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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-65417
PINNACLE GLOBAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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TEXAS 76-0583569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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5599 SAN FELIPE, SUITE 301
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
Registrant's telephone number, including area code: (713) 993-4610
2900 NORTH LOOP WEST, SUITE 1230, HOUSTON, TEXAS 77092
(713) 263-7283
(FORMER ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICE)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes H No M
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 25, 1999, the registrant had 7,125,264 outstanding shares of
Common Stock, par value $0.01 per share, and at such date, the aggregate market
value of the shares of Common Stock held by non-affiliates of the registrant was
$29,353,308. For purposes of this computation, all executive officers, directors
and 5% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Notice of Annual Meeting of Shareholders and definitive
Proxy Statement pertaining to the 1999 Annual Meeting of Shareholders (the
"Proxy Statement") and filed pursuant to Regulation 14A is incorporated herein
by Reference into Part III of this report.
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PINNACLE GLOBAL GROUP, INC. AND SUBSIDIARIES
INDEX
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PART I.
Item 1. Business............................. 1
Item 2. Properties........................... 11
Item 3. Legal Proceedings.................... 12
Item 4. Submission of Matters to a Vote of
Security Holders................... 12
PART II.
Item 5. Market for the Registrant's Common
Equity and Related Stockholder
Matters............................ 13
Item 6. Selected Financial Data.............. 14
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk...... 18
Item 8. Financial Statements and
Supplementary Data................. 20
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... 37
PART III.
Item 10. Directors and Executive Officers of
the Registrant..................... 37
Item 11. Executive Compensation............... 37
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 37
Item 13. Certain Relationships and Related
Transactions....................... 37
PART IV.
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K................................ 38
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PART I.
ITEM 1. BUSINESS
GENERAL
Pinnacle Global Group, Inc. ("Pinnacle" or the "Company") is a publicly
owned holding company that provides a broad range of financial services through
its wholly owned operating entities. Pinnacle's financial services include
investment banking, merchant banking, institutional and retail brokerage,
investment management, secondary market loan and loan servicing placement and
trust related services. Pinnacle serves a diverse group of institutional,
corporate and individual clients predominantly located within the southwestern
United States; however, its fixed-income securities business is conducted for
clients throughout the United States, Europe and Japan and its loan and
servicing placement business is conducted on a national basis.
Pinnacle is the successor issuer to TEI, Inc. ("TEI"), which is now a
wholly owned subsidiary of Pinnacle. During 1995, 1996 and 1997, TEI disposed of
all of its operations other than its liquid waste business and related facility
located in Charlotte, North Carolina operated through its subsidiary Energy
Recovery Resources, Inc. ("ERRI"). As a result of these dispositions, TEI had
cash and liquid investments of approximately $28.0 million at December 31, 1998.
From January 1997 through the first quarter of 1998, TEI's management
actively evaluated strategies and financial alternatives for maximizing
shareholder value. In late April 1998, TEI reached an agreement in principle to
combine with three Houston based financial services firms. These firms were
Harris Webb & Garrison, Inc. ("HWG"), a full service regional investment
banking, brokerage and financial services firm serving the southwestern United
States, Pinnacle Management & Trust Company ("PMT"), a Texas state chartered
trust company and investment management firm, and Spires Financial, L.P.
("Spires"), a regional institutional brokerage services and investment banking
firm specializing in fixed income securities and whole loan and loan servicing
transactions.
On January 29, 1999, TEI completed the combination (the "Transactions")
with HWG, PMT and Spires, with Pinnacle emerging as the new public holding
company. In the Transactions, just over 50% of Pinnacle's outstanding shares
were issued to TEI's former shareholders in exchange for their TEI shares, and
slightly less than 50%, or 3,562,500 shares, were issued to the former owners of
the financial services firms. Pinnacle's new board includes six former TEI
directors and six designees of the financial services firms. Executive officers
of the financial services firms serve as the primary executive officers of
Pinnacle, with TEI's former president and chief executive officer continuing as
Pinnacle's Vice-Chairman.
In March 1999, Pinnacle's new management decided to discontinue the
operations of ERRI's liquid waste business effective December 31, 1998. These
operations, which are conducted primarily in Charlotte, North Carolina and
surrounding areas, involve the treating, recycling, and handling of wastewater,
waste oil and other non-hazardous fluid waters for owners and operators of under
and above ground storage tanks and other commercial and industrial waste
generators. Management believes the sale of the liquid waste business and
related Charlotte, North Carolina facility will be consummated within the next
12 months.
Pinnacle was incorporated in Texas in August 1998 in connection with the
Transactions. The Company's principal executive offices are located at 5599 San
Felipe, Suite 301, Houston, Texas 77056, and its telephone number is (713)
993-4610.
HISTORICAL FINANCIAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K RELATES ONLY TO THE OPERATIONS OF TEI PRIOR TO THE TRANSACTIONS AND DOES
NOT INCLUDE ANY FINANCIAL DATA OR RESULTS OF OPERATIONS OF THE FINANCIAL SERVICE
FIRMS FOR ANY PRIOR PERIOD. THE FOLLOWING DESCRIPTION OF PINNACLE'S BUSINESS
INCLUDES THE OPERATIONS OF THE COMBINED COMPANY RESULTING FROM THE TRANSACTIONS,
EXCEPT FOR TEI'S DISCONTINUED LIQUID WASTE BUSINESS.
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BUSINESS STRATEGY
Pinnacle's business strategy is to (1) increase its asset management and
trust business; (2) expand its fixed-income securities trading activities; (3)
expand its capital markets activities; (4) improve the profitability of its
brokerage operations; and (5) enhance the financial services Pinnacle offers its
clients. Management plans to supplement PGG's internal growth with strategic
acquisitions. Pinnacle also believes certain cross-selling opportunities among
the financial service firms, and certain unquantified potential operating
efficiencies, will be available. The principal elements of Pinnacle's business
strategy are:
o INCREASE ASSET MANAGEMENT AND TRUST BUSINESS. Management intends
to grow Pinnacle's business by expanding its asset management and
trust services related business by improving PMT's coordination
with the HWG and Spires brokerage networks, and by increasing the
assets under its management through acquisitions and internal
growth.
o EXPAND FIXED-INCOME SECURITIES ACTIVITIES. Historically, Spires
has conducted limited trading activity due to the capital-intensive
nature of purchasing inventory and hedging activities necessary to
conduct this business. Pinnacle believes that its proprietary
financial network and technology developed by Spires provides it
with an opportunity to profitably expand its fixed-income
securities trading business. Pinnacle believes the increased
capital and inventory purchasing power created by the
Transactions allow for the successful implementation of this
strategy.
o EXPAND CAPITAL MARKETS ACTIVITIES. Pinnacle intends to increase
its investment banking and merchant banking business by committing
greater resources to, and by carefully focusing its research and
coverage on, geographic regions and industries which management
believes offer the greatest opportunities. Management believes that
this independent and regional focus is particularly well suited to
the southwestern regions currently served by Pinnacle. Management
also believes that consolidations within the investment banking
industry, as a whole, will offer enhanced opportunities for those
firms which maintain their local and industry specific focus.
o IMPROVE PROFITABILITY OF BROKERAGE OPERATIONS. Pinnacle intends to
improve the profitability of its brokerage operations primarily by
hiring additional experienced and productive investment executives
and by providing its investment executives with enhanced training,
product offerings, information systems, support and access to
the expertise and services of each of the financial services firms.
Management believes that the implementation of this strategy will
be aided by Pinnacle's entrepreneurial culture and improved
liquidity resulting from the Transactions.
o ENHANCE PERSONALIZED, HIGH-END SERVICE. Pinnacle's financial
services subsidiaries have traditionally sought to attract and
retain clients by offering a high level of personal service
responsive to client needs. Pinnacle intends to increase its
commitment to service by providing its clients with advanced
account and investment information systems and flexibility in
determining appropriate fee schedules for certain services based
upon the level of client needs, and by providing an array of
one-stop investment and financial planning services.
o SUPPLEMENT GROWTH WITH STRATEGIC ACQUISITIONS. Management plans to
actively pursue opportunities to acquire other firms with
complementary businesses to strengthen or expand the firm's
geographic or product offering base. Management believes that
attractive acquisition opportunities exist, particularly among
smaller regional firms that want to affiliate with a larger firm
while still retaining their regional identity and focus and
entrepreneurial culture. In addition, Pinnacle believes that the
consolidation trends in the financial services industry will allow
it to hire proven financial professionals who prefer the culture
and opportunities inherent in a regional and entrepreneurial firm.
Management believes that acquisitions may also allow Pinnacle to
realize cost benefits by leveraging its infrastructure.
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SERVICES
Pinnacle provides its financial services through its operating
subsidiaries -- HWG, PMT and Spires. The financial services offered by each of
these entities are described below.
HWG
RETAIL BROKERAGE. Through HWG, Pinnacle's strategic plan in the retail
brokerage business is to attract and retain experienced brokers. Its retail
brokerage business has developed and grown by establishing and maintaining
relationships with high net worth individuals. HWG offers its clients brokerage
services relating to equity securities, fixed income securities, mutual funds,
insurance products, options and U.S. government and municipal securities.
Commissions are charged on both exchange and over-the-counter agency
transactions under commission rate tables formulated by HWG. In addition to
retail commissions, HWG generates revenue from asset-based advisory services and
managed accounts where fees are based on a percentage of the assets held in the
client's account in lieu of commissions on a transaction-by-transaction basis.
HWG provides its retail clients with a broad range of services delivered in
a personalized, service-oriented manner. In addition to recommending and
effecting transactions in securities, HWG makes available to its retail clients
equity research reports prepared by HWG and by third party research analysts.
Other services provided by HWG include portfolio strategy, financial planning
and tax, trust and estate advice. HWG believes that the personalized nature and
range of services it provides to its retail clients is a key factor in the
success of its retail brokerage unit.
HWG conducts its retail brokerage operations through its Houston, Texas
office. At December 31, 1998, HWG's retail sales force was comprised of 20
commissioned sales persons who average over 15 years experience in the
securities brokerage business. Pinnacle believes its strategy of providing HWG's
brokers with a high level of support, the flexibility to operate in an
entrepreneurial manner and a corporate culture which encourages performance,
employee ownership, advanced technologies and competitive compensation packages,
will allow HWG to recruit and retain experienced and productive brokers.
INVESTMENT BANKING AND UNDERWRITING ACTIVITIES. Pinnacle's investment
banking strategy is directed at building, through HWG, a balanced mix of
financial advisory services, corporate security underwriting and private
financings, including venture capital financings, with a geographic focus on the
southwestern United States. HWG's financial advisory services include advice on
mergers, acquisitions and divestitures, fairness opinions and financing
strategies. HWG can also provide valuations, litigation support and financial
consulting services. These financial advisory services are typically provided to
emerging or middle market companies with a presence in the southwestern United
States.
HWG participates in underwritten public securities distributions as a
member of underwriting syndicates or of selling groups lead-managed by national
investment banking firms. During 1998, HWG participated in 11 underwritten
public securities offerings. As HWG's business matures and develops, Pinnacle's
long-term strategy includes targeting co-manager roles in selected underwritten
public offerings of securities. HWG has also served as placement agent in
several private placements of securities under a variety of fee structures
depending on the amount of capital raised, including cash and equity contingent
fees, cash and equity non-contingent fees, adjustable cash and equity fees or a
combination of two or more
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of the foregoing. Similar to its financial advisory services, HWG's
participation in corporate securities distributions, whether public or private,
typically involves emerging or middle market companies with a southwestern
United States presence.
MERCHANT BANKING. HWG entered the merchant banking business in 1996. This
activity focuses on providing private equity capital for middle-market growth
companies within a broad range of industries, including, among others, business
services, communications, computing, distribution, direct marketing of
electronic financial services, gaming, information technology, Internet, media
entertainment, retail, specialty chemicals and biotechnology. These transactions
may take a variety of forms, such as buyouts, growth buildups, consolidation of
several private companies in conjunction with public and private offerings,
expansion capital and venture capital financings. These merchant banking
activities are currently conducted through HWG Capital, L.L.C., which is owned
50% by Pinnacle and 50% by an officer of HWG. In addition, Pinnacle currently
holds a significant equity position in BioCyte Therapeutics, Inc., an early
stage biotechnology company focusing on diagnostics and therapeutics for
cancer-related diseases. There is no assurance that BioCyte will ever develop
any commercially marketable products.
PRINCIPAL TRANSACTIONS. HWG makes markets, buying and selling as
principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on Nasdaq or other OTC markets. At December 31, 1998, HWG made
markets in equity securities of over 12 issuers. These securities are generally
those in which there is a substantial continuing client interest and include
securities for which HWG has participated in the underwriting or on which it
provides research reports.
PMT
TRUST, ASSET MANAGEMENT AND RELATED SERVICES. Through PMT, Pinnacle
provides a variety of trust services, including investment management, estate
settlement, retirement planning, mineral interest management, funeral and
cemetery trust administration, real estate and retirement plan administration,
and other back-office services, such as custody of assets and record keeping.
PMT meets with each client to develop asset management strategies that are
consistent with the client's business or personal needs and investment
objectives. Consideration is given to the client's financial and investment
objectives, risk tolerance, investment restrictions and time horizon. Pinnacle
believes this total investment management approach provides clients with
increased diversification, reduced risk and greater control over their
portfolios.
PMT's employees periodically monitor its clients through direct telephone
calls and personal visits to ensure the client's needs are satisfied. PMT
recently licensed a new trust accounting software which provides its clients
with many additional benefits, including flexible statement packages and access
to account information on the Internet through a link established between PMT's
"home page" and the licensor of the software's database.
PMT derives its revenues mainly from asset management and fiduciary fees
based on a percentage of assets under administration. At December 31, 1998, PMT
had $439 million of assets under management. The actual fee charged is based on
a rate schedule formulated by PMT from time to time. Rates vary depending on the
services being provided and the amount of assets involved. Pinnacle believes
that this fee structure, as opposed to transactional commissioned-based
arrangements, more closely aligns Pinnacle's interests with its clients and
helps develop long-term client relationships.
SPIRES
INSTITUTIONAL BROKERAGE. Through Spires, Pinnacle provides brokerage
services to institutional clients relating primarily to fixed-income securities,
such as municipal securities, U.S. government and agency securities,
mortgage-related securities, including those issued through Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC"), and corporate
investment-grade and high-yield bonds. Commissions are charged on all
institutional securities transaction based on rates formulated by Spires.
TRADING. Rather than trading a wide variety of securities in direct
competition with Wall Street firms, Spires has developed a niche strategy to
proprietarily trade certain fixed-income securities, including U.S.
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government securities, certain mortgage related securities and collateralized
mortgage obligations. In its trading activities, Spires generally acts as a
wholesaler. It buys round-lot and odd-lot positions, sells round-lot and odd-lot
positions and acts as market-maker in round-lot and odd-lot positions. The
majority of Spires' counterparts in these transactions are other broker-dealers.
Spires' trading operations generally seek to generate profits based on trading
spreads, rather than through speculation on the direction of the market.
The positions carried in Spires' trading accounts fluctuate significantly.
The size of the securities positions on any one date may not be representative
of Spires' exposure on another date because the securities positions vary
substantially depending on economic and market conditions, the allocation of
capital among types of inventories, customer demands and trading volume. The
aggregate value of inventories that Spires' can carry is limited by certain
requirements under the net capital requirements of the Exchange Act.
Spires has established procedures designed to reduce the risks of its
trading activities. It employs a hedging strategy designed to insulate the net
value of its trading inventory from fluctuations in the general level of
interest rates. However, it is not possible to hedge completely the risks of
interest rate fluctuations for some of the fixed-income securities that Spires
trades, primarily because the price movements of financial instruments typically
used to hedge long positions in such securities may not precisely mirror the
price movements of the hedged securities under all market conditions. In
addition to its hedging procedures, Spires seeks to mitigate the risks
associated with its proprietary trading activities by subjecting its trading
inventory positions and profit and loss statements to daily review by its senior
management. Senior management of Spires reviews daily the profit and loss and
inventory positions of the trading desks. However, such procedures may not
prevent such a loss, which could adversely affect Spires' business, financial
condition, results of operations or cash flows.
OTHER ACTIVITIES. Institutional client securities transactions are
executed on either a cash or margin basis. Under the current clearing
arrangement with Daiwa Securities America, Inc. ("Daiwa") in an institutional
margin transaction, credit is extended to a client through Daiwa for the
purchase of securities, using the securities purchased and/or other securities
in the client's account as collateral for amounts loaned. Spires receives income
from interest charged on such extensions of credit. Although income from
interest charged has not historically been a significant source of revenue, in
the future, the financing of margin purchases can be an important revenue
source, since interest rate paid by the client on funds loaned through Spires
exceeds Spires' interest costs for net customer debit balances paid to Daiwa.
Spires' gross interest revenues are affected not only by prevailing interest
rates, but also by the volume of business conducted on a margin basis. By
permitting a client to purchase on margin, Spires takes the risk that market
declines could reduce the value of the collateral below the principal amount
loaned, plus accrued interest, before the collateral can be sold. Amounts loaned
are limited by margin regulations of the Board of Governors of the Federal
Reserve System and other regulatory authorities and are subject to Daiwa and
credit review and daily monitoring procedures.
Spires is also active as a secondary market broker for residential,
consumer and commercial loans, and derives revenue from the placement of
mortgage servicing and newly "securitized" mortgaged collateral on a
nationwide basis.
CLIENTS
Clients of Pinnacle's broker dealer subsidiaries, HWG and Spires, vary
according to the nature of the services provided. HWG's retail brokerage
services are generally focused on high net worth individuals located within the
southwestern United States. HWG's investment banking, underwriting, merchant
banking, and principal transaction activities are targeted at emerging and
middle market companies with a southwestern United States presence. Spires
services institutional clients throughout the United States, Europe and Japan.
At December 31, 1998, Spires had over 700 institutional clients consisting
mostly of pension funds, money managers, mutual and hedge funds, insurance
companies, commercial banks and thrift companies.
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Pinnacle's trust subsidiary, PMT, provided trust services to approximately
150 clients as of December 31, 1998. These clients consist mainly of high net
worth individuals and their respective estates and trusts, 401(k) and other
employee-directed company sponsored retirement plans and charitable and other
non-profit corporations. PMT also provides trust services relating to trust
funds of owners and operators of funeral homes, cemeteries and related
businesses.
INTELLECTUAL PROPERTY
Pinnacle, through Spires, has developed proprietary trading tools in
connection with its fixed-income securities business. As the structures of
fixed-income securities have become increasingly complex, successful investors
need reliable, accurate and timely information to make prudent investment
decisions. To satisfy this need, Spires has invested significant capital in an
integrated proprietary trading tool known as the "Spires Financial Network,"
or "SFN." SFN is delivered to Spires' clients by direct dial-up or over the
Internet. Through the Internet, Spires' employees and clients access proprietary
databases, search engines and analytics of Spires through its "home page."
Minimal investment is required by the client since all computing is performed on
Spires servers in Houston, Texas. Only mouse clicks and screen graphics are
transmitted over the Internet.
SFN proprietary databases provide current and fourteen-year historical
market information relating to mortgage-backed securities, collateralized
mortgage obligations and other matters. SFN's proprietary search engines and
analytics include:
o Portfolio Pro -- reduces the client's entire portfolio to a single
security by blending cash flows of each position in the portfolio
according to selected interest rate scenarios; and
o Bond Locator -- permits database searching capabilities by CUSIP,
description or profile. Through applications offered by SFN, Spires
and its clients are better able to achieve liquidity and execution by
matching buyers and sellers of similar securities.
These databases also accelerate securities selection and improve overall
yield and total rate of return by isolating the best investment alternatives
based on the client's investment criteria.
In December 1997, Spires obtained a Global Data License from Bloomberg
Financial Markets. As a result, Spires can redistribute selected Bloomberg data
through SFN to its clients. As one of the few entities able to redistribute this
data, Spires provides its customers with additional market information not
available from competitors.
SFN is supported by a staff of five full-time system development,
programming and support personnel. These people are responsible for system
maintenance and support and development of proprietary software tools based on
information provided by Spires' brokerage and trading professionals and its
institutional clients.
Pinnacle management believes that SFN is a key element in the success of
Spires institutional brokerage and trading activities.
MARKETING
The marketing efforts of Pinnacle's broker dealer subsidiaries, HWG and
Spires, are conducted primarily by in-house staff of approximately 35 located at
the Houston headquarters of HWG and Spires and at Spires' four branch offices.
HWG and Spires target their client groups through mailouts, telephone calls,
in-person presentations and firm-sponsored workshops. Due to the nature of HWG's
business, its regional name recognition and the reputation of its management,
certain business is obtained through referrals from other investment bankers or
initiated directly by the client. In addition, Pinnacle believes that Spires'
SFN proprietary technology has been critical to its client development success.
Pinnacle's trust subsidiary, PMT, conducts its marketing and business
development efforts on a company-wide basis. All PMT employees are encouraged to
be actively involved in business development
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efforts through maintenance of professional and personal relationships and
active involvement in community events. PMT markets its specific client groups
through mailouts, telephone calls, multi-media client presentations and
company-sponsored or co-sponsored workshops and seminars.
Pinnacle believes certain cross-selling opportunities existing among HWG,
PMT and Spires based on the relationships developed by the individual companies.
RELATIONSHIP WITH CLEARING BROKERS
Pinnacle's broker-dealer subsidiaries, HWG and Spires, both use the
services of clearing brokers. Currently, HWG clears all transactions, and
carries accounts for clients, with S.G. Cowen & Company ("S.G. Cowen") under a
fully disclosed clearing arrangement. HWG is currently in the process of
evaluating engagement alternatives with other clearing brokers. Spires clears
its transactions, and carries client accounts, primarily through Daiwa and other
clearing brokers. Both S.G. Cowen and Daiwa serve as principal and clearing
broker in all transactions. Spires uses other clearing brokers in addition to
Daiwa. These clearing brokers also provide HWG and Spires with information
necessary to generate commission runs, transaction summaries, data feeds for
various reports including compliance and risk management, execution reports,
trade confirmations, monthly account statements, cashiering functions and
handling of margin accounts. Pinnacle believes these arrangements produce
clearing costs that are competitive within the industry.
Each of HWG and Spires have an uncommitted financing arrangement with these
clearing brokers under which it finances its customer accounts, certain
broker-dealer balances and firm trading positions through these clearing
brokers. Although the customer accounts and such broker-dealer balances will not
be reflected on Pinnacles' Consolidated Statements of Financial Condition for
financial accounting reporting purposes, each of HWG and Spires has generally
agreed to indemnify these clearing brokers for losses it may sustain in
connection with accounts of their respective clients. Pinnacle therefore retains
risk on these accounts. HWG and Spires are each required to maintain certain
cash or securities on deposit with its clearing brokers.
EFFECTS OF INTEREST RATES
Pinnacle's financial service business is affected by general economic
conditions, including movements of interest rates. As interest rates increase,
the prices of equity securities may decline, partially reflecting the increased
competition posed by more attractive rates on fixed-income securities and
partially reflecting the fact that interest rate increases may tend to dampen
economic activity by increasing the cost of capital for investment and
expansion, thereby reducing corporate profits and the value of equity
securities. As interest rates decline, equity securities may tend to rise in
value. The impact of these fluctuations and changes may affect the profitability
of Pinnacles' retail brokerage and investment banking activities. Retail
commission revenue may also be affected by changes in interest rates and any
resulting indirect impact on the value of equity securities. Pinnacle's interest
income and interest expense may likewise change as interest rates change.
Pinnacle's revenues relating to asset-based advisory services and managed
accounts are typically from fees which are generally based on the market value
of assets under management. Consequently, significant fluctuations in the values
of securities, which can occur with changes in interest rates or changes in
other economic factors, may materially affect the amount of assets under
management, and thus, Pinnacle's revenues and profitability.
Pinnacle's inventory of fixed income securities may fluctuate as interest
rates change. As interest rates decrease, the prices of fixed-income securities
may increase, partially reflecting the increased demand for securities with
higher coupon rates. As interest rates increase, fixed-income securities may
tend to decrease in value reflecting the availability of newer securities with
higher coupon rates. Institutional commission revenue may also be affected by
changes in interest rates and any resulting indirect impact on the value of
fixed-income securities.
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COMPETITION
Pinnacle's financial services business and the securities business in
general are highly competitive. The principal competitive factors influencing
Pinnacle's financial services business are its:
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o professional staff o ability to commit capital to
o reputation in the marketplace client transactions and its mix of
o existing client relationships market capabilities
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Pinnacle's ability to compete effectively in its securities brokerage and
investment banking activities will also be influenced by the adequacy of its
capital levels and by its ability to raise additional capital.
Pinnacle competes directly with national and regional full service
broker-dealers and, to a lesser extent, with discount brokers, dealers,
investment banking firms, investment advisors and certain commercial banks. They
also compete for asset management and fiduciary services with commercial banks,
private trust companies, insurance companies and others. Domestic commercial
banks and large international banks have recently entered the securities
business, including markets in which they compete. Pinnacle expects competition
from domestic and international banks to increase as a result of recent and
anticipated legislative and regulatory initiatives in the United States to
remove or relieve restrictions on commercial banks relating to the sale of
securities.
The financial services industry has become considerably more concentrated
as many securities firms have either ceased operations or been acquired by or
merged into other firms. Many of these larger firms have significantly greater
financial and other resources than Pinnacle and can offer their customers more
product offerings, lower pricing, broader research capabilities, access to
international markets and other products and services not offered by Pinnacle,
which may give such firms competitive advantages over Pinnacle.
