulated depreciation and
amortization
    
    
    (370,299
    )
    
    
    (407,003
    )$
    329,651
    
    
    
    333,800
  (8)
    
    Accrued Commissions and BonusesAccrued commissions and bonuses are included in accounts payable, accrued
expenses and other liabilities in the accompanying consolidated statements
of financial condition.As of December 31, 2003 and 2002, the Company had accrued approximately
$1,357,000 and $1,243,000, 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, 2003 and 2002 were
$365,000 and $300,000, respectively. During 2003 and 2002, an officer of
the Company received approximately $289,000 and $80,000, respectively, as
part of his contractual compensation which was based on the Companys
operating performance. Management of the Company reviews both contractual
and discretionary bonus amounts, with discretionary bonus amounts approved
by the Compensation Committee of the Company.(9)
    
    Notes PayableThe Company had a $1,500,000 line of credit with a bank at December 31,
2000. On March 6, 2001, the Company restructured its line of credit. In
exchange for a $500,000 principal reduction and interest being paid to the
restructure date, the line of credit was converted into a term loan in the
amount of $1,000,000. The term loan was secured by the common stock of the
Companys primary operating subsidiary, Tejas Securities, as well as the
personal guaranty of an officer of the Company. Additionally, there were
no financial covenants governing the term loan. The balance of this note
was $500,000 at December 31, 2001. The modified note matured April 1, 2002
and required monthly payments of $50,000 plus accrued interest with
payments beginning April 1, 2001 through maturity of the note on April 1,
2002 when all unpaid principal plus interest became due and payable. On
April 1, 2002, the Company extended the maturity date of the note through
November 1, 2002. There were no changes in the security or covenants of
the restructured term loan. Under the restructured terms, the Company
continued to make monthly payments of $50,000 plus accrued interest. The
note was paid in full on August 15, 2002. The Company incurred
approximately $13,000 and $86,000 in interest related to this debt for the
years ended December 31, 2002 and 2001, respectively.  14
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  In March 2002, the Company entered into a term loan agreement with a bank
to borrow $2,500,000 for operating purposes at Tejas Securities (Note 6).
The balance of the loan agreement is $1,150,000 as of December 31, 2003.On July 31, 2002, the Company entered into an agreement with a bank to
borrow $250,000 for short-term operating purposes at Tejas Securities. The
loan was due and payable in a single payment on October 1, 2002, and
accrued interest at 7% per annum. The loan was secured by the common stock
of the Companys primary operating subsidiary, Tejas Securities. The loan
plus accrued interest of approximately $1,000 was paid in full on August
15, 2002.On October 30, 2002, the Company entered into a loan agreement with a bank
to borrow $500,000 for operating purposes at Tejas Securities. The loan
was due on demand or by May 1, 2004 if no demand is made. The loan accrued
interest at prime plus 1.5% and was to be paid in equal monthly payments
commencing on December 1, 2002. The loan was secured by the common stock
of the Companys primary operating subsidiary, Tejas Securities, as well as
the personal guaranty of an officer of the Company. The balance on the
loan agreement was $473,450 as of December 31, 2002. The note was paid in
full in July 2003. The Company paid interest of approximately $10,000 and
$6,000 during 2003 and 2002, respectively, in relation to this debt.On June 3, 2003, the Company entered into an agreement with a bank to
borrow $805,000 for refinancing purposes. The loan is due on demand or by
December 1, 2004 if no demand is made. The loan accrues interest at prime
plus 1.5% and is to be paid in equal monthly installments of $50,000, plus
accrued interest, commencing on July 1, 2003. The balance on the loan
agreement was $505,050 as of December 31, 2003. The Company paid interest
of approximately $20,000 during 2003 in relation to this loan.(10)
    
