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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-65417
PINNACLE GLOBAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0583569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5599 SAN FELIPE, SUITE 301
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
Registrant's telephone number, including area code: (713) 993-4610
2900 NORTH LOOP WEST, SUITE 1230, HOUSTON, TEXAS 77092
(713) 263-7283
(FORMER ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICE)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes H No M
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. [ ]
As of March 25, 1999, the registrant had 7,125,264 outstanding shares of
Common Stock, par value $0.01 per share, and at such date, the aggregate market
value of the shares of Common Stock held by non-affiliates of the registrant was
$29,353,308. For purposes of this computation, all executive officers, directors
and 5% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Notice of Annual Meeting of Shareholders and definitive
Proxy Statement pertaining to the 1999 Annual Meeting of Shareholders (the
"Proxy Statement") and filed pursuant to Regulation 14A is incorporated herein
by Reference into Part III of this report.
================================================================================
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I.
Item 1. Business............................. 1
Item 2. Properties........................... 11
Item 3. Legal Proceedings.................... 12
Item 4. Submission of Matters to a Vote of
Security Holders................... 12
PART II.
Item 5. Market for the Registrant's Common
Equity and Related Stockholder
Matters............................ 13
Item 6. Selected Financial Data.............. 14
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk...... 18
Item 8. Financial Statements and
Supplementary Data................. 20
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... 37
PART III.
Item 10. Directors and Executive Officers of
the Registrant..................... 37
Item 11. Executive Compensation............... 37
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 37
Item 13. Certain Relationships and Related
Transactions....................... 37
PART IV.
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K................................ 38
i
PART I.
ITEM 1. BUSINESS
GENERAL
Pinnacle Global Group, Inc. ("Pinnacle" or the "Company") is a publicly
owned holding company that provides a broad range of financial services through
its wholly owned operating entities. Pinnacle's financial services include
investment banking, merchant banking, institutional and retail brokerage,
investment management, secondary market loan and loan servicing placement and
trust related services. Pinnacle serves a diverse group of institutional,
corporate and individual clients predominantly located within the southwestern
United States; however, its fixed-income securities business is conducted for
clients throughout the United States, Europe and Japan and its loan and
servicing placement business is conducted on a national basis.
Pinnacle is the successor issuer to TEI, Inc. ("TEI"), which is now a
wholly owned subsidiary of Pinnacle. During 1995, 1996 and 1997, TEI disposed of
all of its operations other than its liquid waste business and related facility
located in Charlotte, North Carolina operated through its subsidiary Energy
Recovery Resources, Inc. ("ERRI"). As a result of these dispositions, TEI had
cash and liquid investments of approximately $28.0 million at December 31, 1998.
From January 1997 through the first quarter of 1998, TEI's management
actively evaluated strategies and financial alternatives for maximizing
shareholder value. In late April 1998, TEI reached an agreement in principle to
combine with three Houston based financial services firms. These firms were
Harris Webb & Garrison, Inc. ("HWG"), a full service regional investment
banking, brokerage and financial services firm serving the southwestern United
States, Pinnacle Management & Trust Company ("PMT"), a Texas state chartered
trust company and investment management firm, and Spires Financial, L.P.
("Spires"), a regional institutional brokerage services and investment banking
firm specializing in fixed income securities and whole loan and loan servicing
transactions.
On January 29, 1999, TEI completed the combination (the "Transactions")
with HWG, PMT and Spires, with Pinnacle emerging as the new public holding
company. In the Transactions, just over 50% of Pinnacle's outstanding shares
were issued to TEI's former shareholders in exchange for their TEI shares, and
slightly less than 50%, or 3,562,500 shares, were issued to the former owners of
the financial services firms. Pinnacle's new board includes six former TEI
directors and six designees of the financial services firms. Executive officers
of the financial services firms serve as the primary executive officers of
Pinnacle, with TEI's former president and chief executive officer continuing as
Pinnacle's Vice-Chairman.
In March 1999, Pinnacle's new management decided to discontinue the
operations of ERRI's liquid waste business effective December 31, 1998. These
operations, which are conducted primarily in Charlotte, North Carolina and
surrounding areas, involve the treating, recycling, and handling of wastewater,
waste oil and other non-hazardous fluid waters for owners and operators of under
and above ground storage tanks and other commercial and industrial waste
generators. Management believes the sale of the liquid waste business and
related Charlotte, North Carolina facility will be consummated within the next
12 months.
Pinnacle was incorporated in Texas in August 1998 in connection with the
Transactions. The Company's principal executive offices are located at 5599 San
Felipe, Suite 301, Houston, Texas 77056, and its telephone number is (713)
993-4610.
HISTORICAL FINANCIAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K RELATES ONLY TO THE OPERATIONS OF TEI PRIOR TO THE TRANSACTIONS AND DOES
NOT INCLUDE ANY FINANCIAL DATA OR RESULTS OF OPERATIONS OF THE FINANCIAL SERVICE
FIRMS FOR ANY PRIOR PERIOD. THE FOLLOWING DESCRIPTION OF PINNACLE'S BUSINESS
INCLUDES THE OPERATIONS OF THE COMBINED COMPANY RESULTING FROM THE TRANSACTIONS,
EXCEPT FOR TEI'S DISCONTINUED LIQUID WASTE BUSINESS.
1
BUSINESS STRATEGY
Pinnacle's business strategy is to (1) increase its asset management and
trust business; (2) expand its fixed-income securities trading activities; (3)
expand its capital markets activities; (4) improve the profitability of its
brokerage operations; and (5) enhance the financial services Pinnacle offers its
clients. Management plans to supplement PGG's internal growth with strategic
acquisitions. Pinnacle also believes certain cross-selling opportunities among
the financial service firms, and certain unquantified potential operating
efficiencies, will be available. The principal elements of Pinnacle's business
strategy are:
o INCREASE ASSET MANAGEMENT AND TRUST BUSINESS. Management intends
to grow Pinnacle's business by expanding its asset management and
trust services related business by improving PMT's coordination
with the HWG and Spires brokerage networks, and by increasing the
assets under its management through acquisitions and internal
growth.
o EXPAND FIXED-INCOME SECURITIES ACTIVITIES. Historically, Spires
has conducted limited trading activity due to the capital-intensive
nature of purchasing inventory and hedging activities necessary to
conduct this business. Pinnacle believes that its proprietary
financial network and technology developed by Spires provides it
with an opportunity to profitably expand its fixed-income
securities trading business. Pinnacle believes the increased
capital and inventory purchasing power created by the
Transactions allow for the successful implementation of this
strategy.
o EXPAND CAPITAL MARKETS ACTIVITIES. Pinnacle intends to increase
its investment banking and merchant banking business by committing
greater resources to, and by carefully focusing its research and
coverage on, geographic regions and industries which management
believes offer the greatest opportunities. Management believes that
this independent and regional focus is particularly well suited to
the southwestern regions currently served by Pinnacle. Management
also believes that consolidations within the investment banking
industry, as a whole, will offer enhanced opportunities for those
firms which maintain their local and industry specific focus.
o IMPROVE PROFITABILITY OF BROKERAGE OPERATIONS. Pinnacle intends to
improve the profitability of its brokerage operations primarily by
hiring additional experienced and productive investment executives
and by providing its investment executives with enhanced training,
product offerings, information systems, support and access to
the expertise and services of each of the financial services firms.
Management believes that the implementation of this strategy will
be aided by Pinnacle's entrepreneurial culture and improved
liquidity resulting from the Transactions.
o ENHANCE PERSONALIZED, HIGH-END SERVICE. Pinnacle's financial
services subsidiaries have traditionally sought to attract and
retain clients by offering a high level of personal service
responsive to client needs. Pinnacle intends to increase its
commitment to service by providing its clients with advanced
account and investment information systems and flexibility in
determining appropriate fee schedules for certain services based
upon the level of client needs, and by providing an array of
one-stop investment and financial planning services.
o SUPPLEMENT GROWTH WITH STRATEGIC ACQUISITIONS. Management plans to
actively pursue opportunities to acquire other firms with
complementary businesses to strengthen or expand the firm's
geographic or product offering base. Management believes that
attractive acquisition opportunities exist, particularly among
smaller regional firms that want to affiliate with a larger firm
while still retaining their regional identity and focus and
entrepreneurial culture. In addition, Pinnacle believes that the
consolidation trends in the financial services industry will allow
it to hire proven financial professionals who prefer the culture
and opportunities inherent in a regional and entrepreneurial firm.
Management believes that acquisitions may also allow Pinnacle to
realize cost benefits by leveraging its infrastructure.
2
SERVICES
Pinnacle provides its financial services through its operating
subsidiaries -- HWG, PMT and Spires. The financial services offered by each of
these entities are described below.
HWG
RETAIL BROKERAGE. Through HWG, Pinnacle's strategic plan in the retail
brokerage business is to attract and retain experienced brokers. Its retail
brokerage business has developed and grown by establishing and maintaining
relationships with high net worth individuals. HWG offers its clients brokerage
services relating to equity securities, fixed income securities, mutual funds,
insurance products, options and U.S. government and municipal securities.
Commissions are charged on both exchange and over-the-counter agency
transactions under commission rate tables formulated by HWG. In addition to
retail commissions, HWG generates revenue from asset-based advisory services and
managed accounts where fees are based on a percentage of the assets held in the
client's account in lieu of commissions on a transaction-by-transaction basis.
HWG provides its retail clients with a broad range of services delivered in
a personalized, service-oriented manner. In addition to recommending and
effecting transactions in securities, HWG makes available to its retail clients
equity research reports prepared by HWG and by third party research analysts.
Other services provided by HWG include portfolio strategy, financial planning
and tax, trust and estate advice. HWG believes that the personalized nature and
range of services it provides to its retail clients is a key factor in the
success of its retail brokerage unit.
HWG conducts its retail brokerage operations through its Houston, Texas
office. At December 31, 1998, HWG's retail sales force was comprised of 20
commissioned sales persons who average over 15 years experience in the
securities brokerage business. Pinnacle believes its strategy of providing HWG's
brokers with a high level of support, the flexibility to operate in an
entrepreneurial manner and a corporate culture which encourages performance,
employee ownership, advanced technologies and competitive compensation packages,
will allow HWG to recruit and retain experienced and productive brokers.
INVESTMENT BANKING AND UNDERWRITING ACTIVITIES. Pinnacle's investment
banking strategy is directed at building, through HWG, a balanced mix of
financial advisory services, corporate security underwriting and private
financings, including venture capital financings, with a geographic focus on the
southwestern United States. HWG's financial advisory services include advice on
mergers, acquisitions and divestitures, fairness opinions and financing
strategies. HWG can also provide valuations, litigation support and financial
consulting services. These financial advisory services are typically provided to
emerging or middle market companies with a presence in the southwestern United
States.
HWG participates in underwritten public securities distributions as a
member of underwriting syndicates or of selling groups lead-managed by national
investment banking firms. During 1998, HWG participated in 11 underwritten
public securities offerings. As HWG's business matures and develops, Pinnacle's
long-term strategy includes targeting co-manager roles in selected underwritten
public offerings of securities. HWG has also served as placement agent in
several private placements of securities under a variety of fee structures
depending on the amount of capital raised, including cash and equity contingent
fees, cash and equity non-contingent fees, adjustable cash and equity fees or a
combination of two or more
3
of the foregoing. Similar to its financial advisory services, HWG's
participation in corporate securities distributions, whether public or private,
typically involves emerging or middle market companies with a southwestern
United States presence.
MERCHANT BANKING. HWG entered the merchant banking business in 1996. This
activity focuses on providing private equity capital for middle-market growth
companies within a broad range of industries, including, among others, business
services, communications, computing, distribution, direct marketing of
electronic financial services, gaming, information technology, Internet, media
entertainment, retail, specialty chemicals and biotechnology. These transactions
may take a variety of forms, such as buyouts, growth buildups, consolidation of
several private companies in conjunction with public and private offerings,
expansion capital and venture capital financings. These merchant banking
activities are currently conducted through HWG Capital, L.L.C., which is owned
50% by Pinnacle and 50% by an officer of HWG. In addition, Pinnacle currently
holds a significant equity position in BioCyte Therapeutics, Inc., an early
stage biotechnology company focusing on diagnostics and therapeutics for
cancer-related diseases. There is no assurance that BioCyte will ever develop
any commercially marketable products.
PRINCIPAL TRANSACTIONS. HWG makes markets, buying and selling as
principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on Nasdaq or other OTC markets. At December 31, 1998, HWG made
markets in equity securities of over 12 issuers. These securities are generally
those in which there is a substantial continuing client interest and include
securities for which HWG has participated in the underwriting or on which it
provides research reports.
