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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, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-30066
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.)
600 TRAVIS, SUITE 2900
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
Registrant's telephone number, including area code: (713) 993-4610
5599 SAN FELIPE, SUITE 555
HOUSTON, TEXAS 77056
(Former address of principal executive offices)
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 [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
As of March 23, 2001, the registrant had 15,199,703 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 nonaffiliates of the registrant was
$29,939,180. 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 2000 Annual Meeting of Shareholders (the "Proxy
Statement") and filed pursuant to Regulation 14A is incorporated herein by
Reference into Part III of this report.
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PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
INDEX
PART I.
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 12
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............................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 20
Item 8. Financial Statements and Supplementary Data........................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................ 47
PART III.
Item 10. Directors and Executive Officers of the Registrant.................................... 48
Item 11. Executive Compensation................................................................ 48
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 48
Item 13. Certain Relationships and Related Transactions........................................ 48
PART IV.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K........................ 49
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PART 1.
ITEM 1. BUSINESS
GENERAL
Pinnacle Global Group, Inc. ("Pinnacle"), provides a broad range of
financial services through its wholly owned operating subsidiaries. Our
financial services include institutional and retail brokerage, investment
banking, merchant banking, trust related services and asset management. We serve
a diverse group of institutional, corporate and individual clients.
We are the successor issuer to TEI, Inc., which is now a wholly owned
subsidiary. During 1995, 1996 and 1997, we disposed of all of TEI's operations
other than its liquid waste business and the related facility located in
Charlotte, North Carolina. The liquid waste business and the related facility
were sold during 2000.
From January 1997 through the first quarter of 1998, our management
actively evaluated strategies and financial alternatives for maximizing
shareholder value. In late April 1998, we reached an agreement in principle to
combine with three Houston-based financial services firms. These firms were
Harris Webb & Garrison, Inc., a full service regional investment banking,
brokerage and financial services firm serving the southwestern United States,
Pinnacle Management & Trust Company, a Texas state-chartered trust company and
investment management firm, and Spires Financial, L.P., a regional institutional
brokerage firm specializing in fixed-income securities and whole loan and loan
servicing transactions.
On January 29, 1999, Pinnacle completed the combination of Harris Webb
& Garrison, Pinnacle Management & Trust and Spires Financial, with Pinnacle
emerging as the new public holding company. In the combination, just over 50% of
our outstanding common shares were issued to TEI's former shareholders in
exchange for their TEI common shares, and slightly less than 50%, or 3,562,500
common shares, were issued to the former owners of the financial services firms.
On January 31, 2000, we completed the merger of Harris Webb & Garrison,
our investment banking subsidiary, with Sanders Morris Mundy Inc. Sanders Morris
Mundy survived the merger, was renamed "Sanders Morris Harris Inc." and became
our wholly owned subsidiary. In the Sanders merger, we issued 7,125,220 of our
common shares to the former shareholders of the Sanders firm, increasing our
total outstanding common shares to approximately 14.25 million. Sanders Morris
Mundy was a twelve year-old investment banking and brokerage firm based in
Houston, Texas, with branch offices in New York City, Denver and Chicago.
In June 2000, our management decided to discontinue the operations of
Spires. In July 2000, we reached an agreement to sell the business and other
related assets to a company associated with a former officer and director of
Pinnacle. In January 2001, the sale was completed.
On June 30, 2000, we acquired Blackford Securities Corporation for
1,000,000 shares of the Company's common stock and $5.5 million in cash.
Blackford Securities, based in Garden City, New York, specializes in providing
prime brokerage services to investment partnerships and trade execution services
for institutions.
On October 2, 2000, we completed the acquisition of the Cummer/Moyers
companies. The former owners of Cummer/Moyers received a total of 850,000 of the
Company's common shares and may later earn up to an additional 150,000 common
shares if the acquired operations meet or exceed specified performance levels.
The Cummer/Moyers companies, based in Fort Worth, Texas consist of Cummer/Moyers
Securities, a broker-dealer; and Cummer/Moyers Capital Advisors, a specialist in
providing fixed income asset management primarily to individual clients.
Pinnacle was incorporated in Texas in August 1998 in connection with
the January 1999 combination. Our principal executive offices are located at 600
Travis, Suite 2900, Houston, Texas 77002, and our telephone number is (713)
993-4610.
The historical financial information contained in this document for
1996 through 1998 does not include any results of operations or the financial
position of our current businesses acquired in the January 1999 combination nor
does it
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reflect the January 2000 Sanders merger, the June 2000 Blackford acquisition or
the October 2000 Cummer/Moyers acquisition. Our operations prior to 1999 reflect
only corporate activities and the results of our discontinued operations. The
historical financial information contained in this document for 1999 relates to
our financial condition after giving effect to the January 1999 combination and
our results of operations include operations of the financial firms since the
date of acquisition, January 31, 1999. The historical financial information
contained in this document for 1999 and 2000 reflects the discontinuance of
Spires and for 2000 reflects the Sanders merger and the Blackford and
Cummer/Moyers acquisitions since the date of their respective acquisitions. The
following description of our business includes the operations of the combined
company after giving effect to the January 1999 combination, January 2000
Sanders merger, the June 2000 Blackford acquisition, and the October 2000
Cummer/Moyers acquisitions, except for our discontinued businesses.
BUSINESS STRATEGY
Our business strategy is to (1) increase our asset management and trust
business; (2) increase our capital markets activities; (3) improve the
profitability of our brokerage operations; (4) enhance the range of financial
services we offer our clients, and (5) supplement internal growth with strategic
acquisitions. We believe certain cross-selling opportunities exist among the
financial services firms, and certain unquantified potential operating
efficiencies, will also be available. The principal elements of our business
strategy are:
o INCREASE ASSET MANAGEMENT AND TRUST BUSINESS. We intend to grow the
business by expanding our asset management and trust services
related businesses by improving the interface between our asset
management operations and our brokerage subsidiaries, and by
increasing the assets under our management through acquisitions and
internal growth.
o INCREASE CAPITAL MARKETS ACTIVITIES. We intend to increase our
investment banking and merchant banking business by committing
greater resources to, and by carefully focusing our investment
research coverage on companies, industries and geographic regions
that management believes offer the greatest opportunities. We also
believe that consolidation within the investment banking industry
will offer greater opportunities for high caliber firms that
maintain their local and industry-specific focus.
o IMPROVE PROFITABILITY OF BROKERAGE OPERATIONS. We intend to improve
the profitability of our brokerage operations primarily by hiring
additional experienced and productive investment executives and by
providing our financial advisors with specialized training as well
as the product offerings, information systems, support and access to
the services of each of our financial services companies.
o ENHANCE PERSONALIZED, HIGH-END SERVICE. We seek to provide excellent
investment advice suited to each client. To that end, our financial
services subsidiaries have traditionally sought to attract and
retain clients by offering a high level of personal service. We
intend to increase that commitment by providing our clients with
advanced account and investment information systems, flexibility in
determining appropriate fee schedules for certain services based
upon the level of client needs, and by providing an array of
investment and financial planning services.
o SUPPLEMENT GROWTH WITH STRATEGIC ACQUISITIONS. We plan to actively
pursue opportunities to acquire or combine with other firms with
complementary businesses to strengthen or expand our geographic or
product offering base. We acted on this strategy by joining our firm
with Sanders Morris Mundy in January 2000 and by acquiring Blackford
in June 2000 and the Cummer/Moyers companies in October 2000. Our
management believes that additional attractive acquisition
opportunities exist, particularly among smaller, specialized
regional financial firms that want to affiliate with a larger
company while still retaining their identity and entrepreneurial
culture. In addition, we believe that the consolidation trend in the
financial services industry will allow us to hire proven financial
professionals who prefer the ambience and opportunities inherent in
a creative regional firm. Management believes that acquisitions may
also allow us to realize cost benefits by leveraging our
infrastructure.
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SERVICES
We provide our financial services through our operating subsidiaries -
Sanders Morris Harris, Pinnacle Management & Trust, and Cummer/Moyers Capital
Advisors. The financial services offered by each of these entities, which we
refer to as "SMH", "PMT", and "CMCA" are described below.
SMH
GENERAL. Sanders Morris Harris provides a range of financial services
including institutional and retail brokerage, investment research, investment
banking, merchant banking and market making. Additionally, SMH has organized and
holds an interest in a number of proprietary funds that invest primarily in
small to medium capitalization companies in a number of industries.
PRIVATE CLIENT. Our strategic plan in the private client business is to
attract and retain experienced financial advisors, especially those able to
utilize our sophisticated investment programs. Our private client business is
focused on high net worth individuals with whom we have developed and maintained
relationships over time, including a core group of individual investors
originally developed by the founders of Sanders Morris Mundy. As a full service
broker, we offer our private clients brokerage services relating to corporate
debt and equity securities, including the securities of companies followed by
our research analysts, underwritings that we co-manage or in which we
participate, private placements of securities in which we serve as placement
agent, mutual funds, 401(k) plans, wrap-fee programs, money market funds, and
insurance products. Commissions are charged on agency transactions in
exchange-listed securities and securities quoted on the Nasdaq National Market
or in the over-the-counter market. In addition to retail commissions, we
generate fee revenue from asset-based advisory services and managed accounts
where the charges are based on a percentage of the assets held in the client's
account in lieu of commissions on a transaction-by-transaction basis.
We provide our private clients with a broad range of services delivered
in a personalized, service-oriented manner. In addition to recommending and
effecting transactions in securities, we provide other services to our retail
clients that include portfolio strategy, investment research service, financial
planning, assistance in the sale of restricted securities and tax, trust and
estate advice. Clients can access their personal portfolio on-line and use our
extensive research library.
At December 31, 2000, we had 142 Series 7-licensed individuals
including 41 retail brokers who average over 15 years experience in the
securities brokerage business. We generally do not hire inexperienced brokers or
trainees to work as retail brokers. We believe we can attract and retain
experienced brokers by providing them with a high level of support, a corporate
culture that encourages performance, employee stock ownership, advanced
technologies, competitive compensation packages, and the opportunity for them
and their clients to participate in private placements and public offerings of
securities we manage or underwrite.
INSTITUTIONAL BROKERAGE. Our institutional stock brokerage strategy is
to provide equity research coverage and trading services focused on companies
that have a presence in the southwestern United States. Our clients are a broad
array of institutions throughout North America, Europe and Asia. Areas of
concentration include the construction industry, environmental services,
biotechnology and healthcare, oil and gas exploration and production, oilfield
services, pipelines, restaurants and food-related providers, specialty
retailing, telecommunication and technology. We provide our institutional
clients with research and execution trading services in both exchange-listed
equity securities and equity securities quoted on Nasdaq. We also distribute to
institutional clients equity securities from offerings that we co-manage or
underwrite.
Our institutional clients include banks, retirement funds, mutual
funds, endowments, investment advisors and insurance companies. We entered the
institutional brokerage business in 1996 through the acquisition of Williams
MacKay Jordan & Co., Inc., a Houston-based registered broker-dealer specializing
in institutional sales and securities analysis.
INVESTMENT RESEARCH. We use our proprietary equity research analysis to
drive or assist a large portion of our business. This analysis is based on
economic fundamentals, using tools such as price-to-earnings multiples,
price-to-book value comparisons, both absolute and relative to historic norms,
and our research department's own earnings forecasts. We intend to rely
primarily on our own research rather than on research products purchased from
outside
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research organizations. We believe that the services provided by our research
department have a significant impact on our revenue-generating activities,
including retail and institutional brokerage, market-making, and investment
banking.
FIXED INCOME BROKERAGE. Through our fixed income division, we provide
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, Federal National Mortgage Association and Federal Home
Loan Mortgage Corp., and corporate investment-grade and high-yield bonds.
Commissions are charged on all institutional securities transactions based on
rates formulated by SMH. At December 31, 2000, our fixed income division
consisted of 11 professionals.
Rather than trading a wide variety of securities in direct competition
with Wall Street firms, we have developed a niche strategy to proprietarily
trade certain fixed-income securities, including U.S. government securities,
certain mortgage related securities and collateralized mortgage obligations. In
our trading activities, we generally deal with institutional clients. We buy
round-lot and odd-lot positions, sell round-lot and odd-lot positions and act as
market-maker in those positions. Many of our counterparties in these
transactions are other broker-dealers. Our trading operations generally seek to
generate profits based on trading spreads, rather than through speculation on
the direction of the market. The size of the securities positions varies
substantially depending on economic and market conditions, the allocation of
capital among types of inventories, customer demands and trading volume.
We are also active as a secondary market broker for residential,
consumer and commercial loans, and derive revenue from the placement of mortgage
loans and servicing.
INVESTMENT BANKING AND UNDERWRITING ACTIVITIES. Our investment banking
strategy is to build a balanced mix of corporate securities underwriting,
private financings, and financial advisory services. We believe that the number
and dollar amount of underwritings and private placements in which we
participate will contribute significantly to increased public and industry
awareness of our company, and will result in increased demand for our investment
banking and corporate advisory services. In 2000, we acted as placement agent in
15 private placements, with gross proceeds totaling approximately $66 million,
and acted as a co-managing underwriter in 3 public offerings with gross proceeds
totaling approximately $93 million. At December 31, 2000, we had a total of 17
professionals performing investment banking services in Houston and New York.
We regularly participate in corporate securities distributions as a
member of an underwriting syndicate or of a selling group in public offerings
managed by other underwriters, including national and regional firms. Our
syndicate department coordinates the distribution of co-managed equity
underwritings, accepts invitations to participate in underwritings managed by
other investment banking firms and allocates our selling allotments to our
various sales units.
Participation in an underwriting syndicate or selling group involves
both economic and regulatory risks. An underwriter or selling group member may
incur losses if it is forced to resell the securities it is committed to
purchase at less than the agreed purchase price. In addition, under the federal
securities laws, other statutes and court decisions with respect to
underwriters' liabilities and limitations on indemnification of underwriters by
issuers, an underwriter is subject to substantial potential liability for
material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings.
We also serve as placement agent or financial advisors in private
placements of securities under a variety of fee structures depending on the
amount and type 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 of the foregoing. Our officers and directors have in
the past, and expect in the future, to invest in the securities involved in the
private placement on the same basis as other investors, where suitable and
permitted by applicable law and regulations. We believe these co-investments
create an identity of interest with our investors, and thus benefit them.
Our financial advisory services include advising on mergers,
acquisitions and divestitures, fairness opinions, and financing strategies. We
also provide valuations, litigation support and financial consulting services.
These financial advisory services are typically provided to emerging or middle
market companies in the southwestern United States.
PROPRIETARY FUNDS. In January 1996, we organized Environmental
Opportunities Fund, L.P. and Environmental Opportunities Fund (Cayman), L.P.,
raising $38 million for investments primarily in private and public companies
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providing environmental or industrial services and related products, an area in
which we have developed a specialty practice. In 1998, we organized a second
investment fund, Environmental Opportunities Fund II, L.P. and Environmental
Opportunities Fund II (Institutional), L.P., raising an additional $75 million
for investments in the environmental services area. We then formed Corporate
Opportunities Fund, L.P. and Corporate Opportunities Fund (Institutional), L.P.
in 1998 with capital commitments of $48 million for investment principally in
private companies and small public companies with enterprise values of less than
$250 million, particularly those in the healthcare, technology, and medical
industries. The Sanders Opportunities Funds, organized in February 2000 with
initial investments totaling $7.4 million, for investments primarily in small to
medium capitalization companies, both public and private, that we believe are
significantly undervalued. At December 31, 2000, total investments in the
Sanders Opportunities Funds at were $12 million. Our recently formed Life
Sciences Opportunity Fund, L.P. is in the process of raising $10 million, of
which $1.5 million has been contributed by PGG as of December 31, 2000.
We hold an interest in these funds and also earn management and
advisory fees based on a fixed percentage per annum of total commitments during
the investment period of the fund (generally four years) and a fixed percentage
of the limited partnership profit above specified hurdle rates. For the two
Environmental Opportunities Funds and the Corporate Opportunities Fund, we
receive 2% per annum of total commitments, and 20% of the limited partnership
profits above specified hurdle rates. For the Sanders Opportunity Funds, we
receive 1% per annum of total capital contributions, and 10% of the limited
partnership profit above specified hurdle rates. We have agreed to compensate
the managers of these funds and employees designated by the managers from 35% to
40% of our 20% and 10% back-end interests in the profits of these limited
partnership funds. Over time, the Sanders fund is expected to receive additional
money. We account for all of these funds using the equity method.
Other than the Environmental Opportunities Funds, Corporate
Opportunities Funds and Sanders Opportunities Funds, our accounts are conducted
on an individual client basis. In many cases, one of our registered broker
employees holds a limited power of attorney permitting discretionary agency and
certain other transactions on a client's behalf. Our officers and directors have
in the past, and expect in the future, to invest in the same securities as our
retail and institutional clients, where suitable and permitted by applicable law
and regulations. We believe co-investment creates an identity of interest that
is generally beneficial, particularly in investments we develop or where we play
a major ongoing role.
