<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999,
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file No. 333-65417
______________________
PINNACLE GLOBAL GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0583569
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification NO.)
5599 SAN FELIPE, SUITE 555
HOUSTON, TEXAS 77056
(Address of principal executive office)
(713) 993-4610
(Registrant's Telephone Number, Including Area Code)
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 X NO
--- ---
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of November 1, 1999, was 7,125,253.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements........................................................... 2
Condensed Consolidated Balance Sheet as of September 30, 1999 and
December 31, 1998 (unaudited)................................................ 2
Condensed Consolidated Statement of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 (unaudited)......................... 3
Condensed Consolidated Statement of Shareholders' Equity for the Nine
Months Ended September 30, 1999 (unaudited).................................. 4
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)...................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)............... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks.................... 18
PART II. OTHER INFORMATION
Item 5. Other Information.............................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................... 21
PART III. SIGNATURES..................................................................... 22
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................. $ 9,377,451 $ 13,292,644
Securities available for sale ............................. 7,972,154 14,637,575
Receivable from broker-dealers and clearing organizations . 26,609,851 -
Deposits with clearing brokers ............................ 9,442,392 -
Securites owned ........................................... 29,741,266 -
Intangible assets, net .................................... 21,330,178 -
Other assets .............................................. 3,110,123 3,990,060
Net assets of discontinued operations ..................... 4,205,801 3,074,960
-------------- -------------
Total assets ..................................... $ 111,789,216 $ 34,995,239
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities .................. $ 365,321 $ 1,295,476
Payable to clearing broker-dealers ........................ 25,000,075 -
Securities sold, not yet purchased ........................ 23,973,389 -
-------------- -------------
Total liabilities ................................ 49,338,785 1,295,476
-------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; no shares issued and outstanding .......... - -
Common stock, $.01 par value; 100,000,000 shares
authorized; 7,125,253 and 3,801,559 shares issued at
September 30, 1999 and December 31, 1998,
respectively .......................................... 71,253 38,016
Additional paid-in capital ................................ 58,667,821 33,248,729
Receivables for shares issued ............................. (1,311,675) -
Retained earnings ......................................... 5,190,685 4,606,689
Accumulated other comprehensive loss ...................... (167,653) (6,000)
Treasury stock at cost, 238,806 shares at December 31, 1998 - (4,187,671)
-------------- -------------
Total shareholders' equity ....................... 62,450,431 33,699,763
-------------- -------------
Total liabilities and shareholders' equity ....... $ 111,789,216 $ 34,995,239
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commissions ............................... $ 2,388,155 $ - $ 7,218,493 $ -
Principal transactions .................... 732,503 - 3,107,580 -
Investment banking ........................ 337,962 - 1,412,463 -
Fiduciary, custodial and advisory fees .... 780,369 - 1,538,502 -
Interest and dividends .................... 894,778 393,206 1,820,018 1,172,168
Other income .............................. 17,818 - 86,509 -
------------ ------------ ------------ ------------
Total revenues ....................... 5,151,585 393,206 15,183,565 1,172,168
------------ ------------ ------------ ------------
Expenses:
Employee compensation and benefits ........ 2,758,324 99,348 7,972,718 385,744
Floor brokerage, exchange and clearance
fees ................................... 186,393 - 600,640 -
Communications and data processing ........ 307,251 4,248 824,482 14,556
Interest .................................. 451,960 - 738,537 20,000
Occupancy ................................. 323,249 22,270 781,122 65,452
Amortization of intangible assets ......... 222,508 - 593,356 -
Other general and administrative .......... 390,052 141,409 1,903,932 596,780
------------ ------------ ------------ ------------
Total expenses ....................... 4,639,737 267,275 13,414,787 1,082,532
------------ ------------ ------------ ------------
Income from continuing operations before
income taxes .............................. 511,848 125,931 1,768,778 89,636
Provision for income taxes ........... 266,250 42,816 882,182 30,476
------------ ------------ ------------ ------------
Income from continuing operations ............... 245,598 83,115 886,596 59,160
Loss from discontinued operations,
net of tax ........................... (302,600) (342,452) (302,600) (328,357)
------------ ------------ ------------ ------------
Net income (loss) ............................... $ (57,002) $ (259,337) $ 583,996 $ (269,197)
============ ============ ============ ============
Basic and diluted income(loss) per share:
From continuing operations ................ $ 0.03 $ 0.03 $ 0.13 $ 0.02
From discontinued operations .............. (0.04) (0.10) (0.04) (0.10)
------------ ------------ ------------ ------------
Net income (loss) per share ............... $ (0.01) $ (0.07) $ 0.09 $ (0.08)
============ ============ ============ ============
Weighted average shares outstanding ............. 7,125,253 3,562,753 6,729,420 3,562,753
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL RECEIVABLES OTHER
------------------ --------------------- PAID-IN FOR SHARES RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL ISSUED EARNINGS LOSS TOTAL
--------- ------- -------- ----------- ----------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.... 3,801,559 $38,016 (238,806) $(4,187,671) $33,248,729 $ - $4,606,689 $(6,000) $33,699,763
Issuance of common stock in
acquistions................. 3,562,500 35,625 - - 29,604,375 - - - 29,640,000
Retirement of treasury stock.. (238,806) (2,388) 238,806 4,187,671 (4,185,283) - - - -
Receivables for shares issued. - - - - - (1,311,675) - - (1,311,675)