Pinnacle also faces competition from a rapidly developing discount or
electronic brokerage services industry. These competitors may have lower costs
and may offer their customers more attractive pricing or other terms. Pinnacle
also anticipates competition from underwriters who attempt to effect public
offerings using non-traditional means of distribution, including through
electronic media like the Internet. In addition, issuers may try to sell their
securities directly to purchasers, including through electronic media such as
the Internet. If issuers and purchasers of securities can transact business
without financial intermediaries, such as Pinnacle, Pinnacle's operating results
could be adversely affected.
GOVERNMENT REGULATION
The securities industry is one of the nation's most extensively regulated
industries. The SEC is responsible for carrying out the federal securities laws
and serves as a supervisory body over all national securities exchanges and
associations. The regulation of broker-dealers has to a large extent been
delegated by the federal securities laws to Self Regulatory Organizations
("SROs"). These SROs include, among others, all the national securities and
commodities exchanges and the NASD. Subject to approval by the SEC and certain
other regulatory authorities, SROs adopt rules that govern the industry and
conduct periodic examinations of the operations of Pinnacle's broker-dealer
subsidiaries -- HWG and Spires. HWG and Spires are also subject to regulation
under the laws of the states, Puerto Rico and certain foreign countries in which
it is registered to conduct securities, investment banking, insurance or
commodities business. Broker-dealers are subject to regulations which cover all
aspects of the securities business, including sales methods, trade practices
among broker-dealers, use and safekeeping of clients' funds and securities,
capital structure of securities firms, record-keeping and the conduct of
directors, officers and employees. Violation of applicable regulations can
result in the revocation of broker-dealer licenses, the imposition of censures
or fines and the suspension or expulsion of a firm, its officers or employees.
8
<PAGE>
As a registered broker-dealer, HWG and Spires are subject to certain net
capital requirements of Rule 15c3-1 under the Exchange Act. The net capital
rules, which specify minimum net capital requirements for registered
broker-dealers, are designed to measure the financial soundness and liquidity of
broker-dealers. The net capital rules also:
(1) require that broker-dealers notify the SEC, in writing, two
business days before making withdrawals or other distributions of equity
capital or lending money to certain related persons if the withdrawals
would exceed, in any 30-day period, 30% of the broker-dealer's excess net
capital, and that they notify the SEC within two business days after any
such withdrawal or loan that would exceed, in any 30-day period, 20% of the
broker-dealer's excess net capital;
(2) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if after the
distribution or loan, the broker-dealer has net capital of less than
$300,000 or if the aggregate indebtedness of the broker-dealer's
consolidated entities would exceed 1,000% of the broker-dealer's net
capital and in certain other circumstances; and
(3) provide that the SEC may, by order, prohibit withdrawals from
capital of a broker-dealer for a period of up to 20 business days, if the
withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital and if the SEC believes the withdrawals would be
detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities.
HWG and Spires are also subject to "Risk Assessment Rules" imposed by the
SEC which require that certain broker-dealers maintain and preserve certain
information, prescribe risk management policies and procedures and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operational condition of the broker-dealers. Certain "Material Associated
Persons" (as defined in the Risk Assessment Rules) of the broker-dealers and
the activities conducted by such Material Associated Persons may also be subject
to SEC regulation. In addition, the possibility exists that, on the basis of the
information it obtains under the Risk Assessment Rules, the SEC could seek
authority over HWG's unregulated subsidiaries either directly or through its
existing authority over HWG and its regulated subsidiaries.
HWG is registered with the SEC as an investment adviser under the
Investment Advisers Act and is subject to regulations under both the Investment
Advisers Act and certain state securities laws and regulations. These
regulations relate to, among other things, (1) limitations on the ability of
investment advisers to charge performance-based or non-refundable fees to
clients, (2) record-keeping and reporting requirements, (3) disclosure
requirements, (4) limitations on principal transactions between an advisor or
its affiliates and advisory clients, and (5) general anti-fraud prohibitions.
The state securities law requirements applicable to registered investment
advisers are in certain cases more comprehensive than those imposed under
federal securities laws.
As a registered investment adviser under the Investment Advisers Act, HWG
is subject to regulations which cover various aspects of HWG's business,
including compensation arrangements. Under the Investment Advisers Act, every
investment advisory agreement with HWG's clients must expressly provide that the
agreement may not be assigned by the investment adviser without the client's
consent. Under the Investment Company Act, every investment adviser's agreement
with a registered investment company must provide for the agreement's automatic
termination if it is assigned. Under both the Investment Advisers Act and the
Investment Company Act, an investment advisory agreement is deemed to have been
assigned when there is a direct or indirect transfer of the agreement, including
a direct assignment or a transfer of a "controlling block" of the firm's
voting securities or, under certain circumstances, upon the transfer of a
"controlling block" of the voting securities of its parent corporation. A
transaction is not, however, an assignment under the Investment Advisers Act or
the Investment Company Act if it does not result in a change of actual control
or management of the investment adviser. Any assignment of HWG's investment
advisory agreements would require, as to any registered investment company
client, the prior approval of a majority of the investment company's
shareholders, and as to HWG's other clients, the prior consent of such clients.
9
<PAGE>
Pinnacle's trust subsidiary, PMT, operates in a highly regulated
environment and is subject to extensive supervision and examination by Texas
regulatory agencies. As a Texas chartered trust company, PMT is subject to the
Texas Trust Company Act, the rules and regulations promulgated under that act
and supervision by the Texas Banking Commissioner. These laws are intended
primarily for the protection of PMT's clients, rather than for the benefit of
investors. The Texas Trust Company Act provides for, and regulates, a variety of
matters, such as:
o periodic examinations by the office of the Texas Banking Commissioner;
o furnishing periodic financial statements to the Commissioner;
o minimum net capital maintenance requirements;
o fiduciary record-keeping requirements;
o bonding requirements for the protection of clients;
o restrictions on investments of restricted capital;
o lending and borrowing limitations;
o prohibitions against engaging in certain activities;
o prior regulatory approval for certain corporate events (e.g., mergers,
sale/purchase of all or substantially all of the assets and
transactions transferring control of the trust company);
o broad regulatory powers if the trust company violates certain
provisions of Texas Trust Company Act or is determined to be in a
"hazardous condition" (as the law defines that term); and
o other matters.
While Pinnacle believes PMT is in material compliance with these laws,
rules and regulations, PMT may not be able to continue compliance in the future,
or these laws, rules or regulations may change adversely, either of which could
have a material adverse effect on PMT.
Pinnacle's ability to comply with laws relating to its financial service
business depends upon establishing and maintaining an effective compliance
system to monitor compliance, and Pinnacle's ability to attract and retain
qualified compliance personnel. While Pinnacle believes that it is in material
compliance with these laws and regulations, they may not be able to comply in
the future. Any noncompliance could have a material adverse effect on Pinnacle.
RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS
From 1995 through 1997, TEI disposed of all of its operating businesses
other than ERRI's liquid waste business. Pinnacle's new management determined to
discontinue the operations of ERRI effective December 31, 1998. In connection
with TEI's December 1997 sale of assets of a former subsidiary, the purchaser
agreed to complete customer contracts of the subsidiary in process at the time
of sale. TEI, and thus indirectly the Company, remains primarily liable to
complete the contracts, and has agreed to reimburse the purchaser if its
aggregate completion costs exceed the aggregate contract price. Throughout the
third quarter of 1998, TEI believed, based in part on information provided by
the purchaser, that TEI had no additional liability under the contracts in
process. However, after December 31, 1998, the purchaser notified TEI that a
major customer cancelled its contract and other contracts in process have or are
expected to result in costs in excess of the amounts recoverable from customers.
As a result, TEI recorded a charge to discontinued operations, net of tax, of
$1,344,000 for the estimated contract losses. Pinnacle is evaluating its
potential options to recover a portion of these losses, but Pinnacle may not be
successful in any attempted recovery. While Pinnacle believes it will not incur
losses for these contracts in excess of the recorded charge, TEI has in the past
experienced significant changes in the estimated costs to complete the ESI
contracts, and it is possible the purchaser of the ESI assets will assert
additional claims in 1999.
In addition, ERRI's liquid waste operations are subject to numerous and
continually evolving federal, state, and local laws, regulations and policies
that govern environmental protection, zoning and other matters, including the
Clean Water Act, Resource Conservation and Recovery Act and the Clean Air Act.
In
10
<PAGE>
addition, while TEI does not accept, and does not intend to accept, hazardous
substances at its facilities, if ERRI's liquid waste operations result in the
release or improper disposal of hazardous substances, Pinnacle could incur
liability under the Comprehensive Environmental Response and Compensation and
Liability Act. Although Pinnacle believes ERRI is in material compliance with
applicable laws and regulations, it may not continue in compliance in the
future. Any failure to comply with these laws, regulations and policies could
have a material adverse effect on Pinnacle's business, results of operations or
financial condition and could result in continuing risk of liability to Pinnacle
for such failures under any proposed sale of ERRI's liquid waste business.
In connection with the decision to dispose of ERRI, TEI recorded a charge
to operations to reduce the value of its investment in ERRI to estimated net
realizable value. There is no assurance that TEI will be able to sell ERRI for
the estimated amount.
EMPLOYEES
At December 31, 1998, Pinnacle had a total of 120 employees, excluding
employees of discontinued operations. Of these employees, 33 were engaged in
retail brokerage, 30 in institutional sales, 21 in investment banking, nine in
trust services, five in systems development and support and 22 in accounting,
administration and operations. No Pinnacle employees are subject to collective
bargaining agreements. Pinnacle believes its relations with its employees
generally are good.
RISK MANAGEMENT; LITIGATION
Pinnacle's financial services business involves substantial risks of
liability. From time to time Pinnacle and its operating subsidiaries may be
named as a defendant in civil litigation and arbitration arising from its
business activities as a broker-dealer, fiduciary or in connection with its
investment management functions. The plaintiffs in such litigation or
arbitration may allege misconduct on the part of Pinnacle's investment or trust
executives, claiming, for example, that investments sold to the plaintiffs were
unsuitable for their portfolios, or that the investment executives engaged in
excessive trading in the plaintiffs' accounts. While historically Pinnacle's
subsidiaries have not incurred material liability in litigation or arbitration,
substantial liabilities in connection with such matters may occur in the future.
In recent years, there has been a substantial amount of litigation
involving the securities industry, including class action lawsuits that
generally seek substantial damages and other suits seeking punitive damages.
Companies engaged in the underwriting of securities, including Pinnacle, through
HWG, are subject to substantial potential liability, including for material
misstatements or omissions in prospectuses and other communications in
underwritten offerings of securities or statements made by securities analysts,
under federal laws, such as Rule 10b-5 under the Exchange Act and Section 11 of
the Securities Act and similar state statutes and common law doctrines. The risk
of liability may be higher for an underwriter which, like HWG, is active in the
underwriting of securities offerings for emerging and middle-market companies
due to the higher degree of risk and volatility associated with the securities
of those companies.
The defense of these or any other lawsuits or arbitrations may divert the
efforts and attention of the management and staff of Pinnacle and its
subsidiaries from other responsibilities, and Pinnacle may incur significant
legal expense in defending such litigation or arbitration.
In addition, Pinnacle may be exposed to certain liabilities and claims
related to the discontinued operations of TEI. See, Item 3 of this Annual Report
on Form 10-K entitled "Legal Proceedings" for a discussion of current
proceedings involving Pinnacle relating to these operations.
ITEM 2. PROPERTIES
Pinnacle leases office facilities in Houston (four locations) and Austin,
Texas, Morris Plains, New Jersey and Westport, Connecticut, aggregating
approximately 40,050 square feet. Two of Pinnacle's Houston leases expire in
2004, one Houston lease in 2002, one Houston lease in 2002, one Houston lease in
2003, the Austin and Morris Plains leases in 2000, and the Westport lease in
2003. The leases are on rental
11
<PAGE>
and other terms that Pinnacle believes are commercially reasonable. Pinnacle
believes its existing facilities are well maintained and adequate for existing
and planned operations.
As part of its plan to discontinue the liquid waste operations, Pinnacle
intends to sell its real property located in Charlotte, North Carolina,
consisting of about six acres of land, related office space and 14,800 square
processing plant built in 1997. The Company anticipates the sale to be
consummated within the next 12 months, but due to unforeseen circumstances a
sale may not be completed within that time frame.
ITEM 3. LEGAL PROCEEDINGS
Pinnacle is a party to various legal proceedings which are of an ordinary
or routine nature incidental to Pinnacle's operations. Pinnacle believes it has
adequately reserved for such litigation matters and that they will not have a
material adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during
the fourth quarter ended December 31, 1998.
12
<PAGE>
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "PING." The Common Stock began trading on
January 29, 1999. Prior to that time, there was no established public trading
market for the Common Stock. As a result of the Transactions, the Company became
the successor issuer to TEI whose common stock (the "TEI Common Stock") was
traded on the Nasdaq National Market under the symbol "TANK." The TEI Common
Stock began trading on June 19, 1991 and was removed from quotation on the
Nasdaq National Market on January 28, 1999. In connection with the Transactions,
each outstanding share of TEI Common Stock was converted into 0.25 of a share of
Common Stock, with just over 50% of the Company's outstanding shares of Common
Stock being issued to TEI's former shareholders. A total of 3,562,500 shares of
Common Stock, representing slightly less than 50% of the Company's outstanding
shares, were issued to the former owners of HWG, PMT and Spires. The following
table sets forth the quarterly high and low sale prices of the TEI Common Stock,
as reported on the Nasdaq National Market for the calendar quarters indicated
and after giving effect to the one for .25 share exchange of the TEI Common
Stock effected in connection with the Transactions:
<TABLE>
<CAPTION>
CALENDAR PERIOD HIGH LOW
- - - ------------------------------------- --------- ---------
<S> <C> <C>
1998:
First Quarter................... 7 3/4 5 5/8
Second Quarter.................. 10 7
Third Quarter................... 10 1/2 6
Fourth Quarter.................. 9 5 1/4
1997:
First Quarter................... 9 1/4 6 1/4
Second Quarter.................. 7 3/4 6 1/4
Third Quarter................... 7 3/4 6 1/8
Fourth Quarter.................. 9 6 1/8
</TABLE>
As of March 25, 1999, there were 345 record holders of the Common Stock. To
date, the Company has not paid cash dividends on its Common Stock. It is the
policy of the Company to continue retaining earnings for use in the Company's
operations and to fund the Company's future activities.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following data reflects the historical operating results and financial
condition of TEI prior to the Transactions. This data does not include any
information of the historical operating results or financial condition of the
financial services firms for any prior period.
As more fully described in Notes 1 and 2 to the Consolidated Financial
Statements, all of the businesses owned by TEI have been sold or are accounted
for as discontinued operations.
The statement of operations data for all periods has also been reclassified
to reflect ERRI's liquid waste operations as discontinued. Periods prior to 1997
had previously been reclassified to reflect the operations of the Tank Testing
Group, Engineered Systems, Inc. ("ESI") and Mankoff, Inc. ("Mankoff") as
discontinued. Accordingly, the historical selected financial data is not
indicative of future operations.
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995
------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest and dividend income........ $ 1,524,405 $ 1,530,264 $ 910,142 $ 740,013
Selling, general and administrative
expenses.......................... 1,364,613 1,537,376 1,622,395 1,594,064
------------ ------------------ ------------------ ------------------
Income (loss) from continuing
operations before income taxes.... 159,792 (7,112) (712,253) (854,051)
Income tax provision (benefit)...... 53,532 (10,733) (255,874) (301,276)
------------ ------------------ ------------------ ------------------
Income (loss) from continuing
operations........................ 106,260 3,621 (456,379) (552,775)
Income (loss) from discontinued
operations, net of tax............ (4,077,020) (2,785,237) 1,211,479 (8,036,330)
------------ ------------------ ------------------ ------------------
Net income (loss)................... $ (3,970,760) $ (2,781,616) $ 755,100 $ (8,589,105)
============ ================== ================== ==================
Basic and diluted earnings (loss)
per share:
From continuing operations..... $ 0.03 $ (0.00) $ (0.13) $ (0.16)
From discontinued operations... (1.14) (0.78) 0.34 (2.26)
------------ ------------------ ------------------ ------------------
Net earnings (loss) per
share........................ $ (1.11) $ (0.78) $ 0.21 $ (2.42)
============ ================== ================== ==================
Weighted average common shares
outstanding....................... 3,562,753 3,561,003 3,559,253 3,557,503
============ ================== ================== ==================
<CAPTION>
1994
------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Interest and dividend income........ $ 251,413
Selling, general and administrative
expenses.......................... 1,345,892
------------------
Income (loss) from continuing
operations before income taxes.... (1,094,479)
Income tax provision (benefit)...... (434,161)
------------------
Income (loss) from continuing
operations........................ (660,318)
Income (loss) from discontinued
operations, net of tax............ 2,203,296
------------------
Net income (loss)................... $ 1,542,978
==================
Basic and diluted earnings (loss)
per share:
From continuing operations..... $ (0.18)
From discontinued operations... 0.61
------------------
Net earnings (loss) per
share........................ $ 0.43
==================
Weighted average common shares
outstanding....................... 3,605,102
==================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 13,292,644 $ 12,810,100 $ 11,421,710 $ 14,967,107 $ 6,249,636
Short-term investments.................. 14,637,575 15,335,619 18,425,979 3,694,873 7,483,075
Working capital......................... 27,355,943 30,033,838 29,001,908 24,896,104 26,300,941
Total assets............................ 34,995,239 39,042,721 43,033,894 42,276,610 52,917,420
Long-term debt, excluding current
maturities............................ -- -- -- -- --
Total shareholders' equity.............. 33,699,763 37,665,147 40,432,973 39,665,133 48,238,488
</TABLE>
The earnings (loss) per share data and weighted average shares outstanding
have been retroactively adjusted to give effect to the one for .25 exchange in
connection with the Transactions.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Selected
Financial Data" included elsewhere in this Report.
GENERAL
TEI was incorporated in 1989 to acquire and operate businesses involved in
various aspects of underground and above ground tank testing and related
services. In 1994, TEI acquired its ERRI subsidiary that performs wastewater
treatment. Beginning in 1995, TEI began disposing of its various tank testing
related businesses and completed the divestiture program in 1997. In March 1999,
Pinnacle's new board of directors adopted a plan to discontinue the operations
of ERRI effective December 31, 1998. Management believes the sale of ERRI and
the related Charlotte, North Carolina facility will be consummated within the
next 12 months. All of TEI's businesses are reflected as discontinued
operations. TEI's continuing operations in the accompanying historical financial
statements consist of (1) interest and dividend income from investments funded
from cash generated from operations in prior years and from disposal of the
discontinued operations, and (2) corporate general and administrative expenses.
Thus, historical results of continuing operations are not indicative of future
operations.
On January 29, 1999, TEI completed the Transactions with HWG, PMT and
Spires, with Pinnacle emerging as the new public holding company. In the
Transactions, just over 50% of Pinnacle's outstanding shares were issued to
TEI's former shareholders in exchange for their TEI shares, and slightly less
than 50%, or 3,562,500 Pinnacle shares, were issued to the former owners of the
financial services firms. The Transactions were accounted for as purchases by
Pinnacle of each of the three financial services firms. The following discussion
of the results of operations relates solely to the operations of TEI prior to
the Transactions. The results of operations of HWG, PMT and Spires during the
periods discussed are not included.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Interest and dividend income declined by $6,000 to $1,524,000 during 1998
from $1,530,000 during 1997, as a result of a decrease in the average balance of
cash and short term investments of approximately $1,500,000 offset by an
increase in the average rate earned on such investments of approximately 0.5%.
Selling, general, and administrative expenses decreased by $172,000 to
$1,365,000 during 1998 from $1,537,000 during 1997, primarily as a result of a
decrease in compensation and benefits of $91,000 from reductions in staff and a
$65,000 decrease in property taxes from the sale of TEI's former corporate
headquarters.
Losses from discontinued operations, net of tax, were $4,077,000 in 1998
compared to a loss of $2,785,000 in 1997. The loss from discontinued operations
in 1998 reflects a $569,000 net after tax loss of ERRI for the year and a
writedown of TEI's investment in ERRI of $2,164,000, net of tax, based on the
estimated net realizable value of the business. In accordance with the terms of
the ESI asset disposition, the purchaser is responsible for completing customer
contracts in place at the date of the disposition. However, TEI remains liable
for costs incurred by the purchaser in excess of amounts collected from
customers. Through the third quarter of 1998, TEI believed, based in part on
information provided by the purchaser, that TEI had no additional liability
under the contracts in process. Subsequent to December 31, 1998, the purchaser
notified TEI that a major customer cancelled its contract and other contracts in
process have or are expected to result in costs in excess of amounts recoverable
from customers. As a result, TEI recorded a charge to discontinued operations,
net of tax, of $1,344,000 for the estimated contract losses. The Company is
evaluating its potential options to recover a portion of these losses, but the
Company may not be successful in any attempted recovery. While the Company
believes it will not incur losses in excess of the recorded charge, TEI has in
the past experienced significant changes in the estimated costs to complete ESI
contracts, and it is possible the purchaser of the ESI assets will assert
additional claims in 1999.
15
<PAGE>
The loss from discontinued operations in 1997 consisted of a $188,000 loss
on disposition of ESI, $2,194,000 of net losses from ESI operations and $403,000
of net losses from ERRI operations.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Interest and dividend income increased by $620,000 to $1,530,000 during
1997 from $910,000 during 1996 as a result of an increase in the average
investment balance during 1997 from proceeds generated from the sale of the Tank
Testing Group in October 1996.
Selling, general, and administrative expenses decreased by $85,000 to
$1,537,000 during 1997 from $1,622,000 during 1996 primarily due to a decrease
in compensation and benefits and a decrease in depreciation from the sale of the
Tank Testing Group. This decrease was partially offset by an increase in legal
and professional fees.
Losses from discontinued operations, net of tax, were $2,785,000 in 1997
compared to a gain of $1,211,000 in 1996. The 1996 gain consisted of $672,000 of
net income from operations and a $1,277,000 gain on disposition of the Tank
Testing Group. These gains were partially offset by net losses of $660,000 at
ESI and $78,000 at ERRI. TEI originally expected to complete the disposition of
ESI prior to December 31, 1996. However, ESI was not sold until December, 1997.
Due to the longer than anticipated period of disposal, TEI recorded an
additional reserve of $660,000 during the fourth quarter of 1996, net of an
income tax benefit of $340,000. ESI incurred operating losses of $2,163,000
during 1996, which were anticipated and charged against the initial reserve for
discontinued operations recorded by TEI. The loss in 1997 related to the
operations and disposal of ESI. This loss consisted of $2,194,000 of net losses
at ESI, including a change in estimated income tax expense of approximately
$517,000 resulting from unanticipated delays in the disposition, and a $188,000
loss on disposition.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash, cash equivalents, and
short-term investments of approximately $27,930,000. During 1999, Pinnacle plans
to use approximately $15,000,000 of its funds to expand its operations,
principally in Spires' fixed income securities trading operations. Approximately
$1,200,000 is expected to be used to reimburse the purchasers of ESI for certain
contract costs. This estimated payment will be net of a $500,000 note receivable
from the purchasers which will be offset against amounts payable to the
purchaser.
For the year ended December 31, 1998, net cash provided by operations
totaled $1,443,000 versus net cash used by operations of $4,083,000 during 1997.
Current year cash provided by operations is principally the result of the
collection of a $1,500,000 income tax receivable.
Capital expenditures for 1998 were $880,000 mainly for the purchase of
machinery and processing equipment at ERRI for modifications to the Company's
newly constructed wastewater treatment plant. The Company also incurred
acquisition costs of $996,000 in connection with the Transactions. Management
anticipates that the Company will make capital expenditures of approximately
$200,000 in 1999.
The Company is involved in litigation and routine claims from time to time.
Certain of the Company's litigation and claims are covered by insurance with a
maximum deductible of $50,000. In addition, the Company is contingently liable
for up to $600,000 for liabilities relating to services performed by the Tank
Testing Group prior to October 25, 1996. TEI has recorded an $599,000 liability
for that contingency as of December 31, 1998. The Company believes the ultimate
outcome of the litigation and claims in which the Company is currently involved
will not have a material adverse effect to the Company's consolidated financial
position, results of operations or liquidity.
Management believes that cash generated from operations, existing cash
balances and available borrowing capacity will be sufficient to meet the
Company's anticipated cash requirements for 1999.
FORWARD-LOOKING STATEMENT
The statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1.
Business and this Item 7. Management's Discussion and
16
<PAGE>
Analysis of Financial Condition and Results of Operations, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Annual
Report could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: general economic conditions, competition, government regulation,
and possible future litigation, as well as the risks and uncertainties discussed
in this Annual Report, including without limitation, the portions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports, filings, and public statements.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company's
financial condition, results of operations or cash flows, However, the rate of
inflation can be expected to affect the Company's expenses such as employee
compensation, occupancy and equipment. Increases in these expenses may not be
readily recoverable in the prices that the Company charges for its services.
Inflation can have significant effects on interest rates that in turn can affect
prices and activities in the financial services market. These fluctuations could
have an adverse impact on the Company's financial services operations.
YEAR 2000 IMPACT
The "Year 2000" problem refers to the inability of computer systems and
applications to correctly interpret the century from a date in which the year is
represented by only two digits. A computer system or application that is not
Year 2000 compliant could not correctly process certain data, or in extreme
situations, could disable the entire system.
