<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): April 28, 2000
PINNACLE GLOBAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 0-30066 76-0583569
(State of Incorporation) (Commission File Number) (IRS Employer Identification No.)
</TABLE>
5599 SAN FELIPE, SUITE 555
HOUSTON, TEXAS 77056
(Address of Registrant's principal executive offices)
(713) 993-4610
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
Pinnacle Global Group, Inc. (Pinnacle) is filing this Current Report on
Form 8-K to update through December 31, 1999 (1) the financial statements of
Sanders Morris Mundy Inc. which was combined in a merger involving our
investment banking subsidiary Harris Webb & Garrison, Inc. that closed
January 31, 2000 and (2) the pro forma financial information related to the
Sanders merger.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
See Index to Financial Statements beginning on page 2.
(b) PRO FORMA FINANCIAL INFORMATION.
See Index to Financial Statements beginning on page 2.
1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Pinnacle Global Group, Inc.
Unaudited ProForma Condensed Combined Balance Sheet as of
December 31, 1999....................................... 4
Unaudited ProForma Condensed Combined Statement of
Operations for the year ended December 31, 1999......... 5
Notes to the Unaudited ProForma Condensed Combined
Financial Statements.................................... 6
Sanders Morris Mundy Inc.
Report of Independent Accountants......................... 8
Consolidated Statement of Financial Condition
as of December 31, 1999 and 1998........................ 9
Consolidated Statement of Income
for the three years in the period ended December 31,
1999.................................................... 10
Consolidated Statement of Changes in Stockholders' Equity
for the three years in the period ended December 31,
1999.................................................... 11
Consolidated Statement of Changes in Subordinated
Borrowings
for the three years in the period ended December 31,
1999.................................................... 12
Consolidated Statement of Cash Flows
for the three years in the period ended December 31,
1999.................................................... 13
Notes to Consolidated Financial Statements................ 14
</TABLE>
2
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined balance sheet as of
December 31, 1999 gives effect to the merger with Sanders Morris Mundy Inc.
(SMM) as if it occurred on that date. The following unaudited pro forma
condensed combined statement of operations for the year ended December 31, 1999
gives effect to the following transactions as if they occurred on January 1,
1999: (1) the January 1999 combination with Harris Webb & Garrison, Inc. (HWG),
Pinnacle Management & Trust Company (PMT) and Spires Financial, L.P. (Spires)
and (2) the merger with SMM. The unaudited pro forma condensed combined
financial statements have been derived from and should be read in connection
with the audited historical financial statements of Pinnacle and SMM as of and
for the year ended December 31, 1999 included later in this Form 8-K in the case
of SMM and included in our most recent annual report on Form 10-K in the case of
Pinnacle.
The pro forma adjustments and the resulting unaudited pro forma condensed
combined financial statements were prepared based on available information and
certain assumptions and estimates described in the notes to the unaudited pro
forma condensed combined financial statements. A final determination of required
purchase accounting adjustments, including the allocation of the purchase price
to the assets acquired and liabilities assumed, has not been made, and the
allocation reflected in the unaudited pro forma condensed combined financial
statements should be considered preliminary. However, in the opinion of our
management, the final allocation will not have a material impact on the
unaudited condensed combined pro forma financial statements.
The unaudited pro forma condensed combined financial statements do not
purport to represent what our financial position or results of operations would
have been had the merger occurred on the dates indicated or to project our
financial position or results of operations for any future period. Furthermore,
the unaudited pro forma condensed combined financial statements do not reflect
changes which may occur as the result of activities after the Sanders merger
closed.