Comprehensive income:
Net income.................. - - - - - - 583,996 - 583,996
Net change in unrealized
depreciation of securities
available for sale........ - - - - - - - (161,653) (161,653)
------------
Total comprehensive income.. - - - - - - - - 422,343
---------- ------- -------- ----------- ----------- ----------- ---------- --------- -----------
Balance, September 30, 1999... 7,125,253 $71,253 - $ - $58,667,821 $(1,311,675)$5,190,685 $(167,653) $62,450,431
========== ======= ======== =========== =========== =========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $ 583,996 $(269,197)
Provision for disposition of discontinued operations.............. 302,600 167,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of intangible assets......................... 593,356 -
Other, net................................................ (93,173) (214,322)
Change in operating assets and liabilities:
Continuing operations..................................... 1,144,519 -
Discontinued operations................................... (1,233,034) 806,542
------------ -------------
Net cash provided by operating activities......................... 1,298,264 490,023
------------ -------------
Cash flows from investing activities:
Purchase of securities available for sale......................... (11,313,388) (21,376,663)
Maturities of securities available for sale....................... 5,575,000 23,847,924
Capital expenditures.............................................. (1,128,088) (613,811)
Acquisition costs................................................. (1,287,887) -
Discontinued operations, net...................................... (200,407) 15,733
------------ -------------
Net cash provided by (used in) investing activites................ (8,354,770) 1,873,183
------------ -------------
Cash of businesses acquired............................................ 3,141,313 -
------------ -------------
Net increase (decrease) in cash and cash equivalents.............. (3,915,193) 2,363,206
Cash and cash equivalents at beginning of period....................... 13,292,644 12,810,100
------------ -------------
Cash and cash equivalents at end of period............................. $ 9,377,451 $ 15,173,306
============ =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Through a series of transactions on January 29, 1999, the shareholders of
TEI, Inc. ("TEI") exchanged all common shares of TEI for 3,562,753 common shares
of Pinnacle Global Group, Inc. (the "Company"), then a newly formed public
holding company. The Company simultaneously acquired 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 (slightly less than 50% of outstanding common shares) for all of
the ownership interests of the three financial services firms. TEI is now a
wholly-owned subsidiary of the Company. As a result of the acquisitions, and the
discontinued operations described below, the Company now provides a broad range
of financial services, including institutional and retail brokerage, investment
banking, merchant banking, secondary market loan and loan servicing placement,
trust related services and investment management. Therefore, results of
operations are not comparable to the prior period.
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements of the Company
include the accounts of its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
In management's opinion, the unaudited condensed consolidated financial
statements include all adjustments necessary for a fair presentation of
financial position at September 30, 1999, results of operations for the three
and nine months ended September 30, 1999 and 1998, and cash flows for the nine
months ended September 30, 1999 and 1998. All such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of results for
a full year.
CASH EQUIVALENTS
Highly liquid debt instruments with original maturities of three months or
less when purchased are considered to be cash equivalents.
SECURITIES AVAILABLE FOR SALE
Securities available for sale include marketable equity securities and debt
instruments with maturities greater than three months when purchased, are
recorded at cost, and are adjusted for unrealized holding gains and losses due
to market fluctuations. These unrealized gains or losses, net of tax, are
recorded as a separate component of other comprehensive income (loss). Gains and
losses are recorded upon sale based on the specific identification method.
SECURITIES TRANSACTIONS
Marketable securities owned, marketable securities sold not yet purchased,
and deposits held by clearing brokers and dealers are valued at market value.
Securities not readily marketable are valued at estimates of fair value as
determined by management. Realized and unrealized gains and losses are included
in income.
Principal securities transactions are recorded on the trade date, as if
they had settled. Profit and loss arising from securities transactions entered
into for the account and risk of the Company are recorded on a trade date basis.
Customers' securities transactions are reported on a settlement date basis with
related commission income and expenses reported on a trade date basis.
6
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-
(CONTINUED)
INVESTMENT BANKING
Investment banking revenues include fees earned from providing
merger-and-acquisition advice, financial advisory services and assistance in
raising both debt and equity capital. Investment banking fees from acting as an
agent in securities offerings are recorded at the time the engagement is
completed and the income is reasonably determinable.
FIDUCIARY, CUSTODIAL AND ADVISORY FEES
Fiduciary, custodial and advisory fees are recorded monthly for most trust
accounts, based on a percentage of each individual account's market value on the
last day of the month then ended.
MANAGEMENT'S ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of consolidated assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. The Company's most significant estimates relate to estimated
recoverable amounts of assets and estimated liabilities of discontinued
operations and to the estimated fair value of securities not readily marketable.
It is reasonably possible that those estimates will change.
2. ACQUISITIONS
On January 29, 1999, the Company acquired HWG, PMT, and Spires. The
former owners of HWG, PMT, and Spires received consideration consisting of
3,562,500 shares of the Company's common stock which represents about 49.98%
of the 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.
This $22 million excess 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 estimated fair value. The actual allocation may be different from
the 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.