The Company's financial services subsidiaries are heavily dependent on
their own computer programs and systems, all of which may be affected by the
Year 2000 problem. In addition, these subsidiaries have material relationships
with third parties related to the performance of the Company's financial
services who must also address the Year 2000 problem. These third parties
include:
<TABLE>
<S> <C>
o trading counter parties o software providers
o financial intermediaries o clearing agencies
o securities exchanges o clearing houses
o depositories
</TABLE>
These operations of the Company's financial services subsidiaries may be
adversely affected if these third parties do not adequately address the Year
2000 problem and the Company is unable to make timely contingency plans. A Year
2000 failure at any of the Company's financial service subsidiaries or at their
material third parties could have a material adverse affect on the Company's
financial services businesses by impairing its ability to, among other things:
o gather and process information vital to strategic decision making by
both the Company and its customers;
o perform pricing calculations;
o execute customer transactions;
o maintain accurate books and records and provide timely reports;
o access audit facilities for both the Company and its customers; and
o undertake risk management functions.
The Company also relies on many third-party vendors and suppliers for a
variety of goods and services necessary for most business, including operating
supplies, banking, telecommunications and utilities, such as water and
electricity. Many of the Company's operations would be adversely affected if
these supplies and services were curtailed as a result of a vendor's or
supplier's Year 2000 problems.
The Company has contacted material third parties whose services or
functions, if curtailed, would have an adverse effect on the Company. However,
the Company to date does not have sufficient information to
17
<PAGE>
assess whether all material third parties will be Year 2000 compliant. The
Company intends to make further inquiry during the second quarter of 1999 with
those material third party relationships who do not respond by March 31, 1999.
The Company's broker-dealer subsidiaries, HWG and Spires, were required to
conduct complete review of the potential impact of Year 2000 issues and report
their findings to the NASD and the SEC no later than August 31, 1998. An updated
report by both subsidiaries is due no later than April 30, 1998. HWG filed its
initial report with the NASD and SEC on August 6, 1998, and Spires filed its
initial report with both agencies on August 31, 1998, both reports were without
response from the NASD or the SEC.
The Company's trust subsidiary, PMT, was required to conduct a complete
review of the potential impact of Year 2000 issues and report its findings to
the Texas Banking Commissioner. PMT filed its initial report with the Bank
Commissioner on August 3, 1998.
The Company has developed the following multi-phase plan to resolve
potential Year 2000 problems relating to its information technology ("IT")
systems at all of its operations and embedded chip technology at its ERRI liquid
waste facility:
Phase I: Identify and evaluate all IT systems and embedded chip technology
according to their potential business impact.
Phase II: Identify IT systems and embedded chip technology that use date
functions and assess them for Year 2000 functionality.
Phase III: Reprogram or replace equipment/systems, where necessary, to ensure
Year 2000 readiness.
Phase IV: Test code modifications and material equipment/systems to ensure
successful operation in a post-1999 environment.
Phase V: Adoption of contingency plans in the case of potential Year 2000
failures.
The Company has completed Phases I through III, and has partially
completed Phases IV and V of its plan at a cost of about $50,000 for modifying
or purchasing new software and for upgrading or purchasing new computer systems.
The Company expects to complete Phases IV and V of its plan during the second
quarter of 1999 at an additional cost estimated not to exceed $200,000. Of these
total Year 2000 costs, about 30,000 are expected to be used for remediation,
which represents an estimated 10% of the Company's 1999 information technology
budget. Some of these costs may be recurring. The Company believes that cash on
hand and cash from operations will be sufficient to fund these costs. No
information technology projects have been deferred due to the Company's Year
2000 efforts.
The Company has begun to develop a firm-wide contingency/recovery plan
aimed at ensuring the continuity of critical business functions before and after
December 31, 1999. As part of this process, the Company will develop reasonably
likely failure scenarios for its critical IT systems, and embedded chip
technology at its ERRI liquid waste facility, and material third-party
relationships. Once these scenarios are identified, the Company will develop
plans designed to reduce the impact to the Company, and provide methods of
returning to normal operations, if one or more of those scenarios occur. The
Company cannot guarantee that it will be able to resolve all of its Year 2000
issues, and any critical unresolved Year 2000 issues at the Company or any of
its material third parties could have a material adverse effect on the Company's
results of operations and financial condition. The Company expects its
contingency and recovery planning to be substantially complete by September 30,
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion regarding the Company's market risk sensitive
instruments at December 31, 1998 relates solely to the instruments held by TEI.
No discussion has been included regarding such instruments held by HWG, PMT and
Spires since the Company's combination with those firms was not consummated
until January 29, 1999.
At December 31, 1998, TEI held cash equivalents and short-term investments
totalling approximately $25.7 million. Cash equivalents include investments in
certificates of deposit, commercial paper and U.S.
18
<PAGE>
government securities, which mature in no more than 90 days from the date of
purchase. Short-term investments include investments in commercial paper, U.S.
government securities, corporate bonds, and mutual funds, which mature in more
than 90 days but less than one year from the date of purchase. For a breakdown
of TEI's cash equivalents and short-term investments by category, see Note 4 to
the TEI Consolidated Financial Statements. At December 31, 1998, TEI's
investments were held in trust by five separate investment managers.
TEI's short-term investments are all classified as available-for-sale and
not as investments held for purposes of trading. These investments are recorded
at cost and adjusted for unrealized holding gains and losses due to market
fluctuations. Unrealized gains or losses are recorded as a separate component of
other comprehensive income, which is charged through shareholders' equity and
not the statement of operations.
TEI's money managers are specifically instructed to invest TEI's capital
only in short-term investment instruments, and if the selected investment
involves commercial paper or debt instruments, that such instruments be rated
grade A or better. TEI's cash equivalents and short-term investments consist
predominantly of fixed-rate instruments, and thus, are not subject to interest
rate risk. TEI's variable-rate investments include its money market mutual funds
and a limited number of its corporate bonds and commercial paper. While these
variable rate investments are subject to interest rate risk, the Company
believes such risk is minimal due to the short-term nature of these investments,
and thus, would not have a material effect the Company's financial position,
results of operations or cash flows.
At December 31, 1998, TEI had no operations subject to commodity price
risks or foreign currency exchange risks, nor does it use derivative financial
instruments in its operations or investment portfolio.
As a result of the Transactions and the nature of the operations of the
combining financial services firms, the Company expects its consolidated market
risk sensitive instruments portfolio to be materially different than that held
by TEI at December 31, 1998.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEI, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent
Accountants.................... 21
Consolidated Balance Sheet as of
December 31, 1998 and 1997..... 22
Consolidated Statement of
Operations for the three years
in the period ended
December 31, 1998............. 23
Consolidated Statement of
Shareholders' Equity for the
three years in the period ended
December 31, 1998.............. 24
Consolidated Statement of Cash
Flows for the three years in
the period ended
December 31, 1998............. 25
Notes to Consolidated Financial
Statements..................... 26
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pinnacle Global Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of TEI, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
LLP
Houston, Texas
March 31, 1999
21
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 13,292,644 $ 12,810,100
Short-term investments.......... 14,637,575 15,335,619
Accounts receivable, net........ -- 639,678
Deferred tax asset.............. 408,658 515,611
Income tax receivable........... -- 1,512,115
Other current assets............ 312,542 598,289
------------ ------------
Total current assets....... 28,651,419 31,411,412
PROPERTY AND EQUIPMENT, NET.......... 25,116 4,789,141
INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION....................... -- 2,288,479
DEFERRED TAX ASSET................... 2,248,119 176,383
ACQUISITION COSTS.................... 995,625 --
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 3,074,960 377,306
------------ ------------
Total assets.................... $ 34,995,239 $ 39,042,721
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................ $ 595,412 $ 344,040
Accrued liabilities............. 700,064 1,033,534
------------ ------------
Total current
liabilities............. 1,295,476 1,377,574
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value;
10,000,000 shares authorized;
no shares issued and
outstanding................... -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
3,801,559 and 3,799,809 shares
issued at December 31,
1998 and 1997, respectively... 38,016 37,999
Additional paid-in capital...... 33,248,729 33,237,370
Retained earnings............... 4,606,689 8,577,449
Accumulated other comprehensive
loss.......................... (6,000) --
Treasury stock at cost, 238,806
shares, at December 31, 1998
and 1997...................... (4,187,671) (4,187,671)
------------ ------------
Total shareholders' equity...... 33,699,763 37,665,147
------------ ------------
Total liabilities and
shareholders' equity.......... $ 34,995,239 $ 39,042,721
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1997 1996
1998 RECLASSIFIED RECLASSIFIED
-------------- ------------ ------------
<S> <C> <C> <C>
Interest and dividend income............ $ 1,524,405 $ 1,530,264 $ 910,142
Selling, general and administrative
expenses.............................. 1,364,613 1,537,376 1,622,395
-------------- ------------ ------------
Income (loss) from continuing
operations before income taxes... 159,792 (7,112) (712,253)
Income tax provision (benefit).......... 53,532 (10,733) (255,874)
-------------- ------------ ------------
Income (loss) from continuing
operations....................... 106,260 3,621 (456,379)
Net (loss) from discontinued
operations,
net of tax....................... (2,732,626) (2,597,383) (65,420)
Gain (loss) on disposition of
discontinued operations, net of
tax.............................. (1,344,394) (187,854) 1,276,899
-------------- ------------ ------------
Net income (loss).................. $ (3,970,760) $ (2,781,616) $ 755,100
============== ============ ============
Basic and diluted earnings (loss) per
share:
From continuing operations......... $ 0.03 $ 0.00 $ (0.13)
From discontinued operations....... (1.14) (0.78) 0.34
-------------- ------------ ------------
Net earnings (loss) per share...... $ (1.11) $ (0.78) $ 0.21
============== ============ ============
Weighted average common shares
outstanding........................... 3,562,753 3,561,003 3,559,253
============== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER
-------------------- --------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS)
--------- --------- --------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........... 3,796,309 $ 37,963 (238,806) $(4,187,671) $33,210,876 $10,603,965 $ --
Issuance of common stock to
nonemployee directors............ 1,750 18 -- -- 12,722 -- --
Comprehensive income (loss):
Net income......................... -- -- -- -- -- 755,100 --
Net change in unrealized
appreciation on short-term
investments...................... -- -- -- -- -- -- --
Total comprehensive income......... -- -- -- -- -- -- --
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1996........... 3,798,059 37,981 (238,806) (4,187,671) 33,223,598 11,359,065 --
Issuance of common stock to
nonemployee directors.............. 1,750 18 -- -- 13,772 -- --
Comprehensive income (loss):
Net loss........................... -- -- -- -- -- (2,781,616) --
Net change in unrealized
appreciation on short-term
investments...................... -- -- -- -- -- -- --
Total comprehensive loss........... -- -- -- -- -- -- --
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1997........... 3,799,809 37,999 (238,806) (4,187,671) 33,237,370 8,577,449 --
Issuance of common stock to
nonemployee directors.............. 1,750 17 -- -- 11,359 -- --
Comprehensive income (loss):
Net loss........................... -- -- -- -- -- (3,970,760) --
Net change in unrealized
depreciation on short-term
investments, net of deferred
taxes of $3,091.................. -- -- -- -- -- -- (6,000)
Total comprehensive loss........... -- -- -- -- -- -- --
--------- --------- --------- ---------- ----------- ---------- --------------
Balance, December 31, 1998........... 3,801,559 $ 38,016 (238,806) $(4,187,671) $33,248,729 $4,606,689 $ (6,000)
========= ========= ========= ========== =========== ========== ==============
<CAPTION>
TOTAL
----------
<S> <C>
Balance, December 31, 1995........... $39,665,133
Issuance of common stock to
nonemployee directors............ 12,740
Comprehensive income (loss):
Net income......................... 755,100
Net change in unrealized
appreciation on short-term
investments...................... --
----------
Total comprehensive income......... 755,100
----------
Balance, December 31, 1996........... 40,432,973
Issuance of common stock to
nonemployee directors.............. 13,790
Comprehensive income (loss):
Net loss........................... (2,781,616)
Net change in unrealized
appreciation on short-term
investments...................... --
----------
Total comprehensive loss........... (2,781,616)
----------
Balance, December 31, 1997........... 37,665,147
Issuance of common stock to
nonemployee directors.............. 11,376
Comprehensive income (loss):
Net loss........................... (3,970,760)
Net change in unrealized
depreciation on short-term
investments, net of deferred
taxes of $3,091.................. (6,000)
----------
Total comprehensive loss........... (3,976,760)
----------
Balance, December 31, 1998........... $33,699,763
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (3,970,760) $ (2,781,616) $ 755,100
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for disposition of
discontinued operations.......... 5,234,085 2,187,210 1,000,000
(Gain) loss on disposition of
discontinued operations.......... -- 187,854 (2,065,228)
ESI operating loss charged to
reserve for discontinued
operations....................... -- (2,193,860) (2,163,317)
Depreciation and amortization...... 910,631 674,538 2,598,411
Net amortization of premiums and
discounts on short-term
investments...................... (201,526) (246,537) (234,897)
Gain on disposal of assets......... (7,701) (63,664) --
Deferred income taxes.............. (1,964,783) 1,205,456 (232,838)
Deferred income.................... -- -- (16,430)
Common stock issued to directors... 11,376 13,790 12,740
Changes in assets and liabilities,
including discontinued
operations:
Increase in accounts
receivable, net............ (298,758) (135,806) (136,149)
(Increase) decrease in costs
and estimated earnings in
excess of billings on
uncompleted contracts...... -- 309,375 (230,304)
(Increase) decrease in
inventories, net........... (17,610) (530,633) 595,206
(Increase) decrease in income
tax receivable............. 1,512,115 (1,512,115) 2,106,678
(Increase) decrease in other
current assets............. 53,024 43,822 (834,414)
Increase (decrease) in
accounts payable and
accrued liabilities........ 182,649 (1,241,198) 556,113
--------------- --------------- ---------------
Net cash provided by
(used in) operating
activities............ 1,442,742 (4,083,384) 1,710,671
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (879,876) (682,192) (1,987,458)
Acquisition costs.................. (995,625) -- --
Proceeds from the disposition of
discontinued operations.......... -- -- 12,000,000
Proceeds from the sale of assets... 15,733 2,492,284 --
Purchases of short-term
investments...................... (28,856,556) (35,693,443) (20,193,368)
Proceeds from maturities of
short-term investments........... 29,756,126 39,355,125 5,697,159
Increase in intangible assets...... -- -- (44,763)
--------------- --------------- ---------------
Net cash provided by
(used in) investing
activities............ (960,198) 5,471,774 (4,528,430)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes
payable.......................... -- -- (28,939)
--------------- --------------- ---------------
Net cash used in
financing
activities............ -- -- (28,939)
--------------- --------------- ---------------
CASH OF BUSINESSES SOLD................. -- -- (698,699)
--------------- --------------- ---------------
Net increase (decrease)
in cash and cash
equivalents........... 482,544 1,388,390 (3,545,397)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 12,810,100 11,421,710 14,967,107
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 13,292,644 $ 12,810,100 $ 11,421,710
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
As more fully described in Note 2, through a series of transactions on
January 29, 1999, the shareholders of TEI, Inc. ("TEI") exchanged all common
shares of TEI for 3,562,753 common shares of a newly formed Pinnacle Global
Group, Inc. ("Pinnacle"). Pinnacle simultaneously completed the acquisition of
three financial services firms, by exchanging 3,562,500 of its common shares
(slightly less than 50% of outstanding common shares) in exchange for all of the
ownership interests of the three financial services firms. TEI is now a wholly
owned subsidiary of Pinnacle. TEI and Pinnacle are both referred to as the
"Company." As a result of the acquisitions, and the discontinued operations
described below, Pinnacle now provides a broad range of financial services
including investment banking, merchant banking, institutional and retail
brokerage, asset management, secondary market loan and loan servicing placement
and trust related services, primarily in the southwestern United States.
TEI has retroactively reflected the one-for-.25 TEI share exchange
described above in the accompanying Financial Statements similar to a stock
split.
During 1995, 1996 and 1997 TEI disposed of all of its operations other than
its liquid waste business, Energy Recovery Resources, Inc. ("ERRI"). In March
1999, the Board of Directors of Pinnacle adopted a plan of disposal of ERRI
effective December 31, 1998. Therefore, all of the Company's businesses operated
prior to the acquisition of the three financial services firms are reflected as
discontinued operations. Continuing operations in the historical financial
statements consist only of interest income from investments of cash, generated
from operations in prior years and from disposal of the discontinued operations,
and corporate general and administrative expenses. Thus, historical results of
continuing operations are not indicative of future operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of TEI and its wholly owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation. Prior year amounts in the
consolidated statement of operations and related notes thereto have been
reclassified to reflect the Company's discontinued operations consisting of
Engineered Systems, Inc. ("ESI"), Tanknology Corporation International
("TCI"), Tanknology Canada (1988), Inc., USTMAN Industries, Inc., collectively
the "Tank Testing Group", and ERRI, as discussed in Note 3. All footnote
amounts related to the statement of operations are from continuing operations
unless otherwise indicated.
CASH EQUIVALENTS
The Company considers all highly liquid investment instruments with
original maturities of three months or less when purchased to be cash
equivalents.
SHORT-TERM INVESTMENTS
Short-term investments are those with maturities greater than three months
when purchased. The Company has classified all short-term investments as
available-for-sale. When purchased, securities are recorded at cost and adjusted
for unrealized holding gains and losses due to market fluctuations. These
unrealized gains or losses are recorded as a separate component of other
comprehensive income. Gains and losses are recorded upon the sales of short-term
investments based upon the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over five to ten years. Depreciation expense was
$11,417, $33,533, and $47,743 for the years ended
26
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, 1997, and 1996, respectively. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and betterments are capitalized.
STOCK-BASED COMPENSATION
The Company grants stock options under stock-based incentive compensation
plans, (the "Plans"). The Company applies APB Opinion 25 and related
Interpretations in accounting for the Plans. In 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation ("SFAS No. 123") which, if
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS No. 123 is optional and the Company decided not to elect these
provisions. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are
presented in Note 8.
INCOME TAXES
The Company utilizes the liability method for deferred income taxes. The
liability approach requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events recognized in the Company's
financial statements or tax returns. All expected future events other than
changes in the law or tax rates, are considered in estimating future tax
consequences.
The provision for income taxes includes federal, state, and local income
taxes currently payable and those deferred because of temporary differences
between the financial statements and tax bases of assets and liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments, and accounts receivable related to discontinued
operations.
The Company maintains cash balances with several banks. Cash and cash
equivalents includes investments in certificates of deposit, commercial paper,
and U.S. Government Securities that mature in no more than 90 days from the date
of purchase. Short-term investments include commercial paper, U.S. Government
Securities, corporate bonds, and mutual funds. Such investments are recorded at
cost and adjusted for fluctuations in market values. At December 31, 1998,
approximately $15,940,000, $5,023,000, $2,624,000, $2,439,000, and $101,000,
respectively, were held in trust by five separate investment managers. At
December 31, 1997, approximately $7,820,000, $2,310,000, $2,495,000, $15,244,000
and $101,000, respectively, were held in trust by five separate investment
managers.
MANAGEMENT'S ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of consolidated assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. The Company's most significant estimates relate to estimated
recoverable amounts of assets and estimated liabilities of discontinued
operations.
27
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements in order for them to conform with the 1998 presentation.
The reclassifications had no effect on financial position, results of operations
or cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") in June 1998. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company has
not determined the impact of adoption of this statement.
2. ACQUISITIONS
On January 29, 1999, Pinnacle acquired three financial services firms;
Harris Webb & Garrison, Inc., Pinnacle Management & Trust Company and Spires
Financial, L.P. In the acquisitions, the former owners of the financial services
firms received consideration consisting of 3,562,500 shares of Pinnacle common
stock ("Common Stock") which represents 49.98% of the outstanding Common
Stock. The acquisitions were accounted for as purchases.
UNAUDITED PROFORMA INFORMATION
The purchase price of $30.7 million exceeded the fair value of identifiable
net assets acquired by approximately $21 million, which is being amortized on a
straight-line basis over 25 years. The results of operations of the financial
services firms will be included in the accompanying financial statements from
the date of acquisition.
The following summarized unaudited pro forma financial information assumes
the acquisitions had occurred on January 1, 1998:
<TABLE>
<S> <C>
Revenues............................. $ 19,552,000
Income from continuing operations.... 1,758,000
Basic and diluted earnings per share
from continuing operations......... 0.25
</TABLE>
These unaudited pro forma amounts are derived from the historical financial
statements of the financial services firms for 1998. The unaudited pro forma
results do not necessarily represent results which would have occurred if the
acquisitions had taken place on the basis assumed above, nor are they indicative
of the results of future combined operations.
3. DISCONTINUED OPERATIONS
In March 1999, the Board of Directors of the Company adopted a plan to
discontinue the operations of ERRI effective December 31, 1998. Accordingly, the
operating results of ERRI have been segregated from continuing operations and
reported as a discontinued operation in the statement of operations. A provision
for estimated loss on disposition of ERRI of $2,164,000 net of tax, consisting
of a write down of goodwill and property and equipment, was recorded during the
fourth quarter of 1998.
The Company has reclassified its prior financial statements to present the
operating results of ERRI as a discontinued operation. The net assets and
liabilities have been included in net assets of discontinued operations on the
balance sheet. The Company anticipates the sale of ERRI during the year ending
December 31, 1999.
28
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 25, 1996, the Company disposed of certain assets and liabilities
of the Tank Testing Group to an unrelated third party for $12 million in cash.
The disposition of the Tank Testing Group was made pursuant to a Stock Purchase
Agreement dated October 7, 1996.
ESI's operations were discontinued as of December 31, 1995. The assets of
ESI were disposed of on December 23, 1997, for a $500,000 interest bearing note
due in 2002. The purchaser has also agreed to complete customer contracts that
were in process at the time of the sale. During 1995, a provision for estimated
loss on disposition of ESI of $3,715,000, including write-off of goodwill and
estimated losses through the then expected date of sale, was recorded net of an
income tax benefit of $1,914,000. During 1996, an additional provision for
estimated loss on disposition of ESI of $660,000 was recorded, net of an income
tax benefit of $340,000. Due to unanticipated delays in the disposition of ESI,
the Company recorded an additional provision of $990,000, net of tax in the
second quarter of 1997. Upon the disposition of the assets of ESI in the fourth
quarter of 1997, the Company incurred additional losses of $1,392,000. The
additional losses in the fourth quarter were primarily due to unanticipated
costs associated with contracts in process and a change in estimate for income
taxes of approximately $517,000 related to the delays in disposition. In
accordance with the terms of the ESI asset disposition, the purchaser is
responsible for completing customers contracts that were in place at the date of
disposition. However, the Company remains liable for costs incurred by the
purchaser in excess of amounts recoverable from customers. Through the third
quarter of 1998, the Company believed, based in part from information provided
by the purchaser, that it had no additional liability with respect to the
contracts in process. Subsequent to December 31, 1998, the Company was notified
that a major customer cancelled its contract and that the other contracts in
process have incurred costs in excess of amounts recoverable from customers. As
a result the Company has recorded an additional loss related to ESI of
$1,344,000, net of tax. The Company estimates that it will not incur any
additional losses with respect to contracts to be completed by the purchaser;
however, the Company has experienced significant changes in these estimates in
the past and it is possible that such changes could occur in 1999.
29
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of selected financial information of discontinued operations for
each of the three years in the period ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
ERRI............................... $ 2,953,000 $ 2,726,000 $ 2,199,000
ESI................................ -- 1,954,000 3,322,000
Tank Testing Group ("TTG")....... -- -- 18,926,000
Cost of sales:
ERRI............................... 2,497,000 2,190,000 1,554,000
ESI................................ -- 3,646,000 4,761,000
TTG................................ -- -- 11,221,000
Gross margin (loss):
ERRI............................... 456,000 536,000 645,000
ESI................................ -- 1,692,000 (1,439,000)
TTG................................ -- -- 7,705,000
Selling, general & administrative:
ERRI............................... 1,173,000 1,088,000 808,000
ESI................................ -- 502,000 724,000
TTG................................ -- -- 5,417,000
Net income (loss), net of tax:
ERRI............................... (2,733,000) (403,000) (78,000)
ESI................................ -- (2,194,000) (660,000)
TTG................................ -- -- 672,000
Gain (loss) on disposition, net of tax:
ESI................................ (1,344,000) (188,000) --
TTG................................ -- -- 1,277,000
</TABLE>
Net assets of discontinued operations at December 31, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- ----------
<S> <C> <C>
Working capital (excluding accrued
losses).............................. $ 795,328 $ (22,694)
Accrued losses....................... (1,568,894) --
Long term assets..................... 3,848,526 400,000
-------------- ----------
Net assets........................... $ 3,074,960 $ 377,306
============== ==========
</TABLE>
4. SHORT-TERM INVESTMENTS
The Company's investments in cash equivalents and short-term investments,
all of which mature within one year, at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------
GROSS UNREALIZED 1997
AMORTIZED --------------------- ESTIMATED ESTIMATED
COST GAINS LOSSES FAIR VALUE FAIR VALUE
------------ --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
U.S. Government agency obligations... $ 1,309,292 $ -- $ (188) $ 1,309,104 $ 5,313,447
Corporate bonds...................... 9,216,698 22,757 (31,691) 9,207,764 9,050,985
Money market mutual funds............ 2,438,650 -- -- 2,438,650 2,309,900
Commercial paper..................... 12,589,152 -- -- 12,589,152 11,013,606
Certificates of deposit.............. 199,969 31 -- 200,000 101,010
Less: Cash equivalents............... (11,107,095) -- -- (11,107,095) (12,453,329)
------------ --------- ---------- ------------ -----------
Total short-term investments.... $ 14,646,666 $ 22,788 $ (31,879) $ 14,637,575 $15,335,619
============ ========= ========== ============ ===========
</TABLE>
30
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net unrealized gain/loss at December 31, 1997 was not material.