MERCHANT BANKING. Our merchant banking activities focus on providing
private equity capital for middle-market growth companies. These middle-market
companies comprise a broad range of industries, including, among others,
business services, communications, computing, distribution, direct marketing of
electronic financial services, energy, 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.
MARKET MAKING AND PRINCIPAL TRANSACTIONS. We make markets, buying and
selling as principal, in securities quoted on Nasdaq or other over-the-counter
markets. In lieu of commissions, we create revenue in return for the risk we
assume based on the markup or markdown of each transaction. Principal
transactions with clients are generally effected at a net price within or equal
to the current interdealer price plus or minus a markup or markdown. The trading
department's objective is to facilitate sales to clients and to other dealers,
not to generate profits based on trading for our own account.
Revenues from principal transactions depend on the general trend of
prices and the level of activity in the securities market, employee skill in
market-making activities and inventory size. Trading activities carried out as a
principal require a commitment of capital, and create an opportunity for profit
and risk of loss due to market fluctuations. At December 31, 2000, we made
markets in the common stock or equity securities of 74 companies that were
quoted on Nasdaq and in the over-the-counter market.
The level of positions carried in our trading accounts fluctuates
significantly depending on the firm's assessment of economic and market
conditions, the allocation of capital among various stocks, client demand,
underwriting commitments, and market trading volume. The aggregate value of our
inventories is limited by certain net capital requirements under the Exchange
Act. At December 31, 2000, trading inventories at SMH totaled $1.7 million.
We have established procedures designed to reduce the systemic risks of our
proprietary trading activities. Our trading inventory positions and profit and
loss statements are reviewed daily by senior management of SMH and
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monthly by its board of directors. However, these procedures may not prevent
losses, which could have a material adverse effect on SMH's business, financial
condition, results of operations or cash flows.
PRIME BROKERAGE. The brokerage industry has developed a service known as
prime brokerage in which a customer maintains a cash or margin account with a
prime broker to record transactions executed at one or more executing brokers.
We provide trade execution, clearing, bookkeeping, reporting, custodial,
borrowing, research and fund raising services for our prime brokerage customers.
By providing these back office services to our customers, we allow them the
opportunity to focus on managing assets and generating returns for their
clients. At December 31, 2000, we had a total of three professionals performing
prime brokerage services in New York.
PMT
TRUST, ASSET MANAGEMENT AND RELATED SERVICES. Through PMT, we provide a
variety of trust services, including investment management, estate settlement,
retirement planning, mineral interest management, real estate, retirement plan
and other administrative services, such as custody of assets and record keeping.
We meet with each client to develop asset management strategies that are
consistent with the client's needs and investment objectives. Consideration is
given to the client's financial and investment objectives, risk tolerance,
investment restrictions and time horizon. We believe this total investment
management approach provides clients with increased diversification, reduced
risk and greater control over their portfolios.
We license trust accounting software that provides our 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.
Our revenues are derived mainly from asset management and fiduciary
fees based on a percentage of assets under administration. At December 31, 2000,
PMT had approximately $571 million of assets under administration. The
management fee charged is based on a rate schedule that is changed from time to
time. Rates vary depending on the services being provided and the amount of
assets involved. We believe that this structure, as opposed to transactional
commissioned-based arrangements, more closely aligns our interests with our
clients and helps develop long-term client relationships.
CMCA
ASSET MANAGEMENT SERVICES. Through CMCA, we provide investment
management services to investors who prefer fixed-income securities as a major
part of their investment portfolios. The portfolios are tailored to each
client's financial and investment objectives, with a focus that can range from
maximum potential yield to maximum potential security. Our revenues are derived
primarily from asset management and fiduciary fees based on a percentage of
assets under administration.
CLIENTS
Clients of our broker dealer subsidiary, SMH, vary according to the
nature of the services provided. Our retail brokerage services are generally
focused on high net worth individuals. SMH's investment banking, underwriting,
investment research and principal transaction activities are targeted at
emerging and middle market companies throughout the United States. At December
31, 2000, we had over 500 institutional clients throughout the United States,
Europe and Asia. These institutional clients consist mostly of pension funds,
money managers, mutual and hedge funds, insurance companies, commercial banks
and thrift companies.
Our trust subsidiary, PMT, provided trust services to approximately 462
accounts at December 31, 2000. These clients consist mainly of high net worth
individuals and their estates and trusts, 401(k) and other employee-directed
company sponsored retirement plans and charitable and other non-profit
corporations.
Our investment advisory subsidiary, CMCA, provided asset management
services to approximately 1,000 accounts at December 31, 2000. These clients
consist mainly of high net worth individuals.
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MARKETING
The marketing efforts of our broker-dealer subsidiary, SMH, are
conducted by an in-house staff of approximately 13 individuals at SMH's eight
offices. SMH targets its client groups through mailings, telephone calls,
in-person presentations and firm-sponsored workshops. Due to the nature of our
business, our regional name recognition and the reputation of our management,
business is obtained through referrals from other investment bankers or
initiated directly by the client, as well as through senior level calling
programs.
Our 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 efforts through maintenance of
professional and personal relationships and active involvement in community
events. PMT markets to specific client groups through mailings, telephone calls,
multi-media client presentations and company-sponsored or co-sponsored workshops
and seminars.
CMCA, our investment advisor subsidiary, conducts its marketing and
business development efforts on a company-wide basis. CMCA markets to specific
client groups through mailings, telephone calls, multi-media client
presentations and company-sponsored or co-sponsored workshops and seminars.
We believe cross-selling opportunities exist among our various
subsidiaries based on the relationships developed by the individual companies.
Existing and potential clients can also gain a variety of information
about our firm and services we provide through our websites at
WWW.PINNACLEGLOBAL.COM, WWW.SMHHOU.COM, WWW.PINNACLETRUST.COM,
WWW.CUMMERMOYERS.COM, and WWW.BLACKFORDASSETS.COM.
RELATIONSHIP WITH CLEARING BROKERS
Our broker-dealer subsidiary uses the services of clearing brokers.
Currently, we clear transactions, and carry accounts for clients, primarily
through the Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corporation, a Credit Suisse First Boston Company under a fully disclosed
clearing arrangement. Pershing serves as clearing broker in all transactions. We
use other clearing brokers in addition to Pershing. These clearing brokers also
provide us 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. We believe these
arrangements produce clearing costs that are competitive within the industry.
We have uncommitted financing arrangements with our clearing brokers
that finance our customer accounts, certain broker-dealer balances and firm
trading positions. Although these customer accounts and broker-dealer balances
are not reflected on our balance sheet for financial accounting reporting
purposes, we have generally agreed to indemnify these clearing brokers for
losses they may sustain in connection with the accounts. Therefore, we retain
risk on these accounts. We are required to maintain certain cash or securities
on deposit with our clearing broker.
EFFECTS OF INTEREST RATES
Our 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 our brokerage, investment banking and market-making activities. Commission
revenue may also be affected by changes in interest rates and any resulting
indirect impact on the value of equity securities. Our interest income and
interest expense may likewise change as interest rates change.
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Our revenues relating to asset-based advisory services and managed
accounts are typically from fees 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,
our revenues and profitability.
The value of fixed-income securities owned by the Company 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. Commission revenue may also be affected by
changes in interest rates and any resulting indirect impact on the value of
fixed-income securities.
The recent abrupt downturn in the economy, as well as in the overall
stock market has had a negative impact on our equity commission revenues and on
underwriting fees derived from public offerings. Additionally, as stock prices
decline, our assets under management typically diminish in value, which, in turn
results in reduced asset management fees. The decline in overall stock prices
and the reduction in interest rates has caused many investors to shift a portion
of their investment portfolios into fixed income securities. This reallocation
has had a positive impact on that portion of our business that derives its
income from fixed income securities. Traditionally, the recent actions taken by
the Federal Reserve to lower interest rates have worked to stimulate the
economy. We believe that a stronger economy will be favorable to our equity
business.
COMPETITION
Our financial services business and the securities business in general
are highly competitive. The principal competitive factors influencing our
financial services business are:
o professional staff,
o reputation in the marketplace,
o existing client relationships, and
o ability to commit capital to client transactions and mix of market
capabilities.
Our ability to compete effectively in our securities brokerage and
investment banking activities will also be influenced by the adequacy of our
capital levels and by our ability to raise additional capital. We compete
directly with national and regional full service broker-dealers and, to a lesser
extent, with discount brokers, dealers, and other investment banking firms,
investment advisors and commercial banks. We also compete for asset management
and fiduciary services with commercial banks, private trust companies, mutual
fund companies, insurance companies and others. Domestic commercial banks and
large international banks have recently entered the securities business,
including markets in which we compete. We expect competition from domestic and
international banks to increase as a result of recent 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 we do and can offer
their customers more product offerings, lower pricing, broader research
capabilities, access to international markets and other products and services we
do not offer, which may give these firms a competitive advantage over us.
We also face 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 than we do.
We also anticipate competition from underwriters who attempt to affect 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 our company, our financial condition
and operating results could be adversely affected.
8
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, called "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 our
broker-dealer subsidiary. Our broker-dealer subsidiary is 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
that cover all aspects of the securities business, including:
o sales methods,
o trade practices among broker-dealers,
o use and safekeeping of clients' funds and securities,
o capital structure of securities firms,
o record-keeping,
o reporting requirements,
o supervisory and organizational procedures intended to ensure
compliance with securities laws, including the prevention of
unlawful trading on material nonpublic information,
o employee-related matters, including qualification and licensing of
supervisory and sales personnel,
o limitations on extensions of credit in securities
transactions,
o clearance and settlement procedures,
o requirements for the registration, underwriting, sale and
distribution of securities, and
o compliance with the rules of the self regulatory organizations
designed to promote high standards of commercial honor and just and
equitable principles of trade.
Many of these regulations involve the relationship between
broker-dealers and their clients including, in some instances, "suitability"
determinations as to certain client transactions, limitations on the amounts
that may be charged to clients, timing of proprietary trading in relation to
clients' trades and disclosures to clients. Violations of any of these customer
regulations or other applicable regulations can lead to revoking broker-dealer
licenses, imposing censures or fines or suspending or terminating a firm, its
officers or employees.
As a registered broker-dealer, our brokerage subsidiary is 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. Failure to maintain the required net capital may subject a firm
to suspension or revocation of registration by the SEC and suspension or
expulsion by other regulatory bodies, and ultimately may require its
liquidation. Further, a decline in a broker-dealer's net capital below certain
"early warning levels," even though above minimum capital requirements, could
cause material adverse consequences to the broker-dealer. For example, the net
capital requirements prohibit payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness and payments in respect of subordinated
indebtedness principal if thereafter net capital would be less than required
levels.
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
9
(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.
Compliance with the SEC's net capital requirements could limit those
operations of our brokerage subsidiaries that requires intensive use of capital,
such as underwriting and trading activities, and also could restrict our ability
to withdraw capital, which, in turn, could limit our ability to pay dividends,
and redeem or purchase shares of our outstanding common stock. We are in
compliance with the net capital requirements.
Our brokerage subsidiary is 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 our unregulated subsidiaries either directly or
through its existing authority over our regulated subsidiaries.
As a registered investment advisor under the Investment Advisers Act,
CMCA is subject to the requirements of regulations under both the Investment
Advisers Act and certain state securities laws and regulations. Such
requirements 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,
CMCA is subject to regulations which cover various aspects of CMCA's business,
including compensation arrangements. Under the Investment Advisors Act, every
investment advisory agreement with CMCA'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 CMCA's investment advisory agreements
would require, as to any registered investment company client, the prior
approval of PGG, and as to CMCA's other clients, the prior consent of such
clients.
Under the National Securities Markets Improvement Act of 1996 and the
Investment Advisors Supervision Coordination Act, investment advisors, such as
CMCA, with less than $25 million of investment advisory assets under management
(excluding discretionary accounts and separate partnerships), are regulated by
the securities administrators of the states in which they offer investment
advisory services. SMH and CMCA are registered as investment advisors with the
SEC.
Our 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;
10
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 we believe 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. Any noncompliance could have a material
adverse effect on us. Our ability to comply with laws relating to our financial
service business depends upon establishing and maintaining an effective
compliance system to monitor compliance, and our ability to attract and retain
qualified compliance personnel.
RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS
From 1995 through 1997, we disposed of all of TEI's operating
businesses other than its liquid waste business. In the 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. We remained
primarily liable to complete the contracts, and agreed to reimburse the
purchaser if its aggregate completion costs exceeded the aggregate contract
price. During 2000, we recorded losses of $300,000 related to the costs of
contract completion. Management expects to make a final payment of approximately
$250,000 during 2001 to reimburse the purchaser for completion costs.
As a result of our decision to focus on the financial services
industry, we discontinued our liquid waste business effective December 31, 1998.
We disposed of the assets and liabilities of the business in July 2000. In
conjunction with the disposition, we recorded a provision for loss of $600,000
during the second quarter of 2000. Until January 2002, we remain contingently
liable for potential environmental claims with a maximum exposure of $2.2
million. A portion of such potential claims is covered by insurance with a
maximum deductible of $50,000 per occurrence. However, we are not aware of the
existence of any such environmental claims at December 31, 2000. Even so, it is
reasonably possible that we will need to record additional loss provisions on
the disposition of Energy Recovery Resources, Inc. ("ERRI") in future periods
based on potential post-closing claims.
Spires Financial, L.P.'s ("Spires") operations were discontinued in
June 2000 due to changes in the mortgage-backed securities market resulting from
interest rate increases and departures of certain key individuals. Spires
incurred net losses of $10.8 million during 2000, including goodwill impairment
of $8.3 million and $2.5 million, net of tax, for operating losses, abandoned
leases, and other expenses. The Company retained cash and other assets,
consisting of receivables from broker-dealers and clearing organizations,
deposits with clearing brokers, and securities owned, but the other assets and
liabilities of Spires, including proprietary software, databases, and property
were held for sale at December 31, 2000 and sold in January 2001.
EMPLOYEES
At December 31, 2000, we had 216 employees. Of these employees, 41 were
engaged in retail brokerage, 37 in institutional sales and trading, 16 in fixed
income sales, 17 in investment banking, 18 in securities analysis and research,
three in prime brokerage, 15 in trust services, three in systems development and
support and 66 in accounting, administration and support operations. None of our
employees are subject to collective bargaining agreements. We believe our
relations with our employees generally are good.
11
RISK MANAGEMENT
Our financial services business involves substantial risks of
liability. From time to time, we or our operating subsidiaries may be named as a
defendant in civil litigation and arbitration arising from our business
activities as a broker-dealer, fiduciary or in connection with our investment
management functions. The plaintiffs in such litigation or arbitration may
allege misconduct on the part of our 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 we 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 our company, are
subject to substantial potential liability, including 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 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 management and staff and those of our subsidiaries
from other responsibilities, and we may incur significant legal expense in
defending such litigation or arbitration.
ITEM 2. PROPERTIES
We lease office facilities in Houston (two locations), Ft. Worth area
(two locations), and Dallas, Texas; New York, New York; Morris Plains, New
Jersey; Chicago, Illinois; Denver, Colorado and Jackson, Mississippi,
aggregating approximately 50,000 square feet. One of our Houston leases expires
in 2002, and the other in 2004. Our other leases expire between 2001 and 2007
including the Ft. Worth lease in 2003, the Dallas lease in 2006, the Morris
Plains leases in 2007, the Chicago and Denver leases in 2001, and the Jackson
lease in 2001. The leases are on rental and other terms that we believe are
commercially reasonable. We believe our existing facilities are well maintained
and adequate for existing and planned operations.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal proceedings that are of an ordinary or
routine nature incidental to our operations. We believe we have adequately
reserved for such litigation matters and that they will not have a material
adverse effect on our financial condition, results of operations, or cash flows.
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, 2000.
12
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "PING." Our common stock began trading on
January 29, 1999. Prior to that time, there was no established public trading
market for our common stock. As a result of the January 1999 combination, we
became the successor issuer to TEI, Inc. whose 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 combination, each outstanding
share of TEI common stock was converted into 0.25 of a share of our common
stock, with just over 50% of our outstanding common shares being issued to TEI's
former shareholders. The following table sets forth the quarterly high and low
sale prices of our common stock during 2000 and 1999 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 combination, each as reported on
the Nasdaq National Market:
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
2000:
First Quarter.........................................................5 1/8 2 7/8
Second Quarter........................................................4 1/8 3
Third Quarter.........................................................6 1/2 3 5/8
Fourth Quarter........................................................6 3/4 3 1/4
1999:
First Quarter.........................................................9 5 1/16
Second Quarter........................................................6 1/4 4 1/2
Third Quarter.........................................................6 4 1/2
Fourth Quarter........................................................5 3/4 3 7/8
At March 22, 2001, there were 319 record holders of our common stock.