    Notes Payable to StockholdersDuring 2000, the Company issued an unsecured short-term demand note to an
officer of the Company in return for $500,000. Also in 2000, the Company
issued an additional unsecured short-term demand note to another officer of
the Company in return for $250,000. The short-term demand notes bore
interest of 9.5% per annum and were due and payable, with accrued interest,
on February 7, 2001. Effective February 7, 2001, the Company restructured
the short-term demand notes into term notes with new maturity dates of
March 7, 2002. The restructured short-term demand notes bore interest at
9% per annum, with payment due upon maturity. The $500,000 note was paid
in full in May 2001, including accrued interest. The $250,000 note was
paid in full in June 2001, including accrued interest. The Company
incurred approximately $19,000 and $10,000, respectively, in interest
related to these debts for the year ended December 31, 2001.On August 8, 2002, the Company entered into an unsecured promissory note
agreement with an officer of the Company to borrow $1,000,000. Under the
terms of the promissory note, the Company was to make twenty monthly
installment payments of $50,000, plus accrued interest, beginning on
September 8, 2002. The promissory note accrued interest at 11.5% per
annum. The balance on the promissory note agreement was $800,000 as of
December 31, 2002. The Company paid the remaining balance of the
promissory note in June 2003 with proceeds from the June 2003 bank loan
agreement. The Company paid interest of approximately $41,000 and $41,000
during 2003 and 2002, respectively, in relation to this debt.  15
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (11)
    
    Subordinated Debt  Related PartyThe Company had $1,000,000 in debt subordinated to claims of general
creditors as of December 31, 2001. The subordinated debt was originally due
November 1, 2001, accrued interest at 11.5% and was owed to a director of
the Company. Interest was paid monthly. On February 27, 2001, the Companys
subordinated debt was restructured. The holder of the debt granted the
Company an option to extend the maturity of the subordinated debt at its
discretion for a period of at least one year not to exceed three years. In
consideration for this option, the Company paid $20,000 to the holder of
the debt. In November 2001, the Company exercised its option to extend the
maturity of the subordinated debt through November 1, 2002. On July 1,
2002, the Company repaid $500,000 of the subordinated debt, and repaid the
remaining $500,000 on August 20, 2002. The Company incurred $65,219 and
$115,000 in interest related to this debt for the years ended December 31,
2002 and 2001, respectively.(12)
    
    Fair Value of Financial InstrumentsSubstantially all of the Companys financial assets and liabilities are
carried at market value or at amounts which, because of their short-term
nature or because they carry market rates of interest, approximate current
fair value. The Companys notes payable, if recalculated based on current
interest rates, would not significantly differ from the amounts recorded at
December 31, 2003 and 2002.(13)
    
    Income TaxesThe Company files a consolidated tax return. Income tax expense (benefit)
consists of the following: 2003
    
    2002
    
    2001FederalCurrent
    
    $
    576,614
    
    
    
    248,903
    
    
    
    72,780Deferred
    
    
    20,584
    
    
    
    13,473
    
    
    
    361,204StateCurrent
    
    
    84,154
    
    
    
    39,372
    
    
    
    36,057Deferred
    
    
    902
    
    
    
    (3,548
    )
    
    
    25,433$
    682,254
    
    
    
    298,200
    
    
    
    495,474
  A reconciliation of expected income tax expense (computed by applying the
statutory income tax rate of 34% to income before income tax expense and
minority interest) to total tax expense in the accompanying consolidated
statements of operations follows: 2003
    
    2002
    
    2001Expected federal income expense (benefit)
    
    $
    519,991
    
    
    
    200,006
    
    
    
    445,292Meals and entertainment
    
    
    60,634
    
    
    
    46,094
    
    
    
    19,486State income tax
    
    
    85,056
    
    
    
    23,644
    
    
    
    40,583Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    16,573
    
    
    
    28,456
    
    
    
    (9,887
    )$
    682,254
    
    
    
    298,200
    
    
    
    495,474
  16
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2003 and 2002 are as
follows: 2003
    
    2002Deferred tax assets:Capital loss carryforward
    
    $
    51,257
    
    
    
    51,078Accrued expenses
    
    
    30,147
    
    
    
    37,649Other
    
    
    21,002
    
    
    
    35,165Gross deferred tax assets
    
    
    102,406
    
    
    
    123,892Valuation allowance
    
    
    (48,902
    )
    
    
    (48,902
    )Net deferred tax asset
    
    $
    53,504
    
    
    
    74,990
  In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences net
of the existing valuation allowances. For the year ended December 31, 2003
the Company did not recognize change in valuation allowance for capital
loss carryforwards. At December 31, 2003, the Company had a capital loss
carryforward of approximately $144,000, which expires in 2005.(14)
    
