<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1998.
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PINNACLE GLOBAL GROUP, INC.
TEI, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 6211 76-0583569
TEXAS 4959 76-0284783
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------
DONALD R. CAMPBELL
2900 NORTH LOOP WEST, SUITE 1230 PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING
HOUSTON, TEXAS 77092 OFFICER
(713) 263-7510 TEI, INC.
(ADDRESS INCLUDING ZIP CODE, AND 2900 NORTH LOOP WEST, SUITE 1230
TELEPHONE NUMBER, HOUSTON, TEXAS 77092
INCLUDING AREA CODE, OF REGISTRANT'S (713) 263-7510
PRINCIPAL (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
EXECUTIVE OFFICES) NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
WITH COPIES TO:
JAMES M. HARBISON, JR. JEFF C. DODD JAMES W. RYAN
PORTER & HEDGES, L.L.P. MAYOR, DAY, CALDWELL & KEETON, L.L.P. RYAN & SUDAN, L.L.P.
700 LOUISIANA, 34TH FLOOR 700 LOUISIANA, SUITE 1900 909 FANNIN STREET, 39TH FLOOR
HOUSTON, TEXAS 77002-2764 HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77010
TELEPHONE: (713) 226-0600 TELEPHONE: (713) 225-7726 TELEPHONE: (713) 652-0501
FAX: (713) 226-0204 FAX: (713) 225-7047 FAX: (713) 652-0503
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01 par value per
share.............................. 3,562,793(1) $23,157,894(2) $6,832
Common Stock, $.01 par value per
share.............................. 1,187,500(3) 1,937,481(4) 572
Common Stock, $.01 par value per
share.............................. 1,187,500(5) 3,318,448(6) 979
Common Stock, $.01 par value per
share.............................. 1,187,500(7) 3,704,387(8) 1,093
- -------------------------------------------------------------------------------------------------
Total........................... 7,125,293 $32,118,210 $9,476
- -------------------------------------------------------------------------------------------------
</TABLE>
(NOTES ON NEXT PAGE)
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE>
(1) Shares issuable in exchange for TEI common stock.
(2) Pursuant to Rule 457(f)(1), the registration fee is calculated based on the
market value of the 14,251,012 shares of TEI common stock to be received by
the Registrant, computing using the average of the bid and ask price of
TEI's common stock as reported by the Nasdaq National Market on October 5,
1998, or $1 5/8 per share.
(3) Shares issuable in exchange for HWG common stock.
(4) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value of the HWG common stock to be received by the Registrant,
computed as of June 30, 1998.
(5) Shares issuable in exchange for PMT common stock.
(6) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value of the PMT common stock to be received by the Registrant,
computed as of June 30, 1998.
(7) Shares issuable in exchange for securities of Spires and certain indirect
owners of Spires, resulting in the transfer of 100% of the ownership in
Spires.
(8) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value of the securities of Spires to be received by the Registrant,
computed as of June 30, 1998.
<PAGE>
TEI, INC.
2900 NORTH LOOP WEST, SUITE 1230
Dear TEI Shareholders: HOUSTON, TEXAS 77092________________________, 1998
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of TEI, Inc. ("TEI") at the _________________________, on
___________________, ___________________, 1998, at ________ a.m., local time.
At this very important Special Meeting, we are asking you to consider and
approve two proposals: (1) the restructure of TEI which will involve the merger
of TEI with a wholly owned subsidiary of Pinnacle Global Group, Inc. ("PGG"),
the proposed newly created public holding company and (2) the issuance of
3,562,500 shares of PGG common stock to the direct and indirect owners of Harris
Webb & Garrison, Inc. ("HWG"), Pinnacle Management & Trust Company ("PMT")
and Spires Financial, L.P. ("Spires"), three Houston, Texas-based financial
services firms, whereby HWG, PMT and Spires will be combined with TEI. The term
"Transactions" refers to all of these and other associated transactions
generally described in the accompanying Proxy Statement/Prospectus.
In the TEI merger, each of your shares of TEI common stock will be
converted into .25 of a share of PGG common stock. As a result of the
Transactions, the former TEI shareholders would own approximately 50.02% of the
outstanding PGG common stock, and the former owners of HWG, PMT and Spires would
own the remaining approximately 49.98% of PGG's outstanding shares. The
Transactions have been structured in an effort to be on a federal income
tax-free basis to you, and an opinion of counsel will be provided to TEI to that
effect.
Since January 1997, we have been evaluating strategies and financial
alternatives for maximizing shareholder value. We believe the combination of
HWG, PMT, and Spires with TEI provides us with an attractive opportunity to
restructure the company as a financial services firm. In recent years the
financial services industry has experienced record growth. Even in light of
recent market declines and volatility, we believe the long-term trends in this
industry remain extremely positive, particularly considering the increase in
investment funds resulting significantly from changing demographic patterns,
industry consolidation, financial services deregulation and rapid changes in
technology and customer demands, among other factors. The combination will also
provide TEI with regional name recognition in the industry and with a proven
management team we believe is capable of competing in this financial services
market.
Your Board of Directors, which has unanimously approved the Transactions,
has determined that the Transactions are in the best interests of the TEI
shareholders and recommends that you vote FOR their approval. The Transactions
will not be completed unless the TEI shareholders approve both the TEI merger
and the share issuance relating to the combination. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the Special Meeting, it is important that
your shares be voted. Please take the time to vote by completing and mailing the
enclosed proxy card to us as promptly as possible so that your shares may be
represented at the Special Meeting and voted consistent with your wishes.
The accompanying Proxy Statement/Prospectus provides you with detailed
information about the proposed Transactions. We encourage you to read this
document carefully.
On behalf of the Board of Directors,
Donald R. Campbell
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the Transactions described in this Proxy
Statement/Prospectus or the PGG common stock to be issued in the Transactions,
nor have they determined if this Proxy Statement/Prospectus is accurate or
adequate. Furthermore, the Securities and Exchange Commission has not determined
the fairness of the Transactions. Any representation to the contrary is a
criminal offense.
THIS PROXY STATEMENT/PROSPECTUS IS DATED __________________, 1998 AND IS FIRST
BEING MAILED TO TEI SHAREHOLDERS ON OR ABOUT __________________, 1998.
<PAGE>
TEI, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Notice is hereby given that a special meeting of the shareholders (the
"Special Meeting") of TEI, Inc. ("TEI") will be held at ________________ at
________ a.m., local time, on __________________, __________________, 1998, for
the following purposes:
1. To consider and vote upon a proposal to approve a merger agreement
whereby TEI would be restructured by merging with a newly formed wholly
owned subsidiary of Pinnacle Global Group, Inc., the proposed newly
formed public holding company ("PGG"). TEI will be the surviving
corporation in the merger and become a wholly owned subsidiary of PGG.
Under the merger agreement, each of your shares of TEI common stock
will be converted into .25 of a share of PGG common stock. The merger
agreement also provides for the election of a 12 member board of
directors of PGG, consisting of six directors designated by TEI and six
by Harris Webb & Garrison, Inc. ("HWG"), Pinnacle Management & Trust
Company ("PMT") and Spires Financial, L.P. ("Spires"). PGG's
management will consist of Titus H. Harris, Jr. as Chairman; Donald R.
Campbell as Vice-Chairman; and Robert E. Garrison, II as President and
Chief Executive Officer;
2. To consider and vote upon a proposal to approve the issuances of
3,562,500 shares of PGG Common Stock to the direct and indirect owners
of HWG, PMT and Spires, in connection with the combination of the three
entities with TEI. As a result of the TEI merger described above and
the share issuance relating to the combination with HWG, PMT and
Spires, former TEI shareholders would own approximately 50.02% of the
outstanding PGG common stock, and the former direct and indirect owners
of HWG, PMT and Spires would own approximately 49.98% of PGG's
outstanding shares; and
3. To consider and act upon such other business as may properly be
presented to the Special Meeting.
It is important that your shares be voted. Please vote as soon as possible
by completing the proxy card and returning it in the enclosed envelope. If you
decide to attend the Special Meeting in person, you can withdraw your proxy and
vote at that time. TEI shareholders of record at the close of business on
November 6, 1998 will be entitled to notice of and to vote at the Special
Meeting. A TEI shareholders' list will be available for ten days preceding the
Special Meeting, and may be inspected during normal business hours prior to the
Special Meeting at the offices of TEI, 2900 North Loop West, Suite 1230,
Houston, Texas 77092.
By Order of the Board of Directors,
______________________________________
SECRETARY
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY
RETURNED IN THE ENCLOSED ENVELOPE, SO THAT YOUR SHARES WILL BE REPRESENTED
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
YOU SHOULD NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY.............................. 1
The Companies.................... 1
The Transactions................. 1
The TEI Special Meeting and Other
Shareholder and Partner
Matters........................ 5
No Appraisal Rights.............. 6
Risk Factors..................... 6
SUMMARY UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA..................... 7
SUMMARY HISTORICAL TEI AND COMBINING
COMPANIES FINANCIAL DATA........... 8
TEI................................ 8
HWG................................ 9
PMT................................ 10
Spires............................. 11
COMPARATIVE PER SHARE DATA........... 12
COMPARATIVE MARKET PRICE DATA........ 13
RISK FACTORS......................... 14
Limited Operating History and
Recent Losses; Absence of
Combined Operating History....... 14
Risks Associated with the Volatile
Nature of the Securities
Brokerage Business............... 14
Securities Business Subject to
General Economic and Political
Conditions....................... 15
Significant Competition............ 15
Dependence on the Ability to Retain
and Recruit Key Personnel........ 16
Geographic Concentration of Certain
Business......................... 16
Litigation and Securities Law
Liability Associated with
Financial Services Business...... 16
Potential Environmental Liability
Associated with Liquid Waste
Business......................... 17
Dependence on Systems and
Software......................... 17
Fluctuations in Operating
Results.......................... 18
Constraints Imposed by Net Capital
Requirements..................... 18
Business Subject to Extensive
Regulation....................... 18
Insufficiency of Insurance......... 20
Losses Due to Fraud or Mistakes of
Customers or Employees........... 20
Market, Credit and Liquidity Risks
Associated with Market-Making,
Principal Trading, Arbitrage and
Underwriting Activities.......... 21
Significant Voting Control by
Management and Shareholders of
Combining Companies.............. 21
Risks Associated with Discontinued
Operations....................... 21
Year 2000 Impact................... 21
No Prior Market; Possible
Volatility of Stock Price........ 22
Preferred Stock; Potential
Anti-Takeover Effects............ 22
Forward Looking Statements......... 22
THE TRANSACTIONS..................... 23
General............................ 23
Ownership, Structure of PGG After
the
Transactions..................... 23
Background......................... 24
Reasons for the Transactions....... 26
Business Combination
Costs -- Anticipated
Consolidation Benefits........... 29
Opinion of J.P. Morgan............. 30
Certain Federal Income Tax
Consequences..................... 33
Accounting Treatment............... 34
Quotation on the Nasdaq National
Market........................... 34
Federal Securities Law
Consequences..................... 35
No Appraisal Rights................ 35
Conflicts of Interests............. 35
THE TEI SPECIAL MEETING.............. 37
Matters to be Considered at the TEI
Special
Meeting.......................... 37
Recommendation of the TEI Board of
Directors........................ 37
Voting at the TEI Special Meeting;
Record Date...................... 37
Proxies............................ 37
Solicitation of Proxies............ 38
THE AGREEMENT........................ 39
Effective Time of the
Transactions..................... 39
Manner and Basis of Converting
Securities....................... 39
Terms of the Agreement............. 40
TEI AND THE COMBINING COMPANIES
UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA..................... 44
BUSINESS OF TEI...................... 50
General............................ 50
Operations and Services Provided... 50
Marketing and Contracts............ 51
Customers.......................... 51
Competition........................ 51
Properties......................... 51
Employees.......................... 52
Government Regulation.............. 52
Risk Management; Litigation........ 53
TEI SELECTED FINANCIAL DATA.......... 54