To date, we have not paid cash dividends on our common stock. It is our policy
to continue to retain earnings for use in our operations and to fund our future
activities.
RECENT SALES OF UNREGISTERED SECURITIES
On October 2000, we issued a total of 850,000 of our common shares in
connection with the Cummer/Moyers acquisition. Under the agreement governing the
acquisition, we could be obligated to issue up to an additional 150,000 of our
common shares if certain performance criteria are met by the acquired
Cummer/Moyers companies. The acquired broker-dealer Cummer/Moyers companies have
been since merged into SMH, our investment banking subsidiary, while the
acquired investment advisor company continued as a separate wholly owned
subsidiary. The shares were issued in a transaction exempt from registration
under Section 4(2) of the Securities Act. Each of the former shareholders of the
acquired Cummer/Moyers companies agreed not to sell or transfer its Pinnacle
shares issued in the acquisition until after October 2, 2001. The former
Cummer/Moyers shareholders were granted "piggyback" registration rights with
respect to the shares issued or to be issued in the transaction, which become
effective once the one year lock-up period expires.
ITEM 6. SELECTED FINANCIAL DATA
The following data for 1996 through 1998 reflects our historical
operating results and financial condition prior to the January 1999 combination
and the subsequent mergers and acquisitions, and does not include any historical
operating results or financial condition data of any of the financial service
firms for those periods. The following data for 1999 reflects (1) our results of
operations, including the operations of HWG and PMT acquired in the January 1999
combination, from January 31, 1999 through December 31, 1999 and (2) our
financial condition after giving effect to the January 1999 combination. The
data for 2000 includes the results of operations of HWG and PMT for the entire
period.
13
The results for SMM, Blackford, and the Cummer/Moyer companies are included from
the dates of merger, January 31, 2000; June 30, 2000; and October 2, 2000,
respectively.
As more fully described in Notes 1 and 10 to the Consolidated Financial
Statements, all of our businesses owned through TEI have been sold.
The statement of operations data for all periods reflects Energy
Recovery Resources' liquid waste operations as discontinued. Periods prior to
1997 reflect the operations of the Tank Testing Group, Engineered Systems, Inc.
and Mankoff, Inc. as discontinued. The balance sheet and statement of operations
data for 1999 and 2000 reflect Spires as discontinued. Accordingly, the
historical selected financial data is not indicative of future operations.
The following data should be read together with the Consolidated
Financial Statements and their related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included later in
this Report.
YEAR ENDED DECEMBER 31,
(in thousands except share and per share amounts)
2000 1999 1998 1997 1996
(RECLASSIFIED)
-------------- ------------------ ------------ -------------- ------------------
STATEMENT OF OPERATIONS
Total revenues $ 43,866 $ 8,430 $ 1,524 $ 1,530 $ 910
Income (loss) from
continuing operations 2,111 (3,725) 106 4 (456)
Income (loss) from
discontinued operations
net of tax (11,734) (969) (4,077) (2,786) 1,211
-------------- ------------------ ------------ -------------- ------------------
Net income (loss) $ (9,623) $ (4,694) $ (3,971) $ (2,782) $ 755
============== ================== ============ ============== ==================
Basic and diluted earnings(loss)
per share
From continuing
operations $ 0.15 $ (0.55) $ 0.03 $ 0.00 $ (0.13)
From discontinued
operations (0.84) (0.14) (1.14) (0.78) 0.34
-------------- ------------------ ------------ -------------- ------------------
Net earnings (loss)
per share $ (0.69) $ (0.69) $ (1.11) $ (0.78) $ 0.21
============== ================== ============ ============== ==================
Weighted average shares
outstanding 13,951,787 6,828,378 3,562,753 3,561,003 3,559,253
============== ================== ============ ============== ==================
AS OF DECEMBER 31,
--------------------------------------------------------------------------------
1999
2000 RECLASSIFIED 1998 1997 1996
-------------- ------------------ ------------ -------------- ------------------
BALANCE SHEET DATA:
Cash and cash equivalents $25,059 $10,495 $13,293 $12,810 $11,422
Securities 13,818 89,052 14,638 15,336 18,426
Total assets 99,214 297,907 34,995 39,043 43,034
Total liabilities 9,102 240,330 1,295 1,378 2,601
Minority interests 186 - - - -
Shareholders' equity 89,926 57,577 33,700 37,665 40,433
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with the Consolidated
Financial Statements and their related notes and "Selected Financial Data"
included later in this Annual Report.
GENERAL
We provide diversified financial services through our subsidiaries,
including institutional and retail brokerage, investment banking, merchant
banking, trust related services and asset management. All of these activities
are highly competitive and are sensitive to many factors outside our control,
including those factors listed under "Factors Affecting Forward-Looking
Statements."
We closely monitor our operating environment to enable us to respond
promptly to market cycles. In addition, we seek to lessen earnings volatility by
controlling expenses, increasing fee-based business and developing new revenue
sources. Nonetheless, operating results of any individual period should not be
considered representative of future performance.
We are the successor issuer to TEI, Inc., which is now a wholly owned
subsidiary. During 1995, 1996 and 1997, we disposed of all of its operations
other than its liquid waste business and the related facility located in
Charlotte, North Carolina. The liquid waste business and the related facility
were sold during 2000.
From January 1997 through the first quarter of 1998, our management
actively evaluated strategies and financial alternatives for maximizing
shareholder value. In late April 1998, we reached an agreement in principle to
combine with three Houston-based financial services firms. These firms were
Harris Webb & Garrison, Inc., a full service regional investment banking,
brokerage and financial services firm serving the southwestern United States;
Pinnacle Management & Trust, a Texas state-chartered trust company and
investment management firm; and Spires Financial, L.P., 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 its combination with Harris Webb &
Garrison, Pinnacle Management & Trust and Spires Financial, with Pinnacle Global
Group emerging as the new public holding company. In the combination, just over
50% of our outstanding common shares were issued to TEI's former shareholders in
exchange for their TEI common shares, and slightly less than 50%, of 3,562,500
common shares, were issued to the former owners of the financial services firms.
On January 31, 2000, we completed the merger of Harris Webb & Garrison,
our investment banking subsidiary, with Sanders Morris Mundy Inc. Sanders Morris
Mundy survived the merger, was renamed "Sanders Morris Harris Inc." and became
our wholly owned subsidiary. In the Sanders merger, we issued 7,125,220 of our
common shares to the former shareholders of the Sanders firm, increasing our
total outstanding common shares to approximately 14.25 million. Sanders Morris
Mundy was a twelve year-old investment banking and brokerage firm based in
Houston, Texas with branch offices in New York City, Denver and Chicago.
Spires' operations were discontinued in June 2000 due to departures of
certain key employees and changes in the mortgage-backed securities market
resulting in part from interest rate increases. The Company retained cash,
receivables from broker-dealers, deposits with clearing brokers, and securities
owned, but the other assets and liabilities of Spires, including proprietary
software, databases, and property, were held for sale at December 31, 2000 and
sold in January 2001.
On June 30, 2000, we acquired Blackford Securities Corporation, for
1,000,000 shares of our common stock and $5.5 million in cash. Blackford, based
in Garden City, New York, specializes in providing prime brokerage services to
investment partnerships and execution services to institutions.
On October 2, 2000, we acquired the Cummer/Moyers companies. The former
owners of Cummer/Moyers received a total of 850,000 of our common shares and may
later earn up to an additional 150,000 common shares if the acquired operations
meet or exceed specified performance levels. The Cummer/Moyers companies, based
in Fort Worth, Texas
15
consist of Cummer/Moyers Securities, a broker-dealer; and Cummer/Moyers Capital
Advisors, a specialist in providing fixed income investment portfolios to
institutional and individual clients (collectively, "Cummer/Moyers").
The historical financial information contained in this document for
1996 through 1998 does not include any results of operations or the financial
position of our current businesses acquired in the January 1999 combination nor
does it reflect the January 2000 Sanders merger, the June 2000 Blackford
acquisition or the October 2000 Cummer/Moyers acquisition. Our operations prior
to 1999 reflect only corporate activities and the results of our discontinued
operations. The historical financial information contained in this document for
1999 related to our financial condition after giving effect to the January 1999
combination and our results of operations include operations of the financial
firms since the date of acquisition, January 31, 1999. The historical financial
information contained in this document for 1999 and 2000 reflects the
discontinuance of Spires. The following description of our business includes the
operation of the combined company after giving effect to the January 1999
combination, the January 2000 Sanders merger, the June 2000 Blackford
acquisition, and the October 2000 Cummer/Moyers acquisitions, except for our
discontinued businesses.
COMPONENTS OF REVENUES AND EXPENSES
REVENUES. Our revenues are comprised primarily of (1) commission
revenue from retail and institutional brokerage transactions, fees from
asset-based advisory services, and principal and agent transactions, (2)
investment banking revenue from corporate finance fees, mergers and acquisitions
fees and merchant banking fees and (3) fees from asset management and fiduciary
services. We also earn interest on the cash held and dividends received from the
equity securities held by us for our corporate capital accounts and have gains
(or losses) in our inventory account. Interest income results from interest
earned on our inventories of fixed-income securities prior to sale and from
interest and dividends earned on investments in our capital accounts. Other
sources of revenue include revenue earned from gains on the sale of securities
held in our corporate accounts, and from realized and unrealized gains (or
losses), on securities in our possession.
EXPENSES. Our expenses consist of (1) compensation and benefits, (2)
brokerage and clearing costs, (3) interest expense and (4) other expenses.
Compensation and benefits is our largest expense item and includes wages,
salaries, commissions to retail and institutional brokers and investment and
merchant bankers, and benefits. During 2000, compensation and benefits
represented 61% as a percentage of total expenses, and 55% as a percentage of
total revenues. Compensation and benefits have both a variable component based
on revenue production, and a fixed component. The variable component includes
institutional and retail sales commissions, bonuses, overrides, trading desk
incentives, and management compensation. Retail and institutional commissions
are based on a competitive commission schedule. The investment banking group and
the research group receive a salary and discretionary bonus as compensation. The
fixed component includes administrative and executive salaries, payroll taxes,
employee benefits and temporary employee costs.
Brokerage and clearance expenses include clearing and settlement costs
associated with the retail and institutional brokerage business at SMH. SMH
clears its transactions primarily through the Pershing Division of Donaldson,
Lufkin and Jenrette Securities Corporation, a Credit Suisse First Boston Company
and other clearing brokers.
Other expenses include (1) occupancy and equipment expenses, such as
rent and utility charges for facilities, and (2) communications and data
processing expense, such as third-party systems, data, and software program
providers.
Amortization expense reflects the amortization of the goodwill created
through the combination of the three financial services firms, and through
subsequent mergers and acquisitions.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our financial results for the year ended December 31, 2000 include the
results of operations of TEI, HWG, and PMT for the entire period. The results
for SMM, Blackford and Cummer/Moyers are included from the dates of merger,
January 31, 2000, June 30, 2000 and October 2, 2000, respectively. During the
comparable period in 1999, our financial statements reflect the operating
results from TEI for the entire period, and the results from HWG and PMT from
January 29, 1999 to December 31, 1999. The operations of Spires for all periods
since its January 1999 acquisition date have
16
been reclassified as discontinued. Therefore, the results of operations for the
year ended December 31, 2000 are not comparable to the results for the same
period in 1999.
Total revenues increased to $43.9 million in 2000 from $8.4 million in
1999 principally due to the mergers with SMM in January 2000, Blackford in June
2000 and Cummer/Moyers in October 2000. Total expenses for the period were $38.1
million, compared to $9.6 million in the prior year due to the compensation and
benefits paid to employees who joined the Company as a result of the SMM,
Blackford and Cummer/Moyers mergers. Income from continuing operations increased
to $2.1 million in 2000 from a loss of $3.7 million during 1999. Basic and
diluted income (loss) per share from continuing operations was $0.15 per share
in 2000, compared to ($0.55) per share for 1999.
Commissions revenue increased to $18.5 million in 2000 from $2.9
million in 1999 primarily as a result of the addition of approximately 18,000
brokerage accounts serviced by SMH and C/M. In 1999, HWG serviced approximately
3,000 accounts. Principal transactions revenue totaled $2.1 million in 2000
compared to $250,000 in 1999. SMH made markets in the common stock or equity
securities of 74 companies during 2000. In 1999, HWG made markets in the common
stock or equity securities of approximately twenty companies. Investment banking
revenue rose to $13.5 million in 2000 from $1.6 million in 1999. During 2000 SMH
acted as a placement agent in 15 private placements and as a co-managing
underwriter in three public offerings raising total gross proceeds of
approximately $159 million. Interest and dividends climbed to $2.4 million in
2000 from $1.0 million in 1999 primarily as a result of the addition of the SMH
securities portfolio. Other income totaled $2.1 million in 2000 compared to
$611,000 in 1999. Fiduciary, custodial and advisory fees rose to $5.3 million in
2000 from $2.0 million in 1999 due to an increase in the number of fee-based
accounts and an increase in the market value of assets under management at PMT
(approximately $571 million at December 31, 2000), the addition of fee-based
accounts through the acquisition of C/M, and $2.6 million in management and
advisory fees SMH earned from its investments in limited partnerships.
Employee compensation and benefits totaled $23.1 million in 2000,
compared to $5.9 million in 1999. Based on the merger with SMH and the
acquisitions of Blackford and C/M total employees increased from 108 at December
31, 1999 to 216 at December 31, 2000. Floor brokerage, exchange and clearance
fees rose to $2.5 million in 2000 from $449,000 in 1999. Communications and data
processing expenses increased to $2.8 million in the current year from $368,000
in 1999 as a result of increased trading volumes at SMH, Blackford and C/M.
Occupancy costs totaled $2.8 million in 2000, compared to $682,000 in the
previous year. The Company leases office space in eleven offices throughout the
United States. Such increases were the result of the merger with SMH and the
acquisitions of Blackford and C/M. Amortization of intangible assets increased
to $1.6 million in the current year from $529,000 in the prior year due to the
addition of goodwill in connection with the merger and acquisitions during 2000.
Other general and administrative expenses rose to $5.3 million during 2000 from
$1.7 million in the same period last year as a result of mergers and
acquisitions during 2000.
The effective tax rate from continuing operations was 56% for the year
ended December 31, 2000 compared to 216% for the year ended December 31, 1999.
The effective tax rate in 2000 exceeds the federal statutory income tax rate
primarily as a result of nondeductible goodwill amortization and state income
taxes. The rate in 1999 was affected by nondeductible goodwill amortization and
an increase in the valuation allowance for deferred tax assets that do not meet
the more likely than not criteria for recognition as discussed above.
Losses from discontinued operations, net of tax, were $11.7 million in
2000, compared to 969,000 in 1999. The loss from discontinued operations in 2000
consists of $600,000 related to the July 2000 sale of Energy Recovery Resources,
Inc. ("ERRI"); $300,000 associated with additional costs incurred to complete
customer contracts related to the 1997 sale of Engineered Systems, Inc. ("ESI");
and $10.8 million related to Spires that included an $8.3 million charge for
impairment of goodwill and $2.5 million, net of tax, for operating losses,
abandoned leases, and other expenses.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues for the year ended December 31, 1999 were $8.4 million
compared to $1.5 million in 1998. The increase in revenues was due to the
acquisition of the three financial services firms on January 29, 1999. Total
expenses for the period were $9.6 million compared to $1.4 million in the
previous year. Loss from continuing operations was $3.7 million in 1999 compared
to income of $106,000 in the previous year.
17
Provision for income taxes was $2.5 million compared to $54,000 in the
previous year. The provision in 1999 included a $2.8 million charge to provide a
valuation allowance for deferred tax assets that do not meet the more likely
than not criteria for recognition. While the charge is included in continuing
operations, these deferred tax assets resulted from losses and tax basis
differences from the Company's discontinued operations. Loss from continuing
operations, net of tax, was $3.7 million compared to income of $106,000 in the
previous year. Loss from discontinued operations, net of tax declined to
$1,400,000 from $2.7 million in 1998. Gain from disposition of discontinued
operations, net of tax, was $865,000 in 1999 compared to a loss of $1.3 million
in 1998. Basic and diluted income (loss) per share from continuing operations
was $(0.55) in 1999 compared to $0.03 per share for the year ended December 31,
1998.
Commissions revenue in 1999 was $2.9 million principally from retail
and institutional brokerage operations at HWG. Principal transactions revenue
was $250,000 consisting primarily of trading gains, net of hedging costs.
Investment banking revenue was $1.6 million primarily from investment banking
fees earned from advisory services and private security offerings. Fiduciary,
custodial and advisory fees were $2.0 million earned primarily from fee-based
account business at PMT. Interest and dividend income declined to $1.0 million
in 1999 from $1.5 million in 1998, primarily due to a reduction in the amount of
securities invested in interest-bearing securities in 1999.