PMT
TRUST, ASSET MANAGEMENT AND RELATED SERVICES. Through PMT, Pinnacle
provides a variety of trust services, including investment management, estate
settlement, retirement planning, mineral interest management, funeral and
cemetery trust administration, real estate and retirement plan administration,
and other back-office services, such as custody of assets and record keeping.
PMT meets with each client to develop asset management strategies that are
consistent with the client's business or personal needs and investment
objectives. Consideration is given to the client's financial and investment
objectives, risk tolerance, investment restrictions and time horizon. Pinnacle
believes this total investment management approach provides clients with
increased diversification, reduced risk and greater control over their
portfolios.
PMT's employees periodically monitor its clients through direct telephone
calls and personal visits to ensure the client's needs are satisfied. PMT
recently licensed a new trust accounting software which provides its clients
with many additional benefits, including flexible statement packages and access
to account information on the Internet through a link established between PMT's
"home page" and the licensor of the software's database.
PMT derives its revenues mainly from asset management and fiduciary fees
based on a percentage of assets under administration. At December 31, 1998, PMT
had $439 million of assets under management. The actual fee charged is based on
a rate schedule formulated by PMT from time to time. Rates vary depending on the
services being provided and the amount of assets involved. Pinnacle believes
that this fee structure, as opposed to transactional commissioned-based
arrangements, more closely aligns Pinnacle's interests with its clients and
helps develop long-term client relationships.
SPIRES
INSTITUTIONAL BROKERAGE. Through Spires, Pinnacle provides brokerage
services to institutional clients relating primarily to fixed-income securities,
such as municipal securities, U.S. government and agency securities,
mortgage-related securities, including those issued through Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC"), and corporate
investment-grade and high-yield bonds. Commissions are charged on all
institutional securities transaction based on rates formulated by Spires.
TRADING. Rather than trading a wide variety of securities in direct
competition with Wall Street firms, Spires has developed a niche strategy to
proprietarily trade certain fixed-income securities, including U.S.
4
government securities, certain mortgage related securities and collateralized
mortgage obligations. In its trading activities, Spires generally acts as a
wholesaler. It buys round-lot and odd-lot positions, sells round-lot and odd-lot
positions and acts as market-maker in round-lot and odd-lot positions. The
majority of Spires' counterparts in these transactions are other broker-dealers.
Spires' trading operations generally seek to generate profits based on trading
spreads, rather than through speculation on the direction of the market.
The positions carried in Spires' trading accounts fluctuate significantly.
The size of the securities positions on any one date may not be representative
of Spires' exposure on another date because the securities positions vary
substantially depending on economic and market conditions, the allocation of
capital among types of inventories, customer demands and trading volume. The
aggregate value of inventories that Spires' can carry is limited by certain
requirements under the net capital requirements of the Exchange Act.
Spires has established procedures designed to reduce the risks of its
trading activities. It employs a hedging strategy designed to insulate the net
value of its trading inventory from fluctuations in the general level of
interest rates. However, it is not possible to hedge completely the risks of
interest rate fluctuations for some of the fixed-income securities that Spires
trades, primarily because the price movements of financial instruments typically
used to hedge long positions in such securities may not precisely mirror the
price movements of the hedged securities under all market conditions. In
addition to its hedging procedures, Spires seeks to mitigate the risks
associated with its proprietary trading activities by subjecting its trading
inventory positions and profit and loss statements to daily review by its senior
management. Senior management of Spires reviews daily the profit and loss and
inventory positions of the trading desks. However, such procedures may not
prevent such a loss, which could adversely affect Spires' business, financial
condition, results of operations or cash flows.
OTHER ACTIVITIES. Institutional client securities transactions are
executed on either a cash or margin basis. Under the current clearing
arrangement with Daiwa Securities America, Inc. ("Daiwa") in an institutional
margin transaction, credit is extended to a client through Daiwa for the
purchase of securities, using the securities purchased and/or other securities
in the client's account as collateral for amounts loaned. Spires receives income
from interest charged on such extensions of credit. Although income from
interest charged has not historically been a significant source of revenue, in
the future, the financing of margin purchases can be an important revenue
source, since interest rate paid by the client on funds loaned through Spires
exceeds Spires' interest costs for net customer debit balances paid to Daiwa.
Spires' gross interest revenues are affected not only by prevailing interest
rates, but also by the volume of business conducted on a margin basis. By
permitting a client to purchase on margin, Spires takes the risk that market
declines could reduce the value of the collateral below the principal amount
loaned, plus accrued interest, before the collateral can be sold. Amounts loaned
are limited by margin regulations of the Board of Governors of the Federal
Reserve System and other regulatory authorities and are subject to Daiwa and
credit review and daily monitoring procedures.
Spires is also active as a secondary market broker for residential,
consumer and commercial loans, and derives revenue from the placement of
mortgage servicing and newly "securitized" mortgaged collateral on a
nationwide basis.
CLIENTS
Clients of Pinnacle's broker dealer subsidiaries, HWG and Spires, vary
according to the nature of the services provided. HWG's retail brokerage
services are generally focused on high net worth individuals located within the
southwestern United States. HWG's investment banking, underwriting, merchant
banking, and principal transaction activities are targeted at emerging and
middle market companies with a southwestern United States presence. Spires
services institutional clients throughout the United States, Europe and Japan.
At December 31, 1998, Spires had over 700 institutional clients consisting
mostly of pension funds, money managers, mutual and hedge funds, insurance
companies, commercial banks and thrift companies.
5
Pinnacle's trust subsidiary, PMT, provided trust services to approximately
150 clients as of December 31, 1998. These clients consist mainly of high net
worth individuals and their respective estates and trusts, 401(k) and other
employee-directed company sponsored retirement plans and charitable and other
non-profit corporations. PMT also provides trust services relating to trust
funds of owners and operators of funeral homes, cemeteries and related
businesses.
INTELLECTUAL PROPERTY
Pinnacle, through Spires, has developed proprietary trading tools in
connection with its fixed-income securities business. As the structures of
fixed-income securities have become increasingly complex, successful investors
need reliable, accurate and timely information to make prudent investment
decisions. To satisfy this need, Spires has invested significant capital in an
integrated proprietary trading tool known as the "Spires Financial Network,"
or "SFN." SFN is delivered to Spires' clients by direct dial-up or over the
Internet. Through the Internet, Spires' employees and clients access proprietary
databases, search engines and analytics of Spires through its "home page."
Minimal investment is required by the client since all computing is performed on
Spires servers in Houston, Texas. Only mouse clicks and screen graphics are
transmitted over the Internet.
SFN proprietary databases provide current and fourteen-year historical
market information relating to mortgage-backed securities, collateralized
mortgage obligations and other matters. SFN's proprietary search engines and
analytics include:
o Portfolio Pro -- reduces the client's entire portfolio to a single
security by blending cash flows of each position in the portfolio
according to selected interest rate scenarios; and
o Bond Locator -- permits database searching capabilities by CUSIP,
description or profile. Through applications offered by SFN, Spires
and its clients are better able to achieve liquidity and execution by
matching buyers and sellers of similar securities.
These databases also accelerate securities selection and improve overall
yield and total rate of return by isolating the best investment alternatives
based on the client's investment criteria.
In December 1997, Spires obtained a Global Data License from Bloomberg
Financial Markets. As a result, Spires can redistribute selected Bloomberg data
through SFN to its clients. As one of the few entities able to redistribute this
data, Spires provides its customers with additional market information not
available from competitors.
SFN is supported by a staff of five full-time system development,
programming and support personnel. These people are responsible for system
maintenance and support and development of proprietary software tools based on
information provided by Spires' brokerage and trading professionals and its
institutional clients.
Pinnacle management believes that SFN is a key element in the success of
Spires institutional brokerage and trading activities.
MARKETING
The marketing efforts of Pinnacle's broker dealer subsidiaries, HWG and
Spires, are conducted primarily by in-house staff of approximately 35 located at
the Houston headquarters of HWG and Spires and at Spires' four branch offices.
HWG and Spires target their client groups through mailouts, telephone calls,
in-person presentations and firm-sponsored workshops. Due to the nature of HWG's
business, its regional name recognition and the reputation of its management,
certain business is obtained through referrals from other investment bankers or
initiated directly by the client. In addition, Pinnacle believes that Spires'
SFN proprietary technology has been critical to its client development success.
Pinnacle's trust subsidiary, PMT, conducts its marketing and business
development efforts on a company-wide basis. All PMT employees are encouraged to
be actively involved in business development
6
efforts through maintenance of professional and personal relationships and
active involvement in community events. PMT markets its specific client groups
through mailouts, telephone calls, multi-media client presentations and
company-sponsored or co-sponsored workshops and seminars.
Pinnacle believes certain cross-selling opportunities existing among HWG,
PMT and Spires based on the relationships developed by the individual companies.
RELATIONSHIP WITH CLEARING BROKERS
Pinnacle's broker-dealer subsidiaries, HWG and Spires, both use the
services of clearing brokers. Currently, HWG clears all transactions, and
carries accounts for clients, with S.G. Cowen & Company ("S.G. Cowen") under a
fully disclosed clearing arrangement. HWG is currently in the process of
evaluating engagement alternatives with other clearing brokers. Spires clears
its transactions, and carries client accounts, primarily through Daiwa and other
clearing brokers. Both S.G. Cowen and Daiwa serve as principal and clearing
broker in all transactions. Spires uses other clearing brokers in addition to
Daiwa. These clearing brokers also provide HWG and Spires with information
necessary to generate commission runs, transaction summaries, data feeds for
various reports including compliance and risk management, execution reports,
trade confirmations, monthly account statements, cashiering functions and
handling of margin accounts. Pinnacle believes these arrangements produce
clearing costs that are competitive within the industry.
Each of HWG and Spires have an uncommitted financing arrangement with these
clearing brokers under which it finances its customer accounts, certain
broker-dealer balances and firm trading positions through these clearing
brokers. Although the customer accounts and such broker-dealer balances will not
be reflected on Pinnacles' Consolidated Statements of Financial Condition for
financial accounting reporting purposes, each of HWG and Spires has generally
agreed to indemnify these clearing brokers for losses it may sustain in
connection with accounts of their respective clients. Pinnacle therefore retains
risk on these accounts. HWG and Spires are each required to maintain certain
cash or securities on deposit with its clearing brokers.
EFFECTS OF INTEREST RATES
Pinnacle's financial service business is affected by general economic
conditions, including movements of interest rates. As interest rates increase,
the prices of equity securities may decline, partially reflecting the increased
competition posed by more attractive rates on fixed-income securities and
partially reflecting the fact that interest rate increases may tend to dampen
economic activity by increasing the cost of capital for investment and
expansion, thereby reducing corporate profits and the value of equity
securities. As interest rates decline, equity securities may tend to rise in
value. The impact of these fluctuations and changes may affect the profitability
of Pinnacles' retail brokerage and investment banking activities. Retail
commission revenue may also be affected by changes in interest rates and any
resulting indirect impact on the value of equity securities. Pinnacle's interest
income and interest expense may likewise change as interest rates change.
Pinnacle's revenues relating to asset-based advisory services and managed
accounts are typically from fees which are generally based on the market value
of assets under management. Consequently, significant fluctuations in the values
of securities, which can occur with changes in interest rates or changes in
other economic factors, may materially affect the amount of assets under
management, and thus, Pinnacle's revenues and profitability.
Pinnacle's inventory of fixed income securities may fluctuate as interest
rates change. As interest rates decrease, the prices of fixed-income securities
may increase, partially reflecting the increased demand for securities with
higher coupon rates. As interest rates increase, fixed-income securities may
tend to decrease in value reflecting the availability of newer securities with
higher coupon rates. Institutional commission revenue may also be affected by
changes in interest rates and any resulting indirect impact on the value of
fixed-income securities.
7
COMPETITION
Pinnacle's financial services business and the securities business in
general are highly competitive. The principal competitive factors influencing
Pinnacle's financial services business are its:
o professional staff o ability to commit capital to
o reputation in the marketplace client transactions and its mix of
o existing client relationships market capabilities
Pinnacle's ability to compete effectively in its securities brokerage and
investment banking activities will also be influenced by the adequacy of its
capital levels and by its ability to raise additional capital.
Pinnacle competes directly with national and regional full service
broker-dealers and, to a lesser extent, with discount brokers, dealers,
investment banking firms, investment advisors and certain commercial banks. They
also compete for asset management and fiduciary services with commercial banks,
private trust companies, insurance companies and others. Domestic commercial
banks and large international banks have recently entered the securities
business, including markets in which they compete. Pinnacle expects competition
from domestic and international banks to increase as a result of recent and
anticipated legislative and regulatory initiatives in the United States to
remove or relieve restrictions on commercial banks relating to the sale of
securities.