TEI MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 55
General............................ 55
Results of Operations.............. 55
Liquidity and Capital Resources.... 57
Seasonality........................ 58
Factors that May Effect Future
Results.......................... 58
Accounting Standards............... 58
Year 2000.......................... 58
BUSINESS OF HWG...................... 59
General............................ 59
Services Provided.................. 59
Relationship with S.G. Cowen....... 61
Effects of Interest Rates.......... 61
Competition........................ 61
Government Regulation.............. 62
Facilities......................... 63
Employees.......................... 63
Risk Management; Litigation........ 64
HWG SELECTED FINANCIAL DATA.......... 65
HWG MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 66
General............................ 66
Components of Revenues and
Expenses......................... 67
Results of Operations.............. 68
Liquidity and Capital Resources.... 69
Effects of Inflation............... 70
Year 2000.......................... 70
BUSINESS OF PMT...................... 71
General............................ 71
Services Provided.................. 71
Clients and Marketing.............. 71
Effects of Interest Rates.......... 72
Competition........................ 72
i
<PAGE>
PAGE
----
Government Regulation.............. 72
Facilities......................... 72
Employees.......................... 73
Risk Management; Litigation........ 73
PMT SELECTED FINANCIAL DATA.......... 74
PMT MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 75
General............................ 75
Components of Revenues and
Expenses......................... 75
Results of Operations.............. 76
Liquidity and Capital Resources.... 77
Effects of Inflation............... 78
Year 2000.......................... 78
BUSINESS OF SPIRES................... 79
General............................ 79
Services Provided.................. 79
Clients............................ 80
Intellectual Property.............. 80
Marketing.......................... 81
Relationship with Clearing
Brokers.......................... 81
Effects of Interest Rates.......... 81
Competition........................ 82
Government Regulation.............. 82
Facilities......................... 83
Employees.......................... 83
Risk Management; Litigation........ 83
SPIRES SELECTED FINANCIAL DATA....... 85
SPIRES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 86
General............................ 86
Components of Revenues and
Expenses......................... 86
Results of Operations.............. 88
Liquidity and Capital Resources.... 90
Effects of Inflation............... 90
Year 2000.......................... 90
MANAGEMENT OF PGG AFTER THE
TRANSACTIONS....................... 92
Board of Directors and Executive
Officers......................... 92
Key Employees...................... 94
Board of Directors Classes;
Director Compensation............ 95
EXECUTIVE COMPENSATION............... 96
Stock Option Grants................ 97
Incentive Plan..................... 97
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................... 100
SUMMARY BUSINESS STRATEGY OF PGG..... 101
Industry Overview.................. 101
Business Strategy.................. 102
PRINCIPAL SHAREHOLDERS OF TEI........ 104
PRINCIPAL SHAREHOLDERS OF HWG........ 105
PRINCIPAL SHAREHOLDERS OF PMT........ 106
PRINCIPAL OWNERS OF SPIRES........... 107
PRINCIPAL SHAREHOLDERS OF PGG AFTER
TRANSACTIONS....................... 108
DESCRIPTION OF PGG CAPITAL STOCK..... 109
Common Stock....................... 109
Preferred Stock.................... 109
Certain Anti-Takeover Provisions... 109
Limitation on Directors' Liability
and Indemnification of Directors
and Officers..................... 111
Transfer Agent and Registrar....... 111
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF PGG AND TEI, HWG AND PMT........ 112
General............................ 112
Authorized Capital................. 112
Voting Requirements and Quorums of
Shareholder Meetings............. 113
Shareholder Proposals.............. 113
Election of Directors.............. 114
Vacancies on the Board of
Directors........................ 114
Number and Term of Directors....... 114
Removal of Directors............... 115
Amendment of Bylaws................ 115
Action by Written Consent and
Special Meetings of
Shareholders..................... 115
Indemnification of Directors and
Officers......................... 116
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF PGG AND PARTNERS OF SPIRES...... 118
General............................ 118
Liquidity and Marketability........ 118
Transferability.................... 118
Purchase and Repurchase Rights..... 119
Antidilution Rights................ 119
Financial Reporting................ 119
Taxation........................... 119
Cash Distributions................. 120
Liquidation Rights................. 120
Right to Compel Dissolution........ 120
Limited Liability.................. 120
Continuity of Existence............ 121
Issuance of Senior Securities...... 121
Voting Rights...................... 121
Meetings of
Partners/Shareholders............ 121
Right to List of
Partners/Shareholders............ 122
Replacement of General
Partners/Directors............... 122
Amending the Partnership
Agreement/Articles of
Incorporation and Bylaws......... 122
Certain Anti-Takeover Provisions... 123
Certain Legal Rights............... 123
Fiduciary Duties................... 123
Limits on Directors' and
Management's Liabilities......... 124
LEGAL MATTERS........................ 124
EXPERTS.............................. 124
WHERE YOU CAN FIND MORE
INFORMATION........................ 125
GLOSSARY OF TERMS.................... 126
INDEX TO FINANCIAL STATEMENTS........ F-1
Appendix A -- Amended and Restated
Agreement and Plan of
Organization....................... A-1
Appendix B -- TEI Plan of Merger..... B-1
Appendix C -- HWG Plan of Merger..... C-1
Appendix D -- PMT Plan of Merger..... D-1
Appendix E -- Opinion of J.P. Morgan
Securities Inc..................... E-1
Appendix F -- PGG Articles of
Incorporation, as amended.......... F-1
ii
<PAGE>
SUMMARY
THE SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. UNLESS OTHERWISE
INDICATED, CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED IN THE GLOSSARY OF
TERMS (PAGES 126 THROUGH 128). FOR A MORE COMPLETE UNDERSTANDING OF THE
TRANSACTIONS DESCRIBED BELOW AND A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS
OF THE TRANSACTIONS, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, AS WELL AS
THE ADDITIONAL DOCUMENTS WE REFER TO YOU. SEE "WHERE YOU CAN FIND MORE
INFORMATION" (PAGE 125).
THE COMPANIES
Pinnacle Global Group, Inc............ After the Transactions, PGG will own
and operate the separate businesses
now operated by TEI, HWG, PMT and
Spires. PGG was formed solely for the
purpose of becoming the public
holding company for these various
businesses. Its principal executive
office, as well as TEI's, is located
at 2900 North Loop West, Suite 1230,
Houston, Texas 77092, and its
telephone number is (713) 263-7510.
TEI, Inc.............................. TEI is a holding company, which after
disposing of its various businesses
from 1995 through 1997, has one
operating subsidiary, Energy Recovery
Resources, Inc. ("ERRI"). ERRI
treats, recycles and handles
wastewater, waste oil and other
non-hazardous fluid waters for owners
and operators of underground storage
tanks, aboveground storage tanks and
other commercial and industrial waste
generators.
Harris Webb & Garrison, Inc........... HWG is a full-service regional retail
brokerage, investment banking and
financial services firm serving the
southwestern United States. Other
significant activities include
participation in the underwriting of
corporate securities, merchant
banking, trading of fixed income and
equity securities, equity research,
and distribution of mutual funds,
insurance and other investment
products. HWG's principal executive
offices are located at 5599 San
Felipe, Suite 301, Houston, Texas
77056, and its telephone number is
(713) 993-4600.
Pinnacle Management & Trust Company... PMT is a Texas chartered private
independent trust company,
specializing in asset management and
fiduciary services for clients
throughout the southwestern United
States. At June 30, 1998, PMT had
$439 million in assets under
administration. PMT's principal
executive offices are located at 5599
San Felipe, Suite 300, Houston, Texas
77056, and its telephone number is
(713) 993-4675.
Spires Financial, L.P................. Spires is a regional investment
banking and brokerage services firm,
specializing in fixed-income
securities and whole loan and loan
servicing transactions. During 1997,
Spires executed over $4.8 billion of
trades in fixed income securities for
over 700 institutional accounts in
the United States, Europe and Japan.
Other significant activities include
brokering of residential, consumer
and commercial loans, and the
placement of mortgage servicing on a
national basis. Spires' principal
executive offices are located at 5151
San Felipe, Suite 1300, Houston,
Texas 77056, and its telephone number
is (713) 572-5000.
THE TRANSACTIONS
The boards of directors of each of TEI and the Combining Companies have
approved the Agreement and the related Transactions, subject to the approval of
the shareholders and owners of TEI and the
1
<PAGE>
Combining Companies and to the satisfaction of certain other conditions. Under
the Agreement, the following transactions will occur at the same time:
o TEI will be restructured by merging with a wholly owned subsidiary of
PGG, with TEI becoming a wholly owned subsidiary of PGG.
o Each of HWG and PMT will be merged with a wholly owned subsidiary of
PGG, with each of HWG and PMT becoming a wholly owned subsidiary of
PGG.
o Various direct and indirect owners of Spires will contribute their
interests in Spires and certain related entities to PGG in exchange
for PGG common stock, and immediately thereafter, PGG will contribute
those interests to two wholly owned subsidiaries of PGG, resulting in
PGG effectively controlling 100% of the ownership of Spires.
If the Transactions are consummated, PGG's board of directors will consist
of 12 members, six of whom have been designated by TEI and six by HWG, PMT and
Spires. PGG's management will consist of Titus H. Harris, Jr. as Chairman;
Donald R. Campbell as Vice-Chairman; and Robert E. Garrison, II as President and
Chief Executive Officer. See "Management of PGG After the Transactions" (page
92).
The Transactions are intended to constitute a tax-free transaction under
Section 351 of the Code, such that none of the TEI Shareholders, HWG
Shareholders, PMT Shareholders or Spires Transferors will recognize gain or loss
for federal income tax purposes as a result of the Transactions. See "The
Transactions -- Certain Federal Income Tax Consequences" (pages 33 through 34).
The Transactions will each be accounted for as a purchase by TEI of PGG and
each of the Combining Companies. See "The Transactions -- Accounting
Treatment" (page 34).
You should review "The Transactions -- General" and "-- Ownership
Structure of PGG After the Transactions" (pages 23 through 24) for a more
complete description of the Transactions and an organizational chart of PGG
after the Transactions.
REASONS FOR THE TRANSACTIONS
During 1995 through 1997, TEI disposed of all of its operations except for
its liquid waste business. Since January 1997, TEI has been evaluating
strategies and financial alternatives for maximizing shareholder value. TEI
believes that the combination of HWG, PMT and Spires provides it with an
attractive opportunity to restructure itself as a financial services firm. In
recent years the financial services industry has experienced record growth. Even
in light of recent market decline and volatility, TEI believes the long-term
trends in this industry remain extremely positive, particularly considering the
increase in investment funds resulting significantly from changing demographic
patterns, industry consolidation, financial services deregulation and rapid
changes in technology and customer demands, among other factors. TEI believes
the acquisition of the Combining Companies provides TEI with regional name
recognition in the industry and with a proven management team capable of
competing in this financial services market. Management of TEI and the Combining
Companies believe certain cross selling opportunities also exist among the
Combining Companies. See "The Transactions -- Reasons for the Transactions"
(page 26 through 29).
CONVERSION OF SECURITIES AND RELATED MATTERS
CONVERSION OF TEI COMMON STOCK. Under the TEI Merger, each share of TEI
Common Stock will be converted into the right to receive .25 of a share of PGG
Common Stock. TEI Shareholders will be entitled to exchange their TEI Common
Stock share certificates for PGG Common Stock share certificates upon completing
and returning a letter of transmittal to the Exchange Agent. Upon exchange of
all of the TEI Common Stock, the former holders of TEI Common Stock will own
approximately 50.02% of the PGG Common Stock outstanding at the Effective Time.
TEI SHAREHOLDERS SHOULD NOT SURRENDER THEIR TEI STOCK CERTIFICATES FOR EXCHANGE
UNTIL AFTER THE TEI MERGER CLOSES AND THE SHAREHOLDER RECEIVES A LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
2
<PAGE>
Each outstanding option to purchase TEI Common Stock will be converted into
an option to purchase the number of shares of PGG Common Stock equal to
one-fourth of the number of shares of TEI Common Stock that could be purchased
under the converted TEI option at an exercise price per share equal to 25% of
the exercise price per share of the converted TEI stock option. The term,
vesting schedule and all other terms and conditions of the replacement PGG
options will be the same as the converted TEI options.