The following summarized unaudited pro forma financial information assumes
the above acquisitions had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- ---------------------------
1998 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues .................................... $ 4,673,682 $ 16,499,826 $ 13,446,301
Income from continuing operations............ 404,113 1,004,339 737,629
Basic and diluted earnings per share from
continuing operations................... $ 0.06 $ 0.15 $ 0.10
</TABLE>
7
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
2. ACQUISITIONS-(CONTINUED)
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 which would have
occurred if the acquisitions had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
On October 12, 1999, the Company entered into a definitive agreement to
merge HWG with Sanders Morris Mundy ("SMM"), a privately owned investment
banking firm in Houston, Texas. Under the agreement, the Company would issue
7,123,233 shares of Company common stock for all the outstanding shares of
SMM. The parties amended and restated the merger agreement on November 12,
1999. The merger is subject to shareholder and regulatory approvals. The
merger would be accounted for as a purchase of SMM.
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale were as follows at September 30, 1999:
<TABLE>
<CAPTION>
Gross Unrealized
----------------------- Estimated
Cost Gains Losses Fair Value
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations ............. $ 1,243,383 $ 743 $ 274 $ 1,243,852
Corporate Bonds ............ 1,226,298 - 8,443 1,217,855
Marketable equity securities 2,764,768 34,680 282,510 2,516,938
Commercial Paper ........... 2,993,509 - - 2,993,509
------------ ----------- ---------- -----------
$ 8,227,958 $ 35,423 $ 291,227 $ 7,972,154
============ =========== ========== ===========
</TABLE>
4. RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
Amounts receivable from and payable to broker-dealers and clearing
organizations at September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Receivable Payable
-------------- -------------
<S> <C> <C>
Payable to clearing broker-dealers ... $ - $25,000,075
Receivable from clearing organizations 25,929,822 -
Fees and commissions receivable ...... 680,029 -
-------------- ------------
$ 26,609,851 $25,000,075
============== ============
</TABLE>
The Company clears certain of its proprietary and customer transactions
through other broker-dealers on a fully disclosed basis. The amount payable to
the clearing broker relates to the aforementioned transactions and is
collateralized by securities owned by the Company.
5. DEPOSITS HELD BY CLEARING BROKERS AND DEALERS
Under its clearing agreements, the Company is required to maintain a
certain level of cash or securities on deposit with clearing broker-dealers.
Should the clearing broker-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
8
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
5. DEPOSITS HELD BY CLEARING BROKERS AND DEALERS-(CONTINUED)
broker-dealer. The Company has funds invested in U.S. Treasury bills and in a
money market account on deposit with clearing broker-dealers to meet this
requirement.
6. SECURITIES OWNED AND SECURITIES SOLD NOT YET PURCHASED
Securities owned consisted of U.S. government and agency obligations,
corporate bonds, commercial paper, and equity securities, including at
September 30, 1999, $1,544,432 of not readily marketable securities valued at
estimated fair value as determined by management. Securities sold not yet
purchased consisted of U.S. government and agency obligations.
7. COMPREHENSIVE INCOME
Total comprehensive income (loss) for the three months ended September
30, 1999 and 1998 was $(132,767) and $(290,537), respectively. Total
comprehensive income (loss) for the nine months ended September 30, 1999 and
1998 was $422,343 and $(300,937), respectively.
8. INCOME TAXES
The differences between the effective tax rate reflected in the income
tax provision for continuing operations and the statutory federal rate for
the period indicated are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------------ -----------------
<S> <C> <C>
Tax computed using the statutory rate $ 174,028 $ 601,384
Nondeductible amortization of
goodwill........................... 75,653 201,741
State income taxes .................. 22,051 71,323
Other ............................... (5,482) 7,734
--------- ---------
Total ............................... $ 266,250 $ 882,182
========= =========
</TABLE>
The effective tax rate for continuing operations was approximately 50%
and 34% for the nine months ended September 30, 1999 and 1998, respectively.
9. DISCONTINUED OPERATIONS
The Board of Directors adopted a plan to discontinue the operations of
Energy Recovery Resources, Inc. ("ERRI") effective December 31, 1998.
Accordingly, the operating results of ERRI have been segregated from
continuing operations and reported as a discontinued operation in the
statement of operations. A provision for estimated loss on disposition of
ERRI of $2,164,000 net of tax, consisting of a write down of goodwill and
property and equipment, was recorded during the fourth quarter of 1998. 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,
consisting of the Company's estimate of ERRI's operating losses through the
anticipated date of disposition. The Company currently estimates that ERRI
can be sold without the Company incurring additional losses. However, the
Company may not be able to dispose of ERRI and recover its investment.
Additionally, ERRI may incur additional operating losses. It is reasonably
possible that the Company would need to record additional loss provisions on
the disposition of ERRI in future periods.
9
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. DISCONTINUED OPERATIONS-(CONTINUED)
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 has also
agreed to complete customer contracts 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 from information provided by the
purchaser, that it had no additional liability with respect to the contracts
in process. Subsequent to December 31, 1998, the Company was notified that a
major customer cancelled its contract and that the other contracts in process
have incurred costs in excess of amounts recoverable from customers. As a
result, during the fourth quarter of 1998 the Company recorded an additional
loss related to ESI of $1,344,000, net of tax. 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. The Company currently estimates that it will not
incur any additional losses with respect to contracts to be completed by the
purchaser; however, the Company has experienced significant changes in these
estimates in the past and it is reasonably possible that such changes could
occur in future periods.
10. 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.