Employee compensation and benefits increased from $453,000 in 1998 to
$5.9 million in 1999 mainly due to additional employees in connection with the
January 1999 combination. Floor brokerage, exchange and clearance fees totaled
$449,000 during 1999. Communications and data processing costs were $368,000 in
1999, compared to $22,000 in 1998. The increase was primarily related to
upgrades in technology and services, including quotes and market data services.
Occupancy costs increased from $75,000 in 1998 to $682,000 in 1999, primarily
due to rent expense for office and equipment leases of the financial services
firms.
The effective tax rate from continuing operations during the year ended
December 31, 1999 was 216% compared to 34% for the year ended December 31, 1998.
The rate in 1999 was affected by nondeductible goodwill amortization and an
increase in the valuation allowance for deferred tax assets that do not meet the
more likely than not criteria for recognition as discussed above.
Losses from discontinued operations, net of tax, were $969,000 in 1999
compared to a loss of $4.1 million in 1998. The loss from discontinued
operations in 1999 consists of $933,000, net of tax, related to a revision of
the estimated loss on the disposition of ERRI, offset by income from
discontinued operations related to Spires of $829,000, and $865,000 related to a
revision of our obligation to fund the cost to complete customer contracts in
connection with the December 1997 sale of ESI and an increase in the related
reserve against amounts due from customers that may not be collected.
LIQUIDITY AND CAPITAL RESOURCES
We intend to satisfy a large portion of our funding needs with our own
capital resources, consisting largely of internally generated earnings and
liquid assets we held before the January 1999 combination. At December 31, 2000,
we had approximately $25.1 million in cash and cash equivalents, which together
with liquid assets, consisting of receivables from broker-dealers and clearing
organizations, deposits with clearing brokers, securities owned, and securities
available for sale represented about 41% of our total assets at year-end.
For the year ended December 31, 2000, net cash provided by operations
totaled $6.9 million versus net cash used in operations of $3.8 million during
1999. Current year cash provided by operations is the result of increases in
working capital changes and other adjustments totaling $16.5 million offset by a
net loss of $9.6 million. As part of our discontinuance of Spires in 2000, we
liquidated the assets of Spires, which consisted principally of marketable
securities and receivables from broker-dealers. The liquidation of the Spires'
assets resulted in an increase in working capital for the Company.
Capital expenditures for 2000 were $854,000, mainly from the purchase
of furniture and computer equipment and software, as well as for leasehold
improvements, necessary for our growth. We paid approximately $5.8 million for
acquisitions, including $5.5 million paid to the former owners of Blackford. In
conjunction with the sale of ERRI, we received a cash payment of $3.1 million.
During 2000, we reacquired 802,000 of our common shares at a total cost of
approximately $3.2 million.
18
At December 31, 2000, SMH, our registered broker-dealer subsidiary, was
in compliance with the net capital requirements of the Securities and Exchange
Commission's Uniform Net Capital Rules and had capital in excess of the required
minimum. PMT was in compliance with the Texas Department of Banking net capital
requirement and had capital in excess of the required minimum.
We are a party to various legal proceedings that are of an ordinary or
routine nature incidental to our operations. We believe we have adequately
reserved for such litigation matters and that they will not have a material
adverse effect on our financial condition, results of operations, or cash flows.
We may be exposed to certain liabilities and claims associated with our
discontinued liquid waste business. In connection with the sale of ERRI, we
remain contingently liable for potential environmental claims with a maximum
exposure of $2.2 million until January 2002. However, at December 31, 2000, we
are not aware of the existence of any such environmental claims. A portion of
such potential claims is covered by insurance with a maximum deductible of
$50,000 per occurrence. We believe such potential claims will not have a
material adverse effect on our financial condition, results of operations, or
cash flows.
A substantial portion of our assets is highly liquid and short-term in
nature, consisting of cash and assets readily convertible into cash. Securities
borrowed and securities loaned, along with receivables from customers and
payables to customers, fluctuate as a result of the changes in the level of
positions held to facilitate customer transactions and changes in market
conditions. Receivables from others and payables to others fluctuate primarily
due to the change in adjustment to securities owned on a trade date basis.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, (the
"Acts"). These forward-looking statements may relate to such matters as
anticipated financial performance, future revenues or earnings, business
prospects, projected ventures, new products, anticipated market performance and
similar matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. To comply with the terms of the safe
harbor, the Company cautions readers that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the forward-looking statements. These risks and
uncertainties, many of which are beyond the Company's control, include, but are
not limited to (1) trading volume in the securities markets; (2) volatility of
the securities markets and interest rates; (3) changes in regulatory
requirements that could affect the demand for the Company's services or the cost
of doing business; (4) general economic conditions, both domestic and foreign,
especially in the regions where the Company does business; (5) changes in the
rate of inflation and related impact on securities markets; (6) competition from
existing financial institutions and other new participants in the securities
markets; (7) legal developments affecting the litigation experience of the
securities industry; (8) successful implementation of technology solutions and
(9) demand for the Company's services. The Company does not undertake any
obligation to publicly update or revise any forward-looking statements.
The recent abrupt downturn in the economy, as well as in the overall
stock market has had a negative impact on our equity commission revenues and on
underwriting fees derived from public offerings. Additionally, as stock prices
decline, our assets under management typically diminish in value, which, in turn
results in reduced asset management fees. The decline in overall stock prices
and the reduction in interest rates has caused many investors to shift a portion
of their investment portfolios into fixed income securities. This reallocation
has had a positive impact on that portion of our business that derives its
income from fixed income securities. Traditionally, the recent actions taken by
the Federal Reserve to lower interest rates have worked to stimulate the
economy. We believe that a stronger economy will be favorable to our equity
business.
19
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on our financial
condition, results of operations or cash flows; however, the rate of inflation
can be expected to affect our expenses, such as employee compensation, occupancy
and equipment. Increases in these expenses may not be readily recoverable in the
prices that we charge for our 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 our
financial services operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The following discussion relates to our market risk sensitive
instruments as of December 31, 2000, and thus, includes such instruments held by
SMH and PMT.
SMH
SMH's trading equity securities are marked to market. At December 31,
2000, SMH's trading equity and debt securities were recorded at a fair value of
$1.7 million and $401,000, respectively. These trading equity securities are
subject to equity price risk. This risk would amount to $170,000 based on a
potential loss in fair value from a hypothetical 10% decrease in the market
value of such equity securities. The actual equity price risk related to the
trading equity securities may differ substantially.
SMH's market making, investing, and underwriting activities often
involve the purchase, sale, or short sale of securities and expose its capital
to significant risks, including market risk, equity price risk, and credit risk.
Market risk represents the potential loss we may incur as a result of absolute
and relative price movements, price volatility, and changes in liquidity in
financial instruments due to many factors over which we have virtually no
control. SMH's primary market risk arises from the fact that it owns a variety
of investments that are subject to changes in value and could result in material
gains or losses. SMH also engages in proprietary trading and makes dealer
markets in equity securities. In doing this, SMH may be required to maintain
certain amounts of inventories in order to facilitate customer order flow. SMH
is exposed to equity price risk due to changes in the level and volatility of
equity prices primarily in Nasdaq and over-the-counter markets. Changes in
market conditions could limit SMH's ability to resell securities purchased or to
purchase securities sold short. Direct market risk exposure to changes in
foreign exchange rates is not material.
SMH seeks to cover its exposure to market and equity price risk by
limiting its net long and short positions and by selling or buying similar
instruments. In addition, trading and inventory accounts are monitored on an
ongoing basis, and SMH has established position limits. Position and exposure
reports are prepared at the end of each trading day and are reviewed by traders,
trading managers, and management personnel. These reports show the amount of
capital committed to various issuers and industry segments. Securities held in
SMH's investment portfolio are guided by an investment policy and are reviewed
on a regular basis.
Credit risk represents the amount of accounting loss SMH would incur
should counterparties to its proprietary transactions fail to perform their
contractual obligations, such as delivery of securities or payment of funds.
This risk depends primarily on the credit worthiness of the counterparty. SMH
seeks to control credit risk by following an established credit approval
process, monitoring credit limits and requiring collateral where appropriate.
SMH monitors its market and counterparty risk on a daily basis through
a number of control procedures designed to identify and evaluate the various
risks to which it is exposed. SMH has established various committees to assess
and to manage risk associated with its investment banking and other activities.
The committees review, among other things, business and transactional risks
associated with potential clients and engagements. SMH seeks to control the
risks associated with its investment banking activities by review and approval
of transactions by the relevant committee, prior to accepting an engagement or
pursuing a material investment transaction.
At December 31, 2000, SMH's securities were recorded at a fair value of
$6.2 million. Since this portfolio is invested primarily in cash and short-term
U.S. treasuries, it is exposed to limited equity price risk.
20
We do not act as dealer, trader, or end-user of complex derivative
contracts such as swaps, collars, and caps. However, SMH does act as a dealer
and trader of mortgage-derivative securities, called collateralized mortgage
obligations (CMOs or REMICs). Mortgage-derivative securities redistribute the
risks associated with their underlying mortgage collateral, by redirecting cash
flows according to specific formulas or algorithms, to various tranches or
classes, designed to meet specific investor objectives.
PMT
At December 31, 2000, PMT had equity securities under management with a
fair value of $571 million. PMT's fee income for the year ended December 31,
2000 would have been reduced by approximately $33,000 assuming a hypothetical
10% decrease in the value of its equity securities under management. PMT's fee
income could also be reduced from changes in interest rates to the extent that
such changes reduce the carrying value of securities under management.
PMT revenues are primarily from asset management and fiduciary fees
based on a percentage of assets under administration. As a result, PMT is
subject to equity price risk since its fees are directly affected by changes in
the equity prices of the assets under its management. Similarly, PMT's fee
income is subject to interest rate risk to the extent changes in interest rates
affect the carrying value of assets under management. While these market risks
are present, quantification remains difficult due to the number of other
variables that affect PMT's fee income.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants .......................................................... 23
Consolidated Balance Sheet as of December 31, 2000 and 1999 ................................ 24
Consolidated Statement of Operations for each of the three years in the period ended
December 31, 2000 ....................................................................... 25
Consolidated Statement of Shareholders' Equity for each of the three years in the period ended
December 31, 2000 ....................................................................... 26
Consolidated Statement of Cash Flows for each of the three years in the period ended
December 31, 2000 ....................................................................... 27
Notes to Consolidated Financial Statements ................................................. 28
22
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
Pinnacle Global Group, Inc. and Subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2001
23
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(in thousands, except share and per share amounts)
DECEMBER 31,
DECEMBER 31, 1999
2000 RECLASSIFIED
----------- ------------
ASSETS
Cash and cash equivalents $25,059 $10,495
Receivables, net of allowance of $615 and $0:
Broker-dealers 1,643 162,423
Customers 2,265 377
Related parties 4,945 878
Other 436 190
Deposits with clearing brokers 250 8,463
Securites owned 9,675 85,002
Securities available for sale 4,143 4,050
Intangible assets, net of accumulated 45,103 13,081
amortization of $2,096 and $529
Furniture and equipment 2,359 670
Deferred income taxes 2,280 -
Other assets 1,056 660
Net assets of discontinued operations - 11,618
----------- ------------
Total assets $99,214 $297,907
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $6,800 $1,396
Payable to clearing broker-dealers 35 117,922
Securities sold, not yet purchased 591 120,275
Net liabilities of discontinued operations 1,676 -
Deferred income taxes - 737
----------- ------------
Total liabilities 9,102 240,330
----------- ------------
Commitments and Contingencies
Minority interests 186 -
Shareholders' equity:
Preferred stock, $.10 par value;
10,000,000 shares authorized; no shares
issued and oustanding - -
Common stock, $.01 par value; 100,000,000 shares
authorized; 16,100,512 and 7,125,292 shares issued
and 15,298,388 and 7,125,292 outstanding at
December 31, 2000 and 1999, respectively 161 71
Additional paid-in capital 103,670 58,929
Receivables for shares issued (558) (1,312)
Accumulated deficit (9,711) (88)
Accumulated other comprehensive loss (452) (23)
Treasury stock at cost, 802,124 shares (3,184) -
----------- ------------
Total shareholders' equity 89,926 57,577
----------- ------------
Total liabilities and shareholders' equity $99,214 $297,907
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
24
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
(in thousands, except share and per share amounts)
2000 1999 1998
RECLASSIFIED
----------- ------------- ---------
Revenues:
Commissions $18,465 $2,946 $ -
Principal transactions 2,109 250 -
Investment banking 13,510 1,609 -
Fiduciary, custodial and advisory fees 5,262 2,027 -
Interest and dividends 2,393 987 1,524
Other income 2,127 611 -
----------- ---------- ---------
Total revenues 43,866 8,430 1,524
----------- ---------- ---------
Expenses:
Employee compensation and benefits 23,096 5,871 453
Floor brokerage, exchange and clearance fees 2,519 449 -
Communications and data processing 2,783 368 22
Occupancy 2,808 682 75
Amortization of intangible assets 1,567 529 -
Other general and administrative 5,352 1,709 814
----------- ---------- ---------
Total expenses 38,125 9,608 1,364
----------- ---------- ---------
Income (loss) from continuing operations before
equity in loss of limited partnerships,
income taxes and minority interests 5,741 (1,178) 160
Equity in loss of limited partnerships (1,748) - -
Provision for income taxes (2,232) (2,547) (54)
Minority interests in net loss of
consolidated companies 350 - -
----------- ---------- ---------
Income (loss) from continuing operations 2,111 (3,725) 106
Loss from discontinued operations, net of tax (10,834) (104) (2,733)
Loss on disposition of discontinued
operations, net of tax (900) (865) (1,344)
----------- ---------- ---------
Net loss $ (9,623) $ (4,694) $ (3,971)
=========== ========== =========
Basic and diluted income (loss) per share:
From continuing operations $ 0.15 $ (0.55) $ 0.03
From discontinued operations (0.84) (0.14) (1.14)
----------- ---------- ---------
Net loss per share $ (0.69) $ (0.69) $ (1.11)
=========== ========== =========
Weighted average common shares outstanding 13,951,787 6,828,378 3,562,753
=========== ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
(in thousands)
COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------ ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- ------- --------- -----------
Balance, December 31, 1997 3,800 $ 38 (239) $ (4,187) $ 33,238
Issuance of common stock to
nonemployee directors 2 11
Comprehensive loss:
Net loss
Net change in unrealized
appreciation on securities
available for sale net of
deferred taxes of $3
Total comprehensive loss
-------- -------- ------- --------- -----------
Balance, December 31, 1998 3,802 38 (239) (4,187) 33,249
Issuance of common stock for
acquisitions 3,563 35 29,865
Retirement of treasury stock (239) (2) 239 4,187 (4,185)
Comprehensive loss:
Net loss
Net change in unrealized
depreciation on securities
available for sale net of
deferred taxes of $9
Total comprehensive loss
-------- -------- ------- --------- -----------
Balance, December 31, 1999 7,126 71 - - 58,929
Issuance of common stock in
acquistions 8,975 90 44,741
Acquisition of treasury stock (802) (3,184)
Collections on receivables for
shares issued
Comprehensive loss:
Net loss
Net change in unrealized
depreciation on securities
available for sale net of
deferred taxes of $221
Total comprehensive loss
-------- -------- ------- --------- -----------
Balance, December 31, 2000 16,101 $ 161 (802) $ (3,184) $ 103,670
======== ======== ======= ========= ===========
ACCUMULATED
RECEIVABLES OTHER
FOR SHARES RETAINED COMPREHENSIVE
ISSUED EARNINGS(DEFICIT) (LOSS) TOTAL
---------- ---------------- ------------ ----------
Balance, December 31, 1997 $ $ 8,577 $ $ 37,666
Issuance of common stock to
nonemployee directors 11
Comprehensive loss:
Net loss (3,971) (3,971)
Net change in unrealized
appreciation on securities
available for sale net of
deferred taxes of $3 (6) (6)
----------
Total comprehensive loss (3,977)
---------- ---------------- ------------ ----------
Balance, December 31, 1998 - 4,606 (6) 33,700
Issuance of common stock for
acquisitions (1,312) 28,588
Retirement of treasury stock -
Comprehensive loss:
Net loss (4,694) (4,694)
Net change in unrealized
depreciation on securities
available for sale net of
deferred taxes of $9 (17) (17)
----------
Total comprehensive loss (4,711)
---------- ---------------- ------------ ----------
Balance, December 31, 1999 (1,312) (88) (23) 57,577
Issuance of common stock in
acquistions 44,831
Acquisition of treasury stock 667 (2,517)
Collections on receivables for
shares issued 87 87
Comprehensive loss:
Net loss (9,623) (9,623)
Net change in unrealized
depreciation on securities
available for sale net of
deferred taxes of $221 (429) (429)
----------
Total comprehensive loss (10,052)
---------- ---------------- ------------ ----------
Balance, December 31, 2000 $ (558) $ (9,711) $ (452) 89,926
========== ================ ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
26
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For each of the three years in the period ended December 31, 2000
(in thousands)
2000 1999 1998
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,623) $ (4,694) $ (3,971)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of securities available for sale (695) (323) --
Depreciation 817 120 11
Net amortization of premiums and discounts on
securities available for sale -- -- (202)
Deferred income taxes (913) 3,389 (1,584)
Amortization of intangible assets 1,567 529 --
Minority interests in net loss of consolidated companies (350) -- --
Changes in assets and liabilities:
(Increase) decrease in receivables 155,098 (161,129) --
(Increase) decrease in securities owned 82,932 (66,887) --
(Increase) decrease in deposits with clearing brokers 8,713 (7,336) --
Increase (decrease) in securities sold, not yet purchased (119,745) 118,735 --
Decrease in income tax receivable -- -- 1,512
(Increase) decrease in other assets 2,588 581 84
Decrease in net assets of discontinued
operations 10,195 1,420 4,905
Increase (decrease) in payable to clearing broker-dealers (118,038) 112,716 --
Decrease in accounts payable and accrued liabilities (5,683) (916) (172)
---------- ---------- ---------
Net cash provided by (used in) operating activities 6,863 (3,795) 583
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (854) (566) (4)
Acquisitions, net of cash acquired of $13,577; $4,359; and $0 7,737 3,519 (996)
Proceeds from sale of discontinued operations 3,099 -- --
Proceeds from sale of assets -- 5 --
Purchase of securities available for sale (5,955) (10,219) (28,856)
Proceeds from sales and maturities of securities available for sale 5,913 8,258 29,756
---------- ---------- ---------
Net cash provided by (used in) investing activites 9,940 997 (100)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (2,293) -- --
Collections on receivables for shares issued 87 -- --
Distributions to minority interests (33) -- --
---------- ---------- ---------
Net cash used in financing activities (2,239) -- --
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 14,564 (2,798) 483
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,495 13,293 12,810
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,059 $ 10,495 $ 13,293
========== ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Through its operating subsidiaries, the Company provides a broad range
of financial services, including institutional and retail brokerage, investment
banking, merchant banking, trust related services and investment management. The
Company serves a diverse group of institutional, corporate and individual
clients.