3
<PAGE>
PINNACLE GLOBAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PINNACLE SMM ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents...................... $ 10,495 $ 9,786 $ (650)(A)
$ 19,631
Securities available for sale.................. 4,049 -- -- 4,049
Receivable from broker-dealers and clearing
organizations................................ 162,423 122 -- 162,545
Deposits with clearing brokers................. 8,463 250 -- 8,713
Securities owned............................... 85,002 7,496 92,498
Intangible assets, net......................... 21,414 281 23,016 (A) 44,711
Other assets................................... 4,172 3,907 -- 8,079
Net assets of discontinued operations.......... 2,448 -- -- 2,448
-------- ------- -------- --------
Total assets................................. $298,466 $21,842 $ 22,366 $342,674
======== ======= ======== ========
Liabilities:
Accounts payable and accrued liabilities....... $ 2,691 $ 7,300 $ -- $ 9,991
Payable to clearing broker-dealers............. 117,922 29 -- 117,951
Securities sold, not yet purchased............. 120,276 62 -- 120,338
-------- ------- -------- --------
Total liabilities............................ 240,889 7,391 -- 248,280
-------- ------- -------- --------
Minority interests............................... -- 550 -- 550
-------- ------- -------- --------
Shareholders' equity:
Common stock................................... 71 1 (1)(B)
71 (A) 142
Additional paid-in capital..................... 58,929 1,103 (1,103)(B)
36,196 (A) 95,125
Receivables for shares issued.................. (1,312) -- -- (1,312)
Retained earnings.............................. (88) 12,797
(12,797)(B) (88)
Accumulated other comprehensive loss........... (23) -- -- (23)
-------- ------- -------- --------
Total shareholders' equity................... 57,577 13,901 22,366 93,844
-------- ------- -------- --------
Total liabilities and shareholders'
equity................................... $298,466 $21,842 $ 22,366 $342,674
======== ======= ======== ========
</TABLE>
4
<PAGE>
PINNACLE GLOBAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PINNACLE PINNACLE
AS JANUARY 1999 AS PRO FORMA
REPORTED ACQUISITIONS(C) ADJUSTMENTS ADJUSTED SMM ADJUSTMENTS COMBINED
-------- --------------- ----------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues........... $18,973 $ 1,527 $ -- $20,500 $34,567 $ -- $55,067
Total expenses........... 18,600 1,214 68 (E)
84 (D) 19,966 29,410 (921 )(H) 50,297
------- ------- ------- ------- ------- ------- -------
Income from continuing
operations before
income taxes........... 373 313 (152) 534 5,157 (921) 4,770
Minority interests and
cumulative effect of
change in accounting... -- -- -- -- (416) -- (416)
Provision for income
taxes.................. 3,271 2 96 (F) 3,369 -- 2,062 (I) 5,431
------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing
operations............. $(2,898) $ 311 $ (248) $(2,835) $ 5,573 $(2,983) $ (245)
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per
share from continuing
operations............. $ (0.43) $ (0.02)
======= =======
Weighted average shares
outstanding............ 6,828 593 (G) 7,421 7,125 (G) 14,546
======= =======
Diluted earnings (loss)
per share from
continuing
operations............. $ (0.43) $ (0.02)
======= =======
Weighted average shares
outstanding............ 6,828 593 (G) 7,421 7,125 (G) 14,546
======= =======
</TABLE>
5
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
A To record the purchase of SMM based on the issuance of 7,125,220 shares at
$5.09 per share, plus $650,000 of estimated transaction costs. The $5.09
share price is based on an average of the market value of Pinnacle common
stock for five days before, the day of, and five days after the announcement
of the proposed merger.
<TABLE>
<S> <C>
Purchase Price.............................................. $ 36,917
Less fair value of identifiable assets...................... (13,901)
--------
Goodwill.................................................... $ 23,016
========
</TABLE>
B To eliminate the historical equity accounts of SMM.
C To include the historical results of operations of HWG, PMT, and Spires for
the one month period prior to their January 31, 1999 acquisition by
Pinnacle:
<TABLE>
<CAPTION>
HWG PMT SPIRES TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Month ended January 31, 1999:
Total revenues............................................ $449 $242 $836 $1,527
Total expenses............................................ 479 120 615 1,214
---- ---- ---- ------
Income (loss) from continuing operations before income
taxes................................................... (30) 122 221 313
Provision (benefit) for income taxes...................... 2 -- -- 2
---- ---- ---- ------
Income (loss) from continuing operations.................. $(32) $122 $221 $ 311
==== ==== ==== ======
</TABLE>
D To record the increase in compensation and benefits of Spires based upon
employment contracts whereby certain employees of Spires receive total
compensation equal to 10% of Spires revenues.