5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts at December
31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Property and equipment:
Buildings and improvements...... $ -- $ 2,347,316
Furniture, fixtures and
equipment..................... 52,455 2,825,068
Land............................ -- 189,260
Plant construction in
progress...................... -- 227,751
----------- ------------
Total property and
equipment............... 52,455 5,589,395
Accumulated depreciation........ (27,339) (800,254)
----------- ------------
Net property and
equipment............... $ 25,116 $ 4,789,141
=========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accrued liabilities:
Compensation.................... $ 32,836 $ 123,364
Claims reserves................. 599,435 829,435
Other........................... 67,793 80,735
------------ ------------
Total accrued
liabilities............. $ 700,064 $ 1,033,534
============ ============
</TABLE>
6. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996
1998 RECLASSIFIED RECLASSIFIED
-------------- ------------ ------------
<S> <C> <C> <C>
Continuing operations:
Federal -- current................. $ -- $ (3,136) $ 145,387
Federal -- deferred................ 53,532 (7,597) (348,280)
State -- current................... -- -- (52,981)
State -- deferred.................. -- -- --
-------------- ------------ ------------
Total continuing.............. 53,532 (10,733) (255,874)
Discontinued operations................. (2,018,315) (142,202) 953,038
-------------- ------------ ------------
Total......................... $ (1,964,783) $ (152,935) $ 697,164
============== ============ ============
</TABLE>
31
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the effective tax rate reflected in the income tax
provision (benefit) for continuing operations and the statutory federal rate is
analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996
1998 RECLASSIFIED RECLASSIFIED
--------- ------------ ------------
<S> <C> <C> <C>
Amount computed using the statutory
rate.................................. $ 54,329 $ (2,418) $ (242,166)
Other................................... (797) (8,315) (13,708)
--------- ------------ ------------
Total.............................. $ 53,532 $(10,733) $ (255,874)
========= ============ ============
</TABLE>
The effective tax rates for continuing operations for the years ended
December 31, 1998, 1997, and 1996 were 33.5%, 150.9%, and 35.9%, respectively.
The effective tax rate for discontinued operations was approximately 33.1%,
5.9%, and 42.5% for the years ended December 31, 1998, 1997, and 1996,
respectively.
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current deferred tax assets
(liabilities):
Net operating loss carryforward.... $ -- $ 285,312
Difference in recognition of
inventory reserve................ 36,663 --
Difference in recognition of
accrued liabilities.............. 240,628 163,338
Difference in recognition of
allowance for doubtful
accounts......................... 131,367 66,961
------------ ------------
Total current deferred tax
asset...................... 408,658 515,611
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Noncurrent deferred tax assets
(liabilities):
Net operating loss
carryforward.................. $ 755,059 $ --
Difference in recognition of
asset impairment.............. 1,150,383 --
Difference in recognition of
accrued liabilities........... 588,141 288,660
Difference in depreciation and
amortization.................. (445,331) (435,937)
Difference in deducting
construction period
interest...................... 41,530 41,530
Difference in recognition of
allowance for other
receivables................... -- 136,340
Other........................... 158,337 145,790
------------ ------------
Total noncurrent deferred
tax asset............... 2,248,119 176,383
------------ ------------
Net deferred income
taxes.............. $ 2,656,777 $ 691,994
============ ============
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Total rental expense for operating leases, none of which extend beyond
December 31, 1999, for the years ended December 31, 1998, 1997, and 1996 was
$69,692, $33,577, and $8,726, respectively.
The Company is involved in litigation and routine claims from time to time.
Certain of the Company's litigation and claims are covered by insurance with a
maximum deductible of $50,000. In addition, the Company is contingently liable
for up to $600,000 for liabilities relating to services performed by the Tank
Testing Group prior to October 25, 1996. The Company has recorded $599,000
liability for that contingency as of December 31, 1998. The Company believes the
ultimate outcome of the litigation and claims
32
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will not have a material adverse effect to the Company's consolidated financial
position, results of operations or cash flows.
8. STOCK OPTIONS
The Board of Directors has reserved 1,000,000 authorized shares of its
Common Stock for the purpose of issuing nonincentive stock options, incentive
stock options, and restricted stock awards to key employees under its 1989 Stock
Option Plan. The exercise price for a nonincentive stock option shall not be
less than 85% of the fair market value of the Common Stock on the date of grant.
The exercise price for each incentive stock option granted may not be less than
the fair market value of the Company stock on the date of grant. For those
incentive stock optionees owning more than 10% of the Company's Common Stock on
the date the options are granted, the option price per share for an incentive
stock option shall not be less than 110% of the fair market value on the date of
the grant. The purchase price for restricted stock may be equal to or less than
par value and may be zero. The options under the plan vest on graded schedule
depending on the Company's stock price. Fifteen percent of all options are
vested immediately as of the date of grant and an additional 15% will vest on
the third anniversary of the date of grant. An additional 70% will vest within 3
years if the Company's stock price equals or exceeds certain criteria.
Otherwise, these options will vest on the tenth anniversary of the date of
grant.
A total of 200,000 shares of Common Stock were reserved for issuance under
the 1991 Nonemployee Director Stock Option Plan, which authorized the granting
of nonincentive stock options to purchase Common Stock and restricted stock
awards subject to certain restrictions to nonemployee directors. Under the
original plan, each eligible nonemployee director received (i) an option to
purchase 1,500 shares of common stock on January 1 of each year, beginning
January 1, 1993, and (ii) 250 shares of restricted stock (collectively, an
"Award"). Each director option will expire five (5) years after the date of
grant. The purchase price for each share of restricted stock shall be zero.
Effective with the January 1, 1995 issue date, the 1991 Nonemployee Director
Stock Option Plan was amended to eliminate the annual issuance of the director
options for 1,500 shares of Common Stock to nonemployee directors.
The Company had 246,474, 235,974, and 174,324 shares of Common Stock
available for grant under existing stock option plans at December 31, 1998,
1997, and 1996, respectively.
The following table sets forth pertinent information regarding stock option
transactions for each of the three years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
----------- ---------------
<S> <C> <C>
Outstanding at January 1,
1996............................ 279,717 $ 13.88
Granted.............................. -- --
Cancelled/Forfeited.................. (36,942) $ 21.16
-----------
Outstanding at December 31,
1996............................ 242,775 $ 12.76
Granted.............................. -- --
Cancelled/Forfeited.................. (61,650) $ 17.20
-----------
Outstanding at December 31,
1997............................ 181,125 $ 11.32
Granted.............................. -- --
Cancelled/Forfeited.................. (10,500) $ 16.24
-----------
Outstanding at December 31,
1998............................ 170,625 $ 11.04
===========
</TABLE>
33
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize information related to stock options
outstanding and exercisable at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/98 CONTR. LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- - - ------------------------------------- ------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 9.64 to $20.00..................... 157,500 6.50 $ 9.84 84,000 $ 9.92
$20.04 to $24.52..................... 13,125 6.00 $ 24.08 13,125 $ 24.08
------------- --- --------------- --------------- ---------------
$ 9.64 to $24.52..................... 170,625 6.46 $ 11.04 97,125 $ 11.44
============= ===============
</TABLE>
<TABLE>
<CAPTION>
1997
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/97 CONTR. LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- - - ------------------------------------- ------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 9.64 to $20.00..................... 168,000 7.50 $ 10.32 90,750 $ 10.68
$20.04 to $24.52..................... 13,125 1.0 $ 24.04 13,125 $ 24.04
------------- --- --------------- --------------- ---------------
$ 9.64 to $24.52..................... 181,125 7.03 $ 11.32 103,875 $ 12.36
============= ===============
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate
of 5.52%; the expected life of options is 5.0 years; and volatility of 32.6% for
the grants. Had the compensation cost for the Company's stock-based compensation
plan been determined in accordance with the accounting requirements of SFAS 123,
the Company's net income and net income per common share for 1998 would
approximate the pro forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
RECLASSIFIED RECLASSIFIED
Income (loss) from continuing
operations --
as reported........................... $ 106,260 $ 3,621 $ (456,379)
Income (loss) from continuing
operations --
pro forma............................. $ 92,126 $ 12,575 $ (462,679)
Continuing operations income (loss) per
share -- as reported.................. $ 0.03 $ 0.00 $ (0.13)
Continuing operations income (loss) per
share -- pro forma.................... $ 0.03 $ 0.00 $ (0.13)
</TABLE>
In connection with the acquisitions of the financial services firms,
Pinnacle adopted the 1998 Incentive Plan ("Incentive Plan"). Under the
Incentive Plan, the Company may issue incentive awards covering an aggregate of
the greater of (i) 1,100,000 shares of Common Stock and (2) 15% of the number
shares of Common Stock issued and outstanding on the last day of the then
preceding calendar quarter. Under the acquisitions, all outstanding TEI options
were converted into options to purchase one-fourth of the number of shares of
Common Stock at exercise price per share four times the per share exercise price
of the converted TEI options.
34
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted per-share computations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Computation of basic and diluted
earnings (loss) per common share:
Net income (loss) applicable to
common stock.................. $ (3,970,760) $ (2,781,616) $ 755,100
============== ============== ==============
Weighted average number of
common shares outstanding..... 3,562,753 3,561,003 3,559,253
Common shares issuable under
stock option plan............. -- -- --
Less shares assumed repurchased
with proceeds................. -- -- --
-------------- -------------- --------------
Weighted average common
shares outstanding...... 3,562,753 3,561,003 3,559,253
============== ============== ==============
Basic and diluted earnings
(loss) per common
share................... $ (1.11) $ (0.78) $ 0.21
============== ============== ==============
</TABLE>
Stock options outstanding of 170,625, 181,125 and 242,775 at December 31,
1998, 1997 and 1996, respectively, have not been included in diluted earnings
per common share because to do so would have been antidilutive for the periods
presented.
10. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
par value $.10 per share. Shares of Preferred Stock may be issued from time to
time by the Board of Directors, without action by the shareholders, in one or
more series with such designations, preferences and special rights and
qualifications, limitations, and restrictions as may be designated by the Board
of Directors prior to the issuance of such series.
11. RELATED PARTIES
The Company issued Common Stock in lieu of cash to nonemployee directors
totaling $11,376, $13,790, and $12,740, during 1998, 1997, and 1996,
respectively. The Company purchased diesel and boiler fuel and utilized freight
services from a company owned by the President of ERRI totaling $207,000,
$159,000 and $59,000 during 1998, 1997, and 1996, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was approximately $0, $6,700, and $5,000 for
the years ended December 31, 1998, 1997, and 1996, respectively. The Company
paid approximately $52,000, $846,000, and $286,000 in cash for income taxes
during the years ended December 31, 1998, 1997, and 1996, respectively, and
received approximately $1,508,000, $72,000 and $1,588,000 in cash from income
tax refunds during the years ended December 31, 1998, 1997, and 1996,
respectively. In 1997, the Company received notes of $500,000 in connection with
disposition of discontinued operations.
35
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 DEC. 31,
RECLASSIFIED RECLASSIFIED RECLASSIFIED 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income......... $ 385,000 $ 374,000 $ 393,000 $ 372,000
Selling, general and administrative
expenses............................. 462,000 333,000 267,000 302,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income
taxes......................... (77,000) 41,000 126,000 70,000
Income tax provision (benefit)....... (26,000) 14,000 43,000 23,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations.................... (51,000) 27,000 83,000 47,000
Income (loss) from discontinued
operations, net of tax........ (40,000) 54,000 (342,000) (3,749,000)
------------- ------------- ------------- -------------
Net income (loss)............... $ (91,000) $ 81,000 $ (259,000) $ (3,702,000)
============= ============= ============= =============
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.02) $ 0.00 $ 0.02 $ 0.01
From discontinued operations.... (0.01) 0.02 (0.09) (1.05)
------------- ------------- ------------- -------------
Net earnings (loss) per share... $ (0.03) $ 0.02 (0.07) $ (1.04)
============= ============= ============= =============
Weighted average common shares
outstanding.......................... 3,562,753 3,562,753 3,562,753 3,562,753
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
RECLASSIFIED RECLASSIFIED RECLASSIFIED RECLASSIFIED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income......... $ 382,000 $ 389,000 $ 370,000 $ 389,000
Selling, general and administrative
expenses........................... 387,000 413,000 411,000 326,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income
taxes......................... (5,000) (24,000) (41,000) 63,000
Income tax provision (benefit)....... (2,000) (8,000) (14,000) 13,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations.................... (3,000) (16,000) (27,000) 50,000
Income (loss) from discontinued
operations, net of tax........ (141,000) (1,139,000) 13,000 (1,519,000)
------------- ------------- ------------- -------------
Net income (loss)............... (144,000) (1,155,000) (14,000) (1,469,000)
============= ============= ============= =============
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.00) $ (0.00) $ 0.00 $ 0.02
From discontinued operations.... (0.04) (0.32) 0.00 (0.43)
------------- ------------- ------------- -------------
Net earnings (loss) per share... (0.04) $ (0.32) $ (0.00) (0.41)
============= ============= ============= =============
Weighted average common shares
outstanding........................ 3,561,003 3,561,003 3,561,003 3,561,003
============= ============= ============= =============
</TABLE>
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item 10 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item 12 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item 13 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
37
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of the Company and Report of Independent
Accountants are included under Part II Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants....... 21
Consolidated Balance Sheet as of
December 31, 1998 and 1997............ 22
Consolidated Statement of Operations for
the three years in the period ended
December 31, 1998..................... 23
Consolidated Statement of Shareholders'
Equity for the three years in the
period
ended December 31, 1998............... 24
Consolidated Statement of Cash Flows for
the three years in the period ended
December 31, 1998..................... 25
Notes to Consolidated Financial
Statements............................ 26
</TABLE>
2. Financial Statement Schedules
The following financial statement schedules should be read in
conjunction with the consolidated financial statements and notes
thereto.
<TABLE>
<S> <C>
Report of Independent Accountants....... S-1
Schedule II -- Valuation and qualifying
accounts.............................. S-2
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or the
required information is included elsewhere in the financial statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - - -------------------------------------------------------------
<C> <S>
3.1 -- Articles of Incorporation of the
Company, as amended (Filed as
Appendix F to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporate herein by
reference).
*3.2 -- Amendment and Restated Bylaws of the
Company.
10.1 -- Amended and Restated Agreement and
Plan of Reorganization dated October
2, 1998 among the company, TEI, Inc.
("TEI"), Harris Webb & Garrison,
Inc. ("HWG"), Pinnacle Management &
Trust Company ("PMT"), Spires
Financial, L.P. ("Spires") and
certain direct and indirect owners of
HWG, PMT and Spires (Filed as
Appendix A to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.2 -- Plan of Merger dated October 2, 1998,
among TEI, TEI Combination
Corporation and the Company (Filed as
Appendix B to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.3 -- Plan of Merger dated October 2, 1998,
among HWG, HWG Combination Corpora-
tion and the Company (Filed as
Appendix C to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.4 -- Plan of Merger dated October 2, 1998,
among PMT, PMT Combination
Corporation and the Company (Filed as
Appendix D to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.5 -- 1998 Incentive Plan of the Company
(Filed as an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference)
10.6 -- Consulting Agreement, dated December
10, 1991, between TEI and T.G. Bogle
(Filed as an exhibit to TEI's Form
10-K for the year ending December 31,
1991 (File No. 0-18899) and
incorporated herein by reference)
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
10.7 -- Asset Purchase Agreement between
Tanknology Environmental, Inc. and
Mankoff Equipment, Inc. dated
September 23, 1993 (Filed as an
exhibit to TEI's Form 8-K dated
October 1, 1993 (File No. 0-18899)
and incorporated herein by
reference).
10.8 -- Noncompete Agreement between
Tanknology Environmental, Inc. and
Curt J. Mankoff (Filed as an exhibit
to TEI's Form 8-K dated October 1,
1993 (File No. 0-18899) and
incorporated herein by reference)
10.9 -- Asset Purchase Agreement dated
Tanknology Environmental, Inc. and
Jack Holder Enterprises, Inc. dated
January 31, 1994 (Filed as an exhibit
to TEI's Form 10-K for the year
ending December 31, 1994 (File No.
0-18899) and incorporated herein by
reference)
10.10 -- Agreement to sell assets, dated
December 22, 1995, between Mankoff,
Inc. and Donald Kooperman (Filed as
an exhibit to TEI's Form 10-K for the
year ending December 31 1995 (File
No. 0-18899) and incorporated herein
by reference).
10.11 -- Installment note between Mankoff,
Inc. and Continental Environmental,
Inc., dated December 20, 1995 (Filed
as an exhibit to TEI's Form 10-K for
the year ending December 31, 1995
(File No. 0-18899) and incorporated
herein by reference).
10.12 -- License Agreement between Tanknology
Worldwide and Fulton Hogan Limited,
dated April 1, 1995 (Filed as an
exhibit to TEI's Form 10-K for the
year ending December 31, 1995 (File
No. 0-18899) and incorporated herein
by reference).
10.13 -- Stock Purchase Agreement between
Tanknology Environmental, Inc. and
NDE Environmental Corporation dated
October 7, 1996 (Filed as an exhibit
to TEI's Form 8-K dated October 25,
1996 (File No. 0-18899) and
incorporated herein by reference).
10.14 -- Asset Purchase Agreement between
Tanknology/Engineered Systems, Inc.,
TEI, Inc. and Sorrento Electronics,
Inc. dated December 23, 1997 (filed
as an exhibit to TEI's Form 10-K for
the year ending December 23, 1997
(File No. 0-18899) and incorporated
herein by reference).
10.15 -- Sublease Agreement dated January 19,
1994 between Texas Commerce Bank
National Association and Harris Webb
& Garrison, Inc., as amended by that
certain First Amendment to Sublease
Agreement dated February 23, 1994,
the Second Amendment to Sublease
Agreement dated April 26, 1994, and
the Third Amendment to Sublease
Agreement dated January 19, 1995.
(Filed as an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.16 -- Office Lease Agreement dated February
1, 1998 between 5599 San Felipe, Ltd.
and Harris Webb & Garrison, Inc.
(Filed as an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference)
*10.17 -- Office Lease Agreement dated January
19, 1999 between 5599 San Felipe,
Ltd. and the Company.
10.18 -- Letter Agreement dated January 14,
1994 between S.G. Cowen & Company and
Harris Webb & Garrison, Inc., as
amended January 19, 1994. (Filed as
an exhibit to the Proxy
Statement/Prospectus of the Company
dated December 31, 1998 (Reg. No.
333-50323) and incorporated herein by
reference).
10.19 -- Autotrust Agreement dated January 9,
1998 between SunGard Trust Systems
Inc. and Pinnacle Management & Trust
Company (Filed as an exhibit to the
Proxy Statement/Prospectus of the
Company dated December 31, 1998 (Reg.
No. 333-50323) and incorporated
herein by reference).
*21.1 -- List of Subsidiaries of the
Registrant.
*23.1 -- Consent of PricewaterhouseCoopers
LLP.
*27.1 -- Financial Data Schedule.
</TABLE>
- - - ------------
* Filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period
ended December 31, 1998.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 1999.
PINNACLE GLOBAL GROUP, INC.
By: /s/ ROBERT E. GARRISON II
____________________________________
PRESIDENT, CHIEF EXECUTIVE
3 OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated and on the 31st day of March, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- - - ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/TITUS H. HARRIS, JR. Chairman of the Board
TITUS H. HARRIS, JR.
/s/ROBERT E. GARRISON II President, Chief Executive Officer, and Director
ROBERT E. GARRISON II (Principal Executive Officer)
/s/DONALD R. CAMPBELL Vice Chairman, Director
DONALD R. CAMPBELL (Principal Financial and
Accounting Officer)
/s/T. G. BOGLE Director
T. G. BOGLE
/s/T. CRAIG BENSON Director
T. CRAIG BENSON
/s/TONY COELHO Director
TONY COELHO
/s/JAMES H. GREER Director
JAMES H. GREER
/s/W. BLAIR WALTRIP Director
W. BLAIR WALTRIP
/s/PETER W. BADGER Director
PETER W. BADGER
</TABLE>
40
<PAGE>
SIGNATURES -- (CONTINUED)
<TABLE>
<CAPTION>
SIGNATURE TITLE
- - - ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/STEPHEN M. RECKLING Director
STEPHEN M. RECKLING
/s/RICHARD C. WEBB Director
RICHARD C. WEBB
/s/SEAN DOBSON Director
SEAN DOBSON
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Pinnacle Global Group, Inc.:
Our audit of the consolidated financial statements referred to in our
report dated March 31, 1999 of TEI, Inc. and Subsidiaries included on page 21 of
this Form 10-K also included an audit of the financial statement schedule listed
in Item 14(a) of this Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers
LLP
Houston, Texas
March 31, 1999
S-1
<PAGE>
SCHEDULE II
TEI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
==================================================================================================================================
COL. A COL. B COL. C(1) COL. C(2) COL. D COL. E
- - - ----------------------------------------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT OTHER
BEGINNING OF ACCOUNTS -- DEDUCTIONS -- BALANCE AT
DESCRIPTION PERIOD ADDITIONS DESCRIBE DESCRIBE END OF PERIOD
<S> <C> <C> <C> <C> <C>
- - - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Allowance for doubtful accounts and
notes.............................. $ 430,510 $ -- $ (9,945)(A) $ (420,565)(B) $ --
============ ========== ============ ============== =============
Reserve for slow moving and obsolete
inventory.......................... $ -- $ -- $ -- $ -- $ --
============ ========== ============ ============== =============
DECEMBER 31, 1997
Allowance for doubtful accounts and
notes.............................. $ 849,427 $452,065 $ -- $ (870,982)(B)(C) $ 430,510
============ ========== ============ ============== =============
Reserve for slow moving and obsolete
inventory.......................... $ -- $ -- $ -- $ -- $ --
============ ========== ============ ============== =============
DECEMBER 31, 1996
Allowance for doubtful accounts and
notes.............................. $1,199,286 $ 30,996 $ (380,855)(A) $ -- $ 849,427
============ ========== ============ ============== =============
Reserve for slow moving and obsolete
inventory.......................... $ 510,480 $ -- $ (510,480)(A) $ -- $ --
============ ========== ============ ============== =============
</TABLE>
- - - ------------
(A) Amounts were reclassified to net assets of discontinued operations.
(B) Represents the charge off of receivables.
(C) Includes $178,425 attributable to discontinued operations.
S-2
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS OF
PINNACLE GLOBAL GROUP, INC.
(the "Corporation")
ARTICLE I
OFFICES
SECTION 1.1. OFFICES. The principal business office of the
Corporation shall be 5599 San Felipe, Suite 1212, Houston, Texas 77056. The
Corporation may have such other business offices within or without the State of
Texas as the Corporation's board of directors (the "BOARD OF DIRECTORS") may
from time to time establish.
ARTICLE II
CAPITAL STOCK
SECTION 2.1. CERTIFICATE REPRESENTING SHARES. Shares of the capital
stock of the Corporation shall be represented by certificates in such form or
forms as the Board of Directors may approve, provided that such form or forms
shall comply with all applicable requirements of law or of the Corporation's
articles of incorporation, as amended (the "ARTICLES OF INCORPORATION"). Such
certificates shall be signed by the President or a vice president, and by the
Secretary or an assistant secretary, of the Corporation and may be sealed with
the seal of the Corporation or imprinted or otherwise marked with a facsimile of
such seal. The signature of any or all of the foregoing officers of the
Corporation may be represented by a printed facsimile thereof. If any officer
whose signature, or a facsimile thereof, shall have been set upon any
certificate shall cease, prior to the issuance of such certificate, to occupy
the position in right of which his signature, or facsimile thereof, was so set
upon such certificate, the Corporation may nevertheless adopt and issue such
certificate with the same effect as if such officer occupied such position as of
such date of issuance; and issuance and delivery of such certificate by the
Corporation shall constitute adoption thereof by the Corporation. The
certificates shall be consecutively numbered, and as they are issued, a record
of such issuance shall be entered in the books of the Corporation.
SECTION 2.2. STOCK CERTIFICATE BOOK AND SHAREHOLDERS OF RECORD. The
Secretary of the Corporation shall maintain, among other records, a stock
certificate book, the stubs in which shall set forth the names and addresses of
the holders of all issued shares of the Corporation, the number of shares held
by each, the number of certificates representing such shares, the date of issue
of such certificates, and whether or not such shares originate from original
issue or from transfer.
1
<PAGE>
The names and addresses of shareholders as they appear on the stock certificate
book shall be the official list of shareholders of record of the Corporation for
all purposes. The Corporation shall be entitled to treat the holder of record of
any shares as the owner thereof for all purposes, and shall not be bound to
recognize any equitable or other claim to, or interest in, such shares or any
rights deriving from such shares on the part of any other person, including, but
without limitation, a purchaser, assignee, or transferee, unless and until such
other person becomes the holder of record of such shares, whether or not the
Corporation shall have either actual or constructive notice of the interest of
such other person.
SECTION 2.3. SHAREHOLDER'S CHANGE OF NAME OR ADDRESS. Each
shareholder shall promptly notify the Secretary of the Corporation, at its
principal business office, by written notice sent by certified mail, return
receipt requested, of any change in name or address of the shareholder from that
as it appears upon the official list of shareholders of record of the
Corporation. The Secretary of the Corporation shall then enter such changes into
all affected Corporation records, including, but not limited to, the official
list of shareholders of record.
SECTION 2.4. TRANSFER OF STOCK. The shares represented by any
certificate of the Corporation are transferable only on the books of the
Corporation by the holder of record thereof or by his duly authorized attorney
or legal representative upon surrender of the certificate for such shares,
properly endorsed or assigned. The Board of Directors may make such rules and
regulations concerning the issue, transfer, registration and replacement of
certificates as they deem desirable or necessary.
SECTION 2.5. TRANSFER AGENT AND REGISTRAR. The Board of Directors
may appoint one or more transfer agents or registrars of the shares, or both,
and may require all share certificates to bear the signature of a transfer agent
or registrar, or both.