In January 1999, the shareholders of TEI, Inc. ("TEI") exchanged all
common shares of TEI for 3,562,753 common shares of the Company. The Company
simultaneously completed the acquisition of three financial services firms:
Harris Webb & Garrison, Inc. ("HWG"), Pinnacle Management & Trust Company
("PMT") and Spires Financial, L. P. ("Spires"), by exchanging 3,562,500 of its
common shares for all of the ownership interests of the three financial services
firms. TEI is now a wholly owned subsidiary of the Company.
In January 2000, the Company merged HWG with Sanders Morris Mundy Inc.
("SMM") by exchanging 7,125,220 shares of the Company's common stock for all of
the ownership interests of SMM. SMM survived the merger, became a wholly owned
subsidiary of the Company and was renamed Sanders Morris Harris Inc. ("SMH").
SMM was a twelve year old investment banking and brokerage firm based in
Houston, Texas, with branch offices in New York City, Denver and Chicago.
In June 2000, the Company acquired Blackford Securities Corporation
("Blackford"), for 1,000,000 shares of the Company's common stock and $5.5
million in cash. Blackford, based in Garden City, New York, specializes in
providing prime brokerage services to investment partnerships and execution
services to institutions.
In June 2000, the Company discontinued the operations of Spires, a
regional
brokerage service firm whose activities primarily included the trading of
mortgage-backed securities. Accordingly, the operations of Spires for all
periods since its acquisition in January 1999 have been reclassified as
discontinued operations.
In October 2000, the Company acquired the Cummer/Moyers companies. The
former owners of Cummer/Moyers received a total of 850,000 of the Company's
common shares and may later earn up to an additional 150,000 common shares if
the acquired operations meet or exceed specified performance levels. The
Cummer/Moyers companies, based in Fort Worth, Texas, consist of Cummer/Moyers
Securities, Inc. ("CMS"), a broker dealer; and Cummer/Moyers Capital Advisors
("CMCA"), a specialist in providing fixed income portfolios to institutional and
individual clients.
As a result of these acquisitions, current period results are not
comparable to the prior period.
The assets and liabilities of Energy Recovery Resources, Inc. ("ERRI")
were sold in July 2000. The Company received cash consideration at closing of
$3.1 million. The purchaser has retained an additional $200,000 for one year to
be used to satisfy post-closing indemnification claims. Based in Charlotte,
North Carolina, ERRI provides wastewater treatment and waste oil recycling
services in the southeastern United States. The Company had reported ERRI as a
discontinued operation since December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of its subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
28
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MANAGEMENT'S ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of 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.
CASH EQUIVALENTS
Highly liquid debt instruments with original maturities of three months
or less when purchased are considered to be cash equivalents.
SECURITIES TRANSACTIONS
Substantially all marketable securities are carried at fair value based
on quoted market prices or amounts that approximate fair value. Not readily
marketable securities are valued at fair value based on either internal
valuation models or management's estimate of amounts that could be realized
under current market conditions assuming an orderly liquidation over a
reasonable period of time. Unrealized gains or losses from marking securities
owned to market value are included in income under the caption trading gains,
net. Securities not readily marketable include securities (a) for which there is
no market on a securities exchange or no independent publicly quoted market, (b)
that cannot be publicly offered or sold unless registration has been effected
under the Securities Act of 1933 or other applicable securities acts, or (c)
that cannot be offered or sold because of other arrangements, restrictions or
conditions applicable to the securities or to the Company. Proprietary
transactions and the related income/expense are recorded on the trade date.
Realized gains and losses from sales of securities are computed using the
average cost method.
SECURITIES AVAILABLE FOR SALE
Securities available for sale include marketable equity securities and
debt instruments owned by the Company`s PMT subsidiary with maturities greater
than three months when purchased. These securities are recorded at cost and are
adjusted for unrealized holding gains and losses due to market fluctuations.
These unrealized gains or losses, net of taxes, are recorded as a separate
component of other comprehensive income (loss). Gains and losses are recorded
upon sale based on the specific identification method.
FURNITURE AND EQUIPMENT
Furniture and equipment and leasehold improvements are carried at cost.
Depreciation of office furniture and equipment is computed on a straight-line
basis over a five to seven year period. Amortization of leasehold improvements
is computed on a straight-line basis over the term of the lease. Depreciation
expense included in continuing operations was $816,558, $120,041, and $11,417
for the years ended December 31, 2000, 1999, and 1998, 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.
INTANGIBLE ASSETS
Intangible assets, principally goodwill, are amortized using the
straight-line method over 20 to 25 years. Amortization expense was $1,566,987
and $528,711 for the years ended December 31, 2000 and 1999 respectively. There
was no goodwill amortization in 1998. The Company evaluates intangible assets
for impairment if events or changes in circumstances occur that indicate the
carrying amount may not be recoverable. If impairment is determined to exist,
the asset is written down to reflect the estimated future discounted cash flows
expected to be generated by the underlying business.
29
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
RESALE AND REPURCHASE AGREEMENTS
Transactions involving purchases of securities under agreements to
resell (reverse repurchase agreements or reverse repos) or sales of securities
under agreements to repurchase (repurchase agreements or repos) are accounted
for as collateralized financings. It is the policy of the Company to obtain the
possession of collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. Collateral is valued daily, and
the Company may require counterparties to deposit additional collateral or
return collateral pledged when appropriate.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the intrinsic
value method. Under this method, the Company recognizes no compensation expense
for stock options granted when the number of underlying shares is known and
exercise price of the options granted is greater than or equal to the fair value
of the stock on the date of grant.
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. A valuation allowance is provided for deferred tax assets when, in
management's judgment, such assets do not meet the more likely than not
recognition criteria.
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.
COMMISSIONS
Commissions and related clearing expenses are recorded on the trade
date as securities transactions occur.
INVESTMENT BANKING
Investment banking revenues include gains, losses, and fees, net of
syndicate expenses, arising from securities offerings in which the Company acts
as an underwriter or agent. Investment banking revenues also include fees earned
from providing merger and acquisition and financial restructuring advisory
services. Investment banking management fees are recorded on offering date,
sales concessions on settlement date, and underwriting fees at the time the
underwriting is completed and the income is reasonably determinable. Other
investment banking fees are recognized when the services have been performed.
FIDUCIARY, CUSTODIAL AND ADVISORY FEES
Fiduciary, custodial and advisory fees are recorded based on a
percentage of each individual account's market value on the last day of the
month.
INVESTMENTS IN LIMITED PARTNERSHIPS
The investments in limited partnerships, which are accounted for using
the equity method, consist of Environmental Opportunities Fund, L.P., Sanders
Opportunity Fund, L.P., and Sanders Opportunity Fund (Institutional), L.P.,
Environmental Opportunities Fund II, L.P., Environmental Opportunities Fund II
(Institutional), L.P., Corporate Opportunities Fund, L.P. and Corporate
Opportunities Fund (Institutional), L.P.
30
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform them with the 2000 presentation. The
reclassifications had no effect on retained earnings, net loss or cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. The standard, as amended by Statement of
Financial Accounting Standards No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO.
133, AN AMENDMENT OF FASB STATEMENT NO. 133, and Statement of Financial
Accounting Standards No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133 (referred to
hereafter as "FAS 133"), is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if it
is, depending on the type of hedging relationship. Management of the Company
anticipates that, due to the Company's limited use of derivative instruments,
the adoption of FAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
2. ACQUISITIONS
On January 29, 1999, the Company acquired HWG, PMT, and Spires. The former
owners of HWG, PMT, and Spires received 3,562,500 shares of the Company's common
stock, which represented 49.98% of the Company's outstanding common stock. The
acquisitions were accounted for as purchases and, accordingly, the financial
information of HWG, PMT, and Spires is included in the Company's consolidated
financial statements from the date of acquisition. The purchase price of
approximately $31 million exceeded the fair value of identifiable net assets
acquired by approximately $22 million, which has been recorded as goodwill and
is being amortized on a straight-line basis over 25 years. During the second
quarter of 2000 the Company charged off approximately $8.3 million of goodwill
related to the discontinuance of the operations of Spires.
On January 31, 2000, HWG merged with SMM. SMM survived the merger, became a
wholly owned subsidiary of the Company and was renamed SMH. The former owners of
SMM received 7,125,220 shares of the Company's common stock in the merger, which
represented approximately 50% of the Company's outstanding common stock. The
merger was accounted for as a purchase and, accordingly, the financial
information of SMM has been included in the Company's consolidated financial
statements from February 1, 2000. The purchase price of approximately $37
million exceeded the fair value of identifiable net assets acquired by
approximately $23 million, which has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years. The purchase price has been
allocated to the individual assets acquired and liabilities assumed based upon
preliminary estimates of fair value. The actual allocation may be different from
preliminary allocation due to refinements in the estimates of the fair values of
the net assets acquired; however, such differences are not expected to be
material.
On June 30, 2000, SMH acquired Blackford. The former owners of Blackford
received 1,000,000 shares of the Company's common stock and $5.5 million in
cash. The acquisition was accounted for as a purchase and, accordingly, the
financial information of Blackford has been included in the Company's
consolidated financial statements from June 30, 2000. The purchase price of
approximately $9.3 million exceeded the fair value of identifiable net assets
acquired by approximately $7.1 million, which has been recorded as goodwill and
is being amortized on a straight-line basis over 20 years. The purchase price
has been allocated to the individual assets acquired and liabilities assumed
based on preliminary estimates of the fair values of the net assets acquired;
however, such differences are not expected to be material.
On October 2, 2000 the Company acquired C/M. The former owners of C/M
received a total of 850,000 of the Company's common shares and may later earn up
to an additional 150,000 common shares if the acquired operations
31
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
meet or exceed specified performance levels. The acquisition was accounted for
as a purchase and, accordingly, the financial information of C/M has been
included in the Company's consolidated financial statements from October 2,
2000. The purchase price of approximately $5 million exceeded the fair value of
identifiable net assets acquired by approximately $5 million, which has been
recorded as goodwill and is being amortized on a straight-line basis over 20
years. In conjunction with the acquisition, CMS, the broker-dealer division of
C/M, was merged into SMH, and CMCA, the asset manager division of C/M, became a
subsidiary of PGG.
The following summarized unaudited pro forma financial information assumes
the above transactions, excluding Spires, occurred on January 1, 1999.
2000 1999
---- ----
(in thousands except per share)
Revenues $55,767 $56,085
Income from continuing 3,642 152
operations
Basic and diluted earnings per 0.23 0.01
share from continuing
operations
These unaudited pro forma amounts are derived from the historical financial
information of the acquired businesses and reflect adjustments for amortization
of intangible assets and for income taxes. The unaudited pro forma financial
information does not necessarily represent results that 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. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased at December 31, 2000 and
1999 were as follows:
2000 1999
------------------------------- ---------------------------------
Sold,Not Yet Sold, Not Yet
Owned Purchased Owned Purchased
----- --------- ----- ---------
(in thousands except per share) (in thousands except per share)
Marketable:
U.S. government and agency obligations $401 $- $80,963 $120,174
Corporate stocks 1,699 591 94 101
Corporate bonds and commercial paper - - 2,484 -
------ ---- ------- --------
2,100 591 83,541 120,275
Not readily marketable:
Partnerships 2,565 - - -
Corporate stocks and warrants 5,010 - 1,461 -
------ ---- ------- --------
$9,675 $591 $85,002 $120,275
====== ==== ======= ========
Securities not readily marketable include investment securities (a) for
which there is no market on a securities exchange or no independent publicly
quoted market, (b) that cannot be publicly offered or sold unless registration
has been effected under the Securities Act of 1933, or (c) that cannot be
offered or sold because of other arrangements, restrictions, or conditions
applicable to the securities or to the Company.
Securities not readily marketable consist of investments in limited
partnerships, equities, options and warrants. The investments in limited
partnerships, which are less than 5% ownership interests and are accounted for
using the equity method, consist of Environmental Opportunities Fund, L.P.,
Environmental Opportunities Fund II, L.P., Environmental Opportunities Fund II
(Institutional), L.P., Corporate Opportunities Fund, L.P., Corporate
Opportunities Fund (Institutional),. L.P., Sanders Opportunity Fund, L.P., and
Sanders Opportunity Fund (Institutional), L.P.
32
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
A summary of the results of operations and net assets of the limited
partnerships is as follows for the period of acquisition through December 31,
2000:
Invesment income $1,622,280
Change in unrealized loss on investments (9,087,754)
Realized gain on investments 1,279,071
Decrease in partners'capital resulting from operations (9,349,366)
Total assets 77,942,696
Total liabilities 4,866,549
Partners' capital 73,076,147
4. SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 2000 and 1999 were as follows:
Amortized Gross Unrealized Estimated
----------------------
Cost Gains Losses Fair Value
---- ----- ------ ----------
(in thousands)
2000:
U.S. Government and agency obligations $1,182 $16 $(3) $1,195
Corporate bonds 100 - (5) 95
Marketable equity securities 3,546 149 (842) 2,853
------ ------ ------- -------
Total $4,828 $165 $(850) $4,143
====== ==== ===== ======
1999:
U.S. Government and agency obligations $973 $ - $(15) $958
Corporate bonds 100 - (9) 91
Marketable equity securities 3,013 200 (212) 3,001
------ ------ ------- -------
Total $4,086 $200 $(236) $4,050
====== ==== ===== ======
The contractual maturities of debt securities available for sale at December 31,
2000 were as follows:
Due after 1 year through 5 years $1,195
Due after 5 years through 10 years 95
------
$1,290
======
Gross gains on sales of securities available for sale were $716,630 and
$464,450 for the years ended December 31, 2000 and 1999, respectively. Gross
losses on sales of securities available for sale were $21,768 and $152,920 for
the years ended December 31, 2000 and 1999, respectively. Such gains and losses
are included in other income.
33
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
5. RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
Amounts receivable from and payable to broker-dealers and clearing
organizations at December 31, 2000 and 1999 were as follows:
2000:
Receivable Payable
---------- -------
(in thousands) (in thousands)
Payable to clearing broker-dealers $- $35
Receivable from clearing organizations 1,100 -
Fees and commissions receivable 543 -
-------- --------
$1,643 $35
======== ========
1999:
Receivable Payable
---------- -------
(in thousands) (in thousands)
Payable to clearing broker-dealers $- $117,922
Receivable from clearing organizations 161,992 -
Fees and commissions receivable 431 -
-------- --------
$162,423 $117,922
======== ========
6. DEPOSITS WITH CLEARING BROKERS AND DEALERS
Under its clearing agreements, SMH is required to maintain a certain
level of cash or securities on deposit with clearing brokers and dealers. Should
the clearing brokers and dealers suffer a loss due to the failure of a customer
of the Company to complete a transaction, the Company is required to indemnify
the clearing brokers and dealers. The Company has funds invested in money market
accounts with a market value of $250,000, and $345,000 as of December 31, 2000
and 1999, respectively, and which are on deposit with clearing brokers and
dealers and in U.S. Treasury bills with a market value of $8.1 million as of
December 31, 1999 to meet this requirement.
7. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 2000 and 1999 was as follows:
December 31,
Estimated useful ------------
life in years 2000 1999
------------- ---- ----
(in thousands)
Equipment 5 $2,209 $406
Furniture and fixtures 7 100 166
Leasehold improvements 5 1,014 245
Accumulated depreciation and amortization (964) (147)
------ ----
$2,359 $670
====== ====
34
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2000 and 1999
were as follows:
December 31,
------------
2000 1999
------ ------
(in thousands)
Accounts payable $4,307 $356
Compensation 2,087 292
Other 406 748
------ ------
Total accounts payable and accrued liabilities $6,800 $1,396
====== ======
Substantially all employees are eligible to participate in the Pinnacle
Global Group, Inc. 401(k) defined contribution plan. There were no contributions
to this plan in 2000 and 1999.
9. INCOME TAXES
The components of the comprehensive income tax provision (benefit) for
the years ended December 31, 2000, 1999, and 1998 were as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Continuing operations
Current $ 2,020 $ 38 $ -
Deferred 212 2,509 54
------- ------- --------
Total continuing operations 2,232 2,547 54
Discontinued operations (1,403) (139) (2,018)
------- ------- --------
Income tax provision (benefit) 829 2,408 (1,964)
Other comprehensive loss (221) (9) (3)
------- ------- --------
Comprehensive income tax provision (benefit) 608 2,399 (1,967)
======= ======= ========
35
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The difference between the effective tax rate reflected in the income
tax provision for continuing operations and the statutory federal rate is
analyzed as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Tax computed using the statutory rate $ 1,358 $ (400) $ 54
Nondeductible amortization of goodwill 580 180 -
State income taxes 102 35 -
Change in valuation allowance - 2,806 -
Other 192 (74) -
------- ------ ------
Total $ 2,232 $2,547 $ 54
======= ====== ======
The effective tax rates for continuing operations for the years ended
December 31, 2000, 1999, and 1998 were 55.9%, 216.2%, and 33.8%, respectively.
The effective tax rate for discontinued operations was approximately 10.7%,
12.5%, and 33.1 % for the years ended December 31, 2000, 1999, and 1998,
respectively.
As a result of the changes in ownership due to the SMM merger in
January 2000, the Company's ability to utilize its net operating loss carry
forward and realize its deferred tax assets at December 31, 2000 was limited.
The Company believed that the deferred tax assets did not meet the more likely
than not criteria for recognition and, accordingly, a valuation allowance was
recorded as of December 31, 1999. In connection with the sale of ERRI in July
2000, the deferred tax assets and related valuation allowance were eliminated.
36
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The components of the deferred income tax assets and liabilities were
as follows:
2000 1999
----- -----
(in thousands)
Deferred income tax assets:
Net operating loss carryforward $39 $1,031
Asset impairment - 1,609
Accrued liabilities 1,312 573
Allowance for doubtful accounts 228 169
Partnership income 1,143 -
Deferred compensation 699 -
Unrealized loss on securities available for sale 233 12
Other 20 53
----- -----
Total deferred tax asset 3,674 3,447
----- -----
Deferred income tax liabilities:
Accumulated depreciation 7 (772)
Change in tax method (29) (43)
Unrealized gains on securities (1,276) (563)
Other (96) -
----- -----
Total deferred tax liabilities (1,394) (1,378)
----- -----
Net deferred tax asset 2,280 2,069
Valuation allowance - (2,806)
----- -----
Net deferred income tax assets(liability) $2,280 $(737)
====== =====
10. DISCONTINUED OPERATIONS
ENERGY RECOVERY RESOURCES, INC.
The Board of Directors 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 consolidated 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. In the third quarter of 1999, the Company revised its estimate of loss
on disposition of ERRI and recorded a provision of $230,000 net of tax, as a
result of higher than anticipated operating losses. During the fourth quarter of
1999, based in part on a purchase offer anticipated from a third party, an
additional provision of $1,000,000 was recorded. The assets and liabilities of
ERRI were sold on July 13, 2000. The Company remains liable for certain
environmental claims with a maximum exposure of $2.2 million until January 2002.
A portion of such potential claims is covered by insurance with a maximum
deductible of $50,000 per occurrence. The Company recorded a provision for loss
on the disposition of ERRI of $600,000 during the second quarter of 2000. It is
reasonably possible that the Company will need to record additional loss
provisions on the disposition of ERRI in future periods based on potential
post-closing claims.
37
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ENGINEERED SYSTEMS, INC.
Engineered Systems, Inc.'s ("ESI") 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 also agreed to
complete customer contracts that were in process at the time of the sale.
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 on 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 had incurred
costs in excess of amounts recoverable from customers. As a result, during the
fourth quarter of 1998 the Company recorded an additional loss related to ESI of
$1,344,000, net of tax. In the second quarter of 1999, the Company paid the
purchaser $1,000,000 to satisfy a portion of those liabilities. In the third
quarter of 1999, the Company was notified that additional costs would be
incurred to complete certain customer contracts and, therefore, the Company
recorded an additional loss of $73,000, net of tax. In March 2000 the Company
was informed by certain customers that payment would not be made based on
delivery delays and failure to perform under the terms of the contract.
Therefore, the Company recorded an additional loss of $1,200,000 during the
fourth quarter of 1999. The Company recorded additional losses of $100,000
during the second quarter and $200,000 during the fourth quarter of 2000 as a
result of those continuing liabilities. In March 2000, the Company paid the
purchaser $420,000, and in July 2000 the Company paid the purchaser an
additional $1.4 million to satisfy a portion of those liabilities. Management
expects to make a final payment of approximately $250,000 during 2001 to
reimburse the purchaser for completion costs.
SPIRES FINANCIAL, L.P.
Spires' operations were discontinued in June 2000 due to departures of
certain key employees and changes in the mortgage-backed securities market
resulting in part from interest rate increases, Spires incurred net losses of
$10.8 million for the year ended December 31, 2000, including goodwill
impairment of $8.3 million and $2.5 million, net of tax, for operating losses,
abandoned leases, and other expenses. The Company retained cash, receivables
from broker-dealers, deposits with clearing brokers, and securities owned, but
the other assets and liabilities of Spires, including proprietary software,
databases, and property, were held for sale at December 31, 2000 and sold in
January 2001.
38
PINNACLE GLOBAL GROUP, 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, 2000 were as follows:
2000 1999 1998
---- ---- ----
(in thousands)
Revenues:
ERRI $2,138 $3,637 $2,953
Spires 3,150 10,543 -
Expenses:
ERRI 2,318 4,064 3,670
Spires 4,295 8,704 -
Net income (loss), net of tax:
ERRI (180) (933) (2,733)
Spires (1,145) 1,839 -
Income (loss) from
discontinued
operations, net of tax
ERRI - (933) (2,733)
Spires (10,834) 829 -
Gain (loss) on disposition, net of tax:
ERRI (600) - -
ESI (300) (865) (1,344)
11. STOCK OPTIONS
Under its 1998 Incentive Plan, the Board of Directors has reserved 15%
of the issued and outstanding Common Stock of the Company, or 1,100,000 shares
of Common Stock, whichever is greater for the purpose of issuing incentive
awards under the plan. The outstanding employee options generally vest over a
period of three years and have an exercise price equal to the closing price of
the Company's stock on the date of grant. The outstanding non-employee director
options vest immediately and have an exercise price equal to the closing price
of the Company's stock on the date of grant.
Under its 1991 Nonemployee Director Stock Option Plan, 200,000
authorized shares were reserved for issuance, for the purpose of granting
nonincentive stock options to purchase Common Stock and restricted stock awards,
subject to certain restrictions for 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 was for a term of five years. The purchase price for each share
of restricted stock was 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. All outstanding options authorized under the 1991 Nonemployee
Director Stock Option Plan were replaced with similar options under the 1998
Incentive Plan as part of the January 1999 acquisition and restructure of the
Company. All of these replacement options have expired without exercise and no
additional options, restricted stock or other awards are to be granted under
this plan.
Under its 1989 Stock Option Plan, the Board of Directors 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. The exercise price for a nonincentive stock option could 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 could not be
less than the fair market value of the
39
Company stock on the date of grant. The purchase price for restricted stock
could be equal to or less than par value and may be zero. The options under the
plan vested on a graded schedule depending on the Company's stock price. Fifteen
percent of all options vested immediately as of the date of grant and an
additional 15% vested on the third anniversary of the date of grant. An
additional 70% vested within three years if the Company's stock price equals or
exceeds certain criteria. Otherwise, these options vested on the tenth
anniversary of the date of grant. All outstanding options authorized under the
1989 Stock Option Plan were replaced with similar options under the 1998
Incentive Plan as part of the January 1999 acquisition and restructure of the
Company. No additional options, restricted stock or other awards are to be
granted under this plan.
In February 2000, the Board granted 482,000 options to employees of SMH
who were employees of SMM prior to the merger with HWG. The options vest over
three years and have an exercise price of $4.44 per share which represented the
closing price of the Company's common stock on the date of the grant.
In September 2000, the Company exchanged recourse notes receivable from
employees for the Company's common shares that were pledged to secure the notes.
These shares are now held as treasury stock. Each employee was issued options in
an amount equal to the pledged shares that were repurchased. A total of 152,649
options were granted which are fully vested and have an exercise price of $5.13,
which was the closing price of the Company's common stock on the date of the
grant.
The Company had 1,304,259, 517,950, and 246,474 shares of Common Stock
available for grant under existing stock option plans at December 31, 2000,
1999, and 1998, respectively.
The following table sets forth pertinent information regarding stock
option transactions for each of the three years in the period ended December 31,
2000:
Weighted Weighted
Number Average Average
of Shares Exercise Price Fair Value
--------- -------------- ----------
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
Granted 532,050 4.63 $2.85
Cancelled/Forfeited (120,625) 11.46
--------
Outstanding at December 31, 1999 582,050 5.09
Granted 634,649 4.60 $3.93
Cancelled/Forfeited (226,200) 4.59
--------
Outstanding at December 31, 2000 990,499 4.89
========
The following tables summarize information related to stock options
outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd. Avg. Exercisable at Wgtd. Avg.
Exercise Prices at 12/31/00 Contr. Life Exercise Price 12/31/2000 Exercise Price
--------------- ----------- ----------- -------------- ---------- --------------
$4.44-$5.13 940,499 9.07 $4.62 443,074 $4.76
$10.00 50,000 3 10.00 50,000 10.00
------- ---- ----- ------- -----
$4.44-$10.00 990,499 8.76 $4.89 493,074 $5.28
======= ==== ===== ======= =====
40
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 5.89%; the expected life of options is 10 years; and volatility of 54% for
the grants. Had the compensation cost for the Company's stock-based compensation
plan been determined based on fair value of the options, results of operations
would approximate the pro forma amounts below:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
------ ------- ------
(in thousands except per share)
Income (loss) from continuing operations--as reported $2,111 $(3,725) $106
Income (loss) from continuing operations--pro forma $1,347 $(4,048) $92
Continuing operations income (loss) per share--as reported $0.15 $(0.55) $0.03
Continuing operations income (loss) per share--pro forma $0.10 $(0.59) $0.03
12. 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. No shares of preferred stock
have been issued as of December 31, 2000.
13. TREASURY STOCK
The Company repurchases its common stock from time to time primarily to
offset the dilutive effect of its employee stock options and stock purchase
plan. Such repurchases are accounted for using the cost method. During 2000, the
Company reacquired 802,124 shares of its common stock at a weighted average
price of $3.97 per share, for an aggregate purchase price of $3,184,225. During
the first quarter of 2001, the Company reacquired 117,487 shares of its common
stock at a weighted average price of $4.43 per share, totaling $519,634.
14. EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted loss per-share computations for the periods indicated
were as follows:
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
---------- --------- ---------
(in thousands, except share and per share)
Computation of basic and diluted loss per common share:
Net loss applicable to common stock $(9,623) $(4,694) $(3,971)
========== ========= =========
Weighted average number of common shares outstanding 13,951,787 6,828,378 3,562,753
Common shares issuable under stock option plan - - -
Less shares assumed repurchased with proceeds - - -
---------- --------- ---------
Weighted average common shares outstanding 13,951,787 6,828,378 3,562,753
========== ========= =========
Basic and diluted loss per common share $(0.69) $(0.69) $(1.11)
========== ========= =========
Stock options outstanding of 990,499, 582,050, and 170,625 at December
31, 2000, 1999 and 1998, respectively, have not been included in diluted
earnings per common share because to do so would have been antidilutive for the
periods presented.
41
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into underwriting
commitments. There were no firm underwriting commitments open at December 31,
2000.
The Company has committed to invest $1 million in the Tactical
Opportunities High Yield Fund, L.P., which is to be managed by CMCA. Such
investment was made during the first quarter of 2001.
Total rental expense for operating leases for the years ended December
31, 2000, 1999, and 1998 was approximately $1,701,750, $1,303,000, and $70,000,
respectively. The Company and its subsidiaries have obligations under operating
leases that expire by 2007 with initial noncancelable terms in excess of one
year. Aggregate annual rentals for office space and computer and office
equipment are as follows:
(in thousands)
2001 $2,139
2002 2,090
2003 1,300
2004 770
2005 496
Thereafter 485
------
$7,280
======
The former owners of CM received a total of 850,000 of the Company's common
shares in the acquisition and may later earn up to an additional 150,000 common
shares if the acquired operations meet or exceed specified performance levels.
As discussed in Note 10 to the consolidated financial statements, the
Company has contingent liabilities and potential loss exposures related to
discontinued operations. The Company may be exposed to certain liabilities and
claims associated with the discontinued liquid waste business. In connection
with the sale of ERRI, the Company remains contingently liable for potential
environmental claims with a maximum exposure of $2.2 million until January 2002.
A portion of such potential claims is covered by insurance with a maximum
deductible of $50,000 per occurrence. However, at December 31, 2000, the Company
is not aware of the existence of any such environmental claims. The Company
believes such potential claims will not have a material adverse effect on its
financial condition, results of operations, or cash flows.
The Company is a party to various legal proceedings that are of an
ordinary or routine nature incidental to our operations. The Company believes it
has adequately reserved for such litigation matters and that they will not have
a material adverse effect on financial condition, results of operations, or cash
flows.
The Company has uncommitted financing arrangements with our clearing
brokers that finance our customer accounts, certain broker-dealer balances and
firm trading positions. Although these customer accounts and broker-dealer
balances are not reflected on the balance sheet for financial accounting
reporting purposes, the Company has generally agreed to indemnify these clearing
brokers for losses they may sustain in connection with the accounts and
therefore, retains risk on these accounts. The Company is required to maintain
certain cash or securities on deposit with our clearing broker.
42
16. CONCENTRATIONS OF CREDIT RISK
Financial investments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
securities available for sale, securities owned, and all receivables, including
those from discontinued operations. Risks and uncertainties associated with
financial investments include credit exposure, interest rate volatility,
regulatory changes, and changes in market values of equity securities. Future
changes in market trends and conditions may occur which could cause actual
results to differ materially from the estimates used in preparing the
accompanying financial statements.
The Company and its subsidiaries are engaged in various trading and
brokerage activities with counterparties that primarily include broker-dealers,
banks, and other financial institutions. If counterparties do not fulfill their
obligations, the Company may be exposed to risk. The risk of default depends on
the creditworthiness of the counterparty or issuer of the instrument. It is the
Company's policy to review, as necessary, the credit standing of each
counterparty.
17. NET CAPITAL REQUIREMENTS OF SUBSIDIARIES
SMH is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (SEC rule 15c3-1), which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1 (and the rule of the "applicable"
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to 1). At
December 31, 2000, SMH had net capital of $4,769,790, which was $4,370,904 in
excess of its required net capital of $398,886. PMT is required by the Texas
Department of Banking to maintain minimum capital, which was $1,500,000 as of
December 31, 2000.