E To record amortization of goodwill over 25 years on a straight-line basis
related to the acquisition of HWG, PMT and Spires.
6
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (CONTINUED)
F To record the pro forma provision for income taxes for PMT and Spires which
were non-taxable entities:
<TABLE>
<CAPTION>
PMT SPIRES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Month ended January 31, 1999:
Income from continuing operations....................... $122 $ 221 $ 343
Less additional Spires Financial compensation and
benefits.............................................. -- 84 84
---- ------ ------
122 137 259
Statutory income tax rate............................... 37% 37% 37%
---- ------ ------
Provision for income taxes.............................. $ 45 $ 51 $ 96
==== ====== ======
</TABLE>
G To adjust the weighted average shares for the shares issued in the
acquisitions of HWG, PMT, Spires and SMM.
H To record amortization of goodwill over 25 years on a straight-line basis
related to the acquisition of SMM.
<TABLE>
<CAPTION>
<S> <C>
Goodwill.................................................... $23,016
Amortization period......................................... 25
-------
Annual amortization expense................................. $ 921
=======
</TABLE>
I To record the provision for income taxes for SMM which was a non-taxable
entity:
<TABLE>
<CAPTION>
<S> <C>
Income from continuing operations of SMM.................... $5,573
Statutory income tax rate................................... 37%
------
Provision for income taxes.................................. $2,062
======
</TABLE>
7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Sanders Morris Mundy Inc.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of income, changes in
stockholders' equity, changes in subordinated borrowings, and cash flows present
fairly, in all material respects, the consolidated financial position of Sanders
Morris Mundy Inc. and subsidiaries (the Company) at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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.
As discussed in Note 2, the Company changed its accounting for organization
and start-up costs pursuant to the provisions of Statement of Position 98-5.
PricewaterhouseCoopers LLP
Houston, Texas
February 25, 2000
8
<PAGE>
SANDERS MORRIS MUNDY INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 9,786,016 $ 8,814,452
Deposit with clearing organization.......................... 250,000 --
Receivables................................................. 2,571,075 1,668,602
Securities owned:
Marketable, at market value............................... 2,297,333 3,565,901
Not readily marketable, at estimated fair value........... 5,199,308 9,911,947
Leasehold improvements, furniture and equipment, net........ 1,241,636 1,309,278
Goodwill, less accumulated amortization of $135,484 and
$93,797, respectively..................................... 281,390 323,077
Other assets................................................ 215,623 105,438
----------- -----------
$21,842,381 $25,698,695
=========== ===========
LIABILITIES, MINORITY INTERESTS, AND STOCKHOLDERS' EQUITY
Payable to brokers and dealers.............................. $ 29,438 $ 32,252
Securities sold, not yet purchased, at market value......... 62,297 19,404
Accounts payable and other accrued liabilities.............. 582,409 579,993
Dividends declared.......................................... 2,109,327 --
Accrued profit sharing...................................... 500,000 450,000
Deferred compensation....................................... 3,262,608 4,134,659
Sales commissions payable................................... 687,735 478,740
State income taxes payable.................................. 157,383 152,856
----------- -----------
Total liabilities....................................... 7,391,197 5,847,904
----------- -----------
Commitments and contingencies
Minority interests.......................................... 550,135 1,085,856
----------- -----------
Stockholders' equity:
Common stock, $0.01 par value, 200,000 shares authorized,
71,229 shares issued and 60,729 shares outstanding at
1999 and 70,459 shares issued and 59,959 shares
outstanding at 1998..................................... 712 705
Less--treasury stock (10,500 shares at par)............... (105) (105)
Additional paid-in capital................................ 1,103,716 846,544