SECTION 2.6. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation
may issue a new certificate for shares of stock in the place of any certificate
theretofore issued and alleged to have been lost, stolen or destroyed, but the
Board of Directors may require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to furnish an affidavit as to such
loss, theft, or destruction and to give a bond in such form and substance, and
with such surety or sureties, with fixed or open penalty, as the board may
direct, in order to indemnify the Corporation and its transfer agents and
registrars, if any, against any claim that may be made on account of the alleged
loss, theft or destruction of such certificate.
SECTION 2.7. FRACTIONAL SHARES. Only whole shares of the stock of
the Corporation shall be issued. In case of any transaction by reason of which a
fractional share might otherwise be issued, the directors, or the officers in
the exercise of powers delegated by the directors, shall take such measures
consistent with the law, the Articles of Incorporation and these bylaws,
including (for example, and not by way of limitation) the payment in cash of an
amount equal to the fair value of any fractional share, as they may deem proper
to avoid the issuance of any fractional share.
2
<PAGE>
ARTICLE III
THE SHAREHOLDERS
SECTION 3.1. ANNUAL MEETING. Commencing in the calendar year 2000,
the annual meeting of the shareholders, for the election of directors and for
the transaction of such other business as may properly come before the meeting,
shall be held at such place, date and time as shall be designated by resolution
of the Board of Directors; PROVIDED, HOWEVER, that no more than thirteen months
shall have elapsed between two consecutive annual meetings of shareholders.
Failure to hold any annual meeting or meetings shall not work a forfeiture or
dissolution of the Corporation.
Only such business shall be conducted as shall have been properly brought
before the meeting. To be properly brought before an annual meeting, business
must be (a) specified in the notice of meeting given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting or at
the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a shareholder of the Corporation. For business to be
properly brought before an annual meeting by a shareholder, the shareholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a shareholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation, no less than 60 days nor
more than 180 days prior to the anniversary date of the immediately preceding
annual meeting; PROVIDED, HOWEVER, that in the event that the date of the annual
meeting is changed by more than 30 days from such anniversary date, notice by
the shareholder to be timely must be received not later than the close of
business on the tenth day following the earlier of the date on which a written
statement setting forth the date of such meeting was mailed to shareholders or
the date on which it is first disclosed to the public. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder proposes to
bring before the annual meeting: (a) a brief description of the business desired
to be brought before the annual meeting, (b) the name and address, as they
appear on the Corporation's books, of the shareholder proposing such proposal,
(c) the class and number of shares of the Corporation that are beneficially
owned by the shareholder, and (d) any material interest of the shareholder in
such business. In addition, if the shareholder's ownership of shares of the
Corporation, as set forth in the notice, is solely beneficial, documentary
evidence of such ownership must accompany the notice. Notwithstanding anything
else in these Bylaws to the contrary, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in this
Section 3. The presiding officer of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that any business that was not
properly brought before the meeting is out of order and shall not be transacted
at the meeting.
SECTION 3.2. SPECIAL MEETINGS. Except as otherwise provided by law
or by the Articles of Incorporation, special meetings of the shareholders may be
called by the chairman of the Board of Directors, the President, or any one of
the directors and shall be held at the principal office of the Corporation or at
such other place, and at such time, as may be stated in the notice calling such
meeting.
3
<PAGE>
SECTION 3.3. NOTICE OF MEETINGS - WAIVER. Written or printed notice
of each meeting of shareholders, stating the place, day and hour of any meeting
and, in case of a special shareholders' meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten nor more than
sixty days before the date of such meeting, either personally or by mail, by or
at the direction of the President, the Secretary, or the persons calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder at his address as it appears on the
stock transfer books of the Corporation, with postage thereon prepaid. Such
further or earlier notice shall be given as may be required by law. The signing
by a shareholder of a written waiver of notice of any shareholders' meeting,
whether before or after the time stated in such waiver, shall be equivalent to
the receiving by him of all notice required to be given with respect to such
meeting. Attendance by a shareholder, whether in person or by proxy, at a
shareholders' meeting shall constitute a waiver of notice of such meeting. No
notice of any adjournment of any meeting shall be required.
SECTION 3.4. DISCHARGE OF NOTICE REQUIREMENT. The notice provided
for in Section 3.3. of these bylaws is not required to be given to any
shareholder if either notice of two consecutive annual meetings and all notices
of meetings held during the period between such annual meetings or all payments
(but in no event less than two payments) of distributions or interest on
securities, during a 12-month period, have been sent by first class mail, to
such shareholder, addressed to the address as shown on the records of the
Corporation and have been returned undeliverable. Any action or meeting taken or
held without notice to such a shareholder shall have the same force and effect
as if the notice had been duly given and any articles or document filed with the
Secretary of State pursuant to action taken may state that notice was duly given
to all persons to whom notice was required to be given. The requirement that
notice be given to such a shareholder shall be reinstated if such shareholder
delivers to the Corporation a written notice setting forth his then current
address.
SECTION 3.5. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. For
the purpose of determining shareholders entitled to notice of, or to vote at,
any meeting of shareholders or any adjournment thereof, or shareholders entitled
to receive a distribution by the Corporation (other than a distribution
involving a purchase or redemption by the Corporation of any of its own shares)
or a share dividend, or in order to make a determination of shareholders for any
other proper purpose, the Board of Directors of the Corporation may provide that
the stock transfer books shall be closed for a stated period in no case to
exceed sixty days. If the stock transfer books shall be closed for the purpose
of determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least the ten days immediately
preceding such meeting. In lieu of closing the stock transfer books, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in no case to be more than sixty days
nor, in the case of a meeting of shareholders, less than ten days prior to the
date on which the particular action requiring such determination of shareholders
is to be taken. If the stock transfer books are not closed and no record date is
fixed for the determination of shareholders entitled to notice of or to vote at
a meeting of shareholders, or shareholders entitled to receive a distribution
(other than a distribution involving a purchase or redemption by the corporation
of any of its own shares) or a share dividend,
4
<PAGE>
the date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such distribution or share
dividend is adopted, as the case may be, shall be the record date of such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made, as provided in this Section,
such determination shall apply to any adjournment thereof except where the
determination has been made through the closing of stock transfer books and the
stated period of closing has expired.
SECTION 3.6. DISTRIBUTIONS AND SHARE OWNERSHIP AS OF RECORD DATE.
Distributions of cash, tangible property or intangible property made or payable
by the Corporation, whether in liquidation or from earnings, profits, assets or
capital, including all distributions that were payable but not paid to the
registered owner of the shares, his heirs, successors or assigns but that are
now being held in suspense by the Corporation or that were paid or delivered by
it into an escrow account or to a trustee or custodian, shall be payable by the
Corporation, escrow agent, trustee or custodian to the person registered as
owner of the shares in the Corporation's stock transfer books as of the record
date determined for that distribution, as provided in Section 3.5. of these
bylaws, his heirs, successors or assigns. The person in whose name the shares
are or were registered in the stock transfer books of the Corporation as of the
record date shall be deemed to be the owner of the shares registered in his name
at that time.
SECTION 3.7. VOTING LIST. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten days prior to such meeting, shall be kept on
file at the registered office of the Corporation and shall be subject to lawful
inspection by any shareholder at any time during the usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting. Failure to comply with this Section shall not affect the
validity of any action taken at such meeting.
SECTION 3.8. QUORUM AND OFFICERS. Except as otherwise provided by
law, by the Articles of Incorporation or by these bylaws, the holders of a
majority of the shares entitled to vote and represented in person or by proxy
shall constitute a quorum at a meeting of shareholders, but the shareholders
present at any meeting, although representing less than a quorum, may from time
to time adjourn the meeting to some other day and hour, without notice other
than announcement at the meeting. The shareholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum. The vote of the
holders of a majority of the shares entitled to vote and thus represented at a
meeting at which a quorum is present shall be the act of the shareholders'
meeting, unless the vote of a greater number is required by law. The chairman of
the board shall preside at, and the Secretary shall keep the records of, each
meeting of shareholders, and in the absence of either such officer, his duties
shall be performed by any other officer authorized by these bylaws or any person
appointed by resolution duly adopted at the meeting.
5
<PAGE>
SECTION 3.9. VOTING AT MEETINGS. Each outstanding share shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders except to the extent that the Articles of Incorporation or the laws
of the State of Texas provide otherwise.
SECTION 3.10. PROXIES. A shareholder may vote either in person or by
proxy executed in writing by the shareholder, or by his duly authorized
attorney-in-fact. No proxy shall be valid after eleven (11) months from the date
of its execution unless otherwise provided in the proxy. A proxy shall be
revocable unless the proxy form conspicuously states that the proxy is
irrevocable and the proxy is coupled with an interest.
SECTION 3.11. BALLOTING. Upon the demand of any shareholder, the
vote upon any question before the meeting shall be by ballot. At each meeting
inspectors of election may be appointed by the presiding officer of the meeting,
and at any meeting for the election of directors, inspectors shall be so
appointed on the demand of any shareholder present or represented by proxy and
entitled to vote in such election of directors. No director or candidate for the
office of director shall be appointed as such inspector. The number of votes
cast by shares in the election of directors shall be recorded in the minutes.
SECTION 3.12. VOTING RIGHTS, PROHIBITION OF CUMULATIVE VOTING FOR
DIRECTORS. Each outstanding share of common stock shall be entitled to one (1)
vote upon each matter submitted to a vote at a meeting of shareholders. No
shareholder shall have the right to cumulate his votes for the election of
directors but each share shall be entitled to one vote in the election of each
director. In the case of any contested election for any directorship, the
candidate for such position receiving a plurality of the votes cast in such
election shall be elected to such position.
SECTION 3.13. RECORD OF SHAREHOLDERS. The Corporation shall keep at
its principal business office, or the office of its transfer agents or
registrars, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
ARTICLE IV
THE BOARD OF DIRECTORS
SECTION 4.1. NUMBER, QUALIFICATIONS, TERM AND NOMINATION. The business and
affairs of the Corporation shall be managed and controlled by the Board of
Directors; and, subject to any restrictions imposed by law, by the Articles of
Incorporation, or by these bylaws, the Board of Directors may exercise all the
powers of the Corporation. The initial Board of Directors shall consist of one
member. Each subsequent Board of Directors shall consist of not less than three
(3) nor more than fifteen (15) members, such number to be determined from time
to time by resolution of a majority of the full Board of Directors; PROVIDED,
HOWEVER, that no decrease shall effect a shortening of the term of any incumbent
director. Directors need not be residents of Texas or shareholders of the
Corporation absent provision to the contrary in the Articles of Incorporation or
laws of the State
6
<PAGE>
of Texas. Except as otherwise provided in the Articles of Incorporation and
Section 4.3. of these bylaws, each position on the Board of Directors shall be
filled by election at the annual meeting of shareholders. Only persons who are
nominated in accordance with the procedures set forth in these Bylaws shall be
eligible to serve as directors. Nominations of persons for election to the Board
of Directors of the Corporation may be made at a meeting of shareholders (a) by
or at the direction of the Board of Directors or (b) by any shareholder of the
Corporation who is a shareholder of record at the time of giving of notice
provided for in this Section 3, who shall be entitled to vote for the election
of directors at the meeting and who complies with the notice procedures set
forth in this Section 3.
Nominations by shareholders shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an annual meeting, not less than
60 days nor more than 180 days prior to the first anniversary of the preceding
year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the
annual meeting is changed by more than 30 days from such anniversary date,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the earlier of the date on which a
written statement setting forth the date of such meeting was mailed to
shareholders or the date on which it is first disclosed to the public, and (b)
in the case of a special meeting at which directors are to be elected, not later
than the close of business on the tenth day following the earlier of the date on
which a written statement setting forth the date of such meeting was mailed to
shareholders or the date on which it is first disclosed to the public. Such
shareholder's notice shall set forth (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Exchange Act (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to the shareholder giving the notice
(i) the name and address, as they appear on the Corporation's books, of such
shareholder and (ii) the class and number of shares of the Corporation which are
beneficially owned by such shareholder and which are owned of record by such
shareholder; and (c) as to the beneficial owner, if any, on whose behalf the
nomination is made, (i) the name and address of such person and (ii) the class
and number of shares of the Corporation which are beneficially owned by such
person. At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a director shall furnish to the Secretary of
the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 4 and he shall so
declare to the meeting, and the defective nomination shall be disregarded. Each
person elected a director shall hold office, unless removed in accordance with
Section 4.2. of these bylaws, until the next annual meeting of the shareholders
and until his successor shall have been duly elected and qualified.
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<PAGE>
SECTION 4.2. REMOVAL. No director nor the entire Board of Directors
may be removed from office, at any special meeting of shareholders except for
cause, and then only by the affirmative vote of at least two thirds of the
shares of the shareholders present in person or by proxy and entitled to vote at
such meeting, if notice of the intention to act upon such matter shall have been
given in the notice calling such meeting. If the notice calling such meeting
shall have so provided, the vacancy caused by such removal may be filled at such
meeting by the affirmative vote of a majority in number of the shares of the
shareholders present in person or by proxy and entitled to vote.
SECTION 4.3. VACANCIES. Any vacancy occurring in the Board of
Directors may be filled by the vote of a majority of the remaining directors, if
any, even if such remaining directors comprise less than a quorum of the Board
of Directors, or by the shareholders if no other directors remain. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any position on the Board of Directors to be filled by
reason of an increase in the number of directors shall be filled by the vote of
a majority of the directors, election at an annual meeting of the shareholders,
or at a special meeting of shareholders duly called for such purpose, provided
that the Board of Directors may fill no more than two such directorships during
the period between any two successive annual meetings of shareholders.
SECTION 4.4. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held immediately following each annual meeting of
shareholders, at the place of such meeting, and at such other times and places
as the Board of Directors shall determine. No notice of any kind of such regular
meetings needs to be given to either old or new members of the Board of
Directors.
SECTION 4.5. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held at any time by call of the chairman of the board, the
President, the Secretary or any one director. The Secretary shall give notice of
each special meeting to each director at his usual business or residence address
by mail at least three days before the meeting or in person or by telegraph or
telephone at least one day before such meeting. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail with postage
thereon prepaid. Except as otherwise provided by law, by the Articles of
Incorporation, or by these bylaws, such notice need not specify the business to
be transacted at, or the purpose of, such meeting. No notice shall be necessary
for any adjournment of any meeting. The signing of a written waiver of notice of
any special meeting by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be equivalent to the receiving of
such notice. Attendance of a director at a meeting shall also constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express and announced purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
SECTION 4.6. QUORUM. A majority of the number of directors fixed by
these bylaws shall constitute a quorum for the transaction of business and the
act of not less than a majority of such quorum of the directors shall be
required in order to constitute the act of the Board of Directors,
8
<PAGE>
unless the act of a greater number shall be required by law, by the Articles of
Incorporation or by these bylaws.
SECTION 4.7. PROCEDURE AT MEETINGS. The Board of Directors, at each
regular meeting held immediately following the annual meeting of shareholders,
shall appoint one of their number as chairman of the Board of Directors. Failure
to designate a chairman of the board shall be deemed a designation of the
President to perform the functions of the chairman of the board. The chairman of
the board shall preside at meetings of the board. In his absence at any meeting,
any officer authorized by these bylaws or any member of the Board of Directors
selected by the members present shall preside. The Secretary of the Corporation
shall act as secretary at all meetings of the Board of Directors. In his
absence, the presiding officer of the meeting may designate any person to act as
Secretary. At meetings of the Board of Directors, the business shall be
transacted in such order as the board may from time to time determine.
SECTION 4.8. PRESUMPTION OF ASSENT. Any director of the Corporation
who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his dissent shall be entered in the minutes of the meeting or unless he
shall file his written dissent to such action with the person acting as the
Secretary of the meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary of the Corporation immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
SECTION 4.9. ACTION WITHOUT A MEETING. Any action required by
statute to be taken at a meeting of the directors of the Corporation, or which
may be taken at such meeting, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by each director
entitled to vote at such meeting, and such consent shall have the same force and
effect as a unanimous vote of the directors. Such signed consent, or a signed
copy thereof, shall be placed in the minute book of the Corporation.
SECTION 4.10. COMPENSATION. Directors as such shall not receive any
stated salary for their service, but by resolution of the Board of Directors, a
fixed sum and reimbursement for reasonable expenses of attendance, if any, may
be allowed for attendance at each regular or special meeting of the Board of
Directors or at any meeting of the Executive Committee of directors, if any, to
which such director may be elected in accordance with the following Section
4.11; but nothing herein shall preclude any director from serving the
Corporation in any other capacity or receiving compensation therefor.
SECTION 4.11. EXECUTIVE COMMITTEE. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may designate
an Executive Committee, which committee shall consist of two or more of the
directors of the Corporation. Such Executive Committee may exercise such
authority of the Board of Directors in the business and affairs of the
Corporation as the Board of Directors may, by resolution duly adopted, delegate
to it except as prohibited by law. The designation of such committee and the
delegation thereto of authority shall not operate to relieve the
9
<PAGE>
Board of Directors, or any member thereof, of any responsibility imposed upon it
or him by law. Any member of the Executive Committee may be removed by the Board
of Directors. The Executive Committee shall keep regular minutes of its
proceedings and report the same to the Board of Directors when required. The
minutes of the proceedings of the Executive Committee shall be placed in the
minute book of the Corporation. Members of the Executive Committee shall receive
such compensation as may be approved by the Board of Directors and will be
reimbursed for reasonable expenses actually incurred by reason of membership on
the Executive Committee.
SECTION 4.12. OTHER COMMITTEES. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may appoint one
or more committees of two or more directors each. Such committees may exercise
such authority of the Board of Directors in the business and affairs of the
Corporation as the Board of Directors may, by resolution duly adopted, delegate,
except as prohibited by law. The designation of any committee and the delegation
thereto of authority shall not operate to relieve the Board of Directors, or any
member thereof, of any responsibility imposed on it or him by law. Any member of
a committee may be removed at any time by the Board of Directors. Members of any
such committees shall receive such compensation as may be approved by the Board
of Directors and will be reimbursed for reasonable expenses actually incurred by
reason of membership on a committee.
ARTICLE V
OFFICERS
SECTION 5.1. NUMBER. The officers of the Corporation shall consist
of a chairman, if one is elected by the Board of Directors, a President, one or
more vice presidents, if elected by the Board, and a Secretary; and, in
addition, such other officers and assistant officers and agents as may be deemed
necessary or desirable. Officers shall be elected or appointed by the Board of
Directors. Any two or more offices may be held by the same person. In its
discretion, the Board of Directors may leave unfilled any office except those of
President and Secretary.
SECTION 5.2. ELECTION; TERM; QUALIFICATION. Officers shall be chosen
by the Board of Directors annually at the meeting of the Board of Directors
following the annual shareholders' meeting. Each officer shall hold office until
his successor has been chosen and qualified, or until his death, resignation, or
removal.
SECTION 5.3. REMOVAL. Any officer or agent elected or appointed by
the Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent shall not of itself
create any contract rights.
SECTION 5.4. VACANCIES. Any vacancy in any office for any cause may
be filled by the Board of Directors at any meeting.
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<PAGE>
SECTION 5.5. DUTIES. The officers of the Corporation shall have such
powers and duties, except as modified by the Board of Directors, as generally
pertain to their offices, respectively, as well as such powers and duties as
from time to time shall be conferred by the Board of Directors and by these
bylaws.
SECTION 5.6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if
one is elected by the Board of Directors, shall preside at all meetings of the
Board of Directors and approve the minutes of all proceedings of such meetings,
and he shall be available to consult with and advise the officers of the
Corporation with respect to the conduct of the business and affairs of the
Corporation and shall have such other powers and duties as designated in
accordance with these bylaws and as from time to time may be assigned to him by
the Board of Directors.
SECTION 5.7. THE PRESIDENT. The President shall have general
direction of the affairs of the Corporation and general supervision over its
several officers, subject however, to the control of the Board of Directors. He
shall at each annual meeting, and from time to time, report to the shareholders
and to the Board of Directors all matters within his knowledge which, in his
opinion, the interest of the Corporation may require to be brought to the notice
of such persons. He may sign, with the Secretary or an assistant secretary, any
or all certificates of stock of the Corporation. He shall preside at all
meetings of the shareholders, shall sign and execute in the name of the
Corporation (i) all contracts or other instruments authorized by the Board of
Directors, and (ii) all contracts or instruments in the usual and regular course
of business, pursuant to Section 6.2 hereof, except in cases when the signing
and execution thereof shall be expressly delegated or permitted by the board or
by these bylaws to some other officer or agent of the Corporation; and, in
general, shall perform all duties incident to the office of President, and such
other duties as from time to time may be assigned to him by the Board of
Directors or as are prescribed by these bylaws.
SECTION 5.8. THE VICE PRESIDENTS. At the request of the President,
or in his absence or disability, the vice presidents, in the order of their
election, shall perform the duties of the President, and, when so acting, shall
have all the powers of, and be subject to all restrictions upon, the President.
Any action taken by a vice president in the performance of the duties of the
President shall be conclusive evidence of the absence or inability to act of the
President at the time such action was taken. The vice presidents shall perform
such other duties as may, from time to time, be assigned to them by the Board of
Directors or the President. A vice president may sign, with the Secretary or an
assistant secretary, certificates of stock of the Corporation.
SECTION 5.9. SECRETARY. The Secretary shall keep the minutes of all
meetings of the shareholders, of the Board of Directors, and of the Executive
Committee, if any, of the Board of Directors, in one or more books provided for
such purpose and shall see that all notices are duly given in accordance with
the provisions of these bylaws or as required by law. He shall be custodian of
the corporate records and of the seal (if any) of the Corporation and see, if
the Corporation has a seal, that the seal of the Corporation is affixed to all
documents the execution of which on behalf of the Corporation under its seal is
duly authorized; shall have general charge of the stock certificate books,
transfer books and stock ledgers, and such other books and papers of the
Corporation as the
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Board of Directors may direct, all of which shall, at all reasonable times, be
open to the examination of any director, upon application at the office of the
Corporation during business hours; and in general shall perform all duties and
exercise all powers incident to the office of the Secretary and such other
duties and powers as the Board of Directors or the President from time to time
may assign to or confer on him.
SECTION 5.10. ASSISTANT OFFICERS. Any assistant secretary appointed
by the Board of Directors shall have power to perform, and shall perform, all
duties incumbent upon the secretary of the Corporation, respectively, subject to
the general direction of such respective officers, and shall perform such other
duties as these bylaws may require or the Board of Directors may prescribe.
SECTION 5.11. SALARIES. The salaries or other compensation of the
officers shall be fixed from time to time by the Board of Directors. No officer
shall be prevented from receiving such salary or other compensation by reason of
the fact that he is also a director of the Corporation.
SECTION 5.12. BONDS OF OFFICERS. The Board of Directors may secure
the fidelity of any officer of the Corporation by bond or otherwise, on such
terms and with such surety or sureties, conditions, penalties or securities as
shall be deemed proper by the Board of Directors.
SECTION 5.13. DELEGATION. The Board of Directors may delegate
temporarily the powers and duties of any officer of the Corporation, in case of
his absence or for any other reason, to any other officer, and may authorize the
delegation by any officer of the Corporation of any of his powers and duties to
any agent or employee, subject to the general supervision of such officer.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. DISTRIBUTIONS. Distributions, subject to the provisions
of the Articles of Incorporation and to limitations set forth by law, if any,
may be declared by the Board of Directors at any regular or special meeting.
Distributions may be in the form of a dividend, including a share dividend, a
purchase or redemption by the Corporation, directly or indirectly, of any of its
own shares or a payment by the Corporation in liquidation of all or a portion of
its assets. A distribution may not be made if it would render the Corporation
insolvent or if it exceeds the surplus of the Corporation, except as otherwise
allowed by law.
Subject to limitations upon the authority of the Board of Directors
imposed by law or by the Articles of Incorporation, the declaration of and
provision for payment of dividends shall be at the discretion of the Board of
Directors.
SECTION 6.2. CONTRACTS. The President shall have the power and
authority to execute, on behalf of the Corporation, contracts or instruments in
the usual and regular course of business, and in addition the Board of Directors
may authorize any officer or officers, agent or agents, of the
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<PAGE>
Corporation to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation, and such authority may be general
or confined to specific instances. Unless so authorized by the Board of
Directors or by these bylaws, no officer, agent or employee shall have any power
or authority to bind the Corporation by any contract or engagement, or to pledge
its credit or to render it pecuniarily liable for any purpose or in any amount.
SECTION 6.3. CHECKS, DRAFTS, ETC. All checks, drafts, or other
orders for the payment of money, notes, or other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officers or
employees of the Corporation as shall from time to time be authorized pursuant
to these bylaws or by resolution of the Board of Directors.
SECTION 6.4. DEPOSITORIES. All funds of the Corporation shall be
deposited from time to time to the credit of the Corporation in such banks or
other depositories as the Board of Directors may from time to time designate,
and upon such terms and conditions as shall be fixed by the Board of Directors.
The Board of Directors may from time to time authorize the opening and
maintaining within any such depository as it may designate, of general and
special accounts, and may make such special rules and regulations with respect
thereto as it may deem expedient.
SECTION 6.5. ENDORSEMENT OF STOCK CERTIFICATES. Subject to the
specific directions of the Board of Directors, any share or shares of stock
issued by any corporation and owned by the Corporation, including reacquired
shares of the Corporation's own stock, may, for sale or transfer, be endorsed in
the name of the Corporation by the President or any vice president; and such
endorsement may be attested or witnessed by the Secretary or any assistant
secretary either with or without the affixing thereto of the corporate seal.