18. BUSINESS SEGMENT INFORMATION
The Company's continuing businesses operate in three reportable
business segments. SMH is an investment banking and brokerage services firm
whose activities primarily include securities underwriting, and retail and
brokerage services. SMH is the successor firm to HWG. PMT is a state chartered
trust company providing a variety of trust services including investment
management, estate settlement, and retirement planning. CMCA provides investment
management services to investors who prefer fixed-income securities as a major
part of their investment portfolios. The Spires segment was discontinued during
the second quarter of 2000. The following summarizes certain financial
information of each reportable segment:
SMH/HWG PMT CMCA
------- --- ----
(in thousands)
For the year ended December 31, 2000:
Revenues $39,132 $3,369 $104
Income before equity in loss of limited partnerships,
income taxes and minority interests 5,937 1,181 2
Equity in loss of limited partnerships (1,748) - -
Total assets 63,085 5,769 7
For the year ended December 31, 1999:
Revenues $5,346 $2,371 $-
Income before equity in loss of limited partnerships,
income taxes and minority interests 85 884 -
Total assets 3,692 5,033 -
43
The following table reconciles the reportable segments to the consolidated
income from continuing operations before equity in loss of limited partnerships,
income taxes and minority interests reported in the consolidated statement of
operations:
Income before equity in loss of limited partnerships, income taxes and minority
interests of reportable segments:
2000 1999
---- ----
(in thousands)
SMH/HWG $5,937 $85
PMT 1,181 884
CMCA 2 -
------ -------
7,120 969
Amortization of intangible assets (1,567) (529)
Corporate revenues and expenses, net 188 (1,618)
Income (loss) from
continuing operations before equity in loss of
limited partnerships, income taxes
and minority interests ------ -------
$5,741 $(1,178)
====== =======
19. SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
---- ---- ----
(in thousands)
Cash paid for interest $- $1,369 $-
Cash paid for income taxes 1,505 184 52
Cash received from income tax refunds - 2 1,508
Non-cash investing and financing activities:
Acquisitions:
Cash 13,577 4,359 -
Securities owned 7,605 5,254 -
Other assets 6,389 7,117 -
Goodwill 35,469 22,230 -
Accounts payable and accrued liabilities (7,688) (1,217) -
Other liabilities (3,973) (6,774) -
Issuance of common stock (45,031) (29,640) -
Cash paid for acquisitions (5,840) (840) (996)
20. RELATED PARTIES
PMT obtained legal services from a PMT Board member. Included in
general and administrative expenses are legal fees of $4,533 and $2,282 paid to
the PMT Board member during 2000 and 1999, respectively.
SMH earned insurance commissions of $116,559 and $250,502 during 2000
and 1999 respectively, from HWG Insurance Agency, Inc. The sole shareholder of
HWG Insurance Agency is an employee of SMH.
The Company has an investment in BioCyte Therapeutics, Inc.
("BioCyte".) The Company had outstanding receivables from BioCyte of $187,647
and $128,061 at December 31, 2000 and 1999, respectively. The Company had a
$500,000 note receivable from BioCyte and accrued interest of $23,000 at
December 31, 1999. The note and accrued interest were paid during 2000. The
Company's president and chief executive officer also has an investment in
BioCyte and serves on its board of directors.
44
The Company purchased diesel and boiler fuel and utilized freight
services from a company owned by the President of ERRI totaling $297,324,
$365,000, and $207,000 in 2000, 1999, and 1998, respectively.
The Company issued Common Stock in lieu of cash to nonemployee
directors totaling $11,376 during 1998.
During 1999, HWG paid St. James Place Corp. ("St. James"), an affiliate
providing furniture and equipment, lease payments of $5,270. In connection with
the acquisition by the Company, HWG purchased the furniture and equipment it
previously leased from St. James for $285,131.
The Chairman of the Board of Directors is a member of the board of
directors of an investment banking client. Fee income of $66,394 and
reimbursable expenses of $16,074 were recorded from this client during 1999.
The Company owns controlling interests in several limited liability
companies that act as the general partners in several limited partnerships
("Partnerships). The Partnerships pay management fees to the general partners.
Certain officers of SMH serve on the boards of directors of certain investees.
In addition, SMH has served, and may in the future serve, as the placement agent
advisor, offering manager or underwriter for companies in which the Partnerships
invest.
In connection with the January 1999 combination, certain employees of
the financial services firms exercised warrants and options for the purchase of
shares in their respective companies, which were then exchanged for shares of
the Company. To exercise the warrants and options, the employees borrowed the
aggregate exercise price from the Company. The loan was evidenced by a recourse
promissory note and was secured by a pledge of the PGG common shares acquired as
part of the exchange. Interest accrues on the unpaid principal balance at the
federal rate published by the Internal Revenue Service for obligations of
comparable maturity. Interest and principal payments are due quarterly
commencing on the third anniversary of the note and continue for eight years.
During 2000, the Company exchanged a portion of the notes receivable from
employees for the Company's common shares that were pledged to secure the notes.
These shares are now held as treasury stock. The following summarizes certain
information regarding the notes receivable from shareholders:
Collateral
Shares Amount
------ ------
Notes receivable from shareholders:
Original principal 315,215 $1,311,675
Notes exchanged for shares (156,809) (666,667)
Payments received on notes (21,632) (86,668)
--------- -----------
Balance at December 31, 2000 136,774 $558,340
--------- -----------
45
21. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Three Months Ended
(in thousands, except share and per share amounts)
---------------------------------------------------------------
2000: March 31, June 30, Sept. 30, Dec. 31,
2000(2) 2000 2000 2000 (3)
--------- -------- --------- --------
Total revenues $9,844 $10,885 $12,348 $10,789
Income (loss) from continuing operations 1,128 547 633 (197)
Income (loss) from discontinued operations (52) (10,521) - (1,161)
---------- ---------- ---------- ----------
Net income (loss) $1,076 $(9,974) $633 $(1,358)
========== ========== ========== ==========
Basic and diluted earning (loss) per share:
From continuing operations $0.10 $0.04 $0.04 $(0.01)
From discontinued operations (0.01) (0.75) - (0.08)
---------- ---------- ---------- ----------
Net earnings (loss) per share $0.09 $(0.71) $0.04 $(0.09)
========== ========== ========== ==========
Weighted average common shares outstanding 11,787,916 13,967,221 14,595,367 15,279,910
========== ========== ========== ==========
Three Months Ended
(in thousands, except share and per share amounts)
----------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999:(2) 1999 1999 1999(1)(2)
--------- -------- --------- --------
Total revenues $1,933 $2,094 $2,364 $2,039
Income (loss)from continuing operations 50 (398) (94) (3,283)
Income (loss from discontinued operations 515 474 (12) (1,946)
--------- --------- --------- ---------
Net income (loss) $565 $76 $(106) $(5,229)
========= ========= ========= =========
Basic and diluted earning (loss) per share:
From continuing operations $0.10 $(0.06) $(0.01) $(0.46)
From discontinued operations - 0.07 - (0.27)
--------- --------- --------- ---------
Net earnings (loss) per share $0.10 $0.01 $(0.01) $(0.73)
========= ========= ========= =========
Weighted average common shares outstanding 5,937,753 7,125,253 7,125,253 7,125,253
========= ========= ========= =========
(1) The quarterly information for the three months ended December 31, 1999
includes adjustments to record additional losses from discontinued
operations of $2.2 million and a valuation allowance on deferred tax
assets of $2.8 million.
(2) As a result of the discontinuance of Spires during the second quarter
of 2000, all prior periods shown herein reflectthe operating results of
Spires as a discontinued operation.
(3) The quarterly information for the three months ended December 31, 2000
includes adjustments to record additional losses from discontinued
operations of $200,000 related to ESI and $961,000 related to Spires.
46
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.
47
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.
48
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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
Pinnacle Global Group, Inc.
Report of Independent Accountants ............................................................... 26
Consolidated Balance Sheet as of December 31, 2000 and 1999 ..................................... 27
Consolidated Statement of Operations for each of the three years in the period ended
December 31, 2000 ........................................................................... 28
Consolidated Statement of Shareholders' Equity for each of the three years in the period ended
December 31, 2000 ........................................................................... 29
Consolidated Statement of Cash Flows for each of the three years in the period ended
December 31, 2000 ........................................................................... 30
Notes to Consolidated Financial Statements ...................................................... 31
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule 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. SEPARATE FINANCIAL STATEMENTS FOR UNCONSOLIDATED SUBSIDIARIES AND 50 PERCENT-OR-LESS OWNED PERSONS
Environmental Opportunities Fund, L.P.
Report of Independent Accountants ............................................................... S-3
Statement of Assets, Liabilities and Partners' Capital as of December 31, 2000 and 1999.......... S-4
Statement of Operations for the years ended December 31, 2000, 1999 and 1998 .................... S-5
Statement of Changes in Partners' Capital for the year ended
December 31, 2000, 1999 and 1998 ............................................................ S-6
Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998 .................... S-7
Schedule of Investments as of December 31, 2000 ................................................. S-8
Schedule of Investments as of December 31, 1999.................................................. S-9
Notes to Financial Statements ................................................................... S-10
EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are listed
in the Index to Exhibits contained elsewhere herein.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period
ended December 31, 2000.
49
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 30, 2001.
PINNACLE GLOBAL GROUP, INC.
By: /s/ ROBERT E. GARRISON II
President, Chief Executive 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 30th day of March 2001.
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/ DON A. SANDERS Vice Chairman and Director
- --------------------------------------------
DON A. SANDERS
/s/ PETER W. BADGER Director
- --------------------------------------------
PETER W. BADGER
/s/ GEORGE L. BALL Director
- --------------------------------------------
GEORGE L. BALL
/s/ DONALD R. CAMPBELL Director
- --------------------------------------------
DONALD R. CAMPBELL
/s/ BEN T. MORRIS Director
- --------------------------------------------
BEN T. MORRIS
/s/ JOHN H. STYLES Director
- --------------------------------------------
JOHN H. STYLES
/s/ W. BLAIR WALTRIP Director
- --------------------------------------------
W. BLAIR WALTRIP
/s/ RICHARD C. WEBB Director
- --------------------------------------------
RICHARD C. WEBB
/s/ RICK BERRY Chief Financial Officer
- --------------------------------------------
RICK BERRY (Principal Financial and
Accounting Officer)
50
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Pinnacle Global Group, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 29, 2001 appearing in the 2000 Annual Report to Shareholders
of Pinnacle Global Group, Inc. and Subsidiaries (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of Schedule II listed in Item 14(a)(2) of this Form
10-K. In our opinion, Schedule II 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 29, 2001
S-1
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
COL. A COL. B COL. C(1) COL. C(2) COL. D COL. E
------ ------ --------- --------- ------ ------
ADDITIONS CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS- DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- --------- -------- -------- -------- ------
DECEMBER 31, 2000
Allowance for doubtful
accounts and notes $- $300 $600 (C) $(285)(B) $615
========= ========= ======== ======== ========
DECEMBER 31, 1999
Allowance for doubtful
accounts and notes $- $- $- $- $-
========= ========= ======== ======== ========
DECEMBER 31, 1998
Allowance for doubtful
accounts and notes $431 $- $(10) (A) $(421)(B) $-
========= ========= ======== ========= ========
(A) Amounts were reclassified to net assets of discontinued operations.
(B) Represents the charge-off of receivables.
(C) Represents the balance of estimated uncollectible receivables existing
at SMM at the merger date.
S-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner and Limited Partners of
Environmental Opportunities Fund, L.P.
In our opinion, the accompanying statement of assets, liabilities and partners'
capital, including the schedules of investments, and the related statements of
operations, changes in partners' capital and cash flows present fairly, in all
material respects, the financial position of Environmental Opportunities Fund,
L.P. at December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the General
Partner; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 the General Partner
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 5, the financial statements include investments in
restricted securities, marketable securities with insufficient trading volumes
and nonmarketable securities, the values of which have been estimated by the
General Partner in the absence of readily ascertainable market values. Those
estimated values may differ significantly from the values that would have been
used had a readily available market for the investments existed, and the
differences could be material to the financial statements.
PricewaterhouseCoopers LLP
Houston, Texas
February 28, 2001
S-3
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31, 2000 AND 1999
2000 1999
ASSETS
Investments (cost $27,230,270 and $27,572,544,
respectively) $19,469,338 $25,994,360
Cash and cash equivalents 48,063 24,382
Other - 28,929
----------- -----------
Total assets $19,517,401 $26,047,671
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued expenses $337,866 $209,418
----------- -----------
Partners' capital:
General partner 951,538 2,506,916
Limited partners 18,227,997 23,331,337
----------- -----------
Total partners' capital 19,179,535 25,838,253
----------- -----------
Total liabilities and partners' capital $19,517,401 $26,047,671
=========== ===========
The accompanying notes are an integral part of these financial statements.
S-4
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
Investment income:
Dividends $296,060 $9,456 $481,800
------------ ------------ ------------
Total investment income 296,060 9,456 481,800
------------ ------------ ------------
Expenses:
Management fees 576,078 620,072 712,516
Organization costs - - 63,622
Professional fees 22,051 26,374 24,947
Other expenses 29,214 42,326 3,190
------------ ------------ ------------
Total expenses 627,343 688,772 804,275
------------ ------------ ------------
Net investment loss (331,283) (679,316) (322,475)
------------ ------------ ------------
Realized gain on investments 221,787 - 21,951,570
Net change in unrealized gain/loss on investments (6,549,222) (7,481,852) (12,051,868)
------------ ------------ ------------
Net realized and change in unrealized loss on
investments (6,327,435) (7,481,852) 9,899,702
------------ ------------ ------------
Increase (decrease) in partners' capital resulting
from operations $ (6,658,718) $(8,161,168) $9,577,227
============ ============ ============
The accompanying notes are an integral part of these financial statements.
S-5
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
GENERAL LIMITED
PARTNER PARTNERS TOTAL
Partners' capital, December 31, 1997 $2,865,315 $43,152,212 $46,017,527
Distributions (253,953) (25,141,380) (25,395,333)
Allocation of net investment loss and net -
realized and unrealized gain on investments 1,693,472 7,883,755 9,577,227
----------- ------------ ------------
Partners' capital, December 31, 1998 4,304,834 25,894,587 30,199,421
Capital contributions 38,000 3,762,000 3,800,000
Allocation of net investment loss and net
realized and unrealized loss on investments (1,835,918) (6,325,250) (8,161,168)
----------- ------------ ------------
Partners' capital, December 31, 1999 2,506,916 23,331,337 25,838,253
Allocation of net investment loss and net
realized and change in unrealized loss
on investments (1,555,378) (5,103,340) (6,658,718)
----------- ------------ ------------
Partners' capital, December 31, 2000 $951,538 $18,227,997 $19,179,535
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
S-6
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
STATEMENT OF CASH FLOW
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
Cash flows from operating activities:
Increase (decrease) in partners' capital resulting
from operations $(6,658,718) $(8,161,168) $9,577,227
Adjustments to reconcile increase (decrease) in partners'
capital resulting from operations to net
cash used in operating activities:
Amortization of organization costs - - 63,622
Non-cash dividends (283,500) - -
Net realized in unrealized loss (gain) on
investments 6,327,435 7,481,852 (9,899,702)
Increase (decrease) in accrued expenses 128,448 189,618 (4,250)
Other 28,929 - -
----------- ----------- ------------
Net cash used in operating activities (457,406) (489,698) (263,103)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of investments - (3,514,137) (8,441,703)
Proceeds from sale of investments 481,087 - 25,446,660
----------- ----------- ------------
Net cash provided by (used in) investing activities 481,087 (3,514,137) 17,004,957
----------- ----------- ------------
Cash flows from financing activities:
Capital contributions - 3,800,000 5,700,000
Distributions to partners - - (25,395,333)
----------- ----------- ------------
Net cash provided by (used in) financing activities - 3,800,000 (19,695,333)
Net increase (decrease) in cash and cash equivalents 23,681 (203,835) (2,953,479)
Cash and cash equivalents at beginning of year 24,382 228,217 3,181,696
----------- ----------- ------------
Cash and cash equivalents at end of year $48,063 $24,382 $228,217
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
S-7
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000
% OF TOTAL
SHARES VALUE INVESTMENTS
UNITED STATES (85.7%)
COMMON STOCK:
1,980,812 Avista Resources, Inc. (1) $3,961,624 20.3%
15,385 Comfort Systems USA, Inc. (2) 29,424 0.2%
359,651 EarthCare Co. (1)(2) 613,655 3.2%
410,000 IESI Corporation (1) 4,099,987 21.0%
13,749 ServiceMaster, Inc. (2) 142,302 0.7%
1,250,000 Synagro Technologies, Inc. (1)(2) 1,968,750 10.1%
625,000 Waterlink, Inc. (1)(2) 170,625 0.9%
159,950 GRT, Inc. (1) 75,100 0.4%
4,637 Zahren Alternative Power Corporation (1) 3,000,000 15.4%
----------- ---------
Total common stock (cost $19,326,474) 14,061,467 72.2%
----------- ---------
PREFERRED STOCK:
1,600 IESI Corporation - Convertible Pfd Series A (1) 2,000,000 10.3%
23,035 SystemOne Technologies, Inc. - Convertible Pfd
Series B (1)(2) 2,303,500 11.9%
----------- ---------
Total preferred stock (cost $4,020,000) 4,303,500 22.2%
----------- ---------
OPTIONS AND WARRANTS:
51,000 Waterlink, Inc. (1)(2) - 0.0%
53 Zahren Alternative Power Corp. (1)(3) 24,646 0.1%
----------- ---------
Total options and warrants (cost $6) 24,646 0.1%
----------- ---------
Total United States (cost $23,346,480) 18,389,613 94.5%
----------- ---------
CANADA (14.3%)
COMMON STOCK:
632,806 Capital Environmental Resource Inc.(1)(2) 1,079,725 5.5%
----------- ---------
Total common stock (cost $3,883,787) 1,079,725 5.5%
----------- ---------
OPTIONS AND WARRANTS:
40,848 Capital Environmental Resource Inc. (1)(2)(3) - 0.0%
----------- ---------
Total options and warrants (cost $3) - 0.0%
----------- ---------
Total Canada (cost $3,883,790) 1,079,725 5.5%
----------- ---------
Total investments (cost $27,230,270) $19,469,338 100.0%
=========== =========
(1) Securities are restricted against transfer unless the transfer is effected
in compliance with the Securities Act of 1933, as amended, and applicable
state securities laws.