Retained earnings......................................... 12,796,726 17,917,791
----------- -----------
Total stockholders' equity.............................. 13,901,049 18,764,935
----------- -----------
$21,842,381 $25,698,695
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
SANDERS MORRIS MUNDY INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Underwriting........................................ $12,865,127 $ 9,269,605 $ 7,987,939
Other investment banking............................ 2,954,303 2,564,962 1,493,805
Commissions......................................... 10,836,993 9,129,954 7,639,843
Trading gains, net.................................. 5,213,199 16,989,945 3,623,462
Management and advisory fees from limited
partnerships...................................... 3,030,824 1,545,612 760,000
Interest income..................................... 705,002 362,555 356,332
Equity in earnings (loss) of limited partnerships... (1,833,909) 1,693,472 2,159,044
Other............................................... 795,884 193,213 908,019
----------- ----------- -----------
Total revenues.................................... 34,567,423 41,749,318 24,928,444
----------- ----------- -----------
Expenses:
Employee compensation and benefits.................. 20,810,243 23,340,637 12,356,213
Clearing and execution fees......................... 2,045,744 1,953,140 1,789,229
Occupancy and equipment............................. 1,505,038 1,139,532 1,068,723
Information services................................ 1,220,332 730,535 558,408
Travel and entertainment............................ 955,942 733,299 445,203
Management fee...................................... -- 180,000 356,894
Depreciation and amortization expense............... 368,570 340,193 284,522
Professional fees................................... 491,628 294,646 258,184
Advertising and public relations.................... 78,060 201,053 267,560
Other............................................... 1,934,784 2,101,250 1,042,005
----------- ----------- -----------
Total expenses.................................... 29,410,341 31,014,285 18,426,941
----------- ----------- -----------
Income before cumulative effect of a change in
accounting principle and minority interests......... 5,157,082 10,735,033 6,501,503
Cumulative effect of a change in accounting
principle........................................... -- (284,694) --
Minority interests in earnings (loss) of consolidated
companies........................................... (415,721) 429,659 699,025
----------- ----------- -----------
Net income............................................ $ 5,572,803 $10,020,680 $ 5,802,478
=========== =========== ===========
Earnings per share--basic and diluted................. $ 92.15 $ 167.13 $ 95.36
=========== =========== ===========
Weighted average shares--basic and diluted............ 60,477 59,958 60,847
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
SANDERS MORRIS MUNDY INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- -------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997........ 70,459 $ 705 (7,300) $ (73) $1,277,168 $ 6,144,633 $ 7,422,433
Net income...................... -- -- -- -- -- 5,802,478 5,802,478
Distribution to shareholders.... -- -- -- -- -- (1,750,000) (1,750,000)
Purchase of treasury stock...... -- -- (3,200) (32) (430,624) -- (430,656)
------ ------ ------- ----- ---------- ----------- -----------
Balance, December 31, 1997...... 70,459 705 (10,500) (105) 846,544 10,197,111 11,044,255
Net income...................... -- -- -- -- -- 10,020,680 10,020,680
Distribution to shareholders.... -- -- -- -- -- (2,300,000) (2,300,000)
------ ------ ------- ----- ---------- ----------- -----------
Balance, December 31, 1998...... 70,459 $ 705 (10,500) $(105) $ 846,544 $17,917,791 $18,764,935
Net income...................... -- -- -- -- -- 5,572,803 5,572,803
Distribution to shareholders.... -- -- -- -- -- (8,584,541) (8,584,541)
Dividends declared.............. -- -- -- -- -- (2,109,327) (2,109,327)
Issuance of shares.............. 770 7 -- -- 257,172 -- 257,179
------ ------ ------- ----- ---------- ----------- -----------
Balance, December 31, 1999...... 71,229 $ 712 (10,500) $(105) $1,103,716 $12,796,726 $13,901,049
====== ====== ======= ===== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
SANDERS MORRIS MUNDY INC.