CONVERSION OF SECURITIES OF COMBINING COMPANIES AND RELATED ENTITIES. In
the HWG Merger and the PMT Merger, all of the capital stock of HWG and PMT will
be converted into the right to receive an aggregate of 2,375,000 shares of PGG
Common Stock, with the former HWG Shareholders, as a group, and former PMT
Shareholders, as a group, each being entitled to receive 1,187,500 shares. In
the Spires Transaction, all of the ownership interests in the Spires' entities
held by the Spires Transferors will be exchanged for an aggregate of 1,187,500
shares of PGG Common Stock. PGG will instruct the Exchange Agent to deliver the
PGG Common Stock to the former HWG Shareholders, PMT Shareholders and Spires
Transferors as soon as reasonably practicable after the Effective Time. As a
result of the conversion and exchange of these securities, the former HWG
Shareholders, PMT Shareholders and Spires Transferors will own in total
approximately 49.98% of the PGG Common Stock outstanding at the Effective Time.
See "The Agreement -- Manner and Basis of Converting Securities" (pages
39 through 40), and "The Transactions -- Conflicts of Interests" (pages 35
through 36).
The following table sets forth, as of August 31, 1998, the amount and
percentage of PGG Common Stock to be held by the TEI Shareholders, the HWG
Shareholders, the PMT Shareholders and the Spires Transferors after giving
effect to the Transactions.
SHARES OF PGG
AFTER THE
TRANSACTIONS
---------------------
NUMBER OF
SHARES PERCENT
--------- ---------
TEI Shareholders(1).................. 3,562,793 50.02%
HWG Shareholders(2).................. 1,187,500 16.66%
PMT Shareholders(2).................. 1,187,500 16.66%
Spires Transferors................... 1,187,500 16.66%
--------- ---------
Totals.......................... 7,125,293 100.00%
========= =========
- ------------
(1) Excludes 170,625 shares subject to options to purchase shares of PGG Common
Stock which will be granted in replacement of outstanding TEI options under
the TEI Merger.
(2) Assumes the exercise of all outstanding options and warrants to purchase
shares of capital stock of HWG and PMT prior to the Transactions as required
by the Agreement.
EFFECTIVE TIME OF THE TRANSACTIONS
The Mergers will become effective at the date and time specified in the
articles of merger filed with respect to each of the TEI Merger, the HWG Merger
and the PMT Merger, and will be the same for each of the Mergers. The Spires
Transaction will be consummated at the same time as the effective time of the
Mergers.
CONDITIONS TO THE TRANSACTIONS
TEI's and the Combining Companies' obligations to consummate the
Transactions are subject to the satisfaction or waiver of certain conditions,
including:
o TEI Shareholder approval of the TEI Merger Agreement and the issuance
of the 3,562,500 shares in connection with the combination of HWG, PMT
and Spires.
o HWG Shareholder approval of the HWG Merger, PMT Shareholder approval
of the PMT Merger and the Spires Partners' approval of the Spires
Transaction.
3
<PAGE>
o The shares of PGG Common Stock to be issued in the Transactions being
approved for quotation on the Nasdaq National Market.
o Texas Banking Commissioner approval of the PMT Merger and the
acquisition of control of PMT by PGG, as required under Texas law.
o Various opinions being delivered, including tax opinions for the
benefit of the TEI Shareholders, the HWG Shareholders, the PMT
Shareholders and the Spires Transferors.
o All outstanding options to purchase shares of HWG and PMT capital
stock being exercised.
o TEI and its consolidated subsidiaries maintaining consolidated
adjusted current assets, consolidated net working capital and
consolidated adjusted net worth of at least $29.0 million, $27.6
million and $26.6 million respectively, computed as of the end of the
last calendar month ending at least 30 days before the Closing Date.
o TEI and its consolidated subsidiaries maintaining, as of the Closing
Date, cash, cash equivalents, short-term investments, plus Transaction
expenses paid after June 30, 1998 and before the Closing Date,
totaling at least $27.0 million.
o Certain other conditions customary in transactions similar to the
Transactions.
None of the parties to the Agreement will waive any condition to Closing
which relates to obtaining TEI Shareholder approval in accordance with Texas law
or the rules of the Nasdaq National Market, or any condition with respect to
compliance with other applicable state or federal laws. See "The Agreement --
Terms of the Agreement -- Conditions to the Transactions" (pages 40 through
41).
TERMINATION OF THE AGREEMENT
The Agreement and the Transactions may be terminated by:
o Mutual consent of the board of directors of TEI and each of the
Combining Companies.
o The board of directors of TEI or any Combining Company, or the Spires
General Partners, if the Transactions have not closed by January 31,
1999, other than as a result of a breach by the terminating party.
o Any party to the Agreement, if the TEI Shareholders fail to approve
the TEI Merger Agreement and Share Issuances at the TEI Special
Meeting.
o The board of directors of any Combining Company, or the Spires General
Partners, if the board of directors of TEI (1) withdraws, or modifies
in a manner adverse to the Non-TEI Parties, its recommendation for
approval of the Transactions or (2) approves or recommends an
alternative transaction.
See "The Agreement -- Terms of the Agreement -- Termination" (page 43).
REGULATORY REQUIREMENTS
The Transactions are contingent upon Texas Banking Commissioner approval of
the PMT Merger and the acquisition of control of PMT by PGG, as required under
Texas law. There are no other outstanding federal or state regulatory
requirements that must be complied with or obtained in connection with the
Transactions.
OTHER MATTERS
You should review "Comparison of Rights of Shareholders of PGG, TEI, HWG
and PMT" and "Comparison of Rights of Shareholders of PGG and Partners of
Spires" (pages 112 through 124) for a description of the material differences
between the rights of holders of PGG Common Stock, TEI Common Stock, HWG capital
stock, PMT capital stock and Spires partnership interests.
4
<PAGE>
THE TEI SPECIAL MEETING AND OTHER SHAREHOLDER AND PARTNER MATTERS
DATE, TIME AND PLACE
The TEI Special Meeting will be held on , 1998, at
, at a.m. (Houston, Texas time).
PURPOSES OF THE TEI SPECIAL MEETING
The purpose of the TEI Special Meeting is to consider and vote to approve
(i) the TEI Merger Agreement, (ii) the issuance of 3,562,500 shares of PGG
Common Stock in connection with the combination of HWG, PMT and Spires and (iii)
such other business as may be properly presented to the meeting.
RECORD DATES; HOLDERS ENTITLED TO VOTE
Only holders of record of shares of TEI Common Stock at the close of
business on November 6, 1998, are entitled to notice of and to vote at the TEI
Special Meeting. On that date, there were shares of TEI Common Stock
outstanding, each of which will be entitled to one vote on each matter to be
acted upon at the TEI Special Meeting.
QUORUM; VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER
PERSONS
TEI. The presence, in person or by proxy, at the TEI Special Meeting of
the holders of a majority of the outstanding shares of TEI Common Stock as of
the TEI Record Date is necessary to constitute a quorum at the meeting. The
affirmative vote of the holders of (i) at least two-thirds of the outstanding
shares of TEI Common Stock is required to approve the TEI Merger Agreement and
(ii) at least a majority of the shares of TEI Common Stock present at the TEI
Special Meeting is required to approve the Share Issuances. TEI Shareholders
holding an aggregate of 5,618,912 shares of TEI Common Stock, or 39.4% of all
outstanding shares, have irrevocably agreed to vote their respective shares in
favor of the TEI Merger and the issuance of the 3,562,500 shares in connection
with the combination of HWG, PMT and Spires. As of the TEI Record Date,
directors and executive officers of TEI and their affiliates owned beneficially
approximately of the outstanding shares of TEI Common Stock.
HWG. The affirmative vote of the holders of at least two-thirds of the
outstanding shares of HWG common stock is required to approve the HWG Merger
Agreement. All HWG Shareholders have irrevocably agreed to vote their respective
shares in favor of the HWG Merger. Thus, the HWG Merger will be approved by
them. As of the date of this Proxy Statement/Prospectus, the directors and
executive officers of HWG and their affiliates owned beneficially approximately
16,360 of the outstanding shares of HWG common stock.
PMT. The affirmative vote of the holders of two-thirds of the outstanding
shares of PMT common stock is required to approve the PMT Merger Agreement. All
PMT Shareholders have irrevocably agreed to vote their respective shares in
favor of PMT Merger. Thus, the PMT Merger will be approved by them. As of the
date of this Proxy Statement/Prospectus, the directors and executive officers of
PMT and their affiliates owned beneficially approximately 121,383 of the
outstanding shares of PMT common stock.
SPIRES. The affirmative vote of the holders of 100% of the general
partnership interests and a majority of each class of limited partnerships
interests of Spires is required to approve the Spires Transaction. All Spires
Partners have irrevocably agreed to vote their respective partnership interests
in favor of the Spires Transaction. Thus, the Spires Transaction will be
approved by them. As of the date of this Proxy Statement/Prospectus, the general
partners and the executive officers of Spires and their affiliates owned
beneficially approximately 91% and 70% of the general partnership interests and
limited partnership interests of Spires, respectively.
5
<PAGE>
RECOMMENDATION OF THE TEI BOARD OF DIRECTORS
The board of directors of TEI believes the TEI Merger and the share
issuance in connection with the combination of HWG, PMT and Spires to be in the
best interests of TEI and the TEI Shareholders and unanimously recommends that
the TEI Shareholders vote to approve these Transactions.
See "The TEI Special Meeting -- Recommendations of the TEI Board of
Directors" (page 37) and "The Transactions -- Conflicts of Interest" (pages
35 through 36).
OPINION OF FINANCIAL ADVISOR
J.P. Morgan has rendered an opinion to the board of directors of TEI, dated
the date of this Proxy Statement/Prospectus, that, as of such date and based
upon and subject to certain matters contained in the opinion, the consideration
to be paid in the Transactions is fair, from a financial point of view, to the
TEI Shareholders. See "The Transactions -- Opinion of J.P. Morgan" (pages 30
through 32), and the full text of the opinion set forth in Appendix E.
NO APPRAISAL RIGHTS
TEI Shareholders do not have the right to seek the appraisal of their
shares under Texas law. In addition, none of the HWG Shareholders, PMT
Shareholders or Spires Transferors have the right to seek the appraisal of their
respective securities being transferred in the Transactions under Texas law or
Delaware law, as applicable. See "The Transactions -- No Appraisal Rights"
(page 35).
RISK FACTORS
You should review "Risk Factors" (pages 14 through 22) for certain
considerations relating to the business and operations of TEI and the Combining
Companies that should be considered by a TEI Shareholder before determining how
to vote at the TEI Special Meeting.
6
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma financial data shows financial results as
if TEI and the Combining Companies had been combined at and for the periods
shown. Pro forma combined figures are simply an arithmetical combination of
TEI's and the Combining Companies' separate historical financial results,
subject to certain adjustments. Under accounting rules, TEI is considered to be
acquiring the Combining Companies. This will create goodwill (and related
amortization charges) in the pro forma combined financial results based on the
difference between the fair value of the PGG shares transferred to the direct
and indirect owners of the Combining Companies in the Acquisition Transactions
and the net fair market value of the Combining Companies' identifiable assets.
You should not assume that TEI and the Combining Companies would have achieved
the unaudited combined pro forma combined results if they actually had been
combined at and for the periods shown.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STATEMENT OF INCOME DATA
(UNAUDITED)(1)
Liquid waste revenues................ $ 2,726 $ 1,556
Commissions.......................... 10,843 5,054
Investment banking................... 2,544 1,202
Fees and services.................... 1,078 665
Interest and dividends............... 2,447 1,396
Securities gains and other........... 1,317 721
----------------- ----------------
Total revenues.................. 20,955 10,594
----------------- ----------------
Liquid waste operating expenses...... 2,190 975
Compensation and benefits(2)......... 10,935 5,267
Brokerage and clearance.............. 789 387
Interest expense..................... 661 539
Other general and
administrative(3).................... 5,548 2,994
----------------- ----------------
Total expenses.................. 20,123 10,162
----------------- ----------------
Income before income taxes........... 832 432
Income tax provision(4).............. 650 309
----------------- ----------------
Income from continuing operations.... $ 182 $ 123
================= ================
Basic earnings per share from
continuing operations.............. $ 0.03 $ 0.02
================= ================
Weighted average shares -- basic..... 7,124 7,125
================= ================
Diluted earnings per share from
continuing operations.............. $ 0.03 $ 0.02
================= ================
Weighted average shares -- diluted... 7,124 7,125
================= ================
JUNE 30, 1998
---------------
(IN THOUSANDS)
PRO FORMA BALANCE SHEET DATA
(UNAUDITED)(1)
Cash, cash equivalents, investment
securities and securities
inventory.......................... $52,017
Total assets......................... 92,109
Total liabilities.................... 28,483
Shareholders' equity................. 63,626
- ------------
(1) The unaudited pro forma combined financial data presented (i) is not
necessarily indicative of the results that would have been obtained had the
Transactions actually occurred on the dates assumed, (ii) is based on
preliminary estimates of the fair value of the net assets to be acquired and
certain assumptions management deems appropriate and (iii) should be read in
conjunction with other historical and pro forma financial statements and
notes thereto included elsewhere herein.