SECTION 6.6. CORPORATE SEAL. The corporate seal, if any, shall be in
such form as the Board of Directors shall approve, and such seal, or a facsimile
thereof, may be impressed on, affixed to, or in any manner reproduced upon,
instruments of any nature required to be executed by officers of the
Corporation.
SECTION 6.7. FISCAL YEAR. The fiscal year of the Corporation shall
begin and end on such dates as the Board of Directors at any time shall
determine.
SECTION 6.8. BOOKS AND RECORDS. The Corporation shall keep correct
and complete books and records of account and shall keep minutes of the
proceedings of its shareholders and Board of Directors, and shall keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of the shares held by
each.
SECTION 6.9. RESIGNATIONS. Any director or officer may resign at any
time. Such resignations shall be made in writing and shall take effect at the
time specified therein, or, if no time is specified, at the time of its receipt
by the President or Secretary. The acceptance of a resignation shall not be
necessary to make it effective, unless expressly so provided in the resignation.
13
<PAGE>
SECTION 6.10. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The
Corporation shall indemnify to the full extent allowed by law any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an action,
suit or proceeding by reason of the fact that he is or was a director, officer,
employee, or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee, partner, venturer, proprietor,
trustee, agent, or similar functionary of another corporation, partnership,
joint venture, trust, other enterprise, or employee benefit plan. This
indemnification shall, to the extent permitted by law, be against judgments,
penalties, fines, settlements and reasonable expenses actually incurred in
connection with such investigation, action, suit or proceeding but if the person
is found liable to the Corporation or is found liable on the basis that personal
benefit was improperly received by the person, indemnification shall be limited
to reasonable expenses actually incurred by the person in connection with the
proceeding and shall not be made in respect of any proceedings in which the
person shall have been found liable for willful or intentional misconduct in the
performance of his duty to the Corporation. A person acting in his official
capacity as a director of the Corporation must have conducted himself in good
faith and reasonably believed his actions to have been in the Corporation's best
interests. A person acting in any other capacity must have conducted himself in
good faith and reasonably have believed his actions were not opposed to the
Corporation's best interests. In the case of any criminal proceeding,
indemnification requires that the person indemnified have had no reasonable
cause to believe his conduct was unlawful.
Any indemnification under this Section shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification is proper because the director, officer, employee or agent has
met the applicable standard of conduct as set forth in the laws of the State of
Texas, and the amount of indemnification (before or after termination of the
proceedings) shall be made only as set forth in the laws of the State of Texas.
Such determinations shall be made as set forth in the laws of the State of
Texas.
Any indemnification of or advance of expenses to any officer,
director, employee, or agent of the Corporation shall be reported in writing to
the shareholders with or before the notice or waiver of notice of the next
shareholder's meeting or with or before the next submission to shareholders of a
consent to action without a meeting pursuant to Section 3.14 hereof and, in any
case, within the twelve-month period immediately following the date of the
indemnification or advance.
Any right of indemnification granted by this Section 6.10 shall be
in addition to and not in lieu of any other such right to which any director or
officer of the Corporation may at any time be entitled under the law of the
State of Texas; and if any indemnification which would otherwise be granted by
this Section 6.10 shall be disallowed by any competent court or administrative
body as illegal or against public policy, then any director or officer with
respect to whom such adjudication was made, and any other officer or director,
shall be indemnified to the fullest extent permitted by law and public policy,
it being the express intent of the Corporation to indemnify its officers,
directors,
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employees and agents to the fullest extent possible in conformity with these
bylaws, all applicable laws, and public policy.
SECTION 6.11. INDEMNITY INSURANCE. The Corporation may purchase and
maintain insurance or another arrangement on behalf of a person who is or was a
director, officer, employee or agent of the Corporation or who is or was serving
at the request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, against any liability asserted
against him and incurred by him in such capacity or arising out of his status as
such a person, whether or not the Corporation would have the power to indemnify
him against that liability under these bylaws or the laws of the State of Texas.
If the insurance or other arrangement is with a person or entity that is not
regularly engaged in the business of providing insurance coverage, the insurance
or arrangement may provide for payment of a liability with respect to which the
Corporation would not have the power to indemnify the person only if the
shareholders of the Corporation approve the inclusion of coverage for the
additional liability.
SECTION 6.12. MEETINGS BY TELEPHONE. Subject to the provisions
required or permitted by these bylaws or the laws of the State of Texas for
notice of meetings, shareholders, members of the Board of Directors, or members
of any committee designated by the Board of Directors may participate in and
hold any meeting required or permitted under these bylaws by telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in a meeting pursuant to this
Section shall constitute presence in person at such a meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE VII
AMENDMENTS
SECTION 7.1. AMENDMENTS. These bylaws may be altered, amended, or
repealed, or new bylaws may be adopted, by the affirmative vote of a majority of
the full Board of Directors at any duly held meeting of directors, provided that
notice of such proposed action shall have been contained in the notice of any
such meeting, unless the Articles of Incorporation or the laws of the State of
Texas reserve the power exclusively to the shareholders in whole or in part, or
the shareholders in amending, repealing or adopting a particular bylaw expressly
provide that the Board of Directors may not amend or repeal that bylaw. Unless
the Articles of Incorporation or a bylaw adopted by the shareholders provides
otherwise as to all or some portion of the Corporation's bylaws, the holders of
a majority of the shares represented at any duly held meeting of the
shareholders, provided that notice of such proposed action shall have been
contained in the notice of any such meeting, may amend, repeal or adopt the
Corporation's bylaws.
15
GEOQUEST CENTER
HOUSTON, TEXAS
OFFICE LEASE AGREEMENT
BETWEEN
5599 SAN FELIPE, LTD.
("LESSOR")
AND
PINNACLE GLOBAL GROUP, INC.
("LESSEE")
JANUARY 19, 1999
<PAGE>
LEASE AGREEMENT
THE STATE OF TEXASss.
ss.
COUNTY OF HARRISss.
THIS LEASE AGREEMENT made and entered into on this the 19th day of
January, 1999 between 5599 SAN FELIPE, LTD. (hereinafter called "Lessor") whose
address for purposes hereof is 5599 San Felipe, Suite 106, Houston, Texas 77056,
and PINNACLE GLOBAL GROUP, INC. (hereinafter called "Lessee") whose address for
purposes hereof is 5599 San Felipe, Suite 301, Houston, Texas, 77056 prior to
the commencement of the lease term and thereafter shall be the leased premises
in the Building;
WITNESSETH:
1. LEASED PREMISES. Subject to and upon the terms and conditions
hereinafter set forth, and each in consideration of the covenants and
obligations of the other hereunder, Lessor does hereby lease, demise and let to
Lessee and Lessee does hereby lease and take from Lessor those certain premises
(hereinafter sometimes called the "Premises") in the building located at 5599
San Felipe (hereinafter sometimes called the "Building") in the City of Houston,
Harris County, Texas, such Premises being more particularly described as
follows:
A total of approximately Six Thousand Five Hundred Thirty (6,530) net
rentable square feet located on the fifth (5th) floor of the Building,
as reflected on the floor plan of such Premises attached hereto and made a part
hereof as Exhibit A and initialed for identification by both parties.
2. NET RENTABLE AREA. The term "net rentable area", as used herein, shall
refer to (i) in the case of a single tenant floor, all floor area measured from
the inside surface of the inner glass or (with respect to the basements)
exterior wall of the Building to the inside surface of the opposite outer wall
excluding only the areas ("service areas") within the outside walls on the
particular floor used for building stairs, fire towers, elevator shafts, flues,
vents, stacks, vertical pipe shafts and vertical ducts, but including any such
service areas which are for the specific use of the particular tenant such as
special stairs or elevators, plus a proportionate part of the areas ("extra
areas") used for building elevator, mechanical, electrical and plumbing room and
the central plant serving the Building, the truck dock, the bridge connecting
the Building with the Garage, fire control stations, and ground floor lobby,
basement, and (ii) in the case of a floor to be occupied by more than one
tenant, all floor areas within the demising walls (measured from the mid-point
of the demising walls and in the case of exterior walls, measured as defined in
(i) above), plus a proportionate part of areas ("common areas") devoted to
lobbies, corridors, elevator foyers, restrooms, electrical, telephone and
-1-
<PAGE>
mechanical rooms, janitor closets, vending areas and other similar facilities
for the use of all tenants on the particular floor . The Lessee's proportionate
part of extra areas shall be based upon the ratio of the Lessee's net rentable
area (excluding "extra areas") to the aggregate net rentable area (excluding
"extra areas") of the Building. The Lessee's proportionate part of common areas
shall be based upon the ratio of the Lessee's net rentable area (excluding
"common" and "extra areas") to the aggregate net rentable area (excluding
"common" and "extra areas") on such floor. No deductions shall be made in
determining net rentable areas for columns or projections necessary to the
Building. The net rentable area in the Premises has been calculated on the basis
of the foregoing definition and is hereby stipulated for all purposes hereof to
be 6,530 square feet, whether the same shall be more or less as a result of
variations resulting from actual construction and completion of the Premises for
occupancy so long as such work is done substantially in accordance with the
terms and provisions hereof. FOR THE PURPOSES OF THIS LEASE, LESSEE'S PROPORTION
OF THE BUILDING SHALL BE 1.4%.
3. TERM. (a) Subject to and upon the terms and conditions set forth
herein, or in any exhibit or addendum hereto, this lease shall continue in force
for a term of sixty (60) months beginning on THE EARLIER TO OCCUR OF SUBSTANTIAL
COMPLETION OF THE PREMISES OR the 1st day of June 1999, and ending on the 31st
day of May 2004.
(b) As more fully defined in Schedule 1 hereto, in the event the Premises
should not be ready for occupancy by the commencement date stated in Section
3(a) for any reason, Lessor shall not be liable or responsible for any claims,
damages or liabilities in connection therewith or by reason thereof, and the
term of this lease shall commence at the time that the Premises are ready for
occupancy by Lessee. Should the term of this lease commence on a date other than
that specified in Section 3(a), Lessor and Lessee will, at the request of
either, execute a declaration specifying the beginning date of the term of this
lease. In such event, rental under this lease shall not commence until said
revised commencement date, and the stated term in this lease shall thereupon
commence and the expiration date shall be extended so as to give effect to the
full stated term. IN THE EVENT, DUE TO LESSOR'S FAULT AND NOT "FORCE MAJEURE",
THE PREMISES ARE NOT SUBSTANTIALLY COMPLETE, AS DEFINED IN SCHEDULE 1 ATTACHED
HERETO, BY JUNE 7, 1999, LESSOR SHALL CREDIT LESSEE ONE (1) DAY OF FREE RENT FOR
EACH DAY SUBSTANTIAL COMPLETION OF THE PREMISES IS DELAYED. AN "ACT OF GOD" OR
"FORCE MAJEURE" IS DEFINED FOR THE PURPOSES OF THIS LEASE AS STRIKES, LOCKOUTS,
SIT-DOWNS, MATERIAL OR LABOR RESTRICTIONS BY ANY GOVERNMENTAL AUTHORITY, UNUSUAL
TRANSPORTATION DELAYS, RIOTS, FLOODS, WASHOUTS, EXPLOSIONS, EARTHQUAKES, FIRE,
STORMS, WEATHER (INCLUDING WET GROUNDS OR INCLEMENT WEATHER WHICH PREVENTS
CONSTRUCTION), ACTS OF THE PUBLIC ENEMY, WARS, INSURRECTIONS AND ANY OTHER CAUSE
NOT REASONABLY WITHIN THE CONTROL OF LESSOR AND WHICH BY THE EXERCISE OF DUE
DILIGENCE LESSOR IS UNABLE, WHOLLY OR IN PART, TO PREVENT OR OVERCOME.
4. USE. The Premises shall be used and occupied by Lessee (and its
permitted assignees and sublessees) solely as general, administrative and
executive offices (including such ancillary uses in connection therewith as
shall be reasonably required by Lessee in the operation of its business);
provided, that in no event shall any of the following be permitted in the
Premises: (i) offices or agencies of a foreign government or political
subdivisions thereof; (ii) offices of any governmental
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bureau or agency of the United States or any state or political subdivision
thereof; (iii) personnel agencies; or (iv) customer service offices of any
public utility company. The following uses shall not be permitted in the
Premises except to the extent they are ancillary to an otherwise permitted use:
(v) data processing activities; (vi) health care activities; (vii) schools or
other training or educational uses; (viii) clerical support services; (ix)
reservation centers for airlines or travel agencies; (x) retail or restaurant
use; (xi) studios for radio, television of other media; or (xii) storage, WITH
THE EXCEPTION OF LESSEE'S FILES, FIXTURES, EQUIPMENT, AND SUPPLIES. The Premises
shall not be used for any purpose which would, in Lessor's reasonable opinion,
lower the first-class character of the Building or any part thereof, create
unreasonable or excessive elevator or floor loads, interfere with any of the
operations of the Building or any part thereof or the proper and economic
heating, air-conditioning, cleaning or other servicing of the Building or any
part thereof or unreasonably interfere with the use of the other areas of the
Building by any other lessees.
5. BASE RENTAL. (a) Commencing THE EARLIER TO OCCUR OF SUBSTANTIAL
COMPLETION OR June 1, 1999, Lessee agrees to pay a base annual rental (herein
called "Base Rental") as follows:
ANNUAL RATE PER NET
PERIOD RENTABLE SQUARE FEET MONTHLY
Lease Years 1 - 5 $18.80 ($10,230.33)
"Lease Year" as used herein means a period of one (1) year, with the first Lease
Year commencing on the commencement date of this lease.
(b) The Lessee shall also pay, as additional rent, all such other
sums of money as shall become due from and payable by Lessee to Lessor under
this lease. The Lessor shall have the same remedies for default in the payment
of additional rent as are available to Lessor in the case of a default in the
payment of Base Rental. Such Base Rental together with any adjustment of rent
provided for herein then in effect shall be due and payable in twelve (12) equal
installments on the first day of each calendar month during the term of this
lease and any extensions or renewals thereof, and Lessee hereby agrees to so pay
such rent to Lessor at Lessor's address as provided herein (or such other
address as may be designated by Lessor from time to time) monthly in advance
without demand. FOR THE PURPOSES OF THIS LEASE, LESSEE SHALL HAVE TEN (10) DAYS
FOLLOWING WRITTEN NOTICE OR INVOICE BEFORE SUCH AMOUNT DUE IS CONSIDERED LATE.
If the term of this lease commences on other than the first day of a month or
terminates on other than the last day of a month, then the installments of Base
Rental and any additional rent for such month or months shall be prorated and
the installment or installments so prorated shall be paid in advance. A five
percent (5%) late penalty per month shall be added to all past due installments
of rent.
6. BASE YEAR. There is established under this lease a "Base Year" which
for these purposes is the calendar year 1999. In the event that the Actual
Operating Expenses (hereinafter defined) of Lessor's operation of the Project
(hereinafter defined) during the first calendar year after
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the Base Year shall differ from the Actual Operating Expenses of Lessor therefor
during the Base Year, Lessee shall pay its share of the year's increases in the
Actual Operating Expenses for such year utilizing the hereinafter described
procedures. If Actual Operating Expenses for any year after the Base Year are
less than the Base Year's Actual Operating Expenses, Lessee shall not be
obligated for rental in excess of the Base Rental stated in Section 5. LESSOR
SHALL CAP THE CONTROLLABLE OPERATING EXPENSES AT TEN PERCENT (10%) PER ANNUM.
THIS CAP DOES NOT INCLUDE EXPENSES FOR TAXES, INSURANCE AND UTILITIES.
7. OPERATING EXPENSES. (a) "Actual Operating Expenses," as said term is
used herein, shall consist of all REASONABLE AND CUSTOMARY operating expenses of
the Project (which term means and includes the Building, Garage, bridge
connecting the Building to the Garage, and the tract or tracts of land on which
they are located) which shall be computed on the accrual basis and shall consist
of all costs by Lessor to maintain all facilities in operation during any year
and such additional facilities in subsequent years as may be determined by
Lessor to be necessary or generally beneficial for the Project. All operating
expenses shall be determined in accordance with generally accepted accounting
principles which shall be consistently applied. The term "operating expenses" as
used herein shall mean all REASONABLE AND CUSTOMARY expenses, costs and
disbursements (but not replacement of capital investment items except as
specifically provided below nor specific costs especially billed to and paid by
specific tenants) of every kind and nature which Lessor shall pay or become
obligated to pay because of or in DIRECT connection with the ownership,
management and operation of the Project including but not limited to the
following
(1) Wages and salaries and related expenses and benefits of all on-site
and off-site employees engaged DIRECTLY in the supervision,
operation and maintenance, or access control, of the Project and
personnel who may provide traffic control relating to ingress and
egress to and from the Project to the adjacent public streets and
the costs (based upon fair market rental rates) of a management
office in the Project.
(2) All supplies, tools, equipment and materials used in operation and
maintenance of the Project.
(3) Cost of all utilities for the Project including the cost of water
and power, heating, lighting, air conditioning and ventilating for
the Project (excluding those costs separately paid by specific
tenants).
(4) Cost of all maintenance and service agreements for the Project and
the equipment therein, including, but not limited to, access control
service, window cleaning, elevator maintenance, landscaping and
janitorial services.
(5) Cost of all insurance relating to the Project including, but not
limited to, the cost of casualty and liability insurance, worker's
compensation, group and health insurance and rental abatement
insurance applicable to the Project and Lessor's personal property
used in connection therewith.
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(6) All taxes and assessments and governmental charges with respect to
the Project whether federal, state, county or municipal, and whether
they be by taxing districts or authorities presently taxing the
Premises or by others, subsequently created or otherwise, and any
other taxes and assessments attributable to the Project or its
operation. It is agreed that Lessee shall be responsible for ad
valorem taxes on its personal property and on the value of leasehold
improvements to the extent that same exceed building standard
allowances (HEREINAFTER CALLED "BUILDING STANDARD" AS DEFINED IN
EXHIBIT C).
(7) Cost of repairs and general maintenance of the Project (excluding
repairs and general maintenance paid by proceeds of insurance or by
Lessee or other third parties, and alterations attributable solely
to preparation of space for occupancy by tenants of the Building
other than Lessee).
(8) Amortization (together with reasonable financing charges) of the
cost of supplying and installation of capital investment items which
are intended for the purpose of reducing operating costs or which
may be required by governmental authority. All such costs shall be
amortized over the reasonable life of the capital investment items
with the reasonable life and amortization schedule being determined
in accordance with generally accepted accounting principles and in
no event to extend beyond the reasonable life of the Building. In
the case of installations for the purpose of reducing operating
costs, Lessor shall, upon request, provide a REASONABLY DETAILED
cost justification for its practicality.
(9) Lessor's central accounting costs and audit fees attributable to the
Project.
(10) The cost of payment and performance of the Lessor's obligations with
respect to all of the above expenses in connection with the bridge
connecting the Project to the Garage and the driveways serving the
Project.
(11) A management cost recovery equal to any and all reasonable fees paid
by Lessor for property management services to the Project.
(12) Cost of assessment against the Project by the San Felipe Green
Subdivision for maintaining the esplanades and private easements.
NOTWITHSTANDING THE FOREGOING, "ACTUAL OPERATING EXPENSES" SHALL NOT INCLUDE ANY
OF THE FOLLOWING EXCLUSIONS:
(1) REPAIRS OR OTHER WORK OCCASIONED BY FIRE, WINDSTORM OR OTHER
CASUALTY OF AN INSURABLE NATURE OR BY THE EXERCISE OF THE RIGHT OF
EMINENT DOMAIN;
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(2) LEASING COMMISSIONS, ATTORNEY'S FEES, COSTS AND DISBURSEMENT AND
OTHER EXPENSES INCURRED IN CONNECTION WITH NEGOTIATIONS OR DISPUTES
WITH TENANTS, OTHER OCCUPANTS, OR PROSPECTIVE TENANTS OR OTHER
OCCUPANTS;
(3) EXPENSES INCURRED IN RENOVATING OR OTHERWISE IMPROVING OR
DECORATING, PAINTING OR REDECORATING SPACE FOR TENANTS OR OTHER
OCCUPANTS OR VACANT SPACE;
(4) LESSOR'S COSTS OF ELECTRICITY AND OTHER SERVICES SOLD TO TENANTS AND
FOR WHICH LESSOR IS ENTITLED TO BE REIMBURSED BY TENANTS AS AN
ADDITIONAL CHARGE OR RENTAL OVER AND ABOVE THE BASIC RENT PAYABLE
UNDER THE LEASE WITH SUCH TENANT;
(5) EXCEPT AS OTHERWISE PROVIDED HEREIN, COSTS INCURRED BY LESSOR FOR
ALTERATIONS WHICH ARE CONSIDERED CAPITAL IMPROVEMENTS AND
REPLACEMENTS UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES;
(6) EXPENSES IN CONNECTION WITH SERVICES OR OTHER BENEFITS OF A TYPE
WHICH ARE NOT PROVIDED TO LESSEE BUT WHICH ARE PROVIDED TO ANOTHER
TENANT OR OCCUPANT;
(7) COSTS INCURRED DUE TO VIOLATION BY LESSOR OR ANY TENANT OF THE TERMS
AND CONDITIONS OF ANY LEASE;
(8) OVERHEAD AND PROFIT INCREMENT PAID TO SUBSIDIARIES OR AFFILIATES OF
LESSOR FOR SERVICES ON OR TO THE REAL PROPERTY, TO THE EXTENT ONLY
THAT THE COSTS OF SUCH SERVICES EXCEED COMPETITIVE COSTS OF SUCH
SERVICES WERE THEY NOT SO RENDERED BY A SUBSIDIARY OR AFFILIATE;
(9) INTEREST ON DEBT OR AMORTIZATION PAYMENTS ON ANY MORTGAGE OR
MORTGAGES, AND RENTAL UNDER ANY GROUND OR UNDERLYING LEASES OR
LEASE;
(10) LESSOR'S GENERAL PARTNERSHIP OVERHEAD;
(11) ANY COMPENSATION PAID TO CLERKS, ATTENDANTS, OR OTHER PERSONS IN
COMMERCIAL CONCESSIONS OPERATED BY LESSOR;
(12) ALL ITEMS AND SERVICES FOR WHICH LESSEE REIMBURSES LESSOR OR PAYS
THIRD PERSONS;
(13) ADVERTISING AND PROMOTIONAL EXPENDITURES;
(14) ANY COSTS, FINES OR PENALTIES INCURRED DUE TO VIOLATIONS BY LESSOR
OF ANY GOVERNMENTAL RULE OR AUTHORITY.
(15) THE COST OF CORRECTING DEFECTS IN THE STRUCTURE OF THE BUILDING OR
PREMISES;
(16) SALARIES OF OFFICERS AND EXECUTIVES OF LESSOR ABOVE THE GRADE OF
BUILDING MANAGER;
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(17) THE COST OF ANY WORK OR SERVICE PERFORMED FOR ANY FACILITY OTHER
THAN THE BUILDING, THE GARAGE, THE LAND OR THE PREMISES;
(18) THE COST OF ANY ITEMS FOR WHICH LESSOR IS REIMBURSED BY INSURANCE OR
OTHERWISE TO THE EXTENT SUCH REIMBURSEMENT;
(19) ALL PENALTIES, INTEREST, FINES, LEGAL FEES AND RELATED EXPENSES
INCURRED DUE TO LESSOR'S FAILURE OR DELAY IN COMPLIANCE WITH ITS
OBLIGATIONS OR APPLICABLE LAWS, REGULATIONS, ORDINANCES AND THE
LIKE;
(20) THE COST OF REMOVAL OR CONTAINMENT OF ANY ASBESTOS OR
POLYCHLORINATED BIPHENYL (PCB'S) OR ANY OTHER HAZARDOUS OR TOXIC
SUBSTANCES.
(b) "Forecast Operating Expenses", as that term is used herein,
shall mean the Actual Operating Expenses as reasonably projected by Lessor for
any calendar year after the Base Year. "Lessee's Share", as that term is used
herein, shall mean a fraction, the numerator of which is the number of net
rentable square feet in the Premises and the denominator of which is the greater
of 95% of the net rentable area in the Building or the total net rentable area
leased to and occupied by tenants of the Building. For each calendar year after
the Base Year, a REASONABLY DETAILED statement of the projected amount of
Lessee's Share of Forecast Operating Expenses shall be furnished by Lessor to
Lessee no less than thirty (30) days prior to the beginning of said calendar
year. Concurrently with each installment payment of Base Rental, Lessee shall
pay to Lessor one-twelfth (1/12th) of Lessee's Share of Forecast Operating
Expenses for each calendar year after the Base Year.
(c) If Lessee's Share of Actual Operating Expenses for any calendar
year after Base Year is greater than payments theretofore made by Lessee on
account of Lessee's Share of Forecast Operating Expenses, Lessee shall pay to
Lessor within thirty (30) days after Lessee's receipt of the annual statements
referred to in (e) below the amount of such excess. However, if Lessee's Share
of Actual Operating Expenses for such calendar year is less than payments
theretofore made by lessee on account of Lessee's Share of Forecast Operating
Expenses, Lessor shall pay to Lessee within thirty (30) days after Lessee's
receipt of such statement the amount of such difference.
(d) Any sums payable by Lessee under this Section 7 shall be deemed
additional rent.
(e) Within one hundred fifty (150) days (or as soon thereafter as
reasonably practicable) after the expiration of a calendar year all or any
portion of which is within the term hereof, Lessor shall deliver to Lessee a
written statement itemized in reasonable detail and certified to by Lessor,
showing Actual Operating Expenses for the calendar year in question and a
statement of Lessee's Share of Actual Operating Expenses.
(f) Notwithstanding any other provision herein to the contrary, it
is agreed that in the event the Building is not fully occupied during any year
or in the event all of the Building is not provided with building standard
services during any year, an adjustment (the "Operating Expense
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Adjustment") shall be made in computing the Actual Operating Expenses for such
year so that the Actual Operating Expenses shall be computed for such year as
though the building had been fully occupied during such year.