10
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
11. COMMITMENTS
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to underwriting commitments that were open at
September 30, 1999, and were subsequently settled, had no material effect on the
consolidated financial statements as of that date.
The Company and its subsidiaries have obligations under operating leases
with initial noncancelable terms in excess of one year. Aggregate annual
rentals for office space and computer and office equipment are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999............................. $1,204,000
2000............................. 1,317,000
2001............................. 1,249,000
2002............................. 1,251,000
2003............................. 1,205,000
Thereafter....................... 203,000
</TABLE>
12. LEGAL MATTERS
The Company is involved in litigation and routine claims from time to
time. Certain of the Company's litigation and claims are covered by insurance
with a maximum deductible of $50,000. In addition, the Company is
contingently liable for up to $600,000 for liabilities relating to services
performed by Tanknology Corporation International, Tanknology Canada (1988),
Inc., and USTMAN Industries, Inc. prior to October 25, 1996. The Company has
fully provided for that contingency as of September 30, 1999. The Company
believes the ultimate outcome of the litigation and claims will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
13. NET CAPITAL REQUIREMENTS OF SUBSIDIARIES
HWG and Spires are subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (SEC rule l5c3-1), 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. 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. PMT is required by the Texas Department of Banking to maintain minimum
capital of $1,500,000.
14. BORROWING ARRANGEMENT
The Company has a $300,000 unsecured line of credit agreement with a bank
expiring on December 1, 1999. Interest is charged at the bank's prime rate plus
.75%. At September 30, 1999, no amount is outstanding under the line of credit.
11
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
15. EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted per-share computations for the periods indicated were as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computation of basic and diluted earnings (loss) per common share for
the three months ended September 30:
Net income (loss) applicable to common stock ................................. $ (57,002) $ (259,337)
=========== ============
Weighted average number of common shares outstanding ......................... 7,125,253 3,562,753
Common shares issuable under stock option plan ............................... - -
Less shares assumed repurchased with proceeds ................................ - -
----------- -----------
Weighted average common shares outstanding ............................... 7,125,253 3,562,753
=========== ===========
Basic and diluted earnings (loss) per common share ....................... $ (0.01) $ (0.07)
=========== ===========
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computation of basic and diluted earnings (loss) per common share for
the nine months ended September 30:
Net income (loss) applicable to common stock ................................. $ 583,996 $ (269,197)
=========== ===========
Weighted average number of common shares outstanding ......................... 6,729,420 3,562,753
Common shares issuable under stock option plan ............................... - -
Less shares assumed repurchased with proceeds ................................ - -
----------- -----------
Weighted average common shares outstanding ............................... 6,729,420 3,562,753
=========== ===========
Basic and diluted earnings (loss) per common share ....................... $ 0.09 $ (0.08)
=========== ===========
</TABLE>
Stock options outstanding have not been included in diluted earnings per
common share because to do so would have been antidilutive for the periods
presented.
16. BUSINESS SEGMENT INFORMATION
The Company's continuing businesses operate in two reportable business
segments. HWG and Spires are regional investment banking and brokerage
services firms whose activities primarily include securities underwriting,
retail and institutional brokerage services, and trading of fixed income and
equity securities, among others. PMT is a state chartered trust company
providing a variety of trust services including investment management, estate
settlement, and retirement planning, among others. The following summarizes
certain financial information of each reportable segment for the three and
nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------------------- ---------------------------------
Investment Banking Investment Banking
and Brokerage Trust and Brokerage Trust
Services Services Services Service
------------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C>
Revenues ........... $ 4,167,561 $ 808,228 $12,882,729 $ 1,668,892
Income before income 743,639 284,066 2,902,056 594,093
Total assets ....... 71,043,243 4,546,590 71,043,243 4,546,590
</TABLE>
12
<PAGE>
PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
16. BUSINESS SEGMENT INFORMATION-(CONTINUED)
The following table reconciles income before income taxes of the reportable
segments to the consolidated income from continuing operations before income
taxes reported in the consolidated statement of operations for the three and
nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1999
------------------ -----------------
<S> <C> <C>
Income before income taxes of
reportable segments:
Investment banking and brokerage
services........................ $ 743,639 $ 2,902,056
Trust services.................... 284,066 594,093
----------- -----------
1,027,705 3,496,149
Amortization of intangible assets. (222,508) (593,356)
Corporate revenues and
expenses, net ................. (293,349) (1,134,015)
----------- -----------
Income from continuing operations
before income taxes............ $ 511,848 $ 1,768,778
=========== ===========
</TABLE>
17. STOCK OPTIONS
Under its 1998 Incentive Plan, the Board of Directors has reserved
1,100,000 authorized shares of Common Stock for the purpose of issuing
incentive awards under the plan. On October 12, 1999, the Board granted
507,050 options to employees of the Company. The options vest over the next
three years, with full vesting on October 12, 2002 and have an exercise price
equal to the closing price of the Company's Common Stock on the day of the
grant. On October 12, 1999, the Board also granted 25,000 fully vested
options to non-employee directors that have an exercise price equal to the
closing price of the Company's Common Stock on the day of the grant.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
Consolidated Financial Statements and their related notes thereto.
GENERAL
The Company is a holding company that provides diversified financial
services through its subsidiaries, including institutional and retail brokerage,
investment banking, merchant banking, secondary market loan and loan servicing
placement, trust related services and investment management. All of these
activities are highly competitive and are sensitive to many factors outside the
control of the Company, including those factors listed under "Factors Affecting
Forward-Looking Statements."