CONSOLIDATED STATEMENT OF CHANGES IN SUBORDINATED BORROWINGS
<TABLE>
<S> <C>
Subordinated borrowings at January 1, 1997.................. $ --
Increase--issuance of subordinated notes.................... 1,250,000
Decrease--payment of subordinated notes..................... (1,250,000)
-----------
Subordinated borrowings at December 31, 1997................ --
Increase--issuance of subordinated notes.................... 3,500,000
Decrease--payment of subordinated notes..................... (3,500,000)
-----------
Subordinated borrowings at December 31, 1998................ --
Increase--issuance of subordinated notes.................... --
Decrease--payment of subordinated notes..................... --
-----------
Subordinated borrowings at December 31, 1999................ $ --
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
SANDERS MORRIS MUNDY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 5,572,803 $10,020,680 $ 5,802,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 368,570 340,193 284,522
Bad debt expense................................... 150,000 350,000 --
Minority interests in earnings (net loss) of
consolidated subsidiaries........................ (415,721) 429,659 699,025
Cumulative change in accounting principle.......... -- 284,694 --
Change in:
Deposit with clearing organization............... (250,000) -- --
Receivables...................................... (1,052,473) (137,869) (565,081)
Securities owned................................. 5,981,207 (5,386,111) (3,210,424)
Other assets..................................... (110,185) (273,666) (55,542)
Payable to brokers and dealers................... (2,814) 19,551 1,944
Securities sold, not yet purchased............... 42,893 (396,603) 233,706
Accounts payable and other accrued liabilities... 2,416 81,991 (59,369)
Accrued profit sharing........................... 50,000 125,000 46,696
Deferred compensation............................ (872,051) 435,736 557,280
Sales commissions payable........................ 208,995 329,838 (23,843)
State income taxes payable....................... 4,527 104,669 (109,501)
----------- ----------- -----------
Net cash provided by operating activities...... 9,678,167 6,327,762 3,601,891
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................. (259,241) (379,141) (857,588)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock............................. 257,179 -- --
Purchase of treasury stock........................... -- -- (430,656)
Distribution to shareholders......................... (8,584,541) (2,300,000) (1,750,000)
Distributions paid to minority interests............. (120,000) (83,628) (51,347)
----------- ----------- -----------
Net cash used in financing activities.......... (8,447,362) (2,383,628) (2,232,003)
----------- ----------- -----------
Net increase in cash and cash equivalents.............. 971,564 3,564,993 512,300
Cash and cash equivalents at beginning of year......... 8,814,452 5,249,459 4,737,159
----------- ----------- -----------
Cash and cash equivalents at end of year............... $ 9,786,016 $ 8,814,452 $ 5,249,459
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest............................... $ -- $ 40,570 $ 21,079
Cash paid for income taxes........................... 11,778 25,812 45,038
Noncash financing activity:
Dividends declared but not yet paid.................. 2,109,327 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Sanders Morris Mundy Inc. (the Company) was incorporated in the state of
Texas for the purpose of serving as a broker/dealer and to enter into certain
investment banking activities. The Company commenced operations in 1987 and
currently operates as an introducing broker. Its customers' accounts had been
carried by Broadcort Capital Corp. (Broadcort) pursuant to a fully-disclosed
clearing arrangement until May 1999, when the Company entered into a new
fully-disclosed clearing arrangement with the Pershing Division of Donaldson,
Lufkin & Jenrette Securities Corporation.
In addition, the Company manages, through its majority interests in certain
management companies, limited partnerships which invest in debt and equity
securities in companies primarily operating in the environmental industry and in
small capitalization companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
SECURITIES OWNED
Substantially all marketable securities are carried at fair value based on
quoted market prices or amounts that approximate fair value. Not readily
marketable securities are valued at fair value based on either internal
valuation models or management's estimate of amounts that could be realized
under current market conditions assuming an orderly liquidation over a
reasonable period of time. Unrealized gain or loss from marking securities owned
to market value is included in income under the caption "Trading gains, net."
Securities not readily marketable include securities (a) for which there is no
market on a securities exchange or no independent publicly quoted market,
(b) that cannot be publicly offered or sold unless registration has been
effected under the Securities Act of 1933 or other applicable securities acts,
or (c) that cannot be offered or sold because of other arrangements,
restrictions or conditions applicable to the securities or to the Company.
Proprietary transactions and the related income/expense are recorded on the
trade date. Realized gains and losses from sales of securities are computed
using the average cost method.
COMMISSIONS
Commissions are recorded on a trade-date basis as securities transactions
occur.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT
Leasehold improvements, furniture and equipment are carried at cost less
accumulated depreciation and amortization. Amortization of leasehold
improvements is computed on a straight-line basis over the term of the lease.
Depreciation of office furniture and equipment is computed on a straight-line
basis over a seven-year period.
14
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is being amortized on a straight-line basis over ten years.