(2) Gives effect to changes in compensation and benefits to the former
principals of Spires who previously received partnership distributions.
(3) Reflects amortization of goodwill recorded as a result of the Transactions
over a 25-year period.
(4) Reflects income taxes at the marginal tax rate on Spires' and PMT's taxable
income which was taxed at the owner level.
7
<PAGE>
SUMMARY HISTORICAL TEI AND COMBINING COMPANIES FINANCIAL DATA
The following tables show financial results actually achieved by each of
TEI, HWG, PMT and Spires. The annual historical financial figures are derived
from TEI's and each of the Combining Companies audited financial statements.
Financial figures at and for the six months ended June 30, 1997 and 1998 are
unaudited, but TEI and each of the Combining Companies believe its own figures
reflect all normal recurring adjustments necessary for a fair presentation of
the results of operations and financial position for those periods. You should
not assume the six-month results are indicative of results for any future
period. The information below should also be read in conjunction with "TEI
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "HWG Management's Discussion and Analysis of Financial Condition
and Results of Operations," "PMT Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Spires Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the respective TEI, HWG, PMT and Spires financial statements and related notes
appearing elsewhere in this Proxy Statement/Prospectus.
TEI
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Liquid waste revenues................. $ 2,375 $ 2,199 $ 2,726 $ 1,297 $ 1,556
--------- --------- --------- --------- ---------
Gross profit (loss)................... 1,058 645 535 207 581
Selling, general and administrative
expenses........................... 2,197 2,428 2,625 1,337 1,363
--------- --------- --------- --------- ---------
Income (loss) from operations......... (1,139) (1,783) (2,090) (1,130) (782)
Other income (expense), net........... 749 910 1,530 772 769
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before provision for
income taxes....................... (390) (873) (560) (358) (13)
Provision (benefit) for income
taxes.............................. (150) (339) (160) (49) (3)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations......................... (240) (534) (400) (309) (10)
Income (loss) from discontinued
operations, including dispositions
net of tax......................... (8,349) 1,289 (2,382) (990) --
--------- --------- --------- --------- ---------
Net income (loss)..................... $ (8,589) $ 755 $ (2,782) $ (1,299) $ (10)
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per
share:
From continuing operations......... $ (0.01) $ (0.04) $ (0.03) $ (0.02) $ 0.00
From discontinued operations....... (0.59) 0.09 (0.17) (0.07) --
--------- --------- --------- --------- ---------
Net earnings (loss) per share...... $ (0.60) $ 0.05 $ (0.20) $ (0.09) $ 0.00
========= ========= ========= ========= =========
Weighted average common shares
outstanding...................... 14,230 14,237 14,244 14,244 14,251
========= ========= ========= ========= =========
</TABLE>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 11,422 $ 12,810 $13,192
Short term investments............. 18,426 15,516 14,456
Working capital.................... 29,002 30,034 29,689
Total assets....................... 43,034 39,043 39,066
Long-term debt, excluding current
portion......................... -- -- --
Shareholders' equity............... 40,433 37,665 37,667
8
<PAGE>
HWG
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Commissions........................ $ 1,364 $ 2,896 $ 4,151 $ 2,158 $ 1,717
Investment banking................. 1,085 722 2,544 309 1,202
Interest and dividends............. 25 38 57 25 61
Securities gains and other......... 395 340 290 181 177
--------- --------- --------- --------- ---------
Total revenues.................. 2,869 3,996 7,042 2,673 3,157
--------- --------- --------- --------- ---------
Compensation and benefits.......... 1,981 3,461 5,096 2,026 2,177
Brokerage and clearance............ 343 419 567 254 264
Interest expense................... 25 22 38 19 1
Other general and administrative... 980 1,271 898 410 540
--------- --------- --------- --------- ---------
Total expenses.................. 3,329 5,173 6,599 2,709 2,982
--------- --------- --------- --------- ---------
Income (loss) before income
taxes.............................. (460) (1,177) 443 (36) 175
Income tax provision............... -- -- 142 -- 60
--------- --------- --------- --------- ---------
Net income (loss).................. $ (460) $ (1,177) $ 301 $ (36) $ 115
========= ========= ========= ========= =========
Basic and diluted earnings (loss)
per share....................... $ (82.72) $ (94.52) $ 16.80 $ (4.45) $ 4.87
========= ========= ========= ========= =========
Weighted average shares
outstanding..................... 5,560 12,455 17,906 7,996 23,659
========= ========= ========= ========= =========
</TABLE>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Investment securities........... $ 101 $ 144 $ 184
Total assets.................... 1,247 1,947 2,156
Shareholders' equity............ 117 885 1,938
9
<PAGE>
PMT
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Fees and services.................. $ 379 $ 653 $ 1,078 $ 465 $ 665
Interest and dividends............. 68 67 98 55 43
Securities gains and other......... 33 10 233 124 188
--------- --------- --------- --------- -----------
Total revenues.................. 480 730 1,409 644 896
--------- --------- --------- --------- -----------
Compensation and benefits.......... 417 487 667 271 368
Other general and administrative... 384 458 358 189 202
--------- --------- --------- --------- -----------
Total expenses.................. 801 945 1,025 460 570
--------- --------- --------- --------- -----------
Net income (loss).................. $ (321) $ (215) $ 384 $ 184 $ 326
========= ========= ========= ========= ===========
</TABLE>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Investment securities........... $ 681 $ 1,793 $ 2,960
Total assets.................... 2,342 2,457 3,344
Shareholders' equity............ 2,288 2,288 3,318
10
<PAGE>
SPIRES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Commissions........................ $ 6,841 $ 7,322 $ 6,692 $ 3,033 $ 3,337
Interest and dividends............. 237 564 800 351 523
Securities gains and other......... 455 394 749 215 356
--------- --------- --------- --------- ---------
Total revenues.................. 7,533 8,280 8,241 3,599 4,216
--------- --------- --------- --------- ---------
Compensation and benefits.......... 2,169 3,023 3,392 1,386 1,754
Brokerage and clearance............ 111 235 222 115 123
Interest expense................... -- 228 615 275 538
Other general and administrative... 1,157 1,548 1,827 843 1,037
--------- --------- --------- --------- ---------
Total expenses.................. 3,437 5,034 6,056 2,619 3,452
--------- --------- --------- --------- ---------
Net income......................... $ 4,096 $ 3,246 $ 2,185 $ 980 $ 764
========= ========= ========= ========= =========
</TABLE>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Securities inventory............ $ 5,455 $ 18,056 $22,491
Total assets.................... 11,271 35,224 30,545
Partners' capital............... 4,920 4,790 3,704
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for TEI and each of
the Combining Companies on a historical basis and on a pro forma basis assuming
that the Transactions had occurred at the beginning of the periods presented for
cash dividends and earnings per common share purposes and as of June 30, 1998
for book value per common share purposes. No cash dividends were paid by TEI or
HWG during the periods presented.
This data should be read in conjunction with the selected historical
financial data and the unaudited pro forma combined financial statements and the
separate historical financial statements included in this Registration
Statement. The unaudited pro forma combined financial data are not necessarily
indicative of the operating results or financial position that would have
occurred had the Transaction been consummated at the beginning of the earliest
period presented and should not be construed as indicative of future operations.
AS OF AND FOR THE
----------------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
(UNAUDITED)
HISTORICAL -- TEI
Earnings (loss) per common share from
continuing operations(a)........... $ (0.30) $ 0.00
Book value per common shares(b)...... 2.64 2.64
HISTORICAL -- HWG
Earnings per common share(a)......... $ 16.80 $ 4.87
Book value per common share(b)....... 49.67 75.82
HISTORICAL -- PMT
Earnings per common share(a)......... $ 3.08 $ 2.17
Cash dividends per common share...... 3.00 --
Book value per common share(b)....... 18.36 22.14
HISTORICAL -- SPIRES
Earnings per partnership unit(a)..... $ 21,845.25 $ 7,644.90
Cash distributions per partnership
unit............................... 23,146.47 7,660.81
Book value per partnership unit(b)... 47,899.92 37,043.87
PRO FORMA PER COMMON SHARE DATA
Earnings per share(c)................ $ 0.03 $ 0.02
Cash dividends per share(d).......... 0.38 0.11
Book value per share................. 8.93
- ------------
(a) The historical earnings (loss) per common share is based upon the weighted
average number of common and common equivalent shares or partnership units
of each respective entity outstanding for each period.
(b) The historical book value per common share is computed by dividing
stockholders' equity or partners' capital by the number of shares of common
stock outstanding or partnership units at the end of each period.
(c) The unaudited pro forma earnings (loss) per common share is based upon the
weighted average number of common and common equivalent shares outstanding
of the entities for each period at the Exchange Ratio of 1 to .25 shares of
PGG common stock for each share of the entities.
(d) The pro forma cash dividends per share is calculated based upon the
historical cash dividends paid by each respective entity. The Company does
not intend to pay cash dividends in the foreseeable future.
12
<PAGE>
COMPARATIVE MARKET PRICE DATA
TEI COMMON STOCK
TEI Common Stock is quoted on the Nasdaq National Market under the symbol
"TANK." The following table shows the high and low closing sale prices by
calendar quarter for the TEI Common Stock as reported by the Nasdaq National
Market. On April 28, 1998, the last full trading day prior to the public
announcement of the signing of the Agreement, the last sale price per share of
TEI Common Stock was $2 1/16. On , 1998, the last full trading day for
which quotations were available prior to the date of this Proxy
Statement/Prospectus, the last sale price per share of TEI Common Stock was $ .
As of November 6, 1998, there were approximately holders of record of the
TEI Common Stock. Shareholders are urged to obtain current quotations for TEI
Common Stock. TEI has never paid dividends on its common stock.
HIGH LOW
---- ---
1996
First Quarter................... 3 1/4 1 5/8
Second Quarter.................. 3 1/32 2 1/8
Third Quarter................... 2 7/16 1 1/16
Fourth Quarter.................. 2 1/2 1 1/16
1997
First Quarter................... 2 5/16 1 9/16
Second Quarter.................. 1 15/16 1 9/16
Third Quarter................... 1 15/16 1 1/32
Fourth Quarter.................. 2 1/4 1 1/32
1998
First Quarter................... 1 15/16 1 1/32
Second Quarter.................. 2 1/2 1 3/4
Third Quarter (through October
6, 1998)...................... 2 5/8 1 1/2
SECURITIES OF THE COMBINING COMPANIES
No market value information is available with respect to the securities of
the Combining Companies since there is no established trading market for their
interests. HWG has never paid dividends on its common stock. PMT has declared
and paid one cash distribution, which accrued in 1997 and aggregated
approximately $0.4 million. Since inception, Spires has made quarterly tax
distributions and year end distributions, payable in cash, and during 1995, 1996
and 1997 made cash distributions aggregating approximately $4.4 million, $3.3
million and $2.2 million, respectively.
POST-TRANSACTIONS DIVIDEND POLICY
After the Transactions, it is the Company's current intention to retain
earnings to finance the expansion of its businesses. Any future dividends will
be at the discretion of the PGG board of directors and will be determined after
consideration of various factors, including, among others, the Company's
earnings, financial condition, cash flows from operations, current and
anticipated cash needs and expansion plans and any restrictions that may be
imposed under the Company's current and future credit facilities.