(2) Public trading market exists for securities of this company.
(3) Beneficially owned through a nominee agreement among the Partnership and
affiliates of the General Partner.
The accompanying notes are an integral part of these financial statements.
S-8
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
SCHEDULE OF INVESTMENTS
YEARS ENDED DECEMBER 31, 1999
% OF TOTAL
SHARES VALUE INVESTMENTS
UNITED STATES (85.9%)
COMMON STOCK:
1,980,824 Avista Resources, Inc. (1) $3,961,648 15.2%
15,385 Comfort Systems USA, Inc.(1),(2) 102,118 0.4%
350,000 EarthCare Co. (1),(2) 2,143,749 8.2%
410,000 IESI Corporation (1) 4,100,000 15.8%
13,751 ServiceMaster, Inc. (2) 152,367 0.6%
1,250,000 Synagro Technologies, Inc. (1),(2) 4,265,609 16.5%
625,000 Waterlink, Inc.(1),(2) 1,093,751 4.2%
27,492 Waste Management, Inc. (2) 425,267 1.6%
159,950 GRT, Inc. (1) 75,100 0.3%
4,636 Zahren Alternative Power Corporation (1) 3,000,000 11.5%
----------- ------
Total common stock (cost $19,668,757) 19,319,609 74.3%
----------- ------
PREFERRED STOCK:
1,600 IESI Corporation - Convertible Pfd Series A (1) 2,000,000 7.7%
20,200 SystemOne Technologies, Inc. - Convertible
Pfd Series B (1)(2) 2,020,000 7.8%
----------- ------
Total preferred stock (cost $4,020,000) 4,020,000 15.5%
----------- ------
OPTIONS AND WARRANTS:
51,001 Waterlink, Inc. (1)(2) - 0.0%
53 Zahren Alternative Power Corp. (1)(3) 24,646 0.1%
----------- ------
Total options and warrants (cost $0) 24,646 0.1%
----------- ------
Total United States (cost $23,688,757) 23,364,255 89.9%
----------- ------
CANADA (14.1%)
COMMON STOCK:
632,807 Capital Environmental Resource Inc. (1)(2) 2,630,105 10.1%
----------- ------
Total common stock (cost $3,883,787) 2,630,105 10.1%
----------- ------
OPTIONS AND WARRANTS:
40,849 Capital Environmental Resource Inc. (1)(2)(3) - 0.0%
----------- ------
Total options and warrants (cost $0) - 0.0%
----------- ------
Total Canada (cost $3,883,787) 2,630,105 10.1%
----------- ------
Total investments (cost $27,572,544) $25,994,360 100.0%
=========== ======
(1) Securities are restricted against transfer unless the transfer is effected
in compliance with the Securities Act of 1933, as amended, and applicable
state securities laws.
(2) Public trading market exists for securities of this company.
(3) Beneficially owned through a nominee agreement between the Partnership and
affiliates of the General Partner.
The accompanying notes are an integral part of these financial statements.
S-9
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Environmental Opportunities Fund, L.P. (the Partnership) is a limited
partnership formed under the laws of the state of Delaware on December
21, 1995. The Partnership operates pursuant to a Partnership Agreement
(the Agreement) dated January 17, 1996, which should be referred to for
a complete description of the provisions of the Partnership. The
general partner is Environmental Opportunities Management Company,
L.L.C. (General Partner), a limited liability company owned by Sanders
Morris Harris Inc. (SMH) and Quirk Carson Peppet Inc. (QCP).
In July 2000, the Partnership assumed all assets and liabilities of its
sister partnership, Environmental Opportunities Fund (Cayman), LP, in
exchange for the issuance of interests in the Partnership to the former
partners of that partnership. The transaction has been accounted for as
an "as if" pooling of interests; therefore, the financial statements
have been restated to include the accounts and operations of Cayman for
all periods presented.
The Partnership is organized for the purpose of purchasing, selling and
investing in securities, including private equity investments. The
securities include those companies predominantly involved in
environmental and waste-related services, technology and products.
The Partnership commenced operations on January 17, 1996 and is
scheduled to terminate on March 31, 2003 but may be extended to March
31, 2005 at the sole discretion of the General Partner. The term may be
further extended to January 31, 2006 with the approval of those
partners holding a majority interest. However, the Partnership may be
terminated earlier on the occurrence of certain events as described in
the Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Partnership considers all money market investments to be cash
equivalents. These money market investments are placed primarily in
obligations backed by the U.S. government and its agencies, high
quality short-term instruments, FDIC-insured banks or foreign banks
with assets in excess of $25 billion. This limits the amount of credit
exposure and the General Partner believes that no significant
concentration of credit risk exists with respect to these investments.
INVESTMENTS
Partnership assets are valued quarterly by the General Partner and such
valuations are approved by the Valuation Committee. Investments in
securities of private companies are valued at their purchase prices,
until a basis for their revaluation exists, as there is no currently
available market for such securities on a securities exchange. Where
there is a known change in their value, the Partnership adjusts the
recorded value to the estimated fair value. Due to the inherent
uncertainty of valuation, those estimated values for investments
carried at cost may differ significantly from values that would have
been used had a ready market for the investments existed, and the
differences could be material to the financial statements. Investments
in shares of public companies are valued at a 10% discount from the
market price if the Partnership's shares are readily marketable or a
30% discount if the shares are not readily marketable. Investments in
unregistered shares of public companies are valued at a 30% discount
from the most recent sales price of registered shares, except in cases
where the securities may be sold pursuant to a currently effective
registration statement or an exemption from registration and sufficient
trading volume in the securities exists, in which case a 10% discount
is used. The discounts reflect liquidity risk and contractual or
statutory restrictions on transfer. Preferred stock of a public company
is carried at its liquidation preference.
S-10
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
Investment transactions are recorded on a trade date basis. Realized
and unrealized gains and losses on investments are included in the
Statement of Operations.
DISTRIBUTIONS
Based on the Agreement, the Partnership is required to make tax
distributions to all partners within 90 days after the close of each
fiscal year of the Partnership that, together with other distributions
made during such fiscal year, equal to at least 35% of the partners'
respective anticipated allocations of taxable items. In addition, the
General Partner in its sole discretion may, but is not obligated to,
distribute other assets of the Partnership, whether in cash or in kind.
INCOME TAXES
The Partnership is not subject to federal, state or local income taxes
because such taxes are the responsibility of the individual partners.
Accordingly, no provision for income taxes has been made in the
financial statements.
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
the General Partner to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual
results, including the ultimate amount realized upon the sale of
illiquid and/or fair valued investments, could differ from those
estimates, and such differences may be significant.
3. PARTNERS' CAPITAL ACCOUNTS
As a condition of admission to the Partnership, each partner was
required to make a capital commitment, with 10% of the committed amount
contributed upon admission. Total committed Partnership capital was
$38,000,000. Additional partner's committed capital was contributed in
increments of at least 10% upon written request by the General Partner
over a period of four years ended January 17, 2000. At December 31,
2000, unfunded committed capital totaled $1,900,000 ($19,000 and
$1,881,000 for the General Partner and limited partners, respectively).
The unfunded committed capital amount was not called before the
investment period expired on January 17, 2000.
Based on the Agreement, Partnership profits are allocated according to
the following (capitalized terms are as defined in the Agreement):
(a) First, to the General Partner until total allocation of profits
equals total losses, if any, allocated to the General Partner
according to (i)(2) below;
(b) Second, to all partners in proportion of losses, if any,
allocated according to (i)(1) below until such losses are
recovered;
(c) Third, to all partners in proportion to losses allocated
according to (h) below until such losses are recovered;
(d) Fourth, to all partners until the total of all allocations under
this clause equals the Accrued Preferred Return of such partner
plus the prior allocation of losses to such partner according to
(g) below.
(e) Thereafter, 20% to the General Partner and 80% to all partners in
proportion to their interests. Based on the Agreement,
Partnership losses are allocated according to the following:
S-11
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
(f) First, 20% to the General Partner and 80% to all partners in
proportion to their interests until the total allocation of
losses equals total allocation of profits according to (e) above;
(g) Second, to all partners until the total allocation of losses
equals total allocation of profits according to (d) above;
(h) Thereafter, to all partners in proportion to their interests;
(i) (1) No limited partner will be allocated losses beyond its share
of the capital account balance. (2) If all limited partners have
capital account deficits, excess losses will be allocated to the
General Partner.
4. RELATED PARTY TRANSACTIONS
The General Partner has the sole authority to manage and control the
business and affairs of the Partnership in accordance with the powers
set forth in the Agreement. The Partnership pays management fees to the
General Partner at an annual rate equal to 2% of the total committed
capital less the cost basis of investments which are sold and
distributed to partners, which are determined by the General Partner to
be permanently impaired, or which are written off and realized as a
loss for tax purposes, payable on the first day of each calendar
quarter in advance for such quarter.
Two managers of the General Partner, who are also officers of SMH, and
one officer of QCP, currently serve on the Boards of Directors of six
of the companies in which the Partnership has investments and have
received, and may in the future receive, compensation for such
services. As a result of the Partnership's right to share a portion of
certain items of compensation received by the General Partner or its
affiliates, the Partnership beneficially owns options in two of the
companies in which it has investments.
In addition, SMH and QCP have served, and may in the future serve, as
the placement agent advisor, offering manager or underwriter for
companies in which the Partnership invests. In 2000 and 1999, SMH acted
as placement agent or financial advisor for four of the companies in
which the Partnership has investments. In 1998, SMH acted as placement
agent or underwriter for three of the companies in which the
Partnership had investments.
5. CONCENTRATION OF RISK
ENVIRONMENTAL COMPANIES
The Partnership's investments concentrate on the U.S. environmental
services industry, which necessarily limit the Partnership's
diversification. Because the Partnership's investments are concentrated
in this industry, overall adverse developments in the industry can
negatively impact the Partnership. Further, within the environmental
services industry, the General Partner may invest up to 12 1/2% of
total commitments in a single company or transaction without the
consent of the Valuation Committee and up to 25% of the commitments in
a single company with the consent of the Valuation Committee. These
attributes subject the Partnership to greater potential volatility than
in a broader-based portfolio.
OTHER RISKS AND UNCERTAINTIES
Because at least two-thirds of the Partnership's capital commitments
are required to be invested in securities that are not initially
publicly tradable, it may be difficult for Partnership investments to
be
S-12
ENVIRONMENTAL OPPORTUNITIES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
sold in a timely and efficient manner, potentially reducing the returns
to investors. Furthermore, such securities are typically offered by
companies with small capitalizations and limited operating histories,
companies operating at a loss or with significant variations in
operating results from period to period, companies which may need
substantial additional capital to support operations and growth and
companies which may be highly leveraged. Such investments by their
nature possess a high degree of business and financial risk. Financial
difficulty on the part of any single company within the portfolio will
expose the Partnership to a greater risk of loss than if the
Partnership held a greater number of investments.
Up to one-third of the Partnership's committed capital may be invested
in publicly traded securities (as determined on the date of
investment). Markets in which the Partnership is anticipated to invest
are subject to a high degree of volatility, and securities purchased by
the Partnership may have only limited liquidity. Because of the
potential magnitude of its investments in such securities, market risk
may be significant for the Partnership.
The Partnership is permitted to invest in nonpublicly traded securities
of companies that may, but are not required to, have a publicly traded
class of securities. Adverse conditions in the securities markets at
certain times may preclude a public offering of an issuer's
unregistered securities.
Investments in restricted securities, marketable securities with
insufficient trading volumes and nonmarketable securities have been
valued by the General Partner in the absence of readily ascertainable
market values. These estimated values may differ significantly from the
values that would have been used had a readily available market existed
for these investments. Such differences could be material to the
financial statements.
S-13
INDEX TO 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. 333-65417) and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of the Company (Filed as an exhibit to
the Company's Form 10-K for the year ending December 31, 1998. (File
No. 333-65417) and incorporated herein by reference).
10.1 Asset Purchase Agreement dated July 13, 2000, among Energy Recovery
Resources, Inc., TEI, Inc., Pinnacle Global Group, Inc. and U.S.
Filter Recovery Services (Mid-Atlantic), Inc. (Filed as Exhibit 2.1
to the Company's 8-K dated July 24, 2000 (File No. 000-30066) and
incorporated herein by reference).
10.2 Employment Agreement dated June 30, 2000, between Sanders Morris
Harris, Inc. and Arnold J. Barton (filed as Exhibit 10.1 to the
Company's 8-K dated July 14, 2000 (File No. 000-30066) and
incorporated herein by reference).
10.3 Registration Rights Agreement dated June 30, 2000, among Pinnacle
Global Group, Inc., Arnold J. Barton, Richard D. Grimes, Jack D.
Seibald, Allison Weiss, Neil Lauro, and John Conlon (Filed as Exhibit
10.2 to the Company's 8-K dated July 14, 2000 (File No. 000-30066)
and incorporated herein by reference).
10.4 Merger Agreement dated June 30, 2000, among Pinnacle Global
Group, Inc., Sanders Morris Harris Inc., Blackford Securities
Corporation, Arnold J. Barton, Richard D. Grimes, Jack D. Seibald,
Allison Weiss, Neil Lauro, and John Conlon (Filed as Exhibit 2.1 to
the Company's 8-K dated July 14, 2000 (File No. 000-30066) and
incorporated herein by reference).
10.5 Amended and Restated Agreement and Plan of Reorganization dated
November 12, 1999 among the Company, Harris Webb & Garrison, Inc.
("HWG"), Sanders Morris Mundy Inc. ("SMM") and the SMM shareholders
(Filed as Appendix A to the Definitive Proxy Statement on Schedule
14A of the Company dated December 6, 1999 and incorporated herein by
reference).
10.6 Amended and Restated Plan of Merger dated November 12, 1999, among
the Company, HWG and SMM (Filed as Appendix B to the Definitive Proxy
Statement on Schedule 14A of the Company dated December 6, 1999 and
incorporated herein by reference).
10.7 Amended and Restated Agreement and Plan of Reorganization dated
October 2, 1998 among the Company, TEI, Inc. ("TEI"), 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. 333-65417) and incorporated herein by
reference).
10.8 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.
333-65417) and incorporated herein by reference).
10.9 Plan of Merger dated October 2, 1998, among HWG, HWG Combination
Corporation and the Company (Filed as Appendix C to the Proxy
Statement/Prospectus of the Company dated December 31, 1998 (Reg. No.
333-65417) and incorporated herein by reference).
10.10 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.
333-65417) and incorporated herein by reference).
10.11 1998 Incentive Plan of the Company (Filed as an exhibit to the Proxy
Statement/Prospectus of the Company dated December 31, 1998 (Reg. No.
333-65417) and incorporated herein by reference).
10.12 Asset Purchase Agreement between 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).
10.13 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).
10.14 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.
333-65417) and incorporated herein by reference).
10.15 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. 333-65417) and incorporated herein by reference).
10.16 Office Lease Agreement dated January 19, 1999 between 5599 San
Felipe, Ltd. and the Company (Filed as an exhibit to the Company's
Form 10-K for the year ending December 31, 1998 (File No. 333-65417)
and incorporated herein by reference).
10.17 Letter Agreement dated April 7, 1999 between the Pershing Division
of Donaldson, Lufkin Jenrette Securities Corporation and Harris Webb
& Garrison, Inc.
10.18 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. 333-65417) and incorporated herein by
reference).
10.19 Letter of Agreement dated August 31, 1999 between Montgomery
Correspondent Services, a division of Banc of America Securities LLC
and Spires Financial, L.P.
10.20 Office Lease Agreement and related amendments dated September 25,
1996 between Texas Tower Limited and Sanders Morris Mundy Inc.
*21.1 List of Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
- ----------
* 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, 2000.