The financial services industry has become considerably more concentrated
as many securities firms have either ceased operations or been acquired by or
merged into other firms. Many of these larger firms have significantly greater
financial and other resources than Pinnacle and can offer their customers more
product offerings, lower pricing, broader research capabilities, access to
international markets and other products and services not offered by Pinnacle,
which may give such firms competitive advantages over Pinnacle.
Pinnacle also faces competition from a rapidly developing discount or
electronic brokerage services industry. These competitors may have lower costs
and may offer their customers more attractive pricing or other terms. Pinnacle
also anticipates competition from underwriters who attempt to effect public
offerings using non-traditional means of distribution, including through
electronic media like the Internet. In addition, issuers may try to sell their
securities directly to purchasers, including through electronic media such as
the Internet. If issuers and purchasers of securities can transact business
without financial intermediaries, such as Pinnacle, Pinnacle's operating results
could be adversely affected.
GOVERNMENT REGULATION
The securities industry is one of the nation's most extensively regulated
industries. The SEC is responsible for carrying out the federal securities laws
and serves as a supervisory body over all national securities exchanges and
associations. The regulation of broker-dealers has to a large extent been
delegated by the federal securities laws to Self Regulatory Organizations
("SROs"). These SROs include, among others, all the national securities and
commodities exchanges and the NASD. Subject to approval by the SEC and certain
other regulatory authorities, SROs adopt rules that govern the industry and
conduct periodic examinations of the operations of Pinnacle's broker-dealer
subsidiaries -- HWG and Spires. HWG and Spires are also subject to regulation
under the laws of the states, Puerto Rico and certain foreign countries in which
it is registered to conduct securities, investment banking, insurance or
commodities business. Broker-dealers are subject to regulations which cover all
aspects of the securities business, including sales methods, trade practices
among broker-dealers, use and safekeeping of clients' funds and securities,
capital structure of securities firms, record-keeping and the conduct of
directors, officers and employees. Violation of applicable regulations can
result in the revocation of broker-dealer licenses, the imposition of censures
or fines and the suspension or expulsion of a firm, its officers or employees.
8
As a registered broker-dealer, HWG and Spires are subject to certain net
capital requirements of Rule 15c3-1 under the Exchange Act. The net capital
rules, which specify minimum net capital requirements for registered
broker-dealers, are designed to measure the financial soundness and liquidity of
broker-dealers. The net capital rules also:
(1) require that broker-dealers notify the SEC, in writing, two
business days before making withdrawals or other distributions of equity
capital or lending money to certain related persons if the withdrawals
would exceed, in any 30-day period, 30% of the broker-dealer's excess net
capital, and that they notify the SEC within two business days after any
such withdrawal or loan that would exceed, in any 30-day period, 20% of the
broker-dealer's excess net capital;
(2) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if after the
distribution or loan, the broker-dealer has net capital of less than
$300,000 or if the aggregate indebtedness of the broker-dealer's
consolidated entities would exceed 1,000% of the broker-dealer's net
capital and in certain other circumstances; and
(3) provide that the SEC may, by order, prohibit withdrawals from
capital of a broker-dealer for a period of up to 20 business days, if the
withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital and if the SEC believes the withdrawals would be
detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities.
HWG and Spires are also subject to "Risk Assessment Rules" imposed by the
SEC which require that certain broker-dealers maintain and preserve certain
information, prescribe risk management policies and procedures and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operational condition of the broker-dealers. Certain "Material Associated
Persons" (as defined in the Risk Assessment Rules) of the broker-dealers and
the activities conducted by such Material Associated Persons may also be subject
to SEC regulation. In addition, the possibility exists that, on the basis of the
information it obtains under the Risk Assessment Rules, the SEC could seek
authority over HWG's unregulated subsidiaries either directly or through its
existing authority over HWG and its regulated subsidiaries.
HWG is registered with the SEC as an investment adviser under the
Investment Advisers Act and is subject to regulations under both the Investment
Advisers Act and certain state securities laws and regulations. These
regulations relate to, among other things, (1) limitations on the ability of
investment advisers to charge performance-based or non-refundable fees to
clients, (2) record-keeping and reporting requirements, (3) disclosure
requirements, (4) limitations on principal transactions between an advisor or
its affiliates and advisory clients, and (5) general anti-fraud prohibitions.
The state securities law requirements applicable to registered investment
advisers are in certain cases more comprehensive than those imposed under
federal securities laws.
As a registered investment adviser under the Investment Advisers Act, HWG
is subject to regulations which cover various aspects of HWG's business,
including compensation arrangements. Under the Investment Advisers Act, every
investment advisory agreement with HWG's clients must expressly provide that the
agreement may not be assigned by the investment adviser without the client's
consent. Under the Investment Company Act, every investment adviser's agreement
with a registered investment company must provide for the agreement's automatic
termination if it is assigned. Under both the Investment Advisers Act and the
Investment Company Act, an investment advisory agreement is deemed to have been
assigned when there is a direct or indirect transfer of the agreement, including
a direct assignment or a transfer of a "controlling block" of the firm's
voting securities or, under certain circumstances, upon the transfer of a
"controlling block" of the voting securities of its parent corporation. A
transaction is not, however, an assignment under the Investment Advisers Act or
the Investment Company Act if it does not result in a change of actual control
or management of the investment adviser. Any assignment of HWG's investment
advisory agreements would require, as to any registered investment company
client, the prior approval of a majority of the investment company's
shareholders, and as to HWG's other clients, the prior consent of such clients.
9
Pinnacle's trust subsidiary, PMT, operates in a highly regulated
environment and is subject to extensive supervision and examination by Texas
regulatory agencies. As a Texas chartered trust company, PMT is subject to the
Texas Trust Company Act, the rules and regulations promulgated under that act
and supervision by the Texas Banking Commissioner. These laws are intended
primarily for the protection of PMT's clients, rather than for the benefit of
investors. The Texas Trust Company Act provides for, and regulates, a variety of
matters, such as:
o periodic examinations by the office of the Texas Banking Commissioner;
o furnishing periodic financial statements to the Commissioner;
o minimum net capital maintenance requirements;
o fiduciary record-keeping requirements;
o bonding requirements for the protection of clients;
o restrictions on investments of restricted capital;
o lending and borrowing limitations;
o prohibitions against engaging in certain activities;
o prior regulatory approval for certain corporate events (e.g., mergers,
sale/purchase of all or substantially all of the assets and
transactions transferring control of the trust company);
o broad regulatory powers if the trust company violates certain
provisions of Texas Trust Company Act or is determined to be in a
"hazardous condition" (as the law defines that term); and
o other matters.
While Pinnacle believes PMT is in material compliance with these laws,
rules and regulations, PMT may not be able to continue compliance in the future,
or these laws, rules or regulations may change adversely, either of which could
have a material adverse effect on PMT.
Pinnacle's ability to comply with laws relating to its financial service
business depends upon establishing and maintaining an effective compliance
system to monitor compliance, and Pinnacle's ability to attract and retain
qualified compliance personnel. While Pinnacle believes that it is in material
compliance with these laws and regulations, they may not be able to comply in
the future. Any noncompliance could have a material adverse effect on Pinnacle.
RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS
From 1995 through 1997, TEI disposed of all of its operating businesses
other than ERRI's liquid waste business. Pinnacle's new management determined to
discontinue the operations of ERRI effective December 31, 1998. In connection
with TEI's December 1997 sale of assets of a former subsidiary, the purchaser
agreed to complete customer contracts of the subsidiary in process at the time
of sale. TEI, and thus indirectly the Company, remains primarily liable to
complete the contracts, and has agreed to reimburse the purchaser if its
aggregate completion costs exceed the aggregate contract price. Throughout the
third quarter of 1998, TEI believed, based in part on information provided by
the purchaser, that TEI had no additional liability under the contracts in
process. However, after December 31, 1998, the purchaser notified TEI that a
major customer cancelled its contract and other contracts in process have or are
expected to result in costs in excess of the amounts recoverable from customers.
As a result, TEI recorded a charge to discontinued operations, net of tax, of
$1,344,000 for the estimated contract losses. Pinnacle is evaluating its
potential options to recover a portion of these losses, but Pinnacle may not be
successful in any attempted recovery. While Pinnacle believes it will not incur
losses for these contracts in excess of the recorded charge, TEI has in the past
experienced significant changes in the estimated costs to complete the ESI
contracts, and it is possible the purchaser of the ESI assets will assert
additional claims in 1999.
In addition, ERRI's liquid waste operations are subject to numerous and
continually evolving federal, state, and local laws, regulations and policies
that govern environmental protection, zoning and other matters, including the
Clean Water Act, Resource Conservation and Recovery Act and the Clean Air Act.
In
10
addition, while TEI does not accept, and does not intend to accept, hazardous
substances at its facilities, if ERRI's liquid waste operations result in the
release or improper disposal of hazardous substances, Pinnacle could incur
liability under the Comprehensive Environmental Response and Compensation and
Liability Act. Although Pinnacle believes ERRI is in material compliance with
applicable laws and regulations, it may not continue in compliance in the
future. Any failure to comply with these laws, regulations and policies could
have a material adverse effect on Pinnacle's business, results of operations or
financial condition and could result in continuing risk of liability to Pinnacle
for such failures under any proposed sale of ERRI's liquid waste business.
In connection with the decision to dispose of ERRI, TEI recorded a charge
to operations to reduce the value of its investment in ERRI to estimated net
realizable value. There is no assurance that TEI will be able to sell ERRI for
the estimated amount.
EMPLOYEES
At December 31, 1998, Pinnacle had a total of 120 employees, excluding
employees of discontinued operations. Of these employees, 33 were engaged in
retail brokerage, 30 in institutional sales, 21 in investment banking, nine in
trust services, five in systems development and support and 22 in accounting,
administration and operations. No Pinnacle employees are subject to collective
bargaining agreements. Pinnacle believes its relations with its employees
generally are good.
RISK MANAGEMENT; LITIGATION
Pinnacle's financial services business involves substantial risks of
liability. From time to time Pinnacle and its operating subsidiaries may be
named as a defendant in civil litigation and arbitration arising from its
business activities as a broker-dealer, fiduciary or in connection with its
investment management functions. The plaintiffs in such litigation or
arbitration may allege misconduct on the part of Pinnacle's investment or trust
executives, claiming, for example, that investments sold to the plaintiffs were
unsuitable for their portfolios, or that the investment executives engaged in
excessive trading in the plaintiffs' accounts. While historically Pinnacle's
subsidiaries have not incurred material liability in litigation or arbitration,
substantial liabilities in connection with such matters may occur in the future.
In recent years, there has been a substantial amount of litigation
involving the securities industry, including class action lawsuits that
generally seek substantial damages and other suits seeking punitive damages.
Companies engaged in the underwriting of securities, including Pinnacle, through
HWG, are subject to substantial potential liability, including for material
misstatements or omissions in prospectuses and other communications in
underwritten offerings of securities or statements made by securities analysts,
under federal laws, such as Rule 10b-5 under the Exchange Act and Section 11 of
the Securities Act and similar state statutes and common law doctrines. The risk
of liability may be higher for an underwriter which, like HWG, is active in the
underwriting of securities offerings for emerging and middle-market companies
due to the higher degree of risk and volatility associated with the securities
of those companies.
The defense of these or any other lawsuits or arbitrations may divert the
efforts and attention of the management and staff of Pinnacle and its
subsidiaries from other responsibilities, and Pinnacle may incur significant
legal expense in defending such litigation or arbitration.
In addition, Pinnacle may be exposed to certain liabilities and claims
related to the discontinued operations of TEI. See, Item 3 of this Annual Report
on Form 10-K entitled "Legal Proceedings" for a discussion of current
proceedings involving Pinnacle relating to these operations.
ITEM 2. PROPERTIES
Pinnacle leases office facilities in Houston (four locations) and Austin,
Texas, Morris Plains, New Jersey and Westport, Connecticut, aggregating
approximately 40,050 square feet. Two of Pinnacle's Houston leases expire in
2004, one Houston lease in 2002, one Houston lease in 2002, one Houston lease in
2003, the Austin and Morris Plains leases in 2000, and the Westport lease in
2003. The leases are on rental
11
and other terms that Pinnacle believes are commercially reasonable. Pinnacle
believes its existing facilities are well maintained and adequate for existing
and planned operations.