13
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS, THE MATTERS DESCRIBED IN THE FOLLOWING RISK FACTORS SHOULD
BE CAREFULLY CONSIDERED BY TEI SHAREHOLDERS IN DETERMINING WHETHER TO APPROVE
THE TEI MERGER AGREEMENT AND THE PGG SHARE ISSUANCE IN CONNECTION WITH THE
COMBINATION OF TEI, HWG, PMT AND SPIRES. SOME OF THESE RISKS, INCLUDING MARKET,
REGULATORY, LIQUIDITY AND CREDIT RISKS ARE INHERENT IN THE FINANCIAL SERVICES
BUSINESSES OF THE COMBINING COMPANIES AND CAN BE SUBSTANTIAL.
LIMITED OPERATING HISTORY AND RECENT LOSSES; ABSENCE OF COMBINED OPERATING
HISTORY
TEI began its remaining liquid waste operations in 1994, each of HWG and
PMT began its operations in 1994 and Spires began operations in 1995.
Accordingly, TEI and each of the Combining Companies has a limited operating
history upon which their operating performances can be evaluated. While the
Company generated pro forma combined operating income for each of the last three
years, this operating income was primarily from the operations of Spires. TEI
has incurred significant operating losses during the first six months of 1998,
and during each of the last three years. Each of HWG and PMT had profitable
operations for the first time in 1997, generating net income of $0.3 million and
$0.4 million, respectively, and again for the six months ended June 30, 1998,
generating net income of $0.1 million and $0.3 million, respectively. However,
each of HWG and PMT had operating losses for 1995 and 1996 and had an
accumulated deficit at June 30, 1998 of $(1.9) million and $(0.5) million,
respectively. Spires has generated significant operating income for each of the
last three years and the first six months of 1998; however, its operating income
has decreased from $4.1 million in 1995 to $2.2 million in 1997. While each of
the Combining Companies had operating income during 1997 and for the six months
ended June 30, 1998, there can be no assurance that the profitable results of
operations achieved by each of the Combining Companies during 1997 and for the
six months ended June 30, 1998 will continue in the future or on a sustained
basis or that TEI's operations will become profitable in the future.
RISKS ASSOCIATED WITH THE VOLATILE NATURE OF THE SECURITIES BUSINESS
The stock market has recently experienced significant volatility, including
some of the largest single day point declines in history. After the stock market
declines in October 1987, October 1989 and October 1997 many firms in the
industry suffered financial losses and in certain areas the level of individual
investor trading activity decreased. Reduced trading volume and lower prices
generally result in reduced transaction revenues. A severe market fluctuation in
the future could have a material adverse effect on the Company's business,
financial condition and operating results. Lower price levels of securities may
result in (1) reduced volumes of securities transactions resulting in lower
commission revenues, and (2) reduced management fees calculated as a percentage
of assets managed. Sudden sharp declines in market values of securities and the
failure of issuers and counter parties to perform their obligations can result
in illiquid securities which may cause the Company to have difficulty selling
securities, hedging its securities positions and investing funds under its
management.
The securities business is subject to significant risks, particularly in
volatile or illiquid trading markets. Risks inherent in the securities business
are numerous and include the risk of trading losses, losses resulting from the
ownership or underwriting of securities, risks associated with principal
activities, the failure of counter parties to meet commitments, customer fraud,
employee fraud, issuer fraud, litigation and errors, misconduct and failures in
processing of securities transactions. The Company's retail broker-dealer
operations, as well as its investment banking, institutional sales, proprietary
trading, investment advisory and other services, are subject to these enhanced
risks present during volatile trading markets and fluctuations in the volume of
market activity.
In addition, the Company is subject to risks inherent in extending credit
to the extent its clearing brokers permit the Company's customers to purchase
securities on margin. This margin risk increases during periods of rapidly
declining markets when the collateral value may fall below the amount of the
customer's indebtedness. Any resulting losses could have a material adverse
effect on the Company's business, financial condition and operating results.
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SECURITIES BUSINESS SUBJECT TO GENERAL ECONOMIC AND POLITICAL CONDITIONS
The securities business is directly affected by many factors, including
economic and political conditions, broad trends in business and finance,
legislation and regulations affecting the national and international business
and financial communities, currency values, inflation, market conditions, the
availability and cost of short-term or long-term funding and capital, the credit
capacity of the securities industry in the marketplace and the level and
volatility of interest rates. Any of these factors may contribute to reduced
levels of trading activity, securities offerings and merger and acquisition
activities, which would result in lower revenues from the Company's brokerage,
trading, institutional sales and investment banking activities. See "Business
of HWG -- Effects of Interest Rates" (page 61), "Business of PMT -- Effects of
Interest Rates" (page 72) and "Business of Spires -- Effects of Interest
Rates" (pages 81 through 82).
SIGNIFICANT COMPETITION
FINANCIAL SERVICES. The Company's financial services business and the
securities business in general are highly competitive. The principal competitive
factors influencing the Company's financial services business are its
professional staff, its reputation in the marketplace, its existing client
relationships, its ability to commit capital to client transactions and its mix
of market capabilities. The Company'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.
The Company 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. In
addition, the Company competes 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 the markets in which the Company competes.
The Company 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 certain restrictions on
commercial banks relating to the sale of securities. The financial services
industry has become considerably more concentrated as numerous securities firms
have either ceased operations or have been acquired by or merged into other
firms. Many of these larger firms have significantly greater financial and other
resources than the Company and are able to offer their customers more product
offerings, lower pricing, broader research capabilities, access to international
markets and other products and services not offered by the Company.
The Company 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. The
Company also anticipates competition from underwriters who attempt to effect
public offerings using non-traditional means of distribution, including through
electronic media such as 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 are able to transact
business without the assistance of financial intermediaries such as the Company,
then the Company's operating results could be adversely affected. See "Business
of HWG -- Competition" (pages 61 through 62), "Business of
PMT -- Competition" (page 72) and "Business of Spires -- Competition" (page
82).
LIQUID WASTE. The liquid waste industry is highly fragmented and very
competitive. The Company competes with other liquid waste processing facilities
and alternative disposal methods of certain waste streams provided by area
landfills, as well as alternative methods of illegal disposal. In addition,
competitive products and services will continue to be successfully developed and
marketed by others. The market for the various resellable by-products recovered
by the Company is also competitive and is served by several large companies and
a number of smaller, owner-operated companies. The Company also faces
competition from customers who seek to enhance and develop their own methods of
disposal instead of using the services of third parties such as the Company.
Increased use of internal processing and disposal methods and other competitive
factors could have a material adverse effect on the Company's business, results
of operations and financial conditions. Certain competitors of the Company's
liquid waste business offer a broader range of services, have greater name
recognition, offer services or products at a lower cost and have greater
financial and other resources than the Company. In addition, as the liquid waste
market
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matures, competition can be expected to increase. As a result of these
competitive factors, there can be no assurance that the Company's liquid waste
business will become profitable or that it will be able to generate cash flow
adequate for its operations and to support internal growth. See "Business of
TEI -- Competition" (page 51).
DEPENDENCE ON THE ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL
GENERAL. The Company is dependent on the continuing efforts of its
executive officers and senior management, which dependence may be intensified by
the Company's decentralized operating strategy. If executive officers or members
of senior management leave the Company, until the Company attracts and retains
qualified replacements, the Company's business or prospects could be adversely
affected. Further, the recent success of the Company can in some measure be
attributed to the entrepreneurial spirit of the senior management of the
Combining Companies. To the extent the Company, as a larger, more structured
organization than any of the Combining Companies, fails to sustain this
entrepreneurial attitude, the impetus for the Company's continued success could
be adversely affected.
FINANCIAL SERVICES PERSONNEL. The Company derives its financial services
revenues from the efforts of senior management and retail investment executives,
and research, investment banking, retail and institutional sales, trading, asset
management and administrative professionals. The future success of the Company
depends, in a large part, on its ability to attract, recruit and retain
qualified financial services professionals. Demand for these professionals is
high and their qualifications make them particularly mobile. The demand for
these professionals has led to escalating compensation packages in the industry
for these persons. Upfront payments, increased payouts and guaranteed contracts
have made recruiting of these professionals more difficult and can lead to
departures from their current employer. In addition, departures by certain of
these professionals can result in client defections due to the close
relationship between the client and the professional. If the Company's attempts
to attract, recruit and retain skilled professionals are impaired for any
reason, it could have a material adverse effect on the Company's business
prospects and operating results.
GEOGRAPHIC CONCENTRATION OF CERTAIN BUSINESS
Because of the focus of HWG and PMT on investors and capital market clients
based in the southwestern United States, a significant economic downturn in that
region could adversely affect the Company's revenues. HWG and PMT accounted for
approximately 40.3% and 38.3% of the Company's pro forma combined revenues for
1997 and the six months ended June 30, 1998, respectively. As a result, an
economic downturn in that region could adversely affect the companies in the
region and reduce the Company's underwriting and brokerage business relating to
those companies. In addition, a regional economic downturn in that region could
have an adverse effect on the Company's retail clients or emerging and
middle-market companies or growth industries within the region, which could also
have an adverse affect on the Company's business, prospects and operating
results.
In addition, ERRI's liquid waste business is predominantly concentrated
within a 150-mile radius of Charlotte, North Carolina. A significant economic
downturn in that area could adversely affect the Company's liquid waste
revenues.
LITIGATION AND SECURITIES LAW LIABILITY ASSOCIATED WITH FINANCIAL SERVICES
BUSINESS
The Company's financial services business involves substantial risks of
liability. From time to time the Company or its subsidiaries may be named as
defendants in civil litigation and arbitrations arising from their business
activities as broker-dealers. The plaintiffs in litigation or arbitration may
allege misconduct by the Company's investment executives, claiming, for example,
that investments sold by the investment executives were unsuitable for the
plaintiffs' portfolios, or that they engaged in excessive trading with respect
to the plaintiffs' accounts. While historically none of the Combining Companies
have incurred material liability relating to this type of litigation or
arbitration, substantial liabilities from these matters could occur in the
future.
In recent years, there has been a substantial amount of litigation
involving the securities brokerage industry, including class action lawsuits
that generally seek substantial damages and other suits seeking punitive
damages. Companies engaged in the underwriting of securities, including HWG, are
subject to
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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 promulgated 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 these companies. The defense of these or any other lawsuits or arbitrations
may divert the efforts and attention of the Company's management and staff, and
the Company may incur significant legal expense in defending this litigation or
arbitration. See also " -- Business Subject to Extensive Regulation" (pages 18
through 20).
POTENTIAL ENVIRONMENTAL LIABILITY ASSOCIATED WITH LIQUID WASTE BUSINESS
The Company, through ERRI, processes and disposes of various types of
non-hazardous wastes at its North Carolina processing facility. Various
liabilities could be incurred by the Company if (1) a facility owned or operated
by the Company causes environmental damage, (2) waste transported by the Company
causes environmental damage at another site, (3) the Company fails to comply
with applicable environmental and land use laws and regulations or the terms of
a permit or outstanding consent order or (4) a facility owned or operated by the
Company or the soil or groundwater at the facility is or becomes contaminated.
These liabilities could include the imposition of substantial monetary
penalties, the issuance of an order reducing or terminating the responsible
operations, the revocation or denial of permits or other approvals necessary for
continued operation or expansion of a facility, the imposition of liability for
environmental damage at the Company's facility or adjacent property or
environmental damage at another site associated with waste transported by the
Company, the imposition of liability on the Company under CERCLA or under
comparable state laws, and criminal liability for the Company or its officers.
In addition, citizens' groups, adjacent landowners or governmental entitles
could oppose the issuance of a permit or approval to the Company or allege
violations of operating permits of the Company or laws or regulations to which
it is subject. Any of these liabilities could have a material adverse effect on
the Company's business, results of operations and financial condition. CERCLA
and comparable state laws impose retroactive strict joint and several liability
on various parties associated with a site at which there has occurred or been
threatened a release of any hazardous substance into the environment. Liability
under RCRA, CERCLA and comparable state laws may include responsibility for
costs of site investigations, site clean up, site monitoring, natural resources
damages and property damages. Liabilities under RCRA, CERCLA and comparable
state laws can be very substantial and, if imposed upon the Company, could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business of TEI -- Government Regulation" (pages 52
through 53).