UNDERWRITING
Underwriting revenues include gains, losses and fees, net of syndicate
expenses, arising from securities offerings in which the Company acts as an
underwriter or agent. Underwriting management fees are recorded on the offering
date, sales concessions are recorded on the settlement date, and underwriting
fees are recorded at the time the underwriting is completed and the related
income is reasonably determinable.
INCOME TAXES
The Company has elected to be treated as an S Corporation for federal income
tax purposes. Accordingly, stockholders are individually responsible for
reporting for federal income tax purposes their appropriate share of the
Company's taxable income or loss. Accordingly, no provision for federal income
taxes is included in the consolidated financial statements.
The Company is directly liable for state income taxes. The provision for
state income taxes is calculated under the liability method and is included in
other expenses in the consolidated statement of income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that the fair value of the Company's financial
instruments is equivalent to the carrying amount of such financial instruments
as presented or disclosed in the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company owns securities which are valued at estimated or quoted market
values at the statement of financial condition date. As a result of changes in
market and other conditions, it is at least reasonably possible that changes to
the values of securities could occur in the short-term and be material to the
Company's financial statements.
15
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGE IN ACCOUNTING PRINCIPLE
In 1998, Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), was adopted. SOP 98-5 requires that organization costs
be expensed as they are incurred. Additionally, any organization costs
previously capitalized and unamortized are to be charged against earnings. The
cumulative effect of adopting SOP 98-5 was a charge of $284,694 which is
reported as a cumulative effect of a change in accounting principle in the
consolidated statement of income.
NEW ACCOUNTING PRONOUNCEMENT
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of Effective Date of Financial Accounting
Standard No. 133" (SFAS 137) which results in a one-year delay of the
implementation of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). As a
result, the provisions of SFAS 133 will now become effective for all reporting
periods beginning after June 15, 2000 and retroactive application of SFAS 133 is
not permitted. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. Under SFAS 133, these derivatives
must be measured at fair value and recognized as either assets or liabilities in
the statement of financial condition. In addition, hedge accounting should only
be provided for those transactions that meet certain specified criteria. The
accounting for changes in fair value of a derivative will be dependent upon the
intended use of the derivative and its designation. The Company does not believe
that the impact of adopting SFAS 133 will be material.
RECLASSIFICATIONS
Certain 1997 and 1998 amounts have been reclassified to conform to their
1999 presentation.
3. RECEIVABLES
The receivables balance at December 31 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes receivable--nonaffiliated parties.............. $1,330,820 $ 801,174
Notes receivable--related parties.................... 357,055 429,995
Receivable from brokers and dealers.................. 121,939 85,930
Other receivables.................................... 1,261,261 701,503
Allowances for bad debts............................. (500,000) (350,000)
---------- ----------
$2,571,075 $1,668,602
========== ==========
</TABLE>
At December 31, 1999, notes receivable from nonaffiliated parties consist of
uncollateralized promissory notes from unrelated companies. The notes bear
interest at rates from 0% to 12% and mature between 2000 and 2003.
At December 31, 1998, the major amounts of notes receivable from
nonaffiliated parties consist of two promissory notes from an unrelated company.
The first note for $425,000 bears interest at 8% and
16
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECEIVABLES (CONTINUED)
matures on December 31, 2002. The second note, in the amount of $265,253, is
noninterest-bearing and matures on December 31, 2002.
Notes receivable from related parties are interest bearing loans provided to
certain executives and employees of the Company. At December 31, 1999, the notes
have tiered maturities from 2000 through 2003 and are structured to be
incentives for the employees to remain at the Company. As each maturity date is
reached, a portion of the notes and applicable interest is forgiven if the
employee remains employed by the Company. Such forgiveness is recorded as
employee compensation expense in the consolidated statement of income.
Included in other receivables at December 31, 1999 and 1998, is $388,449 and
$299,441, respectively, from affiliated limited partnerships primarily for
management fees.
4. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Marketable securities owned and securities sold, not yet purchased, consist
of the following at market values:
<TABLE>
<CAPTION>
SOLD, NOT YET
OWNED PURCHASED
---------- -------------
<S> <C> <C>
1999
U.S. securities--Corporate stocks.................... $2,297,333 $62,297
1998
U.S. securities:
Corporate stocks................................... $3,562,997 $19,404
Options and warrants............................... 2,904 --
---------- -------
$3,565,901 $19,404
========== =======
</TABLE>
Securities not readily marketable consist of investments in limited
partnerships, equities, options and warrants. The investments in limited
partnerships, which are accounted for using the equity method, consist of
Environmental Opportunities Fund, L.P., Environmental Opportunities Fund
(Cayman), L.P., Environmental Opportunities Fund II, L.P., Environmental
Opportunities Fund II (Institutional), L.P., Corporate Opportunities Fund, L.P.,
and Corporate Opportunities Fund (Institutional), L.P.
A summary of the results of operations of the limited partnerships is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Result of operations:
Investment income................. $ 360,873 $ 538,892 $ 154,788
Realized gain (loss) on
investments..................... -- 21,951,470 (3,000,083)
Change in unrealized gain (loss)
on investments.................. (14,681,054) (12,051,868) 15,217,265
Increase (decrease) in partners'
capital resulting from
operations...................... (17,462,497) 8,577,404 11,565,908
</TABLE>
17
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED (CONTINUED)
A summary of the financial condition of the limited partnerships is as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Total assets....................................... $61,370,028 $56,183,338
Total liabilities.................................. 386,856 182,670
</TABLE>
5. LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT
Leasehold improvements, furniture and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE IN YEARS 1999 1998
---------------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements............... 5 $ 1,094,779 $ 1,034,825
Furniture and fixtures............... 7 901,289 858,297
Office equipment..................... 7 1,038,578 882,283
----------- -----------
3,034,646 2,775,405
Accumulated depreciation............. (1,793,010) (1,466,127)
----------- -----------
Leasehold improvements, furniture and
equipment, net..................... $ 1,241,636 $ 1,309,278
=========== ===========
</TABLE>
6. CONCENTRATIONS OF RISK
In the normal course of business, the Company enters into securities sales
transactions as principal. If the securities subject to such transactions are
not in the possession of the Company, the Company is subject to risk of loss if
it must acquire the security on the open market at a price which exceeds the
contract amount of the transaction.
The Company executes, as agent, securities transactions on behalf of its
customers. If either the customer or a counterparty fails to perform, the
Company may be required to discharge the obligations of the nonperforming party.
In such circumstances, the Company may sustain a loss if the market value of the
security is different from the contract value of the transaction. The Company's
customer security transactions are transacted on either a cash or margin basis.
In margin transactions, the customer is extended credit by the clearing broker,
subject to various regulatory margin requirements, collateralized by cash and
securities in the customer's account. In connection with these activities, the
Company executes customer transactions with the clearing broker involving the
sale of securities not yet purchased (short sales). If the customer fails to
satisfy its obligation, the Company may be required to purchase financial
instruments at prevailing market prices in order to fulfill the customer's
obligations.
As an introducing securities broker and dealer, the Company is engaged in
various trading and brokerage activities involving securities of various
industries. A substantial portion of the Company's transactions involve
securities relating to the environmental industry. Accordingly, the overall
economic impact of environmental industry trends could directly impact the
Company's ability to maintain current trading activity levels.
The Company's policy is to monitor its market exposure, customer risk and
counterparty risk through the use of a variety of credit exposure reporting and
control procedures, including marking-to-market securities and any related
collateral as well as requiring adjustments of collateral
18
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONCENTRATIONS OF RISK (CONTINUED)
levels as necessary. In addition, the Company has a policy of reviewing, as
considered necessary, the credit standing of each counterparty and customer with
which it conducts business.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating leases which
provide for base annual rentals and additional rentals based on the lessor's
operating expenses for the year. Rental expense for the year ended December 31,
1999, 1998 and 1997 totaled $750,886, $628,695 and $681,139, respectively.
Future minimum rentals at December 31, 1999 approximate:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ----------
<S> <C>
2000........................................................ $ 858,000
2001........................................................ 862,000
2002........................................................ 808,000
2003........................................................ 241,000
2004........................................................ 80,000
----------
$2,849,000
==========
</TABLE>
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such underwriting commitments that were
open at December 31, 1999 and 1998, and which were subsequently settled, had no
material effect on the consolidated financial statements as of that date.