The Company closely monitors its operating environment to enable it to
respond promptly to market cycles. In addition, the Company seeks 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.
On January 29, 1999, the Company completed the acquisitions of HWG, PMT and
Spires. In the acquisitions, just over 50% of the Company's outstanding shares
were issued to TEI's former shareholders in exchange for their TEI shares, and
slightly less than 50%, or 3,562,500 Company shares, were issued to the former
owners of the financial services firms. The acquisitions were accounted for as
purchases by the Company of each of the three financial services firms. The
following discussion of the results of operations includes the operations of
HWG, PMT and Spires since January 29, 1999.
In March 1999, the Company's new management decided to discontinue the
operations of TEI's liquid waste subsidiary effective December 31, 1998. These
operations, which are conducted primarily in Charlotte, North Carolina and
surrounding areas, involve the treating, recycling, and handling of wastewater,
waste oil and other non-hazardous fluid waters for owners and operators of under
and above ground storage tanks and other commercial and industrial waste
generators. Management believes the sale of the liquid waste business and
related Charlotte, North Carolina facility will be consummated by March 31,
2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
As explained in Note 2 of the Notes to Condensed Consolidated Financial
Statements for the Company, the financial results of the Company for the
three months ended September 30, 1999 include the results of operations of
HWG, PMT and Spires, the Company's three wholly owned financial services
firms. During the comparable period in 1998, the Company's financial
statements reflected operating results from TEI, Inc., the Company's
predecessor corporation. Beginning in 1995, TEI began disposing of its
various tank testing-related businesses and completed this divestiture
program in 1997. For the three months ended September 30, 1998, TEI's
continuing operations consisted of ERRI and various corporate activities. The
Company subsequently discontinued the operations of ERRI as of December 31,
1998.
Total revenues were $5.2 million compared to $0.4 million in 1998. Total
expenses for the period were $4.6 million compared to $0.3 million in the
previous year. Total interest and dividends revenue was $0.9 million compared to
$0.4 million in the same period last year, primarily due to interest earned on
the Company's investments. Basic and diluted income per share from continuing
operations was $0.03 per share for the three months ended September 30, 1999 and
1998.
Commissions revenue was $2.4 million and was derived from retail and
institutional brokerage operations at Spires and HWG. Principal transactions
revenue was $0.7 million, consisting primarily of trading gains net of
hedging costs. Investment banking revenue was $0.3 million, and consisted
primarily of
14
<PAGE>
investment banking fees earned from advisory services and private security
offerings. Fiduciary, custodial and advisory fees revenue was $0.8 million,
derived primarily from fee-based account business at PMT.
Employee compensation and benefits were $2.8 million, primarily due to
additional employees in connection with the acquisitions described in Note 2 of
the Condensed Consolidated Financial Statements for the Company. Employee
compensation and benefits includes commissions paid to retail and institutional
brokers and investment bankers at HWG and Spires. Interest expense was $0.5
million, primarily due to financing of fixed income securities inventories of
Spires. Communication and data processing costs were $0.3 million, primarily
related to upgrades in technology and services, including quotes and market data
services. Occupancy costs were $0.3 million, primarily due to rent expense for
office leases of the financial services firms.
The effective tax rate from continuing operations was 52% and 34% during
the three months ended September 30, 1999 and 1998, respectively. The increase
in the rate in 1999 is primarily the result of non-deductible goodwill
amortization relating to the acquisition of the financial services firms.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
As explained in Note 2 of the Notes to Condensed Consolidated Financial
Statements for the Company, the financial results of the Company for the nine
months ended September 30, 1999 include the results of operations of HWG,
PMT and Spires from the date of acquisition, January 29, 1999. As a result of
the acquisitions, total revenues for the period were $15.2 million and total
expenses were $13.4 million. Interest and dividends income was $1.8 million
compared to $1.2 million in 1998, primarily due to interest earned on the
Company's investments. Basic and diluted income per share from continuing
operations increased to $0.13 per share from $0.02 for the nine months ended
September 30, 1998.
Commissions revenue was $7.2 million and was derived from retail and
institutional brokerage operations at Spires and HWG. Principal transactions
revenue was $3.1 million, consisting primarily of trading gains net of hedging
costs. Investment banking revenue was $1.4 million and consisted primarily of
investment banking fees earned from advisory services and private security
offerings. Fiduciary, custodial and advisory fees revenue was $1.5 million,
derived primarily from fee-based account business at PMT.
Employee compensation and benefits were $8.0 million, primarily due to
additional employees in connection with the acquisitions described in Note 2 of
the Condensed Consolidated Financial Statements for the Company. Employee
compensation and benefits includes commissions paid to retail and institutional
brokers and investment bankers at HWG and Spires. Communication and data
processing costs were $0.8 million primarily related to upgrades in technology
and services including quotes and market data services. Occupancy costs were
$0.8 million, primarily due to rent expense for office leases of the financial
services firms.
The effective tax rate from continuing operations was 50% and 34% during
the nine months ended September 30, 1999 and 1998, respectively. The increase in
the rate is primarily the result of non-deductible goodwill amortization
relating to the acquisition of the financial services firms.