As part of its plan to discontinue the liquid waste operations, Pinnacle
intends to sell its real property located in Charlotte, North Carolina,
consisting of about six acres of land, related office space and 14,800 square
processing plant built in 1997. The Company anticipates the sale to be
consummated within the next 12 months, but due to unforeseen circumstances a
sale may not be completed within that time frame.
ITEM 3. LEGAL PROCEEDINGS
Pinnacle is a party to various legal proceedings which are of an ordinary
or routine nature incidental to Pinnacle's operations. Pinnacle believes it has
adequately reserved for such litigation matters and that they will not have a
material adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during
the fourth quarter ended December 31, 1998.
12
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "PING." The Common Stock began trading on
January 29, 1999. Prior to that time, there was no established public trading
market for the Common Stock. As a result of the Transactions, the Company became
the successor issuer to TEI whose common stock (the "TEI Common Stock") was
traded on the Nasdaq National Market under the symbol "TANK." The TEI Common
Stock began trading on June 19, 1991 and was removed from quotation on the
Nasdaq National Market on January 28, 1999. In connection with the Transactions,
each outstanding share of TEI Common Stock was converted into 0.25 of a share of
Common Stock, with just over 50% of the Company's outstanding shares of Common
Stock being issued to TEI's former shareholders. A total of 3,562,500 shares of
Common Stock, representing slightly less than 50% of the Company's outstanding
shares, were issued to the former owners of HWG, PMT and Spires. The following
table sets forth the quarterly high and low sale prices of the TEI Common Stock,
as reported on the Nasdaq National Market for the calendar quarters indicated
and after giving effect to the one for .25 share exchange of the TEI Common
Stock effected in connection with the Transactions:
CALENDAR PERIOD HIGH LOW
- - - ------------------------------------- --------- ---------
1998:
First Quarter................... 7 3/4 5 5/8
Second Quarter.................. 10 7
Third Quarter................... 10 1/2 6
Fourth Quarter.................. 9 5 1/4
1997:
First Quarter................... 9 1/4 6 1/4
Second Quarter.................. 7 3/4 6 1/4
Third Quarter................... 7 3/4 6 1/8
Fourth Quarter.................. 9 6 1/8
As of March 25, 1999, there were 345 record holders of the Common Stock. To
date, the Company has not paid cash dividends on its Common Stock. It is the
policy of the Company to continue retaining earnings for use in the Company's
operations and to fund the Company's future activities.
13
ITEM 6. SELECTED FINANCIAL DATA
The following data reflects the historical operating results and financial
condition of TEI prior to the Transactions. This data does not include any
information of the historical operating results or financial condition of the
financial services firms for any prior period.
As more fully described in Notes 1 and 2 to the Consolidated Financial
Statements, all of the businesses owned by TEI have been sold or are accounted
for as discontinued operations.
The statement of operations data for all periods has also been reclassified
to reflect ERRI's liquid waste operations as discontinued. Periods prior to 1997
had previously been reclassified to reflect the operations of the Tank Testing
Group, Engineered Systems, Inc. ("ESI") and Mankoff, Inc. ("Mankoff") as
discontinued. Accordingly, the historical selected financial data is not
indicative of future operations.
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995
------------ ------------------ ------------------ ------------------
STATEMENT OF OPERATIONS DATA:
Interest and dividend income........ $ 1,524,405 $ 1,530,264 $ 910,142 $ 740,013
Selling, general and administrative
expenses.......................... 1,364,613 1,537,376 1,622,395 1,594,064
------------ ------------------ ------------------ ------------------
Income (loss) from continuing
operations before income taxes.... 159,792 (7,112) (712,253) (854,051)
Income tax provision (benefit)...... 53,532 (10,733) (255,874) (301,276)
------------ ------------------ ------------------ ------------------
Income (loss) from continuing
operations........................ 106,260 3,621 (456,379) (552,775)
Income (loss) from discontinued
operations, net of tax............ (4,077,020) (2,785,237) 1,211,479 (8,036,330)
------------ ------------------ ------------------ ------------------
Net income (loss)................... $ (3,970,760) $ (2,781,616) $ 755,100 $ (8,589,105)
============ ================== ================== ==================
Basic and diluted earnings (loss)
per share:
From continuing operations..... $ 0.03 $ (0.00) $ (0.13) $ (0.16)
From discontinued operations... (1.14) (0.78) 0.34 (2.26)
------------ ------------------ ------------------ ------------------
Net earnings (loss) per
share........................ $ (1.11) $ (0.78) $ 0.21 $ (2.42)
============ ================== ================== ==================
Weighted average common shares
outstanding....................... 3,562,753 3,561,003 3,559,253 3,557,503
============ ================== ================== ==================
1994
------------------
STATEMENT OF OPERATIONS DATA:
Interest and dividend income........ $ 251,413
Selling, general and administrative
expenses.......................... 1,345,892
------------------
Income (loss) from continuing
operations before income taxes.... (1,094,479)
Income tax provision (benefit)...... (434,161)
------------------
Income (loss) from continuing
operations........................ (660,318)
Income (loss) from discontinued
operations, net of tax............ 2,203,296
------------------
Net income (loss)................... $ 1,542,978
==================
Basic and diluted earnings (loss)
per share:
From continuing operations..... $ (0.18)
From discontinued operations... 0.61
------------------
Net earnings (loss) per
share........................ $ 0.43
==================
Weighted average common shares
outstanding....................... 3,605,102
==================
AS OF DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 13,292,644 $ 12,810,100 $ 11,421,710 $ 14,967,107 $ 6,249,636
Short-term investments.................. 14,637,575 15,335,619 18,425,979 3,694,873 7,483,075
Working capital......................... 27,355,943 30,033,838 29,001,908 24,896,104 26,300,941
Total assets............................ 34,995,239 39,042,721 43,033,894 42,276,610 52,917,420
Long-term debt, excluding current
maturities............................ -- -- -- -- --
Total shareholders' equity.............. 33,699,763 37,665,147 40,432,973 39,665,133 48,238,488
The earnings (loss) per share data and weighted average shares outstanding
have been retroactively adjusted to give effect to the one for .25 exchange in
connection with the Transactions.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Selected
Financial Data" included elsewhere in this Report.
GENERAL
TEI was incorporated in 1989 to acquire and operate businesses involved in
various aspects of underground and above ground tank testing and related
services. In 1994, TEI acquired its ERRI subsidiary that performs wastewater
treatment. Beginning in 1995, TEI began disposing of its various tank testing
related businesses and completed the divestiture program in 1997. In March 1999,
Pinnacle's new board of directors adopted a plan to discontinue the operations
of ERRI effective December 31, 1998. Management believes the sale of ERRI and
the related Charlotte, North Carolina facility will be consummated within the
next 12 months. All of TEI's businesses are reflected as discontinued
operations. TEI's continuing operations in the accompanying historical financial
statements consist of (1) interest and dividend income from investments funded
from cash generated from operations in prior years and from disposal of the
discontinued operations, and (2) corporate general and administrative expenses.
Thus, historical results of continuing operations are not indicative of future
operations.
On January 29, 1999, TEI completed the Transactions with HWG, PMT and
Spires, with Pinnacle emerging as the new public holding company. In the
Transactions, just over 50% of Pinnacle's outstanding shares were issued to
TEI's former shareholders in exchange for their TEI shares, and slightly less
than 50%, or 3,562,500 Pinnacle shares, were issued to the former owners of the
financial services firms. The Transactions were accounted for as purchases by
Pinnacle of each of the three financial services firms. The following discussion
of the results of operations relates solely to the operations of TEI prior to
the Transactions. The results of operations of HWG, PMT and Spires during the
periods discussed are not included.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Interest and dividend income declined by $6,000 to $1,524,000 during 1998
from $1,530,000 during 1997, as a result of a decrease in the average balance of
cash and short term investments of approximately $1,500,000 offset by an
increase in the average rate earned on such investments of approximately 0.5%.
Selling, general, and administrative expenses decreased by $172,000 to
$1,365,000 during 1998 from $1,537,000 during 1997, primarily as a result of a
decrease in compensation and benefits of $91,000 from reductions in staff and a
$65,000 decrease in property taxes from the sale of TEI's former corporate
headquarters.
Losses from discontinued operations, net of tax, were $4,077,000 in 1998
compared to a loss of $2,785,000 in 1997. The loss from discontinued operations
in 1998 reflects a $569,000 net after tax loss of ERRI for the year and a
writedown of TEI's investment in ERRI of $2,164,000, net of tax, based on the
estimated net realizable value of the business. In accordance with the terms of
the ESI asset disposition, the purchaser is responsible for completing customer
contracts in place at the date of the disposition. However, TEI remains liable
for costs incurred by the purchaser in excess of amounts collected from
customers. Through the third quarter of 1998, TEI believed, based in part on
information provided by the purchaser, that TEI had no additional liability
under the contracts in process. Subsequent to December 31, 1998, the purchaser
notified TEI that a major customer cancelled its contract and other contracts in
process have or are expected to result in costs in excess of amounts recoverable
from customers. As a result, TEI recorded a charge to discontinued operations,
net of tax, of $1,344,000 for the estimated contract losses. The Company is
evaluating its potential options to recover a portion of these losses, but the
Company may not be successful in any attempted recovery. While the Company
believes it will not incur losses in excess of the recorded charge, TEI has in
the past experienced significant changes in the estimated costs to complete ESI
contracts, and it is possible the purchaser of the ESI assets will assert
additional claims in 1999.
15
The loss from discontinued operations in 1997 consisted of a $188,000 loss
on disposition of ESI, $2,194,000 of net losses from ESI operations and $403,000
of net losses from ERRI operations.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Interest and dividend income increased by $620,000 to $1,530,000 during
1997 from $910,000 during 1996 as a result of an increase in the average
investment balance during 1997 from proceeds generated from the sale of the Tank
Testing Group in October 1996.
Selling, general, and administrative expenses decreased by $85,000 to
$1,537,000 during 1997 from $1,622,000 during 1996 primarily due to a decrease
in compensation and benefits and a decrease in depreciation from the sale of the
Tank Testing Group. This decrease was partially offset by an increase in legal
and professional fees.
Losses from discontinued operations, net of tax, were $2,785,000 in 1997
compared to a gain of $1,211,000 in 1996. The 1996 gain consisted of $672,000 of
net income from operations and a $1,277,000 gain on disposition of the Tank
Testing Group. These gains were partially offset by net losses of $660,000 at
ESI and $78,000 at ERRI. TEI originally expected to complete the disposition of
ESI prior to December 31, 1996. However, ESI was not sold until December, 1997.
Due to the longer than anticipated period of disposal, TEI recorded an
additional reserve of $660,000 during the fourth quarter of 1996, net of an
income tax benefit of $340,000. ESI incurred operating losses of $2,163,000
during 1996, which were anticipated and charged against the initial reserve for
discontinued operations recorded by TEI. The loss in 1997 related to the
operations and disposal of ESI. This loss consisted of $2,194,000 of net losses
at ESI, including a change in estimated income tax expense of approximately
$517,000 resulting from unanticipated delays in the disposition, and a $188,000
loss on disposition.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash, cash equivalents, and
short-term investments of approximately $27,930,000. During 1999, Pinnacle plans
to use approximately $15,000,000 of its funds to expand its operations,
principally in Spires' fixed income securities trading operations. Approximately
$1,200,000 is expected to be used to reimburse the purchasers of ESI for certain
contract costs. This estimated payment will be net of a $500,000 note receivable
from the purchasers which will be offset against amounts payable to the
purchaser.
For the year ended December 31, 1998, net cash provided by operations
totaled $1,443,000 versus net cash used by operations of $4,083,000 during 1997.
Current year cash provided by operations is principally the result of the
collection of a $1,500,000 income tax receivable.
Capital expenditures for 1998 were $880,000 mainly for the purchase of
machinery and processing equipment at ERRI for modifications to the Company's
newly constructed wastewater treatment plant. The Company also incurred
acquisition costs of $996,000 in connection with the Transactions. Management
anticipates that the Company will make capital expenditures of approximately
$200,000 in 1999.
The Company is involved in litigation and routine claims from time to time.
Certain of the Company's litigation and claims are covered by insurance with a
maximum deductible of $50,000. In addition, the Company is contingently liable
for up to $600,000 for liabilities relating to services performed by the Tank
Testing Group prior to October 25, 1996. TEI has recorded an $599,000 liability
for that contingency as of December 31, 1998. The Company believes the ultimate
outcome of the litigation and claims in which the Company is currently involved
will not have a material adverse effect to the Company's consolidated financial
position, results of operations or liquidity.