    Profit Sharing and Stock Option 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 2003 and 2002, the Company contributed approximately
$167,000 and $173,000, respectively, to the employee profit sharing plan.
No contributions were made for 2001.Stock Option PlansThe Company established the Westech Capital Corp. 1999 Stock Option Plan
(the 1999 Plan) for employees, directors and consultants of the Company
and its subsidiaries on October 15, 1999. Under the 1999 Plan, the Company
was originally authorized to grant up to 300,000 shares of the Companys
common stock through incentive stock options or nonqualified stock options.
In August 2000, the board of directors of the Company amended the 1999 Plan
to increase the number of shares available to 400,000 shares of the
Companys common stock. The exercise price of each incentive stock option
is determined by the Compensation Committee of the Company, and shall not
be less than 100% of the fair market value of the stock on the grant date.
Incentive stock options awarded to ten-percent owners of the Companys
common stock shall not have an exercise price of less than 110% of the fair
market value of the stock on the grant date. Incentive stock options may
only be granted to employees of the Company or a subsidiary.  17
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  Options become exercisable as determined at the date of the grant by the
Compensation Committee or the Board, in the case of non-employee directors.
No option under the 1999 Plan shall be exercisable after the expiration of
ten years from the date of the grant. Options granted to a ten-percent
owner of the Company shall not be exercisable after the expiration of five
years from the date of the grant. The aggregate fair market value of stock
purchased under the 1999 Plan by an employee during any calendar year shall
not exceed $100,000. In the event that the purchased stock exceeds
$100,000, the excess amount shall constitute a nonqualified stock option.During 2001, options totaling 160,000 shares were granted to employees
under the 1999 Plan. The options vested immediately, and expire five years
from the date of the grant. The purchase price of the common stock is
$2.50 per share. The options were granted at or above the market value of
the Companys common stock.During 2003, options totaling 100,000 shares were granted to employees
under the 1999 Plan. The options vest ratably over three years, and expire
five years from the date of the grant. The purchase price of the common
stock is $2.50 per share. The options were granted at or above the market
value of the Companys common stock.A summary of the Companys stock option and warrant activity, and related
information for the years ended December 31, follows. 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    Price
    
    Options
    
    PriceOutstanding 
beginning of year
    
    
    262,063
    
    
    $
    5.53
    
    
    
    482,919
    
    
    $
    11.45
    
    
    
    357,919
    
    
    $
    12.80Granted
    
    
    100,000
    
    
    $
    2.50
    
    
    
    
    
    
    
    
    
    
    
    160,000
    
    
    $
    2.50Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.00Forfeited
    
    
    (40,000
    )
    
    $
    20.00
    
    
    
    (220,856
    )
    
    $
    18.47
    
    
    
    (30,000
    )
    
    $
    22.50Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    $
    50.00Outstanding  end of
Year
    
    
    322,063
    
    
    $
    2.79
    
    
    
    262,063
    
    
    $
    5.53
    
    
    
    482,919
    
    
    $
    11.45Exercisable  end
of year
    
    
    255,393
    
    
    $
    2.86
    
    
    
    262,063
    
    
    $
    5.53
    
    
    
    431,252
    
    
    $
    10.22
  18
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The weighted average fair value of Company stock options, calculated using
the Black Scholes option pricing model, granted during the years ended
December 31, 2003, 2002, and 2001 were $0.34, $0.76 and $1.36 per option,
respectively.The fair value of the options used to compute the pro forma amounts (Note
2k) is estimated using the Black Scholes option-pricing model with the
following assumptions: 2003
    
    2002
    
    2001Risk-free interest rate
    
    
    3.01
    %
    
    
    4.25
    %
    
    
    4.54
    %Expected holding period
    
    3 years
    
    3 years
    
    3 yearsExpected volatility
    
    
    .001
    
    
    
    .001
    
    
    
    .001Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
  The following table summarizes the Companys options outstanding and
exercisable options at December 31, 2003: Stock Options Outstanding
    
    Stock Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseExercise Price
    
    Shares
    
    Life
    
    Price
    
    Shares
    
    Price$2.50
    
    
    260,000
    
    
    3.3 years
    
    $
    2.50
    
    
    
    193,330
    
    
    $
    2.50$4.00
    
    
    62,063
    
    
    1.0 years
    
    $
    4.00
    
    
    
    62,063
    
    
    $
    4.00322,063
    
    
    
    
    
    
    
    
    
    
    
    255,393
  19
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (15)
    