DISCONTINUED OPERATIONS
Loss from discontinued operations in the three months and nine months
ended September 30, 1999 was $303,000 consisting of $230,000 related to a
revision of the estimated loss on the disposition of ERRI, the Company's
liquid waste subsidiary, and $73,000 related to a revision of the Company's
obligation to fund the cost to complete customer contracts at ESI which was
sold in December 1997.
The Company currently estimates that ERRI can be sold without the
Company incurring additional losses. The Company may not be able to dispose
of ERRI and recover its investment. Additionally, ERRI may incur additional
operating losses. It is reasonably possible that the Company would need to
record additional loss provisions on the disposition of ERRI in future
periods.
The Company currently estimates that it will not incur any additional
losses with respect to contracts to be completed by the purchaser; however,
the Company has experienced significant changes in these estimates in the
past and it is reasonably possible that such changes could occur in future
periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to satisfy a large portion of its funding needs with
its own capital resources, consisting largely of internally generated earnings
and liquid assets held by the Company prior to the acquisitions described in
Note 2 of the Notes to Condensed Consolidated Financial Statements. A large
portion of the Company's assets are highly liquid and short term in nature. The
Company's cash, cash equivalents and liquid assets, consisting of securities
available for sale, receivables from broker-dealers and clearing organizations,
deposits with clearing brokers and securities owned, represented about 74% of
the Company's total assets at September 30, 1999. At September 30, 1999, the
Company had approximately $17.3 million in cash and cash equivalents and
securities available for sale. The Company had $21.3 million in intangible
assets at September 30, 1999 as a result of the acquisitions described in Note 2
of the Notes to Condensed Consolidated Financial Statements. Total assets
increased $76.8 million from $35.0 million at December 31, 1998 to $111.8
million at September 30, 1999.
15
<PAGE>
The Company's broker-dealer subsidiaries are subject to the requirements of
the Securities and Exchange Commission ("SEC") relating to liquidity, net
capital standards and the use of client funds and securities. PMT is also
subject to requirements of the Texas Banking Commission relating to, among other
things, liquidity, net capital standards and client bonding requirements. The
Company has historically operated in excess of the minimum net capital
requirements.
During July 1999, the Company entered into a letter of intent to acquire
all ownership of a financial services firm for $6.6 million in cash and 733,333
shares of the Company's common stock. The Company intended to fund the cash
portion of the aggregate purchase price using currently available cash. The
proposed transaction was subject to approval by the Company's Board of
Directors, the receipt of approvals by various regulatory agencies, the absence
of adverse changes in the financial condition of the parties involved, and the
execution of a definitive agreement for the transaction. On August 24, 1999, the
Company announced that such merger discussions had been terminated.
On October 12, 1999, the Company entered into a definitive agreement to
merge HWG with Sanders Morris Mundy, a privately owned investment bank based
in Houston, Texas. The merger will create a new firm, Sanders Morris Harris,
which will be a wholly owned subsidiary of the Company. Under the agreement,
the Company will issue 7,123,233 new shares of Common Stock to Sanders Morris
Mundy shareholders. The parties amended and restated the agreement on
November 12, 1999. The proposed merger, which is subject to approval by the
Company's shareholders, governmental approvals and other typical conditions,
is expected to close early in 2000.
YEAR 2000
The Company utilizes software and related information technologies that
will be affected by the date change in the year 2000. The year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. When the century date change occurs, certain date
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may result in a systems
failure or cause systems to process critical financial and operational
information incorrectly. Additionally, the Company relies on certain
non-information technology systems such as communications and building
operations systems that could also be affected by the date change. The failure
of these non-information technology systems could interrupt or shutdown business
operations for some period of time.
The Company's financial services subsidiaries are heavily dependent on
their own computer programs and systems, all of which may be affected by the
year 2000 problem. In addition, these subsidiaries have material relationships
with third parties related to the performance of the Company's financial
services that must also address the year 2000 problem. These third parties
include:
- trading counter parties
- financial intermediaries
- securities exchange
- depositories
- software providers
- clearing agencies
- clearing houses
The operations of the Company's financial services subsidiaries may be
adversely affected if these third parties do not adequately address the year
2000 problem and the Company is unable to make timely contingency plans. A year
2000 failure at any of the Company's financial services subsidiaries or at their
material third parties could have a material adverse affect on the Company's
financial services businesses by impairing its ability to, among other things:
16
<PAGE>
- gather and process information vital to strategic decision making by
both the Company and its customers;
- perform pricing calculations;
- execute customer transactions;
- maintain accurate books and records and provide timely reports;
- access audit facilities for both the Company and its customers; and
- undertake risk management functions.
The Company also relies on many third-party vendors and suppliers for a
variety of goods and services necessary for most business, including operating
supplies, banking, telecommunications and utilities, such as water and
electricity. Many of the Company's operations would be adversely affected if
these supplies and services were curtailed as a result of a vendor's or
supplier's year 2000 problems.
The Company has contacted those third parties whose services or functions,
if curtailed, would have a material adverse effect on the Company.
The Company's broker-dealer subsidiaries, HWG and Spires, were required to
conduct complete reviews of the potential impact of year 2000 issues and report
their findings to the National Association of Securities Dealers ("NASD") and
the SEC no later than August 31, 1998. HWG filed its initial report with the
NASD and SEC on August 6, 1998, and Spires filed its initial report with both
agencies on August 31, 1998. Both reports were received without comment from the
NASD or the SEC. An updated report by both subsidiaries was due and was filed on
April 30, 1999.