(g) Lessee at its expense shall have the right at any reasonable
time within 24 months after the end of EACH calendar year to audit Lessor's
books and records relating to operating expenses for any calendar year.
8. SECURITY DEPOSIT. Lessee hereby agrees to pay Lessor a security deposit
of Two Thousand Five Hundred Fifty Seven and 58/100 Dollars ($2,557.58) payable
on the date this lease is executed by Lessee. Upon the occurrence of any event
of default by Lessee, Lessor may, from time to time, without prejudice to any
other remedy, use the security deposit paid to Lessor by Lessee as herein
provided to the extent necessary to make good any arrears of rent or any
additional rent, or any other damage, injury, expense or liability caused to
Lessor by such event of default, any
remaining balance of such security deposit to be returned by Lessor to Lessee
within THIRTY (30) DAYS after the termination of this lease, ALONG WITH A
DETAILED ACCOUNTING OF ANY DEDUCTION THEREFROM. However, the security deposit
shall not be considered an advance payment of rental or a measure of Lessor's
damages in case of default by Lessee.
9. UTILITIES. Lessor agrees to use reasonable efforts to cause public
utilities to furnish the electricity, gas and water utilized in operating any
and all facilities serving the Premises.
10. WATER; HVAC; MAINTENANCE; LIGHTING; CLEANING; ELECTRICITY; ELEVATOR
SERVICE; BUILDING DIRECTORY. Lessor agrees to furnish (the cost of which is part
of operating expenses of the Project) Lessee while occupying the Premises:
(a) Hot and cold water at those points of supply provided for
general use of other Lessees in the Building; central heat and air
conditioning in season, at such temperatures and in such amounts as are
considered by Lessor to be standard, but such service at times during week
days other than normal business hours for the Building, on Saturday
afternoons, Sundays and holidays to be furnished only upon the WRITTEN
request of Lessee, who shall bear the entire cost thereof, SUCH COST NOT
TO EXCEED LESSOR'S ACTUAL COST FOR SAID SERVICE WHICH CURRENTLY IS $53.00
PER HOUR; routine maintenance and electric lighting service for all extra
areas, service areas, and common areas of the Building in the manner and
to the extent deemed by lessor to be standard. FOR THE PURPOSES OF THIS
LEASE, NORMAL BUSINESS HOURS ARE DEFINED AS 7:00 AM TO 6:00 PM MONDAY
THROUGH FRIDAY AND FROM 8:00 AM TO 12:00 PM ON SATURDAY. HOLIDAYS ARE AS
FOLLOWS: NEW YEAR'S DAY, MEMORIAL DAY, INDEPENDENCE DAY, LABOR DAY,
THANKSGIVING DAY AND CHRISTMAS DAY. IN THE EVENT A HOLIDAY FALLS ON A
SATURDAY OR SUNDAY, THE BUILDING HOLIDAY SHALL BE THE NATIONALLY
RECOGNIZED DAY EITHER PRECEDING OR FOLLOWING SUCH HOLIDAY. IF OVERTIME
HVAC IS REQUESTED BY LESSEE IMMEDIATELY FOLLOWING NORMAL BUSINESS HOURS
(I.E. AFTER 6:00 PM MONDAY THROUGH FRIDAY, OR SATURDAY AFTER 12:00 PM),
THEN THE REQUESTED OVERTIME HVAC CAN BE
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MADE IN ONE (1) HOUR INCREMENTS. IF OVERTIME HVAC IS REQUESTED BY LESSEE
NOT IMMEDIATELY FOLLOWING NORMAL BUSINESS HOURS (I.E. SUNDAY AFTERNOON),
THEN THE REQUESTED OVERTIME HVAC MUST BE FOR A FOUR (4) HOUR MINIMUM.
(b) Janitor services on a five (5) day week basis; provided,
however, if any of Lessee's floor coverings or other improvements are
other than building standard, Lessee shall pay the additional ACTUAL
cleaning cost attributable thereto plus fifteen percent (15%) for
management cost recovery as additional rent. Lessee shall pay said
additional rent WITHIN THIRTY (30) DAYS OF RECEIPT OF a statement therefor
by Lessor, and Lessee's failure to pay shall constitute default hereunder.
(c) STANDARD 110 VOLT electrical facilities to furnish sufficient
power for typewriters, voice writers, PRINTERS, COPIERS, FACSIMILE
MACHINES, calculating machines and other machines of similar low
electrical consumption (total electrical power requirement not to exceed
6.0 WATTS per square foot of net rentable area INCLUSIVE OF BUILDING
STANDARD LIGHTING); but not including electricity required for duplicating
and electronic data processing equipment, special lighting in excess of
building standard, and any other item of electrical equipment, the
electrical power requirement of which (singly) is more than 0.5 kilowatts
at rated capacity or requires a voltage other than 120/208 volts single
phase; and provided that if the installation or operation of said
electrical equipment requires additional air conditioning capacity above
that provided by the building standard system, then the additional air
conditioning installation and operating costs will be the obligation of
Lessee.
(d) All building standard fluorescent bulb replacement in all areas
INCLUDING THE LEASE PREMISES and all incandescent bulb replacement in
public areas, toilet and rest room areas and stairwells.
(e) Non-exclusive elevator service to the leased Premises during
normal business hours; and at least one elevator serving the leased
Premises available for use at all times.
To the extent that the services described above require electricity, gas
or water supplied by public utilities, Lessor's obligations shall require only
that Lessor use reasonable efforts to cause the utilities to furnish the same
and shall be subject to any curtailment of utilities supplied. Failure by Lessor
to any extent to furnish the foregoing defined services, or any cessation
thereof, shall not render Lessor liable in any respect for damages to either
person or property, nor be construed as an eviction of Lessee, nor work an
abatement of rent, nor relieve Lessee from fulfillment of any covenant or
agreement hereof. Additionally, should any of the equipment or machinery used in
connection with the Project break down, or for any cause cease to function
properly, Lessee shall have no claim for rebate or abatement of rent or damages
on account of an interruption in service occasioned thereby or resulting
therefrom.
HOWEVER, IF ANY CONDITION PROHIBITS LESSEE FROM USING ALL OR A PORTION OF
THE PREMISES, FOR ITS INTENDED PURPOSE AND SUCH CONDITION EXISTS FOR THREE (3)
CONSECUTIVE DAYS AFTER LESSEE PROVIDES
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WRITTEN NOTICE OF THE CONDITION TO LESSOR, THEN ALL RENT SHALL ABATE AS TO THAT
PORTION OF THE PREMISES THAT IS RENDERED UNTENANTABLE FOR THE PURPOSE OF OFFICE
SPACE AND CONTINUE FOR SO LONG AS THE CONDITION EXISTS; PROVIDED, HOWEVER, IF
THE CONDITION CONTINUES FOR THIRTY (30) CONSECUTIVE DAYS, LESSEE SHALL HAVE THE
RIGHT TO TERMINATE THIS LEASE UPON WRITTEN NOTICE TO LESSOR (WHICH NOTICE MAY
ONLY BE GIVEN AFTER THE EXPIRATION OF THIRTY (30) DAY PERIOD), IN WHICH EVENT
LESSEE WILL VACATE THE PREMISES AS SOON AS REASONABLY POSSIBLE AND THEREUPON
LESSEE WILL BE RELIEVED FROM ALL OBLIGATIONS ARISING AFTER SUCH VACATION OF THE
PREMISES.
11. KEYS AND LOCKS. Lessor agrees to furnish, at Lessee's cost, NINETEEN
(19) keys for each corridor door entering the Premises. Additional keys will be
furnished at a charge by Lessor on an order signed by Lessee or Lessee's
authorized representative. All such keys shall remain the property of Lessor. No
additional locks shall be allowed on any door of the Premises without Lessor's
permission, and Lessee shall not make, or permit to be made any duplicate keys,
except those furnished by Lessor. Upon termination of this lease, Lessee shall
surrender to Lessor all keys of the Premises, and give Lessor the explanation of
the combination of all locks for safes, safe cabinets and vault doors, if any,
in the Premises.
12. GRAPHICS. Lessor agrees to provide and install, at Lessee's cost, all
letters or numerals at the entrance to the Premises. Lessor also agrees to
provide and install, at Lessee's expense, a listing of Lessee's name and office
number on the Building Directory Board. No signs, numerals, letters or other
graphics shall be used or permitted on the exterior of, or which may be visible
from outside the Premises unless approved in writing by Lessor. LESSEE IS HEREBY
ENTITLED TO HAVE UP TO TWO (2) STRIPS ON THE BUILDING DIRECTORY BOARD, AT
LESSEE'S COST.
13. PEACEFUL ENJOYMENT. Lessor covenants that Lessee shall, and may
peacefully have, hold and enjoy the Premises, subject to the other terms hereof,
provided that Lessee pays the rental and other sums herein recited to be paid by
Lessee and performs all of Lessee's covenants and agreements herein contained.
It is understood and agreed that this covenant and any and all other covenants
of Lessor contained in this lease shall be binding upon Lessor and its
successors only with respect to breaches occurring during its and their
respective ownerships of the Lessor's interest hereunder.
14. REPAIRS BY LESSOR. Unless otherwise stipulated herein, Lessor shall
not be required to make any improvements to or repairs of any kind or character
on the Premises during the term of this lease, except such repairs as may be
deemed necessary by Lessor for normal maintenance operations. The obligation of
Lessor to maintain and repair the Premises shall be limited to building standard
items. Special leasehold improvements shall, at Lessee's written request, be
maintained by Lessor at Lessee's expense, at a cost or charge equal to the costs
incurred in such maintenance plus an additional charge to cover overhead NOT TO
EXCEED FIFTEEN PERCENT (15%).
15. PAYMENTS BY LESSEE. Lessee agrees to pay all rent and sums provided to
be paid to Lessor hereunder at the times and in the manner herein provided.
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16. REPAIRS BY LESSEE. Subject to Section 43, hereof, at its own cost and
expense, Lessee agrees to repair or replace any damage or injury done to the
Building, or any part thereof, caused by Lessee or Lessee's agents, contractors,
employees, invitees, or visitors, provided, however, if Lessee fails to make
such repairs or replacement promptly, Lessor may, at its option, make repairs or
replacements, and Lessee shall repay the cost thereof to the Lessor WITHIN
THIRTY (30) DAYS OF RECEIPT OF INVOICE, subject to Section 43.
17. CARE OF THE PREMISES. Lessee agrees to not commit or allow any waste
or damage to be committed on any portion of the Premises and at the termination
of this lease, by lapse of time or otherwise, to deliver up said Premises to
Lessor in as good condition as at date of possession by Lessee, ordinary wear
and tear excepted, and upon such termination of this lease, Lessor shall have
the right to re-enter and resume possession of the Premises.
18. ASSIGNMENT OR SUBLEASE. In the event Lessee should desire to assign
this lease or sublet the Premises or any part thereof, Lessee agrees to give
Lessor written notice of such desire (and the proposed effective date thereof)
at least THIRTY (30) days in advance of the date on
which Lessee desires to make such assignment or sublease. Lessor shall then have
a period of FIFTEEN (15) days following receipt of such notice within which to
notify Lessee in writing that Lessor elects either (i) to terminate this lease
as to the space so affected as of the date so specified by Lessee in which event
Lessee will be relieved of all further obligation hereunder as to such space, or
(ii) to permit Lessee to assign this lease or sublet such space, subject,
however, to written approval of the proposed assignee or sublessee by Lessor,
and further subject to the requirement that Lessee enter into written agreements
with Lessor, and with Assignee or Sublessee, that FIFTY PERCENT (50%) OF profit
realized by Lessee as a result of such assignment or sublease (meaning the
consideration agreed upon between Lessee and Assignee or the difference between
the rental rate agreed upon between Lessee and Sublessee and the rent then
required to be paid under this lease multiplied by the number of months in the
term of the sublease) shall, to the extent such profit is immediate, be due and
payable by Lessee to Lessor upon the execution of an assignment or sublease,
and, to the extent such profit is deferred, be payable to Lessor by Assignee or
Sublessee as it accrues, or (iii) to refuse to consent to Lessee's assignment of
this lease or sublease of such space and to continue this lease in full force
and effect as to the entire Premises. If Lessor should fail to notify Lessee in
writing of such election within the stated FIFTEEN (15) day period, Lessor shall
be deemed to have elected option (iii) above. No consent by Lessor to any
assignment or sublease shall be deemed to be consent to a use not permitted
under this lease, to any act in violation of this lease, or to any other or
subsequent assignment or sublease, and no assignment or sublease by Lessee shall
relieve Lessee of any obligation under this lease. Any attempted assignment or
sublease by Lessee in violation of the terms and covenants of Section 18 shall
be void. LESSOR SPECIFICALLY APPROVES THE ASSIGNMENT OR SUBLEASE OF ALL OR A
PORTION OF THE PREMISES TO AN AFFILIATE OR SUBSIDIARY OF LESSEE AT ANY TIME
DURING THE PRIMARY TERM, OR ANY RENEWAL PERIODS WITH WRITTEN NOTICE TO LESSOR
PROVIDED (I) USE OF THE PREMISES IS IN KEEPING WITH THE QUALITY OF OTHER USAGES
IN THE BUILDING AND (II) SUCH AFFILIATE OR SUBSIDIARY HAS AN EQUAL OR GREATER
FINANCIAL STANDING AS DOES LESSEE. WHERE LESSOR'S CONSENT IS REQUIRED, LESSOR
WILL NOT UNREASONABLY WITHHOLD OR DELAY SUCH CONSENT. SUBLESSEE'S AND
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ASSIGNEES SHALL HAVE ACCESS TO USE LESSEE'S DIRECTORY BOARD STRIPS, LESSEE'S
CONTRACT PARKING SPACES (AS ALLOTTED) AND AN ADDITIONAL MAILBOX AT AN ADDITIONAL
COST, IF AVAILABLE.
19. USE, ALTERATIONS, ADDITION, IMPROVEMENTS. Lessee agrees that it shall
not permit the Premises to be used for any purpose other than that stated in the
use clause hereof, or make or allow to be made any alterations or physical
additions in or to the Premises, or place signs on the Premises which are
visible from outside the Premises, or place safes, vaults or other heavy
furniture or equipment within the Premises, without first obtaining the written
consent of Lessor. Any and all such alterations, physical additions, or
improvements, when made to the Premises by Lessee, shall at once become the
property of Lessor and shall be surrendered to Lessor upon termination of this
lease by lapse of time or otherwise; provided, however, this clause shall not
apply to movable
equipment or furniture owned by Lessee. Lessee agrees specifically that no food,
or cooking equipment will be installed within the Premises without the written
consent of Lessor, WHICH SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED.
20. LEGAL USE AND VIOLATIONS OF INSURANCE COVERAGE. Lessee agrees to not
occupy or use, or permit any portion of the Premises to be occupied or used for
any business or purpose which is unlawful, disreputable or deemed to be
extra-hazardous on account of fire, or permit anything to be done which would in
any way increase the rate of fire or liability or any other insurance coverage
on the Building and/or its contents, including but not limited to the use,
storage, disposal or transportation of hazardous materials other than drinking
cups, office supplies and similar substances commonly found in commercial office
buildings in quantities or concentrations that do not violate any legal
requirement.
21. LAWS, REGULATIONS AND RULES OF THE BUILDING. Lessee covenants to
comply with all laws, ordinances, rules and regulations (state, federal,
municipal and other agencies or bodies having any jurisdiction thereof) relating
to the use, condition or occupancy of the Premises. Lessee will comply with the
rules adopted and altered by Lessor from time to time for the safety, care and
cleanliness of the Premises and Building and Project and for preservation of
good order therein, all of which will be sent by Lessor to Lessee in writing and
shall be thereafter carried out and observed by Lessee.
22. ENTRY FOR REPAIR AND INSPECTION. Lessee agrees to permit Lessor or its
agents or representatives to enter into and upon any part of the Premises at all
reasonable hours to inspect the same, clean or make repairs, alterations or
additions to the Project, as Lessor may deem necessary or desirable. In
connection with any repairs, maintenance, improvements or alterations, in or
about the Project, Lessor may erect scaffolding and other structures reasonably
required, and during such operations may enter upon the Premises and take into
and upon or through the Premises, all materials required to make such repairs,
maintenance, alterations or improvements, and may close public entry ways, other
public areas, restrooms, stairways or corridors, and Lessee shall not be
entitled to any abatement or reduction of rent by reason thereof. LESSOR SHALL
CONDUCT ALL SUCH REPAIRS, ETC. SO AS TO MINIMIZE INTERFERENCE OR INCONVENIENCE
TO LESSEE.
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23. NUISANCE. Lessee agrees to conduct its business and control its
agents, employees, invitees, and visitors in such manner as not to create any
nuisance, or interfere with, annoy or disturb any other tenant or Lessor in its
operation of the Building.
24. SUBORDINATION TO MORTGAGE. Lessor covenants and agrees with Lessee
that (a) This lease is subject and subordinate to each mortgage (an "Underlying
Mortgage") and each underlying financing or ground lease (an "Underlying Lease")
which may now or subsequently affect Lessor's interest in the Building. In the
event of the enforcement by the holder of any Underlying Mortgage of the
remedies provided for by law or by such Underlying Mortgage, or in the event of
the termination of an Underlying Lease, Lessee shall, upon request of any person
succeeding to the interest of such holder or upon the request of the lessor
under such Underlying Lease, automatically become the lessee of such successor
in interest or such lessor, as the case may be, without change in the terms or
provisions of this lease; provided, that neither such successor in interest nor
such lessor shall be (i) bound by any payment of the Base Rent or Lessee's
Proportionate Share for more than one month in advance except prepayment in the
nature of security for the performance by Lessee of its obligations under this
lease; (ii) bound by any amendment or modification of this lease made without
the consent of such successor in interest or such lessor; or (iii) liable for
any act or omission of a prior lessor under this lease.
(b) Anything in Section 24(a) to the contrary notwithstanding, the
subordination of this lease to any future Underlying Mortgage or Underlying
Lease shall be conditioned upon the holder of each Underlying Lease and
Underlying Mortgage executing an agreement providing that upon the holder of
same succeeding to Lessor's interest because of a default by Lessor, the holder
shall not terminate this lease so long as Lessee shall comply with its
obligations hereunder, subject to the conditions specified in Section 24(a)(i) -
(iii) above.
25. ESTOPPEL CERTIFICATE. Within ten (10) business days after request
therefor by Lessor, Lessee shall:
(a) execute estoppel certificates addressed to (i) any mortgagee or
prospective mortgagee of Lessor, (ii) any purchaser or prospective
purchaser of all or any portion of, or interest in, the Building, or (iii)
any investor in the Building, certifying to the best of Lessee's knowledge
(i) that this Lease is unmodified and in full force and effect (or if
there have been modifications, identifying such modifications and
certifying that the Lease, as modified, is in full force and effect); (ii)
the dates to which the Base Rental has been paid; (iii) that the Lessor is
not in default under any provision of this Lease (or if Lessor is in
default, specifying each such default); (iv) the address to which notices
to Lessee shall be sent; and (v) other matters as such mortgagee(s),
purchaser(s) or investor may reasonably require; and
(b) deliver to Lessor such information regarding the net worth and
financial condition of Lessee as Lessor may reasonably request in
connection with such mortgage, sale or investments.
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26. LEASEHOLD IMPROVEMENTS. (a) Lessee shall comply with the provisions of
Schedule 2 attached hereto entitled "Construction of Initial Leasehold
Improvements." After receipt of the approved "Tenant Construction Agreement"
containing the pricing for the leasehold improvements , Lessor will partition
and prepare said Premises in accordance therewith; however, Lessor shall not be
required to install any partitions or improvements which are not in conformity
with the plans and specifications for the Building or which are not approved by
Lessor or Lessor's architect, and Lessor shall be responsible only for the costs
and expenses described in Schedule 3 and only to the extent that they do not
exceed the respective allowances indicated in Schedule 3. All installations in
excess thereof shall be for Lessee's account, and Lessee shall pay, as
additional rent hereunder, to Lessor an amount equal to Lessor's actual cost
therefor, including associated architectural and engineering fees, if any, plus
a management cost recovery fee of FIVE PERCENT (5%) to cover overhead within
THIRTY (30) days after being invoiced therefor. Additionally, Lessee shall pay
all ad valorem taxes and increased insurance premiums that are payable on
account of any of the leasehold improvements that are in addition to those items
(or the quantities thereof) described on Schedule 3 hereto. Failure by Lessee to
pay any sums described in Section 26(a) or the Schedules hereto in full within
THIRTY (30) days after its receipt of an invoice therefor will constitute
failure to pay rent when due and an event of default by Lessee hereunder, giving
rise to all remedies available to Lessor under this lease and at law for
nonpayment of rent. It is stipulated that time is of the essence in connection
with Lessee's compliance with the terms of Schedule 2.
(b) Lessee shall not be deemed to be the agent or representative of
Lessor in making any such alterations, physical additions or improvements to the
Premises, and shall have no right, power or authority to encumber any interest
in the Project in connection therewith other than Lessee's leasehold estate
under this Lease. However, should any mechanics' or other liens be filed against
any portion of the Project or any interest therein (other than Lessee's
leasehold estate hereunder) by reason of Lessee's acts or omissions or because
of a claim against Lessee or its contractors, Lessee shall cause the same to be
cancelled or discharged of record by bond or otherwise within ten (10) days
after notice by Lessor. If Lessee shall fail to cancel or discharge said lien or
liens, within said ten (10) day period, which failure shall be deemed to be a
default hereunder, Lessor may, at its sole option and in addition to any other
remedy of Lessor hereunder, cancel or discharge the same and upon Lessor's
demand, Lessee shall promptly reimburse Lessor for all costs incurred in
cancelling or discharging such lien or liens.
27. LIMITATION OF LESSOR'S PERSONAL LIABILITY. Lessee specifically agrees
to look solely to Lessor's interest in the PROJECT for the recovery of any
judgment from Lessor, it being agreed that Lessor (and its partners and
shareholders) shall never be personally liable for any such judgment. The
provision contained in the foregoing sentence is not intended to, and shall not,
limit any right that Lessee might otherwise have to obtain injunctive relief
against Lessor or Lessor's successors in interest, or any other action not
involving the personal liability of Lessor to respond in monetary damages or
from assets of Lessor or any partner of Lessor other than Lessor's interest
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in the PROJECT or any suit or action in connection with enforcement or
collection of amounts which may become owing or payable under insurance policies
maintained by Lessor.
28. PARKING. (a) LESSOR shall at all times during the term of this lease
agreement PROVIDE parking rights for fourteen (14) unreserved parking spaces
AND FIVE (5) RESERVED
PARKING SPACES in the parking garage adjacent to the Building (the "Garage"). No
specific spaces in the Garage are to be assigned to Lessee EXCEPT THOSE RESERVED
PARKING SPACES SPECIFIED HEREIN, but Lessor will issue to Lessee the aforesaid
number of parking stickers, each of which will authorize parking in the Garage
of a vehicle on which the sticker is displayed, or Lessor will provide a
reasonable alternative means of identifying and controlling vehicles authorized
to park in the Garage. Lessor may designate the area or areas of the Garage
within which each such vehicle may be parked, and Lessor may change such
designations from time to time. Lessor may make, modify and enforce rules and
regulations relating to the parking of vehicles in the Garage, and Lessee will
abide by and cause its agents, employees and invitees to comply with such rules
and regulations. Lessor may provide parking for visitors to the Building in an
area designated by lessor and in a capacity determined by Lessor to be
appropriate for the Building. Lessor reserves the right to charge and collect a
fee for parking in the visitor parking area in an amount determined by Lessor to
be appropriate. Lessor, at its sole discretion, may change the designated area
for the visitor parking and the fee to be charged for its use. NOTWITHSTANDING
ANYTHING TO THE CONTRARY, LESSOR RESERVES THE RIGHT TO REDESIGNATE AND RELOCATE
ANY RESERVED PARKING SPACE LOCATED ON LEVEL ONE OF THE GARAGE TO ANOTHER LEVEL,
ONLY IN THE EVENT THAT LESSOR REQUIRES ADDITIONAL VISITOR PARKING SPACES IN THE
GARAGE ON LEVEL ONE.
(b) As the Basic Parking Charge, Lessee covenants and agrees to pay
Lessor during the initial term of this Lease, as additional rental hereunder,
$35.00 for each of the unreserved parking spaces leased hereunder AND $65.00 FOR
EACH OF THE RESERVED PARKING SPACES LEASED HEREUNDER, such sum to be payable
monthly in advance on the first day of each and every calendar month during the
lease term, and a pro rata portion of such sum shall be payable for the first
and last partial calendar month of the term of this lease in the event the lease
term commences on a date other than the first day of a calendar month. Lessee's
obligation to pay the Basic Parking Charge shall be considered an obligation to
pay rent for all purposes hereunder and shall be secured in like manner as is
Lessee's obligation to pay rent. Default in payment of such Basic Parking Charge
(after notice as hereinafter provided) shall be deemed a default in payment of
rent. FOR THE PURPOSES OF THIS LEASE, LESSOR WILL ABATE THE MONTHLY PARKING
CHARGES FOR THE FIRST TWENTY FOUR (24) MONTHS OF THE LEASE TERM FOR THE
UNRESERVED PARKING CHARGES ONLY. THERE IS NO ABATEMENT OF PARKING CHARGES FOR
THE RESERVED SPACES.
29. CONDEMNATION. Lessor and Lessee mutually covenant and agree that if
the Premises is taken or condemned for any public purpose to such an extent as
to render the Premises untenantable, this lease shall, at the option of either
party, forthwith cease and terminate. All proceeds from any taking or
condemnation of the Premises shall belong to and be paid to Lessor.