During the ordinary course of its operations, the Company may receive
citations or notices from governmental authorities claiming noncompliance with
its permits or certain applicable environmental or land use laws and
regulations. The Company intends to work with the authorities to resolve the
issues raised by these citations or notices. The Company may not always be
successful in this regard, and its failure to resolve a significant issue could
have a material adverse effect on the Company's business, results of operations
and financial condition.
DEPENDENCE ON SYSTEMS AND SOFTWARE
The Company's financial services business is highly dependent on
communications and information systems. Any failure or interruption of these
systems, or of the systems of its clearing brokers, could cause delays in
securities trading activities, which could have a material adverse effect on the
Company's operating results. However, the Company or its correspondent
broker-dealers could suffer systems failure or interruption, including those
caused by a natural disaster, power or telecommunications failure, act of God,
act of war or otherwise, or that the back-up procedures and capabilities if a
failure or interruption occurs may be inadequate.
The Company, through Spires, uses integrated, proprietary software to
solicit and develop client relationships over the Internet. Because this
software is Internet-based and dependent, any failure of the Internet, which is
not subject to the Company's control, could have a material adverse effect on
the Company's ability to solicit and execute certain orders. Spires' proprietary
software is also dependent upon
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the efforts of in-house systems and development personnel for maintenance and
system upgrades, as well as source data and programs supplied by third parties
under existing agreements. If the Company's ability to (1) retain or attract
qualified systems and development personnel or (2) access third party source
data and programs, is impaired for any reason, it could have a material adverse
effect on the Company's business, prospects and operating results. See
"Business of Spires -- Services Provided" (pages 79 through 80) and "Business
of Spires -- Intellectual Property" (pages 80 through 81).
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors relating to its
financial services business, including the number of underwriting and merger and
acquisition transactions completed by its clients, the level of institutional
and retail brokerage transactions, the levels of the assets under managements
variations in expenditures for personnel, litigation expenses, and the expenses
of establishing any new business units. The Company's revenues from an
underwriting transaction are recorded only when the underwritten security
commences trading, and revenues from a merger or acquisition transaction are
recorded only when the retainer fees are received or the transaction closes.
Accordingly, the timing of recognition of revenue from a significant transaction
can materially affect the Company's quarterly and annual operating results.
CONSTRAINTS IMPOSED BY NET CAPITAL REQUIREMENTS
The SEC, the NASD, and various other securities exchanges and other
regulatory bodies in the United States have rules with respect to net capital
requirements which affect each broker-dealer subsidiary of the Company,
including HWG and Spires. These rules are designed to ensure that broker-dealers
maintain adequate regulatory capital in relation to their liabilities and the
size of their customers' business. These net capital rules have the effect of
requiring that a substantial portion of a broker-dealer's assets be kept in cash
or highly liquid investments. Failure to maintain the required net capital may
subject a firm to suspension or revocation of its registration by the SEC and
suspension or expulsion by the NASD and other regulatory bodies, and ultimately
may require its liquidation. In addition, under Texas law, the Company's Texas
trust subsidiary, PMT, is required to maintain a minimum net capital of $1.5
million.
HWG's and Spires' compliance with these net capital rules could limit
certain operations that require intensive use of capital, such as underwriting
or trading activities. PMT could also be limited operationally by the net
capital requirements. These net capital rules could also restrict the ability of
the Company to withdraw capital in situations where the Company's broker-dealer
and trust company subsidiaries have more than the minimum amount of required
capital. The Company may be limited in its ability to pay dividends, implement
its strategies, pay interest or repay principal on its debt and redeem or
repurchase shares of outstanding capital stock. In addition, a change in these
net capital rules or the imposition of new rules affecting the scope, coverage,
calculation or amount of the net capital requirements, or a significant
operating loss or significant charge against net capital, could have similar
adverse effects.
BUSINESS SUBJECT TO EXTENSIVE REGULATION
FINANCIAL SERVICES. The Company's subsidiaries which are registered as
broker-dealers or investment advisors are, and the securities industry in
general is, subject to extensive regulation in the United States at both the
federal and state level. As broker-dealers, HWG and Spires are subject to the
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of customers'
funds and securities, capital structure, record keeping, limitations on business
activities, and the conduct of directors, officers and employees.
As a registered investment adviser under the Investment Advisers Act, HWG
is subject to regulations which cover various aspects of HWG's advisory
business, including compensation arrangements. Under the Investment Adviser Act,
every investment advisory agreement with the Company's clients must expressly
provide that the contract may not be assigned by the investment advisor without
the consent of the client. Under the Investment Company Act of 1940 (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 considered to have
been assigned when there is a direct or indirect transfer of the
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agreement, including a direct assignment or a transfer of a "controlling
block" of the adviser'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 advisor. Any assignment of the
Company's investment advisory agreements would require the approval of a
majority of its clients' shareholders in the case of registered investment
company clients, and the consent to the assignments in the case of other
investment advisory clients. The HWG Merger will result in a assignment of HWG's
investment advisory agreements under the statutes. Prior to the Transactions,
HWG is required to obtain the required consent of its investment advisory
clients (other than investment companies) of the assignment resulting from the
HWG Merger. In addition, future issuances of PGG Common Stock by PGG and sales
of PGG Common Stock by existing shareholders could result in an assignment of
the Company's investment advisory agreements. HWG or PGG may not be successful
in obtaining the necessary client consents to the contract assignments resulting
from the HWG Merger or from any future transactions. The failure to obtain such
consents for a significant number of clients could have a material adverse
effect on the Company's business and results of operation.
As a matter of public policy, regulatory bodies are charged with
safeguarding the integrity of the securities and other financial markets and
with protecting the interests of customers participating in those markets. In
addition, self-regulatory organizations ("SROs") and other regulatory bodies
in the United States, such as the SEC, the New York Stock Exchange, the NASD,
and the Municipal Securities Rulemaking Board, require strict compliance with
their rules and regulations. Failure to comply with any of these laws, rules or
regulations could result in a variety of adverse consequences including censure,
civil penalties, fines, the issuance of cease-and-desist orders, the suspension
of a broker-dealer, investment adviser or futures commission merchant, the
statutory disqualification of officers or employees or other adverse
consequences which could have a material adverse effect on the Company. Even if
none of such actions are taken, the administrative or judicial proceedings or
arbitrations could have a material adverse effect on the Company's perceived
creditworthiness, reputation and competitiveness. Financial services clients of
the Company or others who allege that they have been damaged by a violation of
applicable regulations also may seek to obtain compensation from the company,
including the unwinding of any transactions with the company. Additional
legislation or regulations, or changes in the methods or enforcement of existing
regulations by governmental entities or SROs may materially and adversely affect
the Company's business, financial condition or operating results.
The Company's financial services businesses may be materially affected not
only by regulations applicable to its subsidiaries as financial market
intermediaries, but also by regulations of general application. For example, the
volume of the Company's underwriting, merger and acquisition and principal
investment business in a given time period could be affected by existing and
proposed tax legislation, antitrust policy and other governmental regulations
and policies (including the interest rate policies of the Federal Reserve
Board), changes in interpretation or enforcement of existing laws and rules that
affect the business and financial communities and other things. From time to
time, various forms of antitakeover legislation and legislation that could
affect the benefits from financing leveraged transactions with high-yield
securities have been proposed that, if enacted, could adversely affect the
volume of merger and acquisition business. This could have an adverse affect on
the Company's underwriting, advisory and trading revenues related to that
business.
The Company'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
TTCA, the rules and regulations promulgated under the TTCA and supervision by
the Texas Banking Commissioner (the "Bank Regulator"). These laws are intended
primarily for the protection of PMT's clients, rather than for the benefit of
investors. The TTCA provides for, and regulates, a variety of matters,
including: periodic examinations by the office of the Bank Regulator; furnishing
periodic financial statements to the Bank Regulator; minimum net capital
maintenance requirements; fiduciary record-keeping requirements; bonding
requirements for the protection of clients; restrictions on investments of
restricted capital; lending and borrowing limitations; prohibitions against
engaging in certain activities; prior approval from the Bank Regulator for
certain corporate events (E.G., mergers, sale/purchase of all or
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substantially all of the assets and transactions transferring control of the
trust company); broad regulatory powers in the event the trust company violates
certain provisions of TTCA or is determined to be in a "hazardous condition"
(as defined by the TTCA); and other matters. While the Company believes it is in
material compliance with these laws, rules and regulations, it may not be able
to continue such compliance in the future or these laws, rules or regulations
may change adversely, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's ability to comply with applicable laws and rules relating to
its financial services business is dependent in large part upon establishing and
maintaining a compliance system designed to monitor compliance with these laws
and rules, as well as the Company's ability to attract and retain qualified
compliance personnel. Although the Combining Companies believe that they are in
material compliance with these rules and regulations, they may not be able to
continue such compliance in the future, and any noncompliance could have a
material adverse effect on the Company's business, financial condition and
operating results.
LIQUID WASTE. The operations of the Company's liquid waste subsidiary,
ERRI, 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, RCRA and the Clean Air Act. If
existing regulatory requirements change, the Company may be required to make
significant unanticipated capital and operating expenditures. Although the
Company believes that it is presently in material compliance with applicable
laws and regulations, it may not be considered to be in compliance in the
future. Governmental authorities may seek to impose fines and penalties on the
Company or to revoke or deny the issuance or renewal of operating permits for
failure to comply with applicable laws and regulations. Under these
circumstances, the Company might be required to reduce or cease operations or
conduct site remediation until a particular problem is remedied, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, if the Company's liquid waste operations
resulted in the release of hazardous substances, the Company could incur
liability under CERCLA.
ERRI's facility is also required to have permits and approvals from
federal, state and local governments. These permits or approvals or applications
may be denied, revoked or modified under various circumstances. In addition, if
new environmental legislation or regulations are enacted or existing legislation
or regulations are amended or are enforced differently, the Company may be
required to obtain additional operating permits or approvals for its facility.
The process of obtaining a required permit or approval may be lengthy and
expensive and the issuance of the permits or the obtaining of the approval may
be opposed by the public. If the Company is not successful in obtaining or
maintaining all required permits and approvals for its liquid waste processing
facility, its business, results of operations and financial condition could be
adversely affected.
INSUFFICIENCY OF INSURANCE
Many aspects of the Company's business involve substantial risks of
liability. While the Company maintains liability insurance, the insurance is
subject to coverage limits and certain policies exclude coverage for damages
resulting from certain securities laws violations and environmental
contamination. Liability insurance may not continue to be available to the
Company on commercially reasonable terms, and potential types of liabilities
that may be incurred by the Company may not be covered by its insurance, the
dollar amount of potential liabilities may exceed the policy limits and the
insurance carrier may not be able to satisfy its obligations under the policy.
See "-- Litigation and Securities Law Liability Associated with Financial
Services Business" (pages 16 through 17) and "-- Potential Environmental
Liability Associated with Liquid Waste Business" (page 17).
LOSSES DUE TO FRAUD OR MISTAKES OF CUSTOMERS OR EMPLOYEES
The Company is exposed to the risk of significant losses from customer
fraud, employee errors, misconduct and fraud (including unauthorized
transactions by brokers and traders) and failures relating to processing of
securities transactions. There can be no assurance that the Company's risk
management procedures and internal controls will prevent these losses from
occurring.
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MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH MARKET-MAKING, PRINCIPAL
TRADING, ARBITRAGE AND UNDERWRITING ACTIVITIES
The Company's market making, principal trading and underwriting activities
can involve the purchase, sale or short sale of securities as principal. These
activities subject the Company's capital to significant risks from markets that
may be illiquid or that are susceptible to rapid fluctuations in liquidity.
These market conditions could limit the Company's ability to resell securities
purchased or to repurchase securities sold short. These activities subject the
Company's capital to significant risks, including market, credit, counterparty
and liquidity risks. Market risk relates to the risk of fluctuating values and
the ability of third parties to whom the Company has extended credit to repay
amounts owed to the Company. Counterparty risk relates to whether a counterparty
on a transaction will fulfill its contractual obligations, which may include
delivery of securities or payment of funds. Liquidity risk relates to the
Company's inability to liquidate assets or redirect the deployment of assets
contained in illiquid investments.