    Earnings Per ShareBasic earnings per share are based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per
share reflect dilution from all contingently issuable shares, including
options issued during 2003, 2002 and 2001. Contingently issuable shares
are not included in the weighted average number of shares when the
inclusion would increase earnings per share.Earnings per share is calculated as follows. 2003
    
    2002
    
    2001Basic earnings per share:Net income
    
    $
    847,130
    
    
    
    290,052
    
    
    
    833,022Weighted average shares outstanding
    
    
    1,512,024
    
    
    
    1,512,024
    
    
    
    1,348,097Basic earnings per share
    
    $
    0.56
    
    
    
    0.19
    
    
    
    0.62Diluted earnings per share:Net income
    
    $
    847,130
    
    
    
    290,052
    
    
    
    833,022Impact of assumed conversion of
subsidiary stock and recognition of
minority interest
    
    
    
    
    
    
    
    
    
    
    (18,814
    )Income available to common
stockholders after assumed
conversions
    
    $
    847,130
    
    
    
    290,052
    
    
    
    814,208Weighted average shares outstanding
    
    
    1,512,024
    
    
    
    1,512,024
    
    
    
    1,348,097Effect of dilutive securities:Options
    
    
    51,852
    
    
    
    13,679
    
    
    
    21,489Assumed conversion of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    167,641Application of treasury stock method
to subscriptions receivable
    
    
    
    
    
    
    
    
    
    
    8,885Weighted average shares outstanding
    
    
    1,563,876
    
    
    
    1,525,703
    
    
    
    1,546,112Diluted earnings per share
    
    $
    0.54
    
    
    
    0.19
    
    
    
    0.53
  The Company has included the dilutive effect of 322,063, 222,063 and
160,000 shares of the Companys common stock for the years ended December
31, 2003, 2002 and 2001, respectively, in the computation of diluted
earnings per share. Of the 322,063, 222,063 and 160,000 options issued by
the Company, 51,852, 13,679 and 21,489 shares are included as dilutive
securities on a weighted average basis for the years ended December 31,
2003, 2002 and 2001, respectively. Options to purchase 40,000 and 322,919 shares of the Companys common stock for the years ended December 31, 2002
and 2001, respectively, were not included in the computation of diluted
earnings per share because the options were antidilutive.The Company has included the dilutive effects of shares of Tejas
Securities common stock for the year ended December 31, 2001. Tejas
Securities had 990,500 shares of its common stock issued and outstanding as
of August 29, 2001 that were exchanged for common stock of the Company at a
ratio of .24825 to one (245,890 shares). The Company has included the
dilutive effect of Tejas Securities subscriptions receivable based on the
treasury stock method for the year ended December 31, 2001.  20
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (16)
    
    Off Statement of Financial Condition RiskThe Company is responsible to its clearing organization for payment of all
transactions executed both on its behalf and on behalf of its customers.
Therefore, the Company is exposed to off statement of financial condition
risk in the event a customer cannot fulfill its commitment and the clearing
organization must purchase or sell a financial instrument at prevailing
market prices. The Company and its clearing organization seek to control
risk associated with customer transactions through daily monitoring to
assure margin collateral is maintained under regulatory and internal
guidelines.The Company is exposed should Correspondent Services Corporation, the
Companys clearing organization, be unable to fulfill its obligations for
securities transactions.The Company deposits its cash with financial institutions. Periodically
such balances exceed applicable FDIC insurance limits.(17)
    
    Industry Segment DataThe Company has two reportable segments: brokerage services and investment
banking. The primary operating segment, brokerage services, includes sales,
trading and market-making activities of the Company and encompasses both
retail and institutional customer accounts. These segments require the
commitment of significant human capital and financial resources, as well as
industry specific skills. The investment banking segment participates in
underwriting of corporate securities as managing underwriter and as a
syndicate member, and provides advisory services to companies.The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.The following table presents segment revenues, income before income tax
expense, and assets for the year ended December 31, 2003. InvestmentBrokerage
    
    Banking
    
    TotalRevenues from external
customers
    
    $
    25,558,868
    
    
    
    72,799
    
    
    
    25,631,667Interest revenue
    
    
    1,064,441
    
    
    
    
    
    
    
    1,064,441Interest expense
    
    
    227,919
    
    
    
    
    
    
    