Management believes that cash generated from operations, existing cash
balances and available borrowing capacity will be sufficient to meet the
Company's anticipated cash requirements for 1999.
FORWARD-LOOKING STATEMENT
The statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1.
Business and this Item 7. Management's Discussion and
16
Analysis of Financial Condition and Results of Operations, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Annual
Report could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: general economic conditions, competition, government regulation,
and possible future litigation, as well as the risks and uncertainties discussed
in this Annual Report, including without limitation, the portions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports, filings, and public statements.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company's
financial condition, results of operations or cash flows, However, the rate of
inflation can be expected to affect the Company's expenses such as employee
compensation, occupancy and equipment. Increases in these expenses may not be
readily recoverable in the prices that the Company charges for its services.
Inflation can have significant effects on interest rates that in turn can affect
prices and activities in the financial services market. These fluctuations could
have an adverse impact on the Company's financial services operations.
YEAR 2000 IMPACT
The "Year 2000" problem refers to the inability of computer systems and
applications to correctly interpret the century from a date in which the year is
represented by only two digits. A computer system or application that is not
Year 2000 compliant could not correctly process certain data, or in extreme
situations, could disable the entire system.
The Company's financial services subsidiaries are heavily dependent on
their own computer programs and systems, all of which may be affected by the
Year 2000 problem. In addition, these subsidiaries have material relationships
with third parties related to the performance of the Company's financial
services who must also address the Year 2000 problem. These third parties
include:
o trading counter parties o software providers
o financial intermediaries o clearing agencies
o securities exchanges o clearing houses
o depositories
These operations of the Company's financial services subsidiaries may be
adversely affected if these third parties do not adequately address the Year
2000 problem and the Company is unable to make timely contingency plans. A Year
2000 failure at any of the Company's financial service subsidiaries or at their
material third parties could have a material adverse affect on the Company's
financial services businesses by impairing its ability to, among other things:
o gather and process information vital to strategic decision making by
both the Company and its customers;
o perform pricing calculations;
o execute customer transactions;
o maintain accurate books and records and provide timely reports;
o access audit facilities for both the Company and its customers; and
o undertake risk management functions.
The Company also relies on many third-party vendors and suppliers for a
variety of goods and services necessary for most business, including operating
supplies, banking, telecommunications and utilities, such as water and
electricity. Many of the Company's operations would be adversely affected if
these supplies and services were curtailed as a result of a vendor's or
supplier's Year 2000 problems.
The Company has contacted material third parties whose services or
functions, if curtailed, would have an adverse effect on the Company. However,
the Company to date does not have sufficient information to
17
assess whether all material third parties will be Year 2000 compliant. The
Company intends to make further inquiry during the second quarter of 1999 with
those material third party relationships who do not respond by March 31, 1999.
The Company's broker-dealer subsidiaries, HWG and Spires, were required to
conduct complete review of the potential impact of Year 2000 issues and report
their findings to the NASD and the SEC no later than August 31, 1998. An updated
report by both subsidiaries is due no later than April 30, 1998. HWG filed its
initial report with the NASD and SEC on August 6, 1998, and Spires filed its
initial report with both agencies on August 31, 1998, both reports were without
response from the NASD or the SEC.
The Company's trust subsidiary, PMT, was required to conduct a complete
review of the potential impact of Year 2000 issues and report its findings to
the Texas Banking Commissioner. PMT filed its initial report with the Bank
Commissioner on August 3, 1998.
The Company has developed the following multi-phase plan to resolve
potential Year 2000 problems relating to its information technology ("IT")
systems at all of its operations and embedded chip technology at its ERRI liquid
waste facility:
Phase I: Identify and evaluate all IT systems and embedded chip technology
according to their potential business impact.
Phase II: Identify IT systems and embedded chip technology that use date
functions and assess them for Year 2000 functionality.
Phase III: Reprogram or replace equipment/systems, where necessary, to ensure
Year 2000 readiness.
Phase IV: Test code modifications and material equipment/systems to ensure
successful operation in a post-1999 environment.
Phase V: Adoption of contingency plans in the case of potential Year 2000
failures.
The Company has completed Phases I through III, and has partially
completed Phases IV and V of its plan at a cost of about $50,000 for modifying
or purchasing new software and for upgrading or purchasing new computer systems.
The Company expects to complete Phases IV and V of its plan during the second
quarter of 1999 at an additional cost estimated not to exceed $200,000. Of these
total Year 2000 costs, about 30,000 are expected to be used for remediation,
which represents an estimated 10% of the Company's 1999 information technology
budget. Some of these costs may be recurring. The Company believes that cash on
hand and cash from operations will be sufficient to fund these costs. No
information technology projects have been deferred due to the Company's Year
2000 efforts.
The Company has begun to develop a firm-wide contingency/recovery plan
aimed at ensuring the continuity of critical business functions before and after
December 31, 1999. As part of this process, the Company will develop reasonably
likely failure scenarios for its critical IT systems, and embedded chip
technology at its ERRI liquid waste facility, and material third-party
relationships. Once these scenarios are identified, the Company will develop
plans designed to reduce the impact to the Company, and provide methods of
returning to normal operations, if one or more of those scenarios occur. The
Company cannot guarantee that it will be able to resolve all of its Year 2000
issues, and any critical unresolved Year 2000 issues at the Company or any of
its material third parties could have a material adverse effect on the Company's
results of operations and financial condition. The Company expects its
contingency and recovery planning to be substantially complete by September 30,
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion regarding the Company's market risk sensitive
instruments at December 31, 1998 relates solely to the instruments held by TEI.
No discussion has been included regarding such instruments held by HWG, PMT and
Spires since the Company's combination with those firms was not consummated
until January 29, 1999.
At December 31, 1998, TEI held cash equivalents and short-term investments
totalling approximately $25.7 million. Cash equivalents include investments in
certificates of deposit, commercial paper and U.S.
18
government securities, which mature in no more than 90 days from the date of
purchase. Short-term investments include investments in commercial paper, U.S.
government securities, corporate bonds, and mutual funds, which mature in more
than 90 days but less than one year from the date of purchase. For a breakdown
of TEI's cash equivalents and short-term investments by category, see Note 4 to
the TEI Consolidated Financial Statements. At December 31, 1998, TEI's
investments were held in trust by five separate investment managers.
TEI's short-term investments are all classified as available-for-sale and
not as investments held for purposes of trading. These investments are recorded
at cost and adjusted for unrealized holding gains and losses due to market
fluctuations. Unrealized gains or losses are recorded as a separate component of
other comprehensive income, which is charged through shareholders' equity and
not the statement of operations.
TEI's money managers are specifically instructed to invest TEI's capital
only in short-term investment instruments, and if the selected investment
involves commercial paper or debt instruments, that such instruments be rated
grade A or better. TEI's cash equivalents and short-term investments consist
predominantly of fixed-rate instruments, and thus, are not subject to interest
rate risk. TEI's variable-rate investments include its money market mutual funds
and a limited number of its corporate bonds and commercial paper. While these
variable rate investments are subject to interest rate risk, the Company
believes such risk is minimal due to the short-term nature of these investments,
and thus, would not have a material effect the Company's financial position,
results of operations or cash flows.
At December 31, 1998, TEI had no operations subject to commodity price
risks or foreign currency exchange risks, nor does it use derivative financial
instruments in its operations or investment portfolio.
As a result of the Transactions and the nature of the operations of the
combining financial services firms, the Company expects its consolidated market
risk sensitive instruments portfolio to be materially different than that held
by TEI at December 31, 1998.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEI, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS
Report of Independent
Accountants.................... 21
Consolidated Balance Sheet as of
December 31, 1998 and 1997..... 22
Consolidated Statement of
Operations for the three years
in the period ended
December 31, 1998............. 23
Consolidated Statement of
Shareholders' Equity for the
three years in the period ended
December 31, 1998.............. 24
Consolidated Statement of Cash
Flows for the three years in
the period ended
December 31, 1998............. 25
Notes to Consolidated Financial
Statements..................... 26
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pinnacle Global Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of TEI, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
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 audits. We conducted our audits in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
LLP
Houston, Texas
March 31, 1999
21
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 13,292,644 $ 12,810,100
Short-term investments.......... 14,637,575 15,335,619
Accounts receivable, net........ -- 639,678
Deferred tax asset.............. 408,658 515,611
Income tax receivable........... -- 1,512,115
Other current assets............ 312,542 598,289
------------ ------------
Total current assets....... 28,651,419 31,411,412
PROPERTY AND EQUIPMENT, NET.......... 25,116 4,789,141
INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION....................... -- 2,288,479
DEFERRED TAX ASSET................... 2,248,119 176,383
ACQUISITION COSTS.................... 995,625 --
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 3,074,960 377,306
------------ ------------
Total assets.................... $ 34,995,239 $ 39,042,721
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 595,412 $ 344,040
Accrued liabilities............. 700,064 1,033,534
------------ ------------
Total current
liabilities............. 1,295,476 1,377,574
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value;
10,000,000 shares authorized;
no shares issued and
outstanding................... -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
3,801,559 and 3,799,809 shares
issued at December 31,
1998 and 1997, respectively... 38,016 37,999
Additional paid-in capital...... 33,248,729 33,237,370
Retained earnings............... 4,606,689 8,577,449
Accumulated other comprehensive
loss.......................... (6,000) --
Treasury stock at cost, 238,806
shares, at December 31, 1998
and 1997...................... (4,187,671) (4,187,671)
------------ ------------
Total shareholders' equity...... 33,699,763 37,665,147
------------ ------------
Total liabilities and
shareholders' equity.......... $ 34,995,239 $ 39,042,721
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
22
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
1997 1996
1998 RECLASSIFIED RECLASSIFIED
-------------- ------------ ------------
Interest and dividend income............ $ 1,524,405 $ 1,530,264 $ 910,142
Selling, general and administrative
expenses.............................. 1,364,613 1,537,376 1,622,395
-------------- ------------ ------------
Income (loss) from continuing
operations before income taxes... 159,792 (7,112) (712,253)
Income tax provision (benefit).......... 53,532 (10,733) (255,874)
-------------- ------------ ------------
Income (loss) from continuing
operations....................... 106,260 3,621 (456,379)
Net (loss) from discontinued
operations,
net of tax....................... (2,732,626) (2,597,383) (65,420)
Gain (loss) on disposition of
discontinued operations, net of
tax.............................. (1,344,394) (187,854) 1,276,899
-------------- ------------ ------------
Net income (loss).................. $ (3,970,760) $ (2,781,616) $ 755,100
============== ============ ============
Basic and diluted earnings (loss) per
share:
From continuing operations......... $ 0.03 $ 0.00 $ (0.13)
From discontinued operations....... (1.14) (0.78) 0.34
-------------- ------------ ------------
Net earnings (loss) per share...... $ (1.11) $ (0.78) $ 0.21
============== ============ ============
Weighted average common shares
outstanding........................... 3,562,753 3,561,003 3,559,253
============== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
23
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER
-------------------- --------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS)
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1995........... 3,796,309 $ 37,963 (238,806) $(4,187,671) $33,210,876 $10,603,965 $ --
Issuance of common stock to
nonemployee directors............ 1,750 18 -- -- 12,722 -- --
Comprehensive income (loss):
Net income......................... -- -- -- -- -- 755,100 --
Net change in unrealized
appreciation on short-term
investments...................... -- -- -- -- -- -- --
Total comprehensive income......... -- -- -- -- -- -- --
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1996........... 3,798,059 37,981 (238,806) (4,187,671) 33,223,598 11,359,065 --
Issuance of common stock to
nonemployee directors.............. 1,750 18 -- -- 13,772 -- --
Comprehensive income (loss):
Net loss........................... -- -- -- -- -- (2,781,616) --
Net change in unrealized
appreciation on short-term
investments...................... -- -- -- -- -- -- --
Total comprehensive loss........... -- -- -- -- -- -- --
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1997........... 3,799,809 37,999 (238,806) (4,187,671) 33,237,370 8,577,449 --
Issuance of common stock to
nonemployee directors.............. 1,750 17 -- -- 11,359 -- --
Comprehensive income (loss):
Net loss........................... -- -- -- -- -- (3,970,760) --
Net change in unrealized
depreciation on short-term
investments, net of deferred
taxes of $3,091.................. -- -- -- -- -- -- (6,000)
Total comprehensive loss........... -- -- -- -- -- -- --
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1998........... 3,801,559 $ 38,016 (238,806) $(4,187,671) $33,248,729 $4,606,689 $ (6,000)
========= ========= ========= ========== =========== ========== ==============
TOTAL
----------
Balance, December 31, 1995........... $39,665,133
Issuance of common stock to
nonemployee directors............ 12,740
Comprehensive income (loss):
Net income......................... 755,100
Net change in unrealized
appreciation on short-term
investments...................... --
----------
Total comprehensive income......... 755,100
----------
Balance, December 31, 1996........... 40,432,973
Issuance of common stock to
nonemployee directors.............. 13,790
Comprehensive income (loss):
Net loss........................... (2,781,616)
Net change in unrealized
appreciation on short-term
investments...................... --
----------
Total comprehensive loss........... (2,781,616)
----------
Balance, December 31, 1997........... 37,665,147
Issuance of common stock to
nonemployee directors.............. 11,376
Comprehensive income (loss):
Net loss........................... (3,970,760)
Net change in unrealized
depreciation on short-term
investments, net of deferred
taxes of $3,091.................. (6,000)
----------
Total comprehensive loss........... (3,976,760)
----------
Balance, December 31, 1998........... $33,699,763
==========
The accompanying notes are an integral part of the consolidated financial
statements.