As a result of its underwriting and merchant banking activities, the
Company may have large position concentrations in securities of, or commitments
to, a single issuer or issuers engaged in a specific industry. In addition, the
trend in all major capital markets toward larger commitments on the part of lead
underwriters means that an underwriter (including a co-manager) may retain
significant position concentrations in individual securities. Such
concentrations increase the Company's exposure to specific credit and market
risks.
SIGNIFICANT VOTING CONTROL BY MANAGEMENT AND SHAREHOLDERS OF COMBINING COMPANIES
Immediately after the Transactions, the shareholders of the Combining
Companies and the executive officers and directors of PGG will beneficially own
in the aggregate approximately 79.2% of the outstanding PGG Common Stock. If
these persons were to act in concert, they would be able to exercise control
over the Company's affairs, including the election of the entire board of
directors of PGG and, subject to Part Thirteen of the TBCA, any matter submitted
to a vote of PGG shareholders.
RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS
From 1995 through 1997, TEI disposed of all of its operating business other
than ERRI's liquid waste business. 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 remains
primarily liable to complete the contracts, and has agreed to reimburse the
purchaser if its aggregate cost to complete the assumed contracts exceeds the
aggregate contract price. To date the purchaser has incurred approximately $1.5
million in costs on contracts totalling approximately $2.2 million in contract
price. If the purchaser does not complete the contracts, or if it incurs excess
costs in completing the contracts, TEI could incur liability to either the
former customers or the purchaser. Although TEI does not believe it will incur
any additional costs with respect to these contracts, past estimates of
completion costs have varied significantly, and it is possible that excess
completion costs could be incurred within the next two years.
YEAR 2000 IMPACT
The "Year 2000" problem refers to the inability of computer programs to
correctly interpret the century from a date in which the year is represented by
only two digits. A computer system that is not Year 2000 compliant would not be
able to correctly process certain data, or in extreme situations, could cause
the entire system to be disabled. In 1992, TEI purchased and developed new
software, which it has tested and believes is Year 2000 compliant. The Company
believes that its current systems, which are significant to operations, are or
will be Year 2000 compliant.
The Combining Companies are in the process of reviewing all vendor supplied
hardware, software, data feeds and other systems and equipment to ascertain Year
2000 compliance and expect to complete this review by December 31, 1998. As
registered NASD members, each of HWG and Spires is required to conduct a
complete review of the potential impact of Year 2000 issues and report its
findings to the NASD no later than December 31, 1998. An initial report was
filed by Spires with the NASD on August 31, 1998. PMT was required to file, and
did file, a Year 2000 report with the Texas Bank Regulator. The Company cannot
guarantee that Year 2000 problems, if any, in other companies' software,
equipment or systems on which it relies will be timely resolved or that other
companies' failure to resolve such problems, or
21
<PAGE>
resolutions incompatible with the Company's systems, would not have material
adverse effect on the Company. See "TEI Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000" (page 58), "HWG
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000" (page 70), "PMT Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000" (page 78) and
"Spires Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Year 2000" (pages 90 through 91).
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
No prior market for PGG Common Stock has existed and the conversion ratio
on the PGG Common Stock was determined by negotiations among the representatives
of TEI and the Combining Companies. PGG has applied for the approval of the PGG
Common Stock for quotation on the Nasdaq National Market, but no assurance can
be given that an active trading market will develop after consummation of the
Transactions, or, if it does, that it will continue. The market price of the PGG
Common Stock may be subject to significant fluctuations in response to many
factors including variations in the reported financial results of the Company
and changing conditions in the economy in general, in the Company's businesses
in particular or in the industry of one of the Company's major client groups. In
addition, the stock markets experience significant price and volume volatility
from time to time which may affect the market price of the PGG Common Stock for
reasons unrelated to the Company or its operating performance.
PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER EFFECTS
PGG's articles of incorporation, as amended (the "Charter"), authorize
the issuance, without shareholder approval, of one or more series of preferred
stock having such preferences, powers and relative, participating, optional and
other rights (including preferences over the PGG Common Stock respecting
dividends and distributions and voting rights) as PGG's board of directors may
determine. See "Description of PGG Capital Stock -- Preferred Stock" (page
109).
Certain provisions of the Charter, PGG's bylaws and the TBCA may delay,
discourage, inhibit, prevent or render more difficult an attempt to obtain
control of PGG, whether by means of a tender offer, business combination, proxy
contest or otherwise. These provisions include the Charter authorization of
"blank check" preferred stock, classification of the board of directors, a
limitation on the removal of directors only for cause, and then only on approval
of the holders of two-thirds of the outstanding voting stock, a restriction on
the ability of shareholders to take actions by less than unanimous written
consent and a TBCA restriction on business combinations with certain interested
parties. See "Description of PGG Capital Stock" (pages 109 through 111).
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters in this Proxy
Statement/Prospectus may include forward-looking statements that involve risks
and uncertainties. Discussions containing such forward looking-statements may be
found in the material set forth under "Summary," "Risk Factors," "The
Transactions -- Reasons for the Transactions and -- Business Combination
Costs -- Anticipated Consolidation Benefits," "Business" of TEI and each of
the Combining Companies, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of TEI and each of the Combining Companies
and "Summary Business Strategy of PGG," as well as in this Proxy
Statement/Prospectus generally. Forward-looking statements represent
management's current expectations and are inherently uncertain. The Company's
actual results may differ significantly from management's expectations, and
thus, from the results discussed in such forward looking statements. Factors
that may cause such differences include those described in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" of TEI and each of the Combining Companies.
22
<PAGE>
THE TRANSACTIONS
GENERAL
TEI is furnishing this Proxy Statement/Prospectus to the holders of shares
of TEI Common Stock in connection with the solicitation of proxies by the TEI
board of directors for use at the TEI Special Meeting to be held on
, 1998 and at any adjournment or postponements thereof.
At the Special Meeting, TEI Shareholders will be asked to consider and vote
to approve and adopt two proposals: (i) the TEI Merger Agreement and the
transactions contemplated thereby and (ii) the Share Issuances relating to the
combination of TEI with HWG, PMT and Spires. The terms and conditions of these
transactions are set forth in the Amended and Restated Agreement and Plan of
Reorganization dated October , 1998 (the "Agreement"), among, including
others, PGG, TEI, HWG and its shareholders, PMT and its shareholders, Spires and
certain direct and indirect owners of Spires.
The Agreement specifically provides that the following transactions will
simultaneously occur: (i) TEI will merge with TEI Merger Sub, pursuant to which
(A) TEI will be the surviving corporation and become a wholly owned subsidiary
of PGG and (B) each share of TEI Common Stock outstanding immediately prior to
the Effective Time will be automatically converted into the right to receive .25
of a share of PGG Common Stock; (ii) each of HWG and PMT, under separate merger
agreements, will merge with the HWG Merger Sub and the PMT Merger Sub,
respectively, pursuant to which (A) each of HWG and PMT will be the surviving
corporation and become a wholly owned subsidiary of PGG and (B) the equity
securities of each of HWG and PMT outstanding immediately prior to the Effective
Time will automatically be converted into the right to receive 1,187,500 shares
of PGG Common Stock (or 2,375,000 shares of PGG Common Stock in the aggregate);
(iii) OVH and the Spires Limited Partners (other than SFF) will contribute all
of their respective limited partnership interests of SFF and Spires to PGG in
exchange for an aggregate of 1,171,480 shares of PGG Common Stock, and
immediately thereafter, PGG will contribute all of the limited partnership
interests of SFF and Spires to the Spires L.P. Sub; and (iv) the Spires General
Partner Shareholders and the SFP Shareholders will contribute all of their
respective shares of capital stock of the Spires General Partners and SFP to PGG
in exchange for 16,020 shares of PGG Common Stock, and immediately thereafter,
PGG will contribute all of such shares to the Spires G. P. Sub. As a result of
the transactions described above, PGG will own directly or indirectly 100% of
the equity ownership of each of TEI, HWG, PMT and Spires. See " -- Ownership
Structure of PGG After the Transactions" and "The Agreement -- Manner and
Basis of Converting Securities."
The Proxy Statement/Prospectus also constitutes a prospectus of PGG, which
is part of the Registration Statement on Form S-4 (the "Registration
Statement") filed by PGG with the SEC under the Securities Act, in order to
register the shares of PGG Common Stock to be issued to the TEI Shareholders,
the HWG Shareholders, the PMT Shareholders and the Spires Transferors in the
Transactions.
OWNERSHIP STRUCTURE OF PGG AFTER THE TRANSACTIONS
The chart below depicts the ownership structure of PGG after the
Transactions. To simplify the post-Transactions ownership interests of PGG, the
chart does not attribute ownership of shares of PGG Common Stock to more than
one holder or group of holders, does not attribute ownership of shares that a
holder of TEI options has the right to acquire, and assumes the exercise of all
outstanding options and warrants to purchase shares of common stock of HWG and
PMT prior to the consummation of the Transactions as required by the Agreement.
Accordingly, the ownership percentages below reflect certain differences from
those set forth under the caption "Principal Shareholders of PGG after
Transactions."
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
-------------------- ------------------- ------------------- -------------------
| Former | | Former | | Former | | |
| TEI | | HWG | | PMT | | Spires |
| Shareholders | | Shareholders | | Shareholders | | Transferors |
-------------------- ------------------- ------------------- -------------------
|50.02% |16.66% |16.66% |16.66%
| | | |
| | | |
-------------------------------------------------------------------------
|
|
------------
| |
| PGG |
| |
------------
|
|
-----------------------------------------------------------------------------------
| | | | |
| | | | |
--------- --------- ---------- ----------------- -----------------------
| TEI | | HWG | | PMT | | Spires G.P. Sub | | Spires L.P. Sub |
--------- --------- ---------- ----------------- -----------------------
| | | |
| | 15.7% | |
| -------------------------------------- | |
--------- | | | | |
| | | | | | |
| ERRI | ---------------- --------------- ---------- | |
| | | Spires | | Capital | | | | |
--------- | Financial GP, | | Financial | | SFP | | |
| Inc. | | Partner, Inc. | | | | |74.0%
---------------- --------------- ---------- | |
| | |84.3% | |
| | | --------- |
| | | | | |
| | -- | SFF | |
| | | | |
| | --------- |
| | 0.1% |24.9% |
| --------------------- | |
| | | |
| ---------- |
| 1.0% | | |
------------------------------------------| Spires |-----
| |
----------
</TABLE>
BACKGROUND
During 1995 through 1997, TEI disposed of most of its operating
subsidiaries, accumulating in the process over $27 million in liquid assets.
Since January 1997, TEI's management has been evaluating strategies and
financial alternatives for maximizing shareholder value. In late December 1997,
T. Craig Benson, a director of TEI, contacted Stephen Reckling, a personal
friend of Mr. Benson and an executive officer and director of PMT, to discuss
TEI's efforts to locate an appropriate merger candidate. During these
discussions Mr. Reckling inquired as to TEI's interest in the financial services
industry, and specifically its interest in HWG and PMT, or alternatively, TEI's
interest in retaining HWG as its financial advisor. The parties agreed to meet
later in person, together with other members of TEI's and HWG's management, to
discuss TEI's acquisition objectives and HWG's possible engagement.
On January 14, 1998, Messrs. Reckling and Benson, together with Donald R.
Campbell, President and Chief Operating Officer of TEI, Titus H. Harris, Jr.,
Chief Executive Officer of HWG and Robert E. Garrison, II, Executive Vice
President of HWG and Chief Executive Officer of PMT, met to conduct initial
discussions. Messrs. Campbell and Harris have known each other personally and
professionally for over five years. During this meeting, Mr. Campbell outlined
his criteria for the ideal merger candidate, including profitability; revenue
growth potential; qualified and experienced management team; participation
within an
24
<PAGE>
industry with favorable market conditions and consolidation potential; and an
ability to utilize TEI's public company platform and liquidity and capital to
enhance operations. After briefly discussing certain industries which TEI had
previously considered, Messrs. Harris and Garrison again inquired as to TEI's
interest in the financial services industry, and HWG and PMT in particular.