    227,919Depreciation and amortization
    
    
    120,642
    
    
    
    
    
    
    
    120,642Income before income tax
expense
    
    
    1,515,284
    
    
    
    14,000
    
    
    
    1,529,284Segment assets
    
    
    8,356,453
    
    
    
    
    
    
    
    8,356,453Capital expenditures
    
    
    56,239
    
    
    
    
    
    
    
    56,239
  21
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The following table presents segment revenues, income before income tax
expense, and assets for the year ended December 31, 2002. InvestmentBrokerage
    
    Banking
    
    TotalRevenues from external
customers
    
    $
    20,894,690
    
    
    
    335,663
    
    
    
    21,230,353Interest revenue
    
    
    56,058
    
    
    
    
    
    
    
    56,058Interest expense
    
    
    263,968
    
    
    
    
    
    
    
    263,968Depreciation and amortization
    
    
    132,067
    
    
    
    
    
    
    
    132,067Income before income tax
expense
    
    
    428,375
    
    
    
    159,877
    
    
    
    588,252Segment assets
    
    
    9,274,938
    
    
    
    
    
    
    
    9,274,938Capital expenditures
    
    
    10,169
    
    
    
    
    
    
    
    10,169
  The following table presents segment revenues, income (loss) before income
tax expense and minority interest, and assets for the year ended December
31, 2001. InvestmentBrokerage
    
    Banking
    
    TotalRevenues from external
customers
    
    $
    25,070,061
    
    
    
    316,927
    
    
    
    25,386,988Interest revenue
    
    
    62,137
    
    
    
    
    
    
    
    62,137Interest expense
    
    
    350,202
    
    
    
    
    
    
    
    350,202Depreciation and amortization
    
    
    139,652
    
    
    
    
    
    
    
    139,652Income (loss) before income tax
expense
    
    
    1,373,072
    
    
    
    (63,390
    )
    
    
    1,309,682Segment assets
    
    
    7,240,508
    
    
    
    
    
    
    
    7,240,508Capital expenditures
    
    
    77,261
    
    
    
    
    
    
    
    77,261
  (18)
    
    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, 2003 are as follows: Operating
    
    Capital2004
    
    $
    1,463,000
    
    
    
    35,0002005
    
    
    1,083,000
    
    
    
    35,0002006
    
    
    890,000
    
    
    
    15,0002007
    
    
    232,000
    
    
    
    2008
    
    
    33,000
    
    
    
    Minimum Commitments
    
    $
    3,701,000
    
    
    
    85,000Less Interest
    
    
    
    
    
    
    (3,000
    )Net Present Value of Capital Lease Obligations
    
    
    
    
    
    
    82,000
  22
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  Office equipment, under capital leases, with a recorded cost of $96,716,
net of depreciation of $23,295 as of December 31, 2003, collateralizes the
above capital lease obligations and is included in the statements of
financial condition under the caption of Property and Equipment.
Depreciation expense for assets under capital lease was $23,295 in 2003.Rent expense amounted to approximately $1,537,000, $1,452,000 and
$1,421,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Rent expense is reported net of sublease revenue which is
disclosed below.In June 2003, the Company subleased a portion of its Austin, Texas
headquarters, furniture and equipment effective June 15, 2003 through
February 2008. Under the terms of the sublease agreement, the future
minimum payments to be received are approximately $71,000 in 2004 through
2006, and approximately $12,000 in 2007. During 2003, the Company received
approximately $35,000 in relation to this sublease agreement.On December 22, 2000, the Company subleased a portion of its Austin, Texas
headquarters, furniture and equipment effective January 1, 2001 through
March 2003. The Company received approximately $182,000, $660,000 and
$660,000 during 2003, 2002 and 2001, respectively, in relation to these
sublease agreements.On September 30, 2002, the Company subleased a portion of its Atlanta,
Georgia office space. Under the terms of the sublease agreement, the
future minimum payments to be received are approximately $84,000 in 2004
and $63,000 in 2005. The Company received approximately $83,000 and
$10,000 during 2003 and 2002, respectively, in relation to this sublease
agreement.(19)
    