24
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
1998 1997 1996
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (3,970,760) $ (2,781,616) $ 755,100
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for disposition of
discontinued operations.......... 5,234,085 2,187,210 1,000,000
(Gain) loss on disposition of
discontinued operations.......... -- 187,854 (2,065,228)
ESI operating loss charged to
reserve for discontinued
operations....................... -- (2,193,860) (2,163,317)
Depreciation and amortization...... 910,631 674,538 2,598,411
Net amortization of premiums and
discounts on short-term
investments...................... (201,526) (246,537) (234,897)
Gain on disposal of assets......... (7,701) (63,664) --
Deferred income taxes.............. (1,964,783) 1,205,456 (232,838)
Deferred income.................... -- -- (16,430)
Common stock issued to directors... 11,376 13,790 12,740
Changes in assets and liabilities,
including discontinued
operations:
Increase in accounts
receivable, net............ (298,758) (135,806) (136,149)
(Increase) decrease in costs
and estimated earnings in
excess of billings on
uncompleted contracts...... -- 309,375 (230,304)
(Increase) decrease in
inventories, net........... (17,610) (530,633) 595,206
(Increase) decrease in income
tax receivable............. 1,512,115 (1,512,115) 2,106,678
(Increase) decrease in other
current assets............. 53,024 43,822 (834,414)
Increase (decrease) in
accounts payable and
accrued liabilities........ 182,649 (1,241,198) 556,113
--------------- --------------- ---------------
Net cash provided by
(used in) operating
activities............ 1,442,742 (4,083,384) 1,710,671
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (879,876) (682,192) (1,987,458)
Acquisition costs.................. (995,625) -- --
Proceeds from the disposition of
discontinued operations.......... -- -- 12,000,000
Proceeds from the sale of assets... 15,733 2,492,284 --
Purchases of short-term
investments...................... (28,856,556) (35,693,443) (20,193,368)
Proceeds from maturities of
short-term investments........... 29,756,126 39,355,125 5,697,159
Increase in intangible assets...... -- -- (44,763)
--------------- --------------- ---------------
Net cash provided by
(used in) investing
activities............ (960,198) 5,471,774 (4,528,430)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes
payable.......................... -- -- (28,939)
--------------- --------------- ---------------
Net cash used in
financing
activities............ -- -- (28,939)
--------------- --------------- ---------------
CASH OF BUSINESSES SOLD................. -- -- (698,699)
--------------- --------------- ---------------
Net increase (decrease)
in cash and cash
equivalents........... 482,544 1,388,390 (3,545,397)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 12,810,100 11,421,710 14,967,107
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 13,292,644 $ 12,810,100 $ 11,421,710
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
25
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
As more fully described in Note 2, through a series of transactions on
January 29, 1999, the shareholders of TEI, Inc. ("TEI") exchanged all common
shares of TEI for 3,562,753 common shares of a newly formed Pinnacle Global
Group, Inc. ("Pinnacle"). Pinnacle simultaneously completed the acquisition of
three financial services firms, by exchanging 3,562,500 of its common shares
(slightly less than 50% of outstanding common shares) in exchange for all of the
ownership interests of the three financial services firms. TEI is now a wholly
owned subsidiary of Pinnacle. TEI and Pinnacle are both referred to as the
"Company." As a result of the acquisitions, and the discontinued operations
described below, Pinnacle now provides a broad range of financial services
including investment banking, merchant banking, institutional and retail
brokerage, asset management, secondary market loan and loan servicing placement
and trust related services, primarily in the southwestern United States.
TEI has retroactively reflected the one-for-.25 TEI share exchange
described above in the accompanying Financial Statements similar to a stock
split.
During 1995, 1996 and 1997 TEI disposed of all of its operations other than
its liquid waste business, Energy Recovery Resources, Inc. ("ERRI"). In March
1999, the Board of Directors of Pinnacle adopted a plan of disposal of ERRI
effective December 31, 1998. Therefore, all of the Company's businesses operated
prior to the acquisition of the three financial services firms are reflected as
discontinued operations. Continuing operations in the historical financial
statements consist only of interest income from investments of cash, generated
from operations in prior years and from disposal of the discontinued operations,
and corporate general and administrative expenses. Thus, historical results of
continuing operations are not indicative of future operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of TEI and its wholly owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation. Prior year amounts in the
consolidated statement of operations and related notes thereto have been
reclassified to reflect the Company's discontinued operations consisting of
Engineered Systems, Inc. ("ESI"), Tanknology Corporation International
("TCI"), Tanknology Canada (1988), Inc., USTMAN Industries, Inc., collectively
the "Tank Testing Group", and ERRI, as discussed in Note 3. All footnote
amounts related to the statement of operations are from continuing operations
unless otherwise indicated.
CASH EQUIVALENTS
The Company considers all highly liquid investment instruments with
original maturities of three months or less when purchased to be cash
equivalents.
SHORT-TERM INVESTMENTS
Short-term investments are those with maturities greater than three months
when purchased. The Company has classified all short-term investments as
available-for-sale. When purchased, securities are recorded at cost and adjusted
for unrealized holding gains and losses due to market fluctuations. These
unrealized gains or losses are recorded as a separate component of other
comprehensive income. Gains and losses are recorded upon the sales of short-term
investments based upon the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over five to ten years. Depreciation expense was
$11,417, $33,533, and $47,743 for the years ended
26
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, 1997, and 1996, respectively. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and betterments are capitalized.
STOCK-BASED COMPENSATION
The Company grants stock options under stock-based incentive compensation
plans, (the "Plans"). The Company applies APB Opinion 25 and related
Interpretations in accounting for the Plans. In 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation ("SFAS No. 123") which, if
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS No. 123 is optional and the Company decided not to elect these
provisions. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are
presented in Note 8.
INCOME TAXES
The Company utilizes the liability method for deferred income taxes. The
liability approach requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events recognized in the Company's
financial statements or tax returns. All expected future events other than
changes in the law or tax rates, are considered in estimating future tax
consequences.
The provision for income taxes includes federal, state, and local income
taxes currently payable and those deferred because of temporary differences
between the financial statements and tax bases of assets and liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments, and accounts receivable related to discontinued
operations.
The Company maintains cash balances with several banks. Cash and cash
equivalents includes investments in certificates of deposit, commercial paper,
and U.S. Government Securities that mature in no more than 90 days from the date
of purchase. Short-term investments include commercial paper, U.S. Government
Securities, corporate bonds, and mutual funds. Such investments are recorded at
cost and adjusted for fluctuations in market values. At December 31, 1998,
approximately $15,940,000, $5,023,000, $2,624,000, $2,439,000, and $101,000,
respectively, were held in trust by five separate investment managers. At
December 31, 1997, approximately $7,820,000, $2,310,000, $2,495,000, $15,244,000
and $101,000, respectively, were held in trust by five separate investment
managers.
MANAGEMENT'S ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of consolidated assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. The Company's most significant estimates relate to estimated
recoverable amounts of assets and estimated liabilities of discontinued
operations.
27
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements in order for them to conform with the 1998 presentation.
The reclassifications had no effect on financial position, results of operations
or cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") in June 1998. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company has
not determined the impact of adoption of this statement.
2. ACQUISITIONS
On January 29, 1999, Pinnacle acquired three financial services firms;
Harris Webb & Garrison, Inc., Pinnacle Management & Trust Company and Spires
Financial, L.P. In the acquisitions, the former owners of the financial services
firms received consideration consisting of 3,562,500 shares of Pinnacle common
stock ("Common Stock") which represents 49.98% of the outstanding Common
Stock. The acquisitions were accounted for as purchases.
UNAUDITED PROFORMA INFORMATION
The purchase price of $30.7 million exceeded the fair value of identifiable
net assets acquired by approximately $21 million, which is being amortized on a
straight-line basis over 25 years. The results of operations of the financial
services firms will be included in the accompanying financial statements from
the date of acquisition.
The following summarized unaudited pro forma financial information assumes
the acquisitions had occurred on January 1, 1998:
Revenues............................. $ 19,552,000
Income from continuing operations.... 1,758,000
Basic and diluted earnings per share
from continuing operations......... 0.25
These unaudited pro forma amounts are derived from the historical financial
statements of the financial services firms for 1998. The unaudited pro forma
results do not necessarily represent results which would have occurred if the
acquisitions had taken place on the basis assumed above, nor are they indicative
of the results of future combined operations.
3. DISCONTINUED OPERATIONS
In March 1999, the Board of Directors of the Company adopted a plan to
discontinue the operations of ERRI effective December 31, 1998. Accordingly, the
operating results of ERRI have been segregated from continuing operations and
reported as a discontinued operation in the statement of operations. A provision
for estimated loss on disposition of ERRI of $2,164,000 net of tax, consisting
of a write down of goodwill and property and equipment, was recorded during the
fourth quarter of 1998.
The Company has reclassified its prior financial statements to present the
operating results of ERRI as a discontinued operation. The net assets and
liabilities have been included in net assets of discontinued operations on the
balance sheet. The Company anticipates the sale of ERRI during the year ending
December 31, 1999.
28
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 25, 1996, the Company disposed of certain assets and liabilities
of the Tank Testing Group to an unrelated third party for $12 million in cash.
The disposition of the Tank Testing Group was made pursuant to a Stock Purchase
Agreement dated October 7, 1996.
ESI's operations were discontinued as of December 31, 1995. The assets of
ESI were disposed of on December 23, 1997, for a $500,000 interest bearing note
due in 2002. The purchaser has also agreed to complete customer contracts that
were in process at the time of the sale. During 1995, a provision for estimated
loss on disposition of ESI of $3,715,000, including write-off of goodwill and
estimated losses through the then expected date of sale, was recorded net of an
income tax benefit of $1,914,000. During 1996, an additional provision for
estimated loss on disposition of ESI of $660,000 was recorded, net of an income
tax benefit of $340,000. Due to unanticipated delays in the disposition of ESI,
the Company recorded an additional provision of $990,000, net of tax in the
second quarter of 1997. Upon the disposition of the assets of ESI in the fourth
quarter of 1997, the Company incurred additional losses of $1,392,000. The
additional losses in the fourth quarter were primarily due to unanticipated
costs associated with contracts in process and a change in estimate for income
taxes of approximately $517,000 related to the delays in disposition. In
accordance with the terms of the ESI asset disposition, the purchaser is
responsible for completing customers contracts that were in place at the date of
disposition. However, the Company remains liable for costs incurred by the
purchaser in excess of amounts recoverable from customers. Through the third
quarter of 1998, the Company believed, based in part from information provided
by the purchaser, that it had no additional liability with respect to the
contracts in process. Subsequent to December 31, 1998, the Company was notified
that a major customer cancelled its contract and that the other contracts in
process have incurred costs in excess of amounts recoverable from customers. As
a result the Company has recorded an additional loss related to ESI of
$1,344,000, net of tax. The Company estimates that it will not incur any
additional losses with respect to contracts to be completed by the purchaser;
however, the Company has experienced significant changes in these estimates in
the past and it is possible that such changes could occur in 1999.