The Company's trust company subsidiary, PMT, was required to conduct a
complete review of the potential impact of the year 2000 issues and report its
findings to the Texas Banking Commission. PMT filed its initial report on
August 3, 1998.
The Company has developed the following multi-phase plan to resolve
potential Year 2000 problems relating to its information technology ("IT")
systems at all of its operations:
Phase I: Identify and evaluate all IT systems according to their
potential business impact.
Phase II: Identify IT systems that use date functions and
assess them for year 2000 functionality.
Phase III: Reprogram or replace equipment/systems, where necessary, to
ensure year 2000 readiness.
Phase IV: Test code modifications and material equipment/systems to
ensure successful operation in a post-l999 environment.
Phase V: Adoption of contingency plans in the case of potential year
2000 failures.
The Company has completed Phases I through III, and has substantially
completed Phases IV and V of its plan at a cost of about $50,000 for
modifying or purchasing new software and for upgrading or purchasing new
computer systems. The Company expects to complete Phases IV and V of its plan
by December 31, 1999 at an additional cost estimated not to exceed $200,000.
Of these total year 2000 costs, about $30,000 are expected to be used for
remediation, which represents an estimated 10% of the Company's 1999
information technology budget. Some of these costs may be recurring. The
Company believes that cash on hand and cash from operations will be
sufficient to fund these costs. No information technology projects have been
deferred due to the Company's year 2000 efforts.
The Company has substantially completed development of a firm-wide
contingency/recovery plan aimed at ensuring the continuity of critical
business functions before and after December 31, 1999. As part of this
process, the Company has or will develop reasonably likely failure scenarios
for its critical IT systems and material third-party relationships. Once
these scenarios are fully identified, the Company will develop plans designed
to reduce the impact to the Company, and provide methods of returning to
normal operations, if one or more of those scenarios occur. The Company
cannot guarantee that it will be able to resolve all of its year 2000 issues,
and
17
<PAGE>
any critical unresolved year 2000 issues at the Company or any of its
material third parties could have a material adverse effect on the Company's
results of operations and financial condition. The Company expects its
contingency and recovery planning to be complete by December 31, 1999.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q 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 Company's 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 which 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 Company's discussion of the issues surrounding year 2000 contain
forward-looking statements as defined in the Acts. These forward-looking
statements could relate to, but are not limited to (1) the financial impact of
the year 2000 project; (2) the Company's estimated timetables for completion of
each phase of the project; (3) the Company's estimates of the availability of
vendor software upgrades and consulting services; (4) the readiness of
third-party service providers; and (5) contingency plans. The Company cautions
that many factors, including those outside of the control of the Company, could
cause actual results to be materially different from those anticipated and
expressed in the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
MARKET RISKS
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates, equity prices, and changes in credit ratings of the issuer.
The Company's exposure to market risk is directly related to its role as a
financial intermediary in customer-related transactions and to its proprietary
trading activities.
Interest rate risk is a consequence of maintaining inventory positions and
trading in interest-rate sensitive financial instruments. To facilitate its
proprietary trading in fixed income securities, the Company maintains an active
inventory of interest rate sensitive instruments. As of September 30, 1999, the
Company's fixed income trading inventory consisted principally of $24.0 million
in mortgage-related instruments with a weighted average life approximating four
years.
Market prices on the Company's fixed income inventory fluctuate with
changes in interest rates, credit and liquidity spreads. The Company uses
various hedging strategies to protect its market value exposure to changes in
interest rates. On September 30, 1999, management determined that the short sale
of $23.9 million of thirty-year mortgage-backed securities best hedged its
inventory against changes in both interest rates.
The Company's fixed income activities also expose it to the risk of loss
related to changes in credit and liquidity spreads. Credit spread risk arises
from the potential that changes in an issuer's credit rating or credit
18
<PAGE>
perception could effect the value of financial instruments. In management's
opinion, the Company's inventory at September 30, 1999, consisting entirely of
high quality securities of relatively short duration, exposes the Company to
minimal risk associated with changes in credit spreads.
Liquidity spread risk arises from the potential that changes in the
liquidity (ease of marketability) of a financial instrument or market sector
could effect the value of financial instruments. In management's opinion, the
Company's inventory at September 30, 1999, consisting entirely of high quality
securities of relatively short duration, exposes the Company to minimal risk
associated with changes in liquidity spreads.
The Company is exposed to equity price risk as a result of making markets
in equity securities. Equity price risk results from changes in the level or
volatility of equity prices, which affect the value of equity securities or
instruments that derive their value from a particular stock, a basket of stocks
or a stock index.
Credit risk arises from the potential nonperformance by counterparties to
trading activities, customers or debt security issuers. The Company is exposed
to credit risk as a trading counterparty to dealers and customers, as a holder
of securities and as a member of exchanges and clearing organizations.
The Company manages risk exposure through the involvement of various levels
of management. Position limits in trading and inventory accounts are well
established and monitored on an ongoing basis. Current and proposed
underwriting, banking and other commitments are subject to due diligence reviews
by senior management, as well as professionals in the appropriate business and
support units involved. Credit risk related to various financing activities is
reduced by the industry practice of obtaining and maintaining collateral. The
Company monitors its exposure to counterparty risk through the use of credit
exposure information, the monitoring of collateral values and the establishment
of credit limits.