    ContingenciesThe Company is involved in various claims and legal actions that have
arisen in the ordinary course of business. It is managements opinion that
liabilities, if any, arising from these actions will not have a significant
adverse effect on the consolidated financial position or results of
operations of the Company.In October 2001, an officer of the Company purchased a liability of the
Company in the amount of approximately $121,000 originally payable to a
third party. The liability originated from the Merger (Note 1) and is now
payable to the officer upon the Companys successful listing on a national
exchange.(20)
    
    Net Capital RequirementsTejas Securities, as a registered fully licensed broker and dealer in
securities, is subject to the Securities and Exchange Commission Uniform
Net Capital Rule (Rule 15c3-1 of the Securities Exchange Act of 1934, as
amended). Under this rule, Tejas Securities is required to maintain a
minimum net capital to satisfy rule 15c3-1. At December 31, 2003, the
minimum net capital requirement for Tejas Securities was $250,000. Net
capital at December 31, 2003 aggregated $924,132. Tejas Securities ratio
of aggregate indebtedness to net capital was 3.02 to 1 at December 31,
2003.  23
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (21)
    
    Other Related Party TransactionsIn November 2001, the Company entered into a service agreement with
Firstmark Corp. (Firstmark), a publicity traded corporation, to provide
management support services for $5,000 per month for an initial term of one
year. The Company owned shares in Firstmark with a fair value of
approximately $458,000 as of December 31, 2001, which were included in
securities owned in the accompanying consolidated statements of financial
condition. Additionally in November 2001, two officers of the Company were
named to the board of directors of Firstmark, and an additional officer of
the Company was appointed as an officer of Firstmark. During May 2002, the
Company effectively liquidated its holdings in Firstmark. In August 2002,
the Company severed its service agreement with Firstmark, and the officers
of the Company resigned as directors and officer of Firstmark. The Company
recognized approximately $50,000 for the year ended December 31, 2002 for
services provided to Firstmark.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.(22)
    
    Subsequent EventOn February 17, 2004, the Company entered into an agreement with a bank to
borrow $2,500,000 for operating and financing purposes. The Company used a
portion of the proceeds to repay the March 2002 and the June 2003 loan
agreements in full. The loan is due on demand or by February 15, 2007 if
no demand is made. The loan accrues interest at prime plus 2% and is to be
paid in equal monthly payments of $70,000, plus accrued interest,
commencing on March 15, 2004. The loan is secured by the common stock of
the Companys primary operating subsidiary, Tejas Securities, as well as
the personal guaranty of an officer of the Company. On March 4, 2004,
Tejas Securities redeemed the $1,150,000 certificate of deposit held as
collateral against the March 2002 loan.  24
    (Continued)




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##### Table of Contents



WESTECH CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  (23)
    
    Quarterly Results (Unaudited)The following tables set forth selected quarterly consolidated statements
of operations information for the years ended December 31, 2003 and 2002. First
    
    Second
    
    Third
    
    Fourth2003
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenue
    
    $
    9,374,121
    
    
    
    5,657,298
    
    
    
    5,615,273
    
    
    
    5,937,068Income before income tax expense
    
    
    818,481
    
    
    
    104,474
    
    
    
    300,792
    
    
    
    305,637Net income
    
    
    485,629
    
    
    
    53,791
    
    
    
    169,856
    
    
    
    137,854Basic earnings per share:Net income
    
    
    0.32
    
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.09Diluted earnings per share:Net income
    
    
    0.32
    
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.07
 First
    
    Second
    
    Third
    
    Fourth2002
    
    Quarter
    
    Quarter

    
    Quarter
    
    QuarterTotal revenue
    
    $
    6,110,735
    
    
    
    5,808,408
    
    
    
    4,307,702
    
    
    
    5,008,082Income (loss) before income tax expense (benefit)
    
    
    334,400
    
    
    
    351,270
    
    
    
    (91,795
    )
    
    
    (5,623
    )Net income (loss)
    
    
    185,216
    
    
    
    194,761
    
    
    
    (55,101
    )
    
    
    (34,824
    )Basic earnings (loss) per share:Net income (loss)
    
    
    0.12
    
    
    
    0.13
    
    
    
    (0.04
    )
    
    
    (0.02
    )Diluted earnings (loss) per share:Net income (loss)
    
    
    0.12
    
    
    
    0.13
    
    
    
    (0.04
    )
    
    
    (0.02
    )
  25




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBITS3.1
    
    
    Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to the registrants Registration Statement on Form
10-12(g) (File No. 000-29235))3.2
    