30. DAMAGES FROM CERTAIN CAUSES. Lessor and Lessee mutually covenant and
agree that Lessor shall not be liable or responsible to Lessee for any loss or
damage to any property or person
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occasioned by theft, fire, act of God, public enemy, injunction, riot, strike,
insurrection, war, court order, requisition or order of governmental body or
authority, or any cause beyond Lessor's reasonable control, or SUBJECT TO THE
PROVISIONS OF SECTION 10 HEREOF, for any damage or inconvenience which may arise
through repair or alteration of any part of the Project, or failure to make any
such repairs, PROVIDED THAT THE ACTION OR INACTION OF LESSOR IS REASONABLE.
32. LESSOR'S RIGHT TO RELET. In the event of default by Lessee in any of
the terms or covenants of this lease or in the event the Premises are abandoned
or vacated for thirty (30) consecutive days by Lessee, Lessor and Lessee
mutually covenant and agree that Lessor shall have the right, but not the
obligation, to relet same for the remainder of the term provided for herein, and
if the rent received through reletting does not at least equal the rent provided
for herein, Lessee shall pay and satisfy the deficiency between the amount of
the rent so provided for and that received through reletting, including, but not
limited to, the REASONABLE cost of reletting and related commissions,
renovating, altering and decorating for a new occupant. Nothing herein shall be
construed as in any way denying Lessor the right, in the event of abandonment of
the Premises or other breach of this lease by Lessee, to treat the same as an
entire breach and at Lessor's option to terminate this lease and/or immediately
seek recovery for the entire breach of this lease and any and all damages which
Lessor suffers thereby; HOWEVER, LESSOR SHALL USE REASONABLE EFFORTS TO MITIGATE
DAMAGES IN SUCH EVENT, INCLUDING ATTEMPTING TO RELET THE PREMISES.
33. HOLDING OVER. In the event of holding over by Lessee after expiration
or termination of this lease without the written consent of Lessor, Lessor and
Lessee mutually covenant and agree that Lessee shall pay as liquidated damages
ONE HUNDRED FIFTY PERCENT (150%) OF the then existing base rental and additional
rental, CALCULATED ON A DAILY BASIS. No holding over by Lessee after the term of
this lease shall be construed to extend the lease; in the event of any
unauthorized holding over, Lessee shall indemnify Lessor against all claims for
damages by any other tenant to whom Lessor may have leased all or any part of
the Premises effective upon the termination of this
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<PAGE>
lease. Any holding over with the consent of Lessor in writing shall thereafter
constitute this lease a lease from month to month.
34. FIRE CLAUSE. In the event of a fire in the Premises, Lessor and Lessee
mutually covenant and agree that Lessee shall immediately give notice thereof to
Lessor. If the Premises, through no fault or neglect of Lessee, its agents,
employees, OR invitees , shall be partially destroyed by fire or other casualty
so as to render the Premises untenantable, the rental provided for herein shall
abate thereafter until such time as the Premises are made tenantable as
REASONABLY determined by Lessor (but in no event shall Lessor's obligation
exceed Building Standard Improvements). In the event of the destruction of the
Premises without fault or neglect of Lessee, its agents, employees, OR invitees
, or if from any cause the same shall be so damaged that Lessor shall decide not
to rebuild OR THE DAMAGE CAN NOT BE RESTORED WITHIN ONE HUNDRED TWENTY (120)
DAYS OF THE DATE OF CASUALTY, then Lessor or Lessee may terminate this lease and
all rent owed up to the time of such damage, destruction or termination shall be
paid by Lessee and thenceforth this lease shall cease and come to an end.
35. ATTORNEYS FEES. In any action or proceeding brought by Lessor or
Lessee regarding the performance of any of the terms, covenants, agreements or
conditions contained in this lease, Lessor and Lessee mutually covenant and
agree that the prevailing party shall be entitled to recover from the other
party its reasonable attorney's fees, investigations costs and court costs.
36. AMENDMENTS. This lease may not be altered, changed or amended, except
by an instrument in writing signed by both parties hereto.
37. ASSIGNMENT BY LESSOR. Lessor shall have the right to transfer and
assign, in whole or in part, all its rights and obligations hereunder and in the
Building and property referred to herein, and in such event and upon such
transfer (any such transferee to have the benefit of, and be subject to, the
provisions of Sections 13 and 27 hereof) no further liability or obligation
shall thereafter accrue against Lessor hereunder or under any agreement relating
to this lease.
38. DEFAULT BY LESSEE. If default shall be made in the payment of any sum
to be paid by Lessee under this lease, and default shall continue for ten (10)
days, or default shall be made in the performance of any of the other covenants
or conditions which Lessee is required to observe and to perform, and such
default shall continue for twenty (20) days AFTER WRITTEN NOTICE TO LESSEE, or
if the interest of Lessee under this lease shall be levied on under execution or
other legal process, or if any petition shall be filed by or against Lessee to
declare Lessee a bankrupt or to delay, reduce or modify Lessee's debt or
obligations, or if any petition shall be filed or other action taken to
reorganize or modify Lessee's capital structure if Lessee be a corporation or
other entity, or if Lessee be declared insolvent according to law, or if any
assignment of Lessee's property shall be made for the benefit of creditors, or
if a receiver or trustee is appointed for Lessee or its property, or if Lessee
shall abandon or vacate the Premises during the term of this lease or any
renewals or extensions thereof, or if Lessee is a corporation and Lessee shall
cease to exist as a corporation in good standing under the laws of the State of
Texas or if Lessee is a partnership or other entity and shall be dissolved or
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<PAGE>
otherwise liquidated, then Lessor may treat the occurrence of any one or more of
the foregoing events as a breach of this lease (provided that no such levy,
execution, legal process or petition filed against Lessee shall constitute a
breach of this lease if Lessee shall vigorously contest the same by appropriate
proceedings and shall remove or vacate the same within thirty (30) days from the
date of its creation, service or filing) and thereupon, at Lessor's option, may
have any one or more of the following described remedies in addition to all
other rights and remedies available at law or in equity:
(a) Lessor may terminate this lease and forthwith repossess the
Premises and be entitled to recover forthwith as damages a sum of money
equal to the total of (i) the cost of recovering the Premises, (ii) the
unpaid rent earned at the time of termination, plus interest thereon at
the LOWER OF THE maximum non-usurious rate OR TWELVE PERCENT (12%) per
annum from the due date, (iii) the balance of the rent for the remainder
of the term less the fair market rental value of the Premises for said
period and (iv) any other sum of money and damages owed by Lessee to
Lessor.
(b) Lessor may terminate Lessee's right of possession (but not the
lease) and may repossess the Premises by forcible entry or detainer suit
or otherwise, without demand or notice of any kind to Lessee and without
terminating this lease, in which event Lessor may, but shall be under no
obligation to do so, relet the same for the account of Lessee for such
rent and upon such terms as shall be satisfactory to Lessor. For the
purpose of such reletting Lessor is authorized to decorate or to make any
repairs, changes, alterations or additions in or to the Premises that may
be necessary or convenient, and (i) if Lessor shall fail or refuse to
relet the Premises, or (ii) if the same are relet and a sufficient sum
shall not be realized from such reletting after paying the unpaid basic
and additional rent due here under plus interest at the LOWER OF THE
maximum non-usurious rate OR TWELVE PERCENT (12%) thereon, the cost of
recovering possession, and all of the costs and expenses of such
decorations, repairs, changes, alterations and additions and the expense
of such reletting and of the collection of the rent accruing therefrom to
satisfy the rent provided for in this lease to be paid, then Lessee shall
pay to Lessor as damages a sum equal to the amount of the rental reserved
in this lease for such period or periods, or if the Premises have been
relet, the Lessee shall satisfy and pay any such deficiency upon demand
therefor from time to time and Lessee agrees that Lessor may file suit to
recover any sums falling due under the terms of Section 38(b) from time to
time, and that no delivery to or recovery of any portion due Lessor
hereunder shall be any defense in any action to recover any amount not
theretofore reduced to judgment in favor of Lessor, nor shall such
reletting be construed as an election on the part of Lessor to terminate
this lease unless a written notice of such intention be given to Lessee by
Lessor. Notwithstanding any such reletting without termination, Lessor may
at any time thereafter elect to terminate this Lease for such previous
breach.
39. NON-WAIVER. Failure of Lessor to declare any default immediately upon
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive such default, but
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Lessor shall have the right to declare any such default at any time and take
such action as might be lawful or authorized hereunder, either in law or in
equity.
40. CASUALTY INSURANCE. Lessor shall maintain fire and extended coverage
insurance on the base building portion of the Building and on Building Standard
Improvements within the Premises. Said insurance shall be maintained with an
insurance company authorized to do business in Texas, in amounts desired by
Lessor (but no less than 80% of the insurable value of the insurable portion of
the Building (exclusive of foundations), including replacement cost endorsement)
and at the expense of Lessor (which expense shall be an operating expense
pursuant to Section 7(a)(5) of this lease) and payments for losses thereunder
shall be made solely to Lessor and Lessor's mortgagees. Lessee shall maintain,
at its expense, fire and extended coverage insurance on all of its personal
property, including removable trade fixtures, located in the Premises and on all
additions and leasehold improvements to the Premises which exceed Building
Standard. If the annual premiums to be paid by Lessor shall exceed the standard
rates because Lessee's operations, contents of the Premises, or leasehold
improvements with respect to the Premises beyond Building Standard, result in
extra-hazardous exposure or increased costs, Lessee shall promptly pay the
excess amount of the premium upon request by Lessor.
41. LIABILITY INSURANCE. Lessor shall, at its expense (which expense shall
be an operating expense pursuant to Section 7(a)(5) of this lease), maintain a
policy or policies of comprehensive general liability insurance with the
premiums thereon fully paid on or before the due date, issued by and binding
upon some solvent insurance company, such insurance to afford minimum protection
(such insurance to inure to the benefit of Lessor only, and not to Lessee) of
not less than $1,000,000 in respect of personal injury or death in respect of
any one occurrence and of not less than $250,000 for property damage in any one
occurrence. Lessee shall, at its expense maintain a policy or policies of
comprehensive general liability insurance with the premiums thereon fully paid
on or before the due date, issued by and binding upon some solvent insurance
company, such insurance to afford Lessee minimum protection of not less than
$1,000,000 in respect of personal injury or death in respect of any one
occurrence and of not less than $250,000 for property damage in any one
occurrence.
Lessee shall furnish to Lessor and maintain on deposit with Lessor,
duplicate insurance policies or certificates of insurance evidencing Lessee's
compliance with the insurance provisions hereof.
42. HOLD HARMLESS. Lessor shall not be liable to Lessee, or to Lessee's
agents, servants, employees, customers or invitees for any injury or damage to
person or property caused by any act, omission or neglect of Lessee, its agents,
servants, or employees, and Lessee agrees to indemnify and hold Lessor harmless
from all liability and claims for any such damage or bodily injury. Lessee shall
not be liable to Lessor, or to Lessor's agents, servants, employees, customers
or invitees for any damage to person or property caused by any act, omission or
neglect of Lessor, its agents, servants or employees, and Lessor agrees to
indemnify and hold Lessee harmless from all claims for such damage or bodily
injury.
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<PAGE>
43. WAIVER OF SUBROGATION RIGHTS. Anything in this lease to the contrary
notwithstanding, Lessor and Lessee each hereby waive any and all rights of
recovery, claim, action or cause of action, against the other, its agents,
officers, or employees, for any loss or damage that may occur to the Premises,
or any leasehold improvements thereto, or said Building of which the Premises
are a part, or any improvements thereto, or any personal property of such party
therein, by reason of fire, the elements, or any other cause which could be
insured against under the terms of standard fire and extended coverage insurance
policies referred to in Section 40 hereof, regardless of cause or origin,
including negligence of the other party hereto, its agents, officers or
employees, and agrees that no insurer under such policies shall hold any right
of subrogation against such other party.
44. NAME OF BUILDING. Lessor may change the name of the Building at any
time without notice to Lessee and Lessee shall not use the name of the Building
for any purpose other than its mailing address.
45. NOTICES. Any notice which may or shall be given under the terms of
this Lease shall be in writing and shall be either delivered by hand, delivered
by a commercially recognized express mail or messenger service, or sent by
United States Mail, certified or registered, return receipt requested, postage
prepaid, to the addresses noted for the respective parties. Such addresses may
be changed from time to time by either party by giving written notice as
provided herein. Notice shall be deemed given upon the date of delivery if by
hand or messenger service (or attempted delivery if such delivery is
unsuccessful), as evidenced by the records of the express mail or messenger
service or the return receipt, as applicable.
47. SURVIVAL. All of Lessee's AND LESSOR'S covenants and obligations
contained in this Lease shall survive the expiration or earlier termination of
this Lease. No provision of this Lease providing for termination in certain
events shall be construed as a limitation or restriction of Lessor's rights and
remedies at law or in equity available upon a breach by Lessee of this Lease.
This lease shall be binding upon and inure to the benefit of the
successors and assigns of Lessor, and shall be binding upon and inure to the
benefit of Lessee, its successors, and, to the extent
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assignment may be approved by Lessor hereunder, Lessee's assigns. The pronouns
of any gender shall include the other genders, and either the singular of the
plural shall include the other.
All rights and remedies of Lessor under this lease shall be cumulative and
none shall exclude any other rights or remedies allowed by law; and this lease
is a Texas contract, and all of the terms hereof shall be construed according to
the laws of the State of Texas.
48. REAL ESTATE BROKERS. Lessee represents to Lessor that Lessee has not
dealt with any broker in connection with this Lease, other than The Staubach
Company on behalf of Lessee and Tanglewood Property Management Company on behalf
of Lessor.
49. TELECOMMUNICATIONS. (a) Lessor reserves the right as promulgated by
state and federal laws, rules and regulations to oversee and manage the
telecommunication issues, equipment and cabling in the Building. Lessee will
notify Lessor of any telecommunication needs, requirement and issues as required
or deemed necessary by the Lessee. The Lessor will not unreasonably delay any
request by the Lessee regarding any telecommunications issues or needs. The
Lessor will not unreasonably deny or discriminate regarding entry to the
Building by any telecommunications provider, but will seek a fair and reasonable
agreement based on available space in the Building; health, safety and
engineering issues and other issues that directly effect the Building and the
Building's tenants.
(b) Lessor reserves the right now or in the future to install a
minimum point of entry cable facility and a cable/fiber riser system within the
Building and require all telecommunication providers to equally utilize this
location or area depending on the space available and utilize the cable or fiber
riser system as each telecommunications provider chronologically seeks to enter
the Building. If the telecommunications providers currently have equipment and
cabling in the Building riser when the Lessor institutes the Building cable
facility, the Lessor will give that telecommunications provider(s) ninety (90)
days written notice that the Lessor will be completing a new cable riser
facility in the Building and that the telecommunications provider will be
required to move to the minimum point of entry and connect to the Building's
cable riser system.
(c) Lessee agrees to indemnify and hold the Lessor, Lessor's
partners, agents, employees
and contractors harmless from all liabilities and damages regarding
telecommunication services as well as the telecommunications riser facility
installed or present in the Building by any telecommunications company or
provider.
(d) Telecommunications will evolve and increase in need during the
term of this Lease agreement. The Lessor will use best efforts to accommodate
all reasonable needs and requirements of all tenants and all telecommunications
providers.
50. RENEWAL OPTION. (a) As long as Lessee is not in uncured default in the
performance of its covenants under this lease of which Lessor has given Lessee
written notice, Lessee is hereby granted the option to renew the term of this
lease for one (1) additional period of five (5) years, the
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"Renewal Term" to commence at the expiration of the initial term of this lease.
Lessee shall exercise its option to renew as follows: Lessee shall deliver
written notice to Lessor at least six (6) months prior to the expiration of the
current term of this lease that Lessee may exercise its renewal option. Within
thirty (30) days of Lessor's receipt of Lessee's written notice, Lessor shall
notify Lessee in writing of the Market Base Rental Rate (hereinafter defined)
that Lessee shall pay during such renewal term. Within forty five (45) days
after receipt of such written notice from Lessor, Lessee shall, if it elects,
deliver written notice to Lessor of its election to exercise its renewal option
hereunder. If Lessee does not respond within such forty five (45) day period,
Lessee's right to renew hereunder shall terminate. All terms of this lease shall
apply to such renewal option, except (i) the Base Rental (hereinafter defined)
during the Renewal Term shall be the then prevailing Market Base Rental Rate at
the time Lessee exercises the respective renewal option, (ii) Lessee shall not
have an option to renew this lease beyond the expiration of the Renewal Term,
(iii) Lessee shall not have the right to assign its renewal rights to any
sublessee or assignee of the Premises nor may a sublessee or assignee exercise
such renewal right, and (iv) the leasehold improvements will be provided in
their then existing condition (i.e. on an "as-is" basis) at the time the Renewal
Term commences.
(b) As used in this lease, the term "Market Base Rental Rate" shall
mean the net effective rate per square foot of net rentable area at which a
willing lessor and a willing lessee would agree to lease comparable space to
that for which the Market Base Rental Rate is being determined in comparable
office buildings in the West Loop/Galleria area of Houston, Texas, which rate
shall take into account all relevant economic and non-economic factors,
including but not limited to: the credit-worthiness, and other qualities of such
lessee, the quality of the management of the building in question, the amount of
space being offered for lease, the location within the building of such offered
space, whether the space being offered is a full floor or a portion of a
multi-tenant floor, the quality and finish of the offered space as it then
exists, the age and quality of such building, the lease term and renewal
options, the scheduled or actual commencement date, add-on factors, basis for
paying operating expenses, and market inducements, such as free rent, moving
expenses, and architectural, construction and lease assumption allowances.
(c) Whenever Lessee is to pay the Market Base Rental Rate for space
under the terms of this lease, Lessee shall, in addition, pay its share of the
Forecast Operating Expenses (hereinafter defined) utilizing the hereinafter
defined procedures. The Base Year shall be the calendar year that the Market
Base Rental Rate is determined for that calendar year.
51. NON-DISTURBANCE AGREEMENT. Lessor will use its best efforts to obtain
a Non-Disturbance Agreement from its lender in a form similar to the one
attached. During the term of this Lease, should Lessee request a Non-Disturbance
Agreement, Lessee agrees to pay Lessor the fee for such requested form as
specified in Paragraph 52 below.
52. FEES FOR LESSEE REQUESTED FORMS. During the term of this Lease, Lessee
may request certain specific forms which may be necessary for the Lessor to
prepare, review, consent or approve.
The fees for such forms are as follows:
PINNACLE.WPD
-22-
<PAGE>
FORM FEE PER OCCURRENCE
Subordination and Non-Disturbance Agreement................ $300.00
Landlord's Waiver & Consent................................ $150.00
Sub-Lease Agreement........................................ $300.00
Miscellaneous Amendments (Lessee Name Change,.............. $300.00
Early Termination, or any document that does not
create income for the Lessor)
Review of remodeling plans for any modification of......... $ 20.00
the Premises not already covered during the initial per sheet
improvement of the Premises.
53. SIGNAGE. Upon execution of this Lease, Lessee shall have the right to
place its name on the exterior monument located in the surface parking lot.
Lessee hereby agrees to pay Lessor a one time charge of $3,000.00 prior to any
installation. Lessee hereby agrees to pay for all installation costs associated
with the installation of such signage on the monument. Prior to installation,
the lettering height, design, and location of such must be submitted to the
Lessor for approval, which shall not be unreasonably withheld or delayed.
IN TESTIMONY WHEREOF, the parties hereto have executed this lease as of
the date aforesaid.
LESSOR: LESSEE:
5599 SAN FELIPE, LTD., PINNACLE GLOBAL GROUP, INC.,
a Texas limited partnership a Texas corporation
By: San Felipe Tower, Inc.,
a Delaware corporation,
the sole general partner
By: LOUIS B. TRENCHARD III By: RE GARRISON II
Name: Louis B. Trenchard III Name: RE GARRISON II
Title: President Title: PRESIDENT AND CEO
PINNACLE.WPD
-23-
<PAGE>
SCHEDULE 1
TERM-SUBSTANTIAL COMPLETION
The term shall commence upon the first to occur of (i) Substantial
Completion of the Premises, (ii) occupancy of the Premises by Lessee (the first
of such dates being herein called the "Term Commencement Date"), and, except as
otherwise provided herein or in any exhibit or addendum hereto, shall continue
in full force for a period of sixty (60) months thereafter (the last day of the
term of this lease being herein referred to as the "Term Expiration Date"). The
parties estimate that the Term Commencement Date will occur on or about June 1,
1999 (the "Scheduled Term Commencement Date"). If the Premises are not
Substantially Complete by the Scheduled Term Commencement Date for any reason,
Lessor shall not be liable for any claims, damages or liabilities in connection
therewith or by reason thereof, but the Term Commencement Date shall be
determined as provided above. LESSEE SHALL RECEIVE ONE (1) DAY OF RENTAL
ABATEMENT FOR EACH DAY BEYOND JUNE 7, 1999 THAT SUBSTANTIAL COMPLETION IS
DELAYED (EXCEPT IF DUE TO LESSEE DELAYS OR FORCE MAJEURE). If Substantial
Completion occurs prior to the Scheduled Term Commencement Date, Lessee shall
take occupancy at that time and the term shall commence. In either circumstance
the Term Expiration Date shall be determined as provided above to provide for
the lease being effective for its full term of months. Lessor shall provide
Lessee with as much notice as circumstances allow of the date when Lessor
expects to achieve Substantial Completion, based upon the progress of the work.
Should the Term Commencement Date be a date other than the Scheduled Term
Commencement Date, either Lessor or Lessee, at the request of the other, shall
execute a declaration specifying the Term Commencement Date.
"Substantial Completion" shall mean (and the Premises shall be deemed
"Substantially Complete") when (i) installation of all leasehold improvements
has occurred, (ii) Lessee has access to the BUILDING'S ELEVATOR AND elevator
lobby on the floor where the Premises are located, and (iii) Building services
are ready to be furnished to the Premises (or could be furnished to the Premises
if all the leasehold improvements were completed). Substantial Completion shall
be deemed to have occurred notwithstanding a requirement to complete "punchlist"
or similar corrective work. The existence of construction work in other portions
of the Building or the Project shall not affect the determination of the date of
Substantial Completion of the Premises.
PINNACLE.WPD
-1-
<PAGE>
SCHEDULE 2
CONSTRUCTION OF INITIAL LEASEHOLD IMPROVEMENTS
Notwithstanding anything to the contrary, Lessee is leasing the Premises in an
"as-is" condition with no modifications required by the Lessor, except Lessor
shall modify the Premises according to the plans submitted by Lessee attached
hereto as Lessee's working drawings ("Lessee's Work") and known as Exhibit "A".
Lessor's monetary obligation to perform such modifications shall not exceed the
allowance listed in Schedule 3 attached hereto.
PINNACLE.WPD
-2-
<PAGE>
SCHEDULE 3
MONETARY MATTERS
Lessor shall be responsible for costs and expenses incurred in connection with
the Lessee Work shown on Exhibit "A" in an amount not to exceed $12.00 per
rentable square foot, estimated or $78,360.00, for the Premises only
(hereinafter known as "Lessor's Contribution"). Lessor's contribution shall be
used exclusively for leasehold improvements and architectural services
associated with such improvements. IF ANY PORTION OF THE ALLOWANCE REMAINS
UNUSED, LESSEE SHALL HAVE THE RIGHT TO USE THE OVERAGE ON VOICE/DATA CABLING
COSTS UP TO A MAXIMUM OF $1.00 PER RENTABLE SQUARE FOOT.
If the cost of the Leasehold Improvements exceeds Lessor's Contribution, Lessor,
upon written request of Lessee, shall finance up to an additional $2.00 per
rentable square foot to be paid over the primary term of the Lease at an
interest rate of ten percent (10%) per annum in equal monthly payments, paid as
an addition to the Base Rent amount. The parties shall execute a memorandum of
Rent Adjustment to memorialize the actual monthly Base Rent amount upon
Substantial Completion of the Leasehold Improvements.
Should Lessee not fully expend Lessor's Contribution , Lessee shall not be
entitled to any off-set against rent.
Should Lessee's leasehold improvements exceed Lessor's contribution, then such
overage shall be (i) due and payable to Lessor within thirty (30) days after
delivery of a written invoice to Lessee and (ii) subject to the construction
supervision fee as stated in Paragraph 26 of the Lease.
PINNACLE.WPD
-3-
<PAGE>
EXHIBIT "A THROUGH C"
INTENTIALLY OMITTED
EXHIBIT 21.1
List of Subsidiaries of Advanced Technical Products, Inc.
STATE OR JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION
------------------ ----------------------
Technical Products Group, Inc. Delaware
Alcore, Inc. Delaware
Lincoln Properties, Inc. Delaware
Marion Properties, Inc. Delaware
Deland Properties, Inc. Delaware
Alcore Brigantine France
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Pinnacle Global Group, Inc. on Form S-8 (Registration Statement No.
333-72325) of our reports dated March 31, 1999 on our audits of the consolidated
financial statements and financial statement schedule of TEI, Inc. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Houston, Texas
March 31, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,292,644
<SECURITIES> 14,637,575
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 28,651,419
<PP&E> 52,455
<DEPRECIATION> (27,339)
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0
0
<COMMON> 38,016
<OTHER-SE> 33,661,747
<TOTAL-LIABILITY-AND-EQUITY> 34,995,239
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<TOTAL-REVENUES> 1,524,405
<CGS> 0
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<INCOME-TAX> 53,532
<INCOME-CONTINUING> 106,260
<DISCONTINUED> (4,077,020)
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<NET-INCOME> (3,970,760)
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