On December 31, 1999, the Board of Directors declared a cash dividend to the
Company's shareholders of record at December 31, 1999 of 50% of 1) the sum of
the Company's taxable income for the year ended December 31, 1999 and for the
month of January 2000, 2) less capital gains realized from the sale of common
stock of a public company and 3) less distributions of shares of stock of a
public company and a private company in 1999. The amount of the dividend related
to the year ended December 31, 1999 is recognized as a liability on the
consolidated statement of financial condition.
As part of its regular examination cycle, NASD Regulation inspected the
Company in August 1999. Following this inspection, various issues primarily
regarding supervisory procedure documentation, recordkeeping requirements, and
supervision relating to such requirements and procedures were brought to the
Company's attention. The Company has submitted to NASD Regulation its responses
to the issues brought to the Company's attention. The Company believes its
responses are adequate to resolve the outstanding issues. However, NASD
Regulation has not responded to the Company as to whether they will commence
enforcement proceedings with respect to one or more of the issues. The Company
has undergone NASD Regulation inspections in prior years and has not had an
enforcement proceeding commenced with respect to any issues raised in previous
inspections.
The Company is a defendant in certain litigation incidental to its
securities and underwriting business. Management of the Company, after
consultation with outside legal counsel, believes that the resolution of these
lawsuits will not result in any material adverse effect on the Company's
consolidated financial position.
19
<PAGE>
SANDERS MORRIS MUNDY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BENEFIT PLANS
The Company maintains a defined contribution profit sharing plan for all
eligible employees, as defined by the plan document. The annual contributions by
the Company are discretionary. During 1999 and 1998, the Company accrued
contributions of $500,000 and $450,000, respectively. Such contributions were
funded subsequent to December 31, 1999 and 1998, respectively.
The Company has a defined contribution plan in accordance with
section 401(k) of the Internal Revenue Code for all eligible employees, as
defined by the plan document. Eligible employees may contribute a percentage of
pretax earnings to the plan. Matching contributions by the Company are optional
and discretionary. For the years ended December 31, 1999 and 1998, there were no
expenses under this plan. For the year ended December 31, 1997 expenses under
this plan were $1,188,320.
9. DEFERRED COMPENSATION PLANS
As part of certain underwriting agreements with its customers, the Company
is awarded warrants, options, or equities which it contributes to a deferred
compensation plan for key executives and employees. The Company is contractually
obligated to pay to plan participants all proceeds, if any, from the exercise or
sale of such securities. Expenses under this plan, which correspond to the
increases in value of such warrants were $3,585,411, $9,006,570, and $1,188,320
for the years ended December 31, 1999, 1998, and 1997, respectively.
The Company has an agreement with certain of its employees which entitles
them to participate in a portion of the appreciation in its investment in
certain limited partnership interests. The deferred compensation liability under
this agreement was $615,497 and $1,091,677 for the years ended December 31, 1999
and 1998, respectively.
10. NET CAPITAL REQUIREMENTS
The Company is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. At December 31, 1999, the Company had
net capital, as defined, of $5,879,446 which was $5,567,327 in excess of the
required minimum net capital of $312,119. At December 31, 1998, the Company had
net capital, as defined, of $6,528,705 which was $6,278,705 in excess of the
required minimum net capital of $250,000. The Company's aggregate indebtedness
to net capital ratio was .80-to-1 and .43-to-1 at December 31, 1999 and 1998,
respectively.
11. MERGER
On January 31, 2000, Pinnacle Global Group, Inc. (Pinnacle) acquired 100% of
the outstanding stock of the Company and merged Harris Webb & Garrison, Inc., a
subsidiary of Pinnacle, into the Company. The combined company is known as
Sanders Morris Harris Inc. In connection with the merger, in December 1999, the
Company distributed 150,000 shares of common stock of EarthCare Company and
25,000 shares of convertible preferred stock of OptiMark Technologies, Inc. to
the Company's shareholders.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATED this 28th day of April, 2000.
<TABLE>
<S> <C> <C>
PINNACLE GLOBAL GROUP, INC.
By: /s/ ROBERT E. GARRISON II
-----------------------------------------
Robert E. Garrison II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
21