The Company has performed an analysis of the Company's financial
instruments and has assessed the related risk and materiality in accordance with
the rules. Based on this analysis, in the opinion of management, the market risk
associated with the Company's financial instruments at September 30, 1999 will
not have a material adverse effect on the Company's consolidated financial
position or operating results.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument represents a contractual agreement
between counterparties and has value that is derived from changes in the value
of some other underlying asset such as the price of another security, interest
rates (such as the Prime Rate, or LIBOR), indices (i.e. S&P 500), or the value
referenced in the contract.
The Company does not act as dealer, trader, or end-user of complex
derivative contracts such as swaps, collars and caps. However, the Company does
act as a dealer and trader of mortgage-derivative securities and collateralized
mortgage obligations (CMOs or REMICs). Mortgage-derivative securities
redistribute the risks associated with the underlying mortgage collateral by
redirecting cash flows, according to specific formulas or algorithms, to various
tranches or classes in accordance with specific investor objectives.
19
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During July 1999, the Company entered into a letter of intent to acquire
all ownership of a financial services firm for $6.6 million in cash and 733,333
shares of the Company's common stock. The Company intended to fund the cash
portion of the aggregate purchase price using currently available cash. The
proposed transaction was subject to approval by the Company's Board of
Directors, the receipt of approvals by various regulatory agencies, the absence
of adverse changes in the financial condition of the parties involved, and the
execution of a definitive agreement for the transaction. On August 24, 1999, the
Company announced that such merger discussions had been terminated.
On October 12, 1999, the Company entered into a definitive agreement to
merge HWG with Sanders Morris Mundy, a privately owned investment bank based
in Houston, Texas. The merger will create a new firm, Sanders Morris Harris,
which will be a wholly owned subsidiary of the Company. Under the agreement,
the Company will issue 7,123,233 new shares of Common Stock to Sanders Morris
Mundy shareholders. The parties amended and restated the agreement on
November 12, 1999. The proposed merger, which is subject to approval by the
Company's shareholders, governmental approvals and other typical conditions,
is expected to close early in 2000.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits, from which schedules and exhibits have been omitted
and will be furnished to the Commission upon its request, are filed with this
Current Report on Form 10-Q:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 incorporate
herein by reference).
3.2 -Amended and Restated Bylaws of the Company (Filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K as filed with
the Commission on April 1, 1999 and incorporated herein by
reference).
10.1 -Amended and Restated Agreement and Plan of Reorganization dated
October 2, 1998 among the Company, TEI, Inc. ("TEI"), Harris
Webb & Garrison, Inc. ("HWG"), Pinnacle Management & Trust
Company ("PMT"), Spires Financial, L.P. ("Spires") and certain
direct and indirect owners of HWG, PMT and Spires (Filed as
Appendix A to the Proxy Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No. 333-65417) and incorporated
herein by reference).
10.2 -Plan of Merger dated October 2, 1998, among TEI, TEI
Combination Corporation and the Company (Filed as Appendix B to
the Proxy Statement/Prospectus of the Company dated December 31,
1998 (Reg. No. 333-65417) and incorporated herein by reference)
10.3 -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).
10.4 -Plan of Merger dated October 2, 1998, among PMT, PMT
Combination Corporation and the Company (Filed as Appendix D to
the Proxy Statement/Prospectus of the Company dated December 31,
1998 (Reg. No. 333-65417) and incorporated herein by reference).
10.5 -Sublease Agreement dated January 19, 1994 between Texas
Commerce Bank National Association and Harris Webb & Garrison,
Inc., as amended by the 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.)
10.6 -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).
10.7 -Office Lease Agreement dated January 19, 1999 between 5599 San
Felipe, Ltd. and the Company (Filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K as filed with the
Commission on April 1, 1999 and incorporated herein by
reference).
10.8 -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).
*27.1 -Financial Data Schedule for the nine months ended September 30,
1999.
</TABLE>
________________________
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by this
Quarterly Report.
21
<PAGE>
PART III
SIGNATURES
Pursuant to the requirements 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.
PINNACLE GLOBAL GROUP, INC.
By /s/ ROBERT E. GARRISON II
---------------------------------------
ROBERT E. GARRISON II
PRESIDENT & CHIEF EXECUTIVE OFFICER
By /s/ DONALD R. CAMPBELL
---------------------------------------
DONALD R. CAMPBELL
VICE CHAIRMAN AND
PRINCIPAL FINANCIAL OFFICER
Date: November 15, 1999
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,377
<RECEIVABLES> 26,610
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 37,713
<PP&E> 1,085
<TOTAL-ASSETS> 111,789
<SHORT-TERM> 0
<PAYABLES> 25,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 23,973
<LONG-TERM> 0
0
0
<COMMON> 71
<OTHER-SE> 62,379
<TOTAL-LIABILITY-AND-EQUITY> 111,789
<TRADING-REVENUE> 3,108
<INTEREST-DIVIDENDS> 1,820
<COMMISSIONS> 7,218
<INVESTMENT-BANKING-REVENUES> 1,412
<FEE-REVENUE> 1,539
<INTEREST-EXPENSE> 739
<COMPENSATION> 7,973
<INCOME-PRETAX> 1,769
<INCOME-PRE-EXTRAORDINARY> 584
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 584
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