    
    Bylaws (Incorporated herein by reference to Exhibit 3.2 to the
registrants Registration Statement on Form 10-12(g) (File No.
000-29235))3.3
    
    
    Certificate of Amendment to Certificate of Incorporation (Incorporated
herein by reference to the registrants Current Report on Form 8-K
filed on June 25, 2001)3.4
    
    
    Certificate of Amendment to Certificate of Incorporation (Incorporated
herein by reference to the registrants Current Report on Form 8-K
filed on June 20, 2002)4.1+
    
    
    Shareholder Agreement, dated November 23, 1999, between John Ohmstede,
John Glade, Michael Hidalgo, Jon McDonald, Britt Rodgers, Bob
Sternberg, Mike Wolf, Greg Woodby and the Company (Incorporated herein
by reference to Exhibit 4.3 to the registrants Registration Statement
on Form 10-12(g) (File No. 000-29235))10.1+
    
    
    First Amended and Restated Westech Capital Corp. 1999 Stock Option Plan10.2+
    
    
    Form of Incentive Stock Option Agreement (Incorporated herein by
reference to Exhibit 10.3 to the registrants Registration Statement
on Form 10-12(g)) (File No. 000-29235)10.3+
    
    
    Form of Nonqualified Stock Option Agreement (Incorporated herein by
reference to Exhibit 10.4 to the registrants Registration Statement
on Form 10-12(g) (File No. 000-29235)10.4+
    
    
    Lease Agreement, effective as of September 30, 1999, by and between
Westech Capital Corp. and Desta Two Partnership, Ltd. (Incorporated
herein by reference to Exhibit 10.5 to the registrants Registration
Statement on Form 10-12(g) (File No. 000-29235)10.5+
    
    
    Employment and Confidentiality Agreement, dated as of August 30, 1999,
between Tejas Securities Group, Inc. and Charles Mayer (Incorporated
herein by reference to Exhibit 10.6 to the registrants Annual Report
on Form 10-K for the year ended December 31, 1999)10.6+
    
    
    Employment and Confidentiality Agreement, dated as of October 29,
1998, between Tejas Securities Group, Inc. and Reed Durant
(Incorporated herein by reference to Exhibit 10.8 to the registrants
Annual Report on Form 10-K for the year ended December 31, 1999)10.7+
    
    
    Employment and Confidentiality Agreement, dated as of January 10,
2000, between Tejas Securities Group, Inc. and Kurt Rechner
(Incorporated herein by reference to Exhibit 10.9 to the registrants
Annual Report on Form 10-K for the year ended December 31, 1999)10.8+
    
    
    Employment and Confidentiality Agreement, dated as of November 1,
1998, between Tejas Securities Group, Inc. and John F. Garber
(Incorporated herein by reference to Exhibit 10.6 to the registrants
Annual Report on Form 10-K for the year ended December 31, 1999)10.9+
    
    
    Modification of employment agreement between Charles H. Mayer and
Tejas Group, Inc., dated January 1, 2001 (Incorporated herein by
reference to Exhibit 10.19 to the registrants Annual Report on Form
10-K for the year ended December 31, 2000)10.10
    
    
    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)10.11
    *
    
    Promissory note agreement dated February 17, 2004 between First United
Bank and the Company21.1
    *
    
    Registrants Subsidiaries31.1
    *
    
    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 and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    
    Articles of Incorporation of Tejas Securities Group, Inc.
(Incorporated herein by reference to Exhibit 99.1 to the registrants
Registration Statement on Form 10-12(g) (File No. 000-29235))
 26




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBITS99.2
    
    
    Bylaws of Tejas Securities Group, Inc. (Incorporated herein by
reference to Exhibit 99.2 to the registrants Registration Statement
on Form 10-12(g) (File No. 000-29235))99.3
    
    
    Articles of Incorporation of Tejas Securities Group Holding Company
(Incorporated herein by reference to Exhibit 99.3 to the registrants
Registration Statement on Form 10-12(g) (File No. 000-29235))99.4
    
    
    Bylaws of Tejas Securities Group Holding Company (Incorporated herein
by reference to Exhibit 99.4 to the registrants Registration
Statement on Form 10-12(g) (File No. 000-29235))
 *     Filed herewith. +    Management contract or compensatory plan or arrangement. 27