29
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of selected financial information of discontinued operations for
each of the three years in the period ended December 31, 1998 are as follows:
1998 1997 1996
------------ ------------ ------------
Revenues:
ERRI............................... $ 2,953,000 $ 2,726,000 $ 2,199,000
ESI................................ -- 1,954,000 3,322,000
Tank Testing Group ("TTG")....... -- -- 18,926,000
Cost of sales:
ERRI............................... 2,497,000 2,190,000 1,554,000
ESI................................ -- 3,646,000 4,761,000
TTG................................ -- -- 11,221,000
Gross margin (loss):
ERRI............................... 456,000 536,000 645,000
ESI................................ -- 1,692,000 (1,439,000)
TTG................................ -- -- 7,705,000
Selling, general & administrative:
ERRI............................... 1,173,000 1,088,000 808,000
ESI................................ -- 502,000 724,000
TTG................................ -- -- 5,417,000
Net income (loss), net of tax:
ERRI............................... (2,733,000) (403,000) (78,000)
ESI................................ -- (2,194,000) (660,000)
TTG................................ -- -- 672,000
Gain (loss) on disposition, net of tax:
ESI................................ (1,344,000) (188,000) --
TTG................................ -- -- 1,277,000
Net assets of discontinued operations at December 31, 1998 and 1997
consisted of the following:
1998 1997
-------------- ----------
Working capital (excluding accrued
losses).............................. $ 795,328 $ (22,694)
Accrued losses....................... (1,568,894) --
Long term assets..................... 3,848,526 400,000
-------------- ----------
Net assets........................... $ 3,074,960 $ 377,306
============== ==========
4. SHORT-TERM INVESTMENTS
The Company's investments in cash equivalents and short-term investments,
all of which mature within one year, at December 31, 1998 and 1997 were as
follows:
1998
--------------------------------------------------
GROSS UNREALIZED 1997
AMORTIZED --------------------- ESTIMATED ESTIMATED
COST GAINS LOSSES FAIR VALUE FAIR VALUE
------------ --------- ---------- ------------ -----------
U.S. Government agency obligations... $ 1,309,292 $ -- $ (188) $ 1,309,104 $ 5,313,447
Corporate bonds...................... 9,216,698 22,757 (31,691) 9,207,764 9,050,985
Money market mutual funds............ 2,438,650 -- -- 2,438,650 2,309,900
Commercial paper..................... 12,589,152 -- -- 12,589,152 11,013,606
Certificates of deposit.............. 199,969 31 -- 200,000 101,010
Less: Cash equivalents............... (11,107,095) -- -- (11,107,095) (12,453,329)
------------ --------- ---------- ------------ -----------
Total short-term investments.... $ 14,646,666 $ 22,788 $ (31,879) $ 14,637,575 $15,335,619
============ ========= ========== ============ ===========
30
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net unrealized gain/loss at December 31, 1997 was not material.
5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts at December
31, 1998 and 1997 is presented below:
DECEMBER 31,
-------------------------
1998 1997
----------- ------------
Property and equipment:
Buildings and improvements...... $ -- $ 2,347,316
Furniture, fixtures and
equipment..................... 52,455 2,825,068
Land............................ -- 189,260
Plant construction in
progress...................... -- 227,751
----------- ------------
Total property and
equipment............... 52,455 5,589,395
Accumulated depreciation........ (27,339) (800,254)
----------- ------------
Net property and
equipment............... $ 25,116 $ 4,789,141
=========== ============
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
Accrued liabilities:
Compensation.................... $ 32,836 $ 123,364
Claims reserves................. 599,435 829,435
Other........................... 67,793 80,735
------------ ------------
Total accrued
liabilities............. $ 700,064 $ 1,033,534
============ ============
6. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1998, 1997, and 1996 were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996
1998 RECLASSIFIED RECLASSIFIED
-------------- ------------ ------------
Continuing operations:
Federal -- current................. $ -- $ (3,136) $ 145,387
Federal -- deferred................ 53,532 (7,597) (348,280)
State -- current................... -- -- (52,981)
State -- deferred.................. -- -- --
-------------- ------------ ------------
Total continuing.............. 53,532 (10,733) (255,874)
Discontinued operations................. (2,018,315) (142,202) 953,038
-------------- ------------ ------------
Total......................... $ (1,964,783) $ (152,935) $ 697,164
============== ============ ============
31
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the effective tax rate reflected in the income tax
provision (benefit) for continuing operations and the statutory federal rate is
analyzed as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996
1998 RECLASSIFIED RECLASSIFIED
--------- ------------ ------------
Amount computed using the statutory
rate.................................. $ 54,329 $ (2,418) $ (242,166)
Other................................... (797) (8,315) (13,708)
--------- ------------ ------------
Total.............................. $ 53,532 $(10,733) $ (255,874)
========= ============ ============
The effective tax rates for continuing operations for the years ended
December 31, 1998, 1997, and 1996 were 33.5%, 150.9%, and 35.9%, respectively.
The effective tax rate for discontinued operations was approximately 33.1%,
5.9%, and 42.5% for the years ended December 31, 1998, 1997, and 1996,
respectively.
The components of the deferred tax assets and liabilities are as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ ------------
Current deferred tax assets
(liabilities):
Net operating loss carryforward.... $ -- $ 285,312
Difference in recognition of
inventory reserve................ 36,663 --
Difference in recognition of
accrued liabilities.............. 240,628 163,338
Difference in recognition of
allowance for doubtful
accounts......................... 131,367 66,961
------------ ------------
Total current deferred tax
asset...................... 408,658 515,611
------------ ------------
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ ------------
Noncurrent deferred tax assets
(liabilities):
Net operating loss
carryforward.................. $ 755,059 $ --
Difference in recognition of
asset impairment.............. 1,150,383 --
Difference in recognition of
accrued liabilities........... 588,141 288,660
Difference in depreciation and
amortization.................. (445,331) (435,937)
Difference in deducting
construction period
interest...................... 41,530 41,530
Difference in recognition of
allowance for other
receivables................... -- 136,340
Other........................... 158,337 145,790
------------ ------------
Total noncurrent deferred
tax asset............... 2,248,119 176,383
------------ ------------
Net deferred income
taxes.............. $ 2,656,777 $ 691,994
============ ============
7. COMMITMENTS AND CONTINGENCIES
Total rental expense for operating leases, none of which extend beyond
December 31, 1999, for the years ended December 31, 1998, 1997, and 1996 was
$69,692, $33,577, and $8,726, respectively.
The Company is involved in litigation and routine claims from time to time.
Certain of the Company's litigation and claims are covered by insurance with a
maximum deductible of $50,000. In addition, the Company is contingently liable
for up to $600,000 for liabilities relating to services performed by the Tank
Testing Group prior to October 25, 1996. The Company has recorded $599,000
liability for that contingency as of December 31, 1998. The Company believes the
ultimate outcome of the litigation and claims
32
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will not have a material adverse effect to the Company's consolidated financial
position, results of operations or cash flows.
8. STOCK OPTIONS
The Board of Directors has reserved 1,000,000 authorized shares of its
Common Stock for the purpose of issuing nonincentive stock options, incentive
stock options, and restricted stock awards to key employees under its 1989 Stock
Option Plan. The exercise price for a nonincentive stock option shall not be
less than 85% of the fair market value of the Common Stock on the date of grant.
The exercise price for each incentive stock option granted may not be less than
the fair market value of the Company stock on the date of grant. For those
incentive stock optionees owning more than 10% of the Company's Common Stock on
the date the options are granted, the option price per share for an incentive
stock option shall not be less than 110% of the fair market value on the date of
the grant. The purchase price for restricted stock may be equal to or less than
par value and may be zero. The options under the plan vest on graded schedule
depending on the Company's stock price. Fifteen percent of all options are
vested immediately as of the date of grant and an additional 15% will vest on
the third anniversary of the date of grant. An additional 70% will vest within 3
years if the Company's stock price equals or exceeds certain criteria.
Otherwise, these options will vest on the tenth anniversary of the date of
grant.
A total of 200,000 shares of Common Stock were reserved for issuance under
the 1991 Nonemployee Director Stock Option Plan, which authorized the granting
of nonincentive stock options to purchase Common Stock and restricted stock
awards subject to certain restrictions to nonemployee directors. Under the
original plan, each eligible nonemployee director received (i) an option to
purchase 1,500 shares of common stock on January 1 of each year, beginning
January 1, 1993, and (ii) 250 shares of restricted stock (collectively, an
"Award"). Each director option will expire five (5) years after the date of
grant. The purchase price for each share of restricted stock shall be zero.
Effective with the January 1, 1995 issue date, the 1991 Nonemployee Director
Stock Option Plan was amended to eliminate the annual issuance of the director
options for 1,500 shares of Common Stock to nonemployee directors.
The Company had 246,474, 235,974, and 174,324 shares of Common Stock
available for grant under existing stock option plans at December 31, 1998,
1997, and 1996, respectively.
The following table sets forth pertinent information regarding stock option
transactions for each of the three years in the period ended December 31, 1998:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
----------- ---------------
Outstanding at January 1,
1996............................ 279,717 $ 13.88
Granted.............................. -- --
Cancelled/Forfeited.................. (36,942) $ 21.16
-----------
Outstanding at December 31,
1996............................ 242,775 $ 12.76
Granted.............................. -- --
Cancelled/Forfeited.................. (61,650) $ 17.20
-----------
Outstanding at December 31,
1997............................ 181,125 $ 11.32
Granted.............................. -- --
Cancelled/Forfeited.................. (10,500) $ 16.24
-----------
Outstanding at December 31,
1998............................ 170,625 $ 11.04
===========
33
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize information related to stock options
outstanding and exercisable at December 31, 1998 and 1997.
1998
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/98 CONTR. LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- - - ------------------------------------- ------------- ------------- --------------- --------------- ---------------
$ 9.64 to $20.00..................... 157,500 6.50 $ 9.84 84,000 $ 9.92
$20.04 to $24.52..................... 13,125 6.00 $ 24.08 13,125 $ 24.08
------------- --- --------------- --------------- ---------------
$ 9.64 to $24.52..................... 170,625 6.46 $ 11.04 97,125 $ 11.44
============= ===============
1997
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/97 CONTR. LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- - - ------------------------------------- ------------- ------------- --------------- --------------- ---------------
$ 9.64 to $20.00..................... 168,000 7.50 $ 10.32 90,750 $ 10.68
$20.04 to $24.52..................... 13,125 1.0 $ 24.04 13,125 $ 24.04
------------- --- --------------- --------------- ---------------
$ 9.64 to $24.52..................... 181,125 7.03 $ 11.32 103,875 $ 12.36
============= ===============
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate
of 5.52%; the expected life of options is 5.0 years; and volatility of 32.6% for
the grants. Had the compensation cost for the Company's stock-based compensation
plan been determined in accordance with the accounting requirements of SFAS 123,
the Company's net income and net income per common share for 1998 would
approximate the pro forma amounts below:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---------- ------------ ------------
RECLASSIFIED RECLASSIFIED
Income (loss) from continuing
operations --
as reported........................... $ 106,260 $ 3,621 $ (456,379)
Income (loss) from continuing
operations --
pro forma............................. $ 92,126 $ 12,575 $ (462,679)
Continuing operations income (loss) per
share -- as reported.................. $ 0.03 $ 0.00 $ (0.13)
Continuing operations income (loss) per
share -- pro forma.................... $ 0.03 $ 0.00 $ (0.13)
In connection with the acquisitions of the financial services firms,
Pinnacle adopted the 1998 Incentive Plan ("Incentive Plan"). Under the
Incentive Plan, the Company may issue incentive awards covering an aggregate of
the greater of (i) 1,100,000 shares of Common Stock and (2) 15% of the number
shares of Common Stock issued and outstanding on the last day of the then
preceding calendar quarter. Under the acquisitions, all outstanding TEI options
were converted into options to purchase one-fourth of the number of shares of
Common Stock at exercise price per share four times the per share exercise price
of the converted TEI options.
34
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted per-share computations are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Computation of basic and diluted
earnings (loss) per common share:
Net income (loss) applicable to
common stock.................. $ (3,970,760) $ (2,781,616) $ 755,100
============== ============== ==============
Weighted average number of
common shares outstanding..... 3,562,753 3,561,003 3,559,253
Common shares issuable under
stock option plan............. -- -- --
Less shares assumed repurchased
with proceeds................. -- -- --
-------------- -------------- --------------
Weighted average common
shares outstanding...... 3,562,753 3,561,003 3,559,253
============== ============== ==============
Basic and diluted earnings
(loss) per common
share................... $ (1.11) $ (0.78) $ 0.21
============== ============== ==============
Stock options outstanding of 170,625, 181,125 and 242,775 at December 31,
1998, 1997 and 1996, respectively, have not been included in diluted earnings
per common share because to do so would have been antidilutive for the periods
presented.
10. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
par value $.10 per share. Shares of Preferred Stock may be issued from time to
time by the Board of Directors, without action by the shareholders, in one or
more series with such designations, preferences and special rights and
qualifications, limitations, and restrictions as may be designated by the Board
of Directors prior to the issuance of such series.