Messrs. Harris and Garrison then briefly outlined certain business and financial
matters relating to HWG and PMT. Mr. Campbell expressed certain concerns that
based on the revenue levels and limited operating histories of these entities
that a combination may not be viable.
Discussions among the parties were renewed at a meeting held on February 9,
1998, which included in addition to the participants at the initial meeting,
three members of TEI's board of directors, an additional member of PMT's
management and Peter W. Badger, President and co-founder of Spires. At this
meeting, representatives of HWG and PMT introduced for the first time the
possibility of inviting Spires to participate in the combination in an effort to
increase the revenues of a combined entity and its service capabilities. The
parties briefly discussed certain business and financial matters relating to
Spires and potential cross-selling opportunities among the Combining Companies.
With the addition of Spires, Mr. Campbell believed a combination among TEI and
the Combining Companies may have appeal to TEI and its shareholders. At that
point, the parties agreed that preliminary due diligence relating to the
business and financial matters of the Combining Companies should begin.
Commencing the week of February 16, 1998, representatives of TEI and the
Combining Companies provided each other with information relating to certain
business, financial and accounting matters regarding their respective entities.
Representatives of each of the companies internally reviewed and discussed the
information provided. On March 6, 1998, the parties met again to discuss in
greater detail certain of the items discussed at the February 9th meeting,
considered preliminary matters relating to the parties' views on executive
management of a combined company, the composition of its board of directors and
the form of consideration to be received by the former owners of the Combining
Companies.
The parties met again during the first and second week of April 1998, to
reach agreement in principle as to the basic terms of combination. Specifically,
it was discussed that (i) Messrs. Harris and Garrison would serve as the primary
executive officers of any resulting combined company, (ii) the board of
directors would consist of 11 members, six of whom would be designated by TEI
and five by the Combining Companies and (iii) the former shareholders of TEI
would retain slightly greater than 50% of the outstanding shares of any combined
company with the former owners of the Combining Companies to receive shares
representing slightly less than 50% of the outstanding shares. TEI then engaged
outside counsel to prepare separate drafts of letters of intent with each of the
Combining Companies, which letters were to be executed by TEI and presented to
the Combining Companies for execution pending TEI board approval. At a special
TEI board meeting held on April 28, 1998, the proposed combination with the
Combining Companies was discussed and the letters of intent were approved by the
TEI board. Following the TEI board meeting, TEI management executed the letters
of intent and presented them to representatives of the Combining Companies,
which then executed the letters of intent and returned them to TEI that same
evening. The transactions were publicly announced by TEI the morning of April
29th and at the regularly scheduled annual meeting of the TEI shareholders held
later that day.
As is typical in business combination transactions, the type and amount of
consideration ultimately agreed to was not empirically determined, but instead
resulted from intense arm's length negotiating between the senior executives of
the four entities, having due regard for the historical operating results and
anticipated future prospects of each entity. In the final analysis, the
consideration resulted from the negotiators' perceptions of the relative values
of the entities and the recognition by all parties that the indicated value of
the Transactions would need to insure that the Transactions would have an
accretive effect on the Company's pro forma combined operating results for the
twelve months ended December 31, 1997 and would afford potential for earnings
growth in future periods.
Initial drafts of the combination agreement containing the proposed terms
of the transaction were circulated on May 28, 1998. Numerous telephone
discussions among the parties concerning various aspects of the proposed
combination and the related documents continued through the middle of August
1998.
25
<PAGE>
During this time, extensive discussions and negotiations took place and revised
drafts of the documents were circulated to the various parties on or about June
16th, July 10th, July 17th, August 5th and August 14th. The items raised and
ultimately agreed upon during this process included, among others, (i) a change
in the structure of the transaction with Spires for federal income tax purposes,
(ii) an increase in the number of directors comprising the full board of the
combined company from 11 to 12, six of whom would be designated by TEI and six
by the Combining Companies, (iii) a prohibition of TEI soliciting or discussing
any alternative transaction, except (A) it may consider written offers upon a
determination that the TEI board's fiduciary duty requires it to do so, or (B)
disclosing to the TEI Shareholders the TEI board's position on certain tender
offers, (iv) the granting to TEI of a termination right in certain cases if the
TEI board withdraws or amends adversely its recommondation for the proposed
combination or approves or recommends an alternative transaction, (v) an
agreement by TEI that it loan up to $825,000 to holders of outstanding options
to purchase shares of PMT capital stock for the sole purpose of funding the
exercise of these options prior to closing, and (vi) the addition of a condition
that TEI satisfy certain adjusted current assets, working capital and net worth
requirements prior to closing.
At a special board meeting held on August 18, 1998, the TEI board
considered the proposed Agreement and the transactions contemplated thereby. TEI
management presented a comprehensive analysis of the proposed transaction,
including an overview of the Combining Companies, as well as a description of
various aspects of their respective operations, financial condition and
competitive position. The TEI board also discussed the potential for expansion
and improvement of the combined enterprise's business as a result of
cross-selling opportunities, which TEI management believed could be achieved.
During the TEI board meeting, J.P. Morgan verbally described the valuation
methodologies used in connection with its financial analysis of the transactions
(see "-- Opinion of J.P. Morgan"). The TEI board conducted a review with TEI's
counsel of the principal features of the Agreement and the transactions
contemplated thereby. The TEI board also received formal due diligence reports
and then unanimously approved the Agreement in its final form; thereafter, the
Agreement was executed by the appropriate TEI and Combining Companies officers
on the evening of August 18th.
At the request of Spires, the Agreement was amended and restated to again
change for federal income tax reasons the structure of the Spires transaction. A
draft of the revised agreement was circulated to the parties on August 31, 1998.
The revision involved the addition of new affiliated Spires entities and their
respective owners as parties to the Agreement. As a result of this request, TEI
required additional representations and warranties with respect to these new
entities and their respective equity ownership, as well as a cash escrow to
cover estimated federal income tax liability of these entities that would be
effectively inherited by the combined company. In addition, the parties agreed
to extend the termination date of the Agreement from December 31, 1998 to
January 31, 1999. The Agreement as amended and restated was finalized by the
parties and executed on October 2, 1998.
REASONS FOR THE TRANSACTIONS
TEI
THE TEI BOARD HAS UNANIMOUSLY DETERMINED THAT EACH OF THE TEI MERGER AND
THE SHARE ISSUANCES IS IN THE BEST INTERESTS OF TEI AND THE TEI SHAREHOLDERS AND
HAS APPROVED THE TEI MERGER AGREEMENT. THE TEI BOARD UNANIMOUSLY RECOMMENDS THAT
THE TEI SHAREHOLDERS VOTE IN FAVOR OF EACH OF THE TEI MERGER AGREEMENT AND THE
SHARE ISSUANCES AT THE TEI SPECIAL MEETING.
ADVANTAGES. In recent years the financial services industry has
experienced record growth. Even in light of recent market declines and
volatility, TEI believes the long-term trends in this industry remain extremely
positive, particularly considering the increase in investment funds resulting
significantly from changing demographic patterns, industry consolidation,
financial services deregulation and rapid changes in technology and customer
demands, among other factors. As the financial services industry continues to
consolidate at a record pace, the number of quality and affordable financial
services firms within the southwest region has been significantly reduced. TEI
believes the combination with the Combining Companies will provide it with
regional name recognition within the industry and an experienced and
26
<PAGE>
knowledgeable management team necessary to compete in this financial services
market. For the TEI Shareholders, on a pro forma basis, the Transactions are
also expected to have an accretive effect on earnings per share for the fiscal
year ended December 31, 1997 (from $(.03) to $.05). The TEI board believes the
Transactions will provide an opportunity for improved earnings and cash flow
potential for the long term growth of PGG, as successor to TEI, and enhanced
shareholder value.
For the foregoing reasons, the TEI board believes that the terms and
conditions of the Agreement, including the TEI Merger and the Share Issuances,
are in the best interest of TEI and the TEI Shareholders. The following are the
material factors considered by the TEI board in reaching its conclusions:
(i) the judgment, advice and analyses of TEI's management with respect
to the strategic, financial and potential operational benefits of the
Transactions, based in part on the business, financial and legal due
diligence investigations performed with respect to each of the Combining
Companies;
(ii) management's belief that the long-term trend in the financial
services industry remains positive, despite the recent declines and
volatility in the industry, especially in light of an increase in
investment funds as a result of various industry conditions;
(iii) the limited number of available quality and affordable regional
financial service firms focused on the southwest region;
(iv) the reputation and experience of the Combining Companies
management teams, several members of which TEI board members and officers
have had personal business dealings;
(v) certain cross-selling opportunities and operating efficiencies
that may become available to the combined enterprise as a result of the
Transactions, see "Summary Business Strategy of PGG -- Business
Strategy";
(vi) the advice of, and financial analyses prepared by, J.P. Morgan
(see "--Opinion of J.P. Morgan");
(vii) the advice of counsel that the PGG Common Stock issuable in the
Transactions should be tax-free for federal income tax purposes;
(viii) the corporate governance aspects of the Transactions, including
that TEI directors would continue to constitute one-half of all the members
of the PGG board and that certain of TEI's management would continue in
significant capacities with the Company; and
(ix) the number of shares of TEI Common Stock to be issued to the HWG
Shareholders, the PMT Shareholders and the Spires Transferors in the
Transactions, and the percentage of ownership of the combined enterprise
represented by such issuance.
DISADVANTAGES. In addition to the foregoing anticipated advantages, the
TEI board considered the following additional factors:
(i) the recent decline and volatility of the equity markets and the
related impact on the financial services industry:
(ii) the challenges inherent in combining the operating managements of
TEI and the Combining Companies and establishing a single unified corporate
culture, the success of which could not be assured; and
(iii) the ability of the combined enterprise to achieve the benefits
intended by the Transactions would be dependent in significant degree upon
its success in leveraging existing client relationships among the Combining
Companies which also cannot be assured.
The foregoing discussions of the information and factors considered by the
TEI board is not intended to be exhaustive. In view of the variety of the
factors considered in connection with its evaluation of the Transactions, the
TEI board did not find it practicable to, and did not quantify or otherwise
assign relative weights to, the specific factors considered in reaching its
determination. In addition, individual members of the TEI board may have given
different weight to different factors.
27
<PAGE>
THE COMBINING COMPANIES
THE BOARD OF EACH OF HWG AND PMT AND EACH OF THE SPIRES GENERAL PARTNERS
HAS UNANIMOUSLY DETERMINED THAT THE HWG MERGER, THE PMT MERGER AND THE SPIRES
TRANSACTION, AS APPLICABLE, IS IN THE BEST INTERESTS OF THE RESPECTIVE COMBINING
COMPANIES AND ITS RESPECTIVE SHAREHOLDERS AND PARTNERS AND HAS APPROVED THE HWG
MERGER AGREEMENT, THE PMT MERGER AGREEMENT AND THE SPIRES TRANSACTION, AS
APPLICABLE. CERTAIN MEMBERS OF THE BOARDS OF HWG AND PMT AND DIRECTORS OF THE
SPIRES GENERAL PARTNERS MAY HAVE CONFLICTING INTERESTS IN THE TRANSACTIONS. SEE
"-- CONFLICTS OF INTEREST."
HWG. The HWG board has determined that the terms and conditions of the HWG
Merger are in the best interests of HWG and the HWG Shareholders. In making such
determination, the HWG board considered, among other things, the following
factors:
(i) the Transactions would combine the complementary businesses of the
Combining Companies with limited overlap and present the potential for
cross-selling opportunities;
(ii) the Transactions would effectively diversify the Combining
Companies into a broader array of financial services and give them a
competitive edge in the consolidating financial services industry;
(iii) the Transactions would provide PGG, as successor to TEI, with
regional name recognition within the financial services industry and an
experienced and knowledgeable management team necessary to compete in the
consolidating financial services market;
(iv) the Combining Companies would possess greater financial resources
by being a part of a publicly held company as well as by having access to
TEI's current cash surplus;
(v) with greater financial resources, the Combining Companies would be
able to pursue internal and external (e.g., acquisitions) growth
opportunities as well as diversification and enhanced recruiting
opportunities;
(