11. RELATED PARTIES
The Company issued Common Stock in lieu of cash to nonemployee directors
totaling $11,376, $13,790, and $12,740, during 1998, 1997, and 1996,
respectively. The Company purchased diesel and boiler fuel and utilized freight
services from a company owned by the President of ERRI totaling $207,000,
$159,000 and $59,000 during 1998, 1997, and 1996, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was approximately $0, $6,700, and $5,000 for
the years ended December 31, 1998, 1997, and 1996, respectively. The Company
paid approximately $52,000, $846,000, and $286,000 in cash for income taxes
during the years ended December 31, 1998, 1997, and 1996, respectively, and
received approximately $1,508,000, $72,000 and $1,588,000 in cash from income
tax refunds during the years ended December 31, 1998, 1997, and 1996,
respectively. In 1997, the Company received notes of $500,000 in connection with
disposition of discontinued operations.
35
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. UNAUDITED QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 DEC. 31,
RECLASSIFIED RECLASSIFIED RECLASSIFIED 1998
------------- ------------- ------------- -------------
Interest and dividend income......... $ 385,000 $ 374,000 $ 393,000 $ 372,000
Selling, general and administrative
expenses............................. 462,000 333,000 267,000 302,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income
taxes......................... (77,000) 41,000 126,000 70,000
Income tax provision (benefit)....... (26,000) 14,000 43,000 23,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations.................... (51,000) 27,000 83,000 47,000
Income (loss) from discontinued
operations, net of tax........ (40,000) 54,000 (342,000) (3,749,000)
------------- ------------- ------------- -------------
Net income (loss)............... $ (91,000) $ 81,000 $ (259,000) $ (3,702,000)
============= ============= ============= =============
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.02) $ 0.00 $ 0.02 $ 0.01
From discontinued operations.... (0.01) 0.02 (0.09) (1.05)
------------- ------------- ------------- -------------
Net earnings (loss) per share... $ (0.03) $ 0.02 (0.07) $ (1.04)
============= ============= ============= =============
Weighted average common shares
outstanding.......................... 3,562,753 3,562,753 3,562,753 3,562,753
============= ============= ============= =============
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
RECLASSIFIED RECLASSIFIED RECLASSIFIED RECLASSIFIED
------------- ------------- ------------- -------------
Interest and dividend income......... $ 382,000 $ 389,000 $ 370,000 $ 389,000
Selling, general and administrative
expenses........................... 387,000 413,000 411,000 326,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income
taxes......................... (5,000) (24,000) (41,000) 63,000
Income tax provision (benefit)....... (2,000) (8,000) (14,000) 13,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations.................... (3,000) (16,000) (27,000) 50,000
Income (loss) from discontinued
operations, net of tax........ (141,000) (1,139,000) 13,000 (1,519,000)
------------- ------------- ------------- -------------
Net income (loss)............... (144,000) (1,155,000) (14,000) (1,469,000)
============= ============= ============= =============
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.00) $ (0.00) $ 0.00 $ 0.02
From discontinued operations.... (0.04) (0.32) 0.00 (0.43)
------------- ------------- ------------- -------------
Net earnings (loss) per share... (0.04) $ (0.32) $ (0.00) (0.41)
============= ============= ============= =============
Weighted average common shares
outstanding........................ 3,561,003 3,561,003 3,561,003 3,561,003
============= ============= ============= =============
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item 10 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item 12 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item 13 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
37
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of the Company and Report of Independent
Accountants are included under Part II Item 8 of this Form 10-K.
PAGE
----
Report of Independent Accountants....... 21
Consolidated Balance Sheet as of
December 31, 1998 and 1997............ 22
Consolidated Statement of Operations for
the three years in the period ended
December 31, 1998..................... 23
Consolidated Statement of Shareholders'
Equity for the three years in the
period
ended December 31, 1998............... 24
Consolidated Statement of Cash Flows for
the three years in the period ended
December 31, 1998..................... 25
Notes to Consolidated Financial
Statements............................ 26
2. Financial Statement Schedules
The following financial statement schedules should be read in
conjunction with the consolidated financial statements and notes
thereto.
Report of Independent Accountants....... S-1
Schedule II -- Valuation and qualifying
accounts.............................. S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or the
required information is included elsewhere in the financial statements.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- - - -------------------------------------------------------------
3.1 -- Articles of Incorporation of the
Company, as amended (Filed as
Appendix F to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporate herein by
reference).
*3.2 -- Amendment and Restated Bylaws of the
Company.
10.1 -- Amended and Restated Agreement and
Plan of Reorganization dated October
2, 1998 among the company, TEI, Inc.
("TEI"), Harris Webb & Garrison,
Inc. ("HWG"), Pinnacle Management &
Trust Company ("PMT"), Spires
Financial, L.P. ("Spires") and
certain direct and indirect owners of
HWG, PMT and Spires (Filed as
Appendix A to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.2 -- Plan of Merger dated October 2, 1998,
among TEI, TEI Combination
Corporation and the Company (Filed as
Appendix B to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.3 -- Plan of Merger dated October 2, 1998,
among HWG, HWG Combination Corpora-
tion and the Company (Filed as
Appendix C to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.4 -- Plan of Merger dated October 2, 1998,
among PMT, PMT Combination
Corporation and the Company (Filed as
Appendix D to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.5 -- 1998 Incentive Plan of the Company
(Filed as an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference)
10.6 -- Consulting Agreement, dated December
10, 1991, between TEI and T.G. Bogle
(Filed as an exhibit to TEI's Form
10-K for the year ending December 31,
1991 (File No. 0-18899) and
incorporated herein by reference)
38
10.7 -- Asset Purchase Agreement between
Tanknology Environmental, Inc. and
Mankoff Equipment, Inc. dated
September 23, 1993 (Filed as an
exhibit to TEI's Form 8-K dated
October 1, 1993 (File No. 0-18899)
and incorporated herein by
reference).
10.8 -- Noncompete Agreement between
Tanknology Environmental, Inc. and
Curt J. Mankoff (Filed as an exhibit
to TEI's Form 8-K dated October 1,
1993 (File No. 0-18899) and
incorporated herein by reference)
10.9 -- Asset Purchase Agreement dated
Tanknology Environmental, Inc. and
Jack Holder Enterprises, Inc. dated
January 31, 1994 (Filed as an exhibit
to TEI's Form 10-K for the year
ending December 31, 1994 (File No.
0-18899) and incorporated herein by
reference)
10.10 -- Agreement to sell assets, dated
December 22, 1995, between Mankoff,
Inc. and Donald Kooperman (Filed as
an exhibit to TEI's Form 10-K for the
year ending December 31 1995 (File
No. 0-18899) and incorporated herein
by reference).
10.11 -- Installment note between Mankoff,
Inc. and Continental Environmental,
Inc., dated December 20, 1995 (Filed
as an exhibit to TEI's Form 10-K for
the year ending December 31, 1995
(File No. 0-18899) and incorporated
herein by reference).
10.12 -- License Agreement between Tanknology
Worldwide and Fulton Hogan Limited,
dated April 1, 1995 (Filed as an
exhibit to TEI's Form 10-K for the
year ending December 31, 1995 (File
No. 0-18899) and incorporated herein
by reference).
10.13 -- Stock Purchase Agreement between
Tanknology Environmental, Inc. and
NDE Environmental Corporation dated
October 7, 1996 (Filed as an exhibit
to TEI's Form 8-K dated October 25,
1996 (File No. 0-18899) and
incorporated herein by reference).
10.14 -- Asset Purchase Agreement between
Tanknology/Engineered Systems, Inc.,
TEI, Inc. and Sorrento Electronics,
Inc. dated December 23, 1997 (filed
as an exhibit to TEI's Form 10-K for
the year ending December 23, 1997
(File No. 0-18899) and incorporated
herein by reference).
10.15 -- Sublease Agreement dated January 19,
1994 between Texas Commerce Bank
National Association and Harris Webb
& Garrison, Inc., as amended by that
certain First Amendment to Sublease
Agreement dated February 23, 1994,
the Second Amendment to Sublease
Agreement dated April 26, 1994, and
the Third Amendment to Sublease
Agreement dated January 19, 1995.
(Filed as an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.16 -- Office Lease Agreement dated February
1, 1998 between 5599 San Felipe, Ltd.
and Harris Webb & Garrison, Inc.
(Filed as an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference)
*10.17 -- Office Lease Agreement dated January
19, 1999 between 5599 San Felipe,
Ltd. and the Company.
10.18 -- Letter Agreement dated January 14,
1994 between S.G. Cowen & Company and
Harris Webb & Garrison, Inc., as
amended January 19, 1994. (Filed as
an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.19 -- Autotrust Agreement dated January 9,
1998 between SunGard Trust Systems
Inc. and Pinnacle Management & Trust
Company (Filed as an exhibit to the
Proxy Statement/Prospectus of the
Company dated December 31, 1998 (Reg.
No. 333-50323) and incorporated
herein by reference).
*21.1 -- List of Subsidiaries of the
Registrant.
*23.1 -- Consent of PricewaterhouseCoopers
LLP.
*27.1 -- Financial Data Schedule.
- - - ------------
* Filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period
ended December 31, 1998.
39
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, on March 31, 1999.
PINNACLE GLOBAL GROUP, INC.
By: /s/ ROBERT E. GARRISON II
____________________________________
PRESIDENT, CHIEF EXECUTIVE
3 OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated and on the 31st day of March, 1999.
SIGNATURE TITLE
- - - ------------------------------------------------------ ---------------------------------------------------------
/s/TITUS H. HARRIS, JR. Chairman of the Board
TITUS H. HARRIS, JR.
/s/ROBERT E. GARRISON II President, Chief Executive Officer, and Director
ROBERT E. GARRISON II (Principal Executive Officer)
/s/DONALD R. CAMPBELL Vice Chairman, Director
DONALD R. CAMPBELL (Principal Financial and
Accounting Officer)
/s/T. G. BOGLE Director
T. G. BOGLE
/s/T. CRAIG BENSON Director
T. CRAIG BENSON
/s/TONY COELHO Director
TONY COELHO
/s/JAMES H. GREER Director
JAMES H. GREER
/s/W. BLAIR WALTRIP Director
W. BLAIR WALTRIP
/s/PETER W. BADGER Director
PETER W. BADGER
40
SIGNATURES -- (CONTINUED)
SIGNATURE TITLE
- - - ------------------------------------------------------ ---------------------------------------------------------
/s/STEPHEN M. RECKLING Director
STEPHEN M. RECKLING
/s/RICHARD C. WEBB Director
RICHARD C. WEBB
/s/SEAN DOBSON Director
SEAN DOBSON
41
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Pinnacle Global Group, Inc.:
Our audit of the consolidated financial statements referred to in our
report dated March 31, 1999 of TEI, Inc. and Subsidiaries included on page 21 of
this Form 10-K also included an audit of the financial statement schedule listed
in Item 14(a) of this Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers
LLP
Houston, Texas
March 31, 1999
S-1
SCHEDULE II
TEI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
==================================================================================================================================
COL. A COL. B COL. C(1) COL. C(2) COL. D COL. E
- - - ----------------------------------------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT OTHER
BEGINNING OF ACCOUNTS -- DEDUCTIONS -- BALANCE AT
DESCRIPTION PERIOD ADDITIONS DESCRIBE DESCRIBE END OF PERIOD
- - - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Allowance for doubtful accounts and
notes.............................. $ 430,510 $ -- $ (9,945)(A) $ (420,565)(B) $ --
============ ========== ============ ============== =============
Reserve for slow moving and obsolete
inventory.......................... $ -- $ -- $ -- $ -- $ --
============ ========== ============ ============== =============
DECEMBER 31, 1997
Allowance for doubtful accounts and
notes.............................. $ 849,427 $452,065 $ -- $ (870,982)(B)(C) $ 430,510
============ ========== ============ ============== =============
Reserve for slow moving and obsolete
inventory.......................... $ -- $ -- $ -- $ -- $ --
============ ========== ============ ============== =============
DECEMBER 31, 1996
Allowance for doubtful accounts and
notes.............................. $1,199,286 $ 30,996 $ (380,855)(A) $ -- $ 849,427
============ ========== ============ ============== =============
Reserve for slow moving and obsolete
inventory.......................... $ 510,480 $ -- $ (510,480)(A) $ -- $ --
============ ========== ============ ============== =============
- - - ------------
(A) Amounts were reclassified to net assets of discontinued operations.
(B) Represents the charge off of receivables.
(C) Includes $178,425 attributable to discontinued operations.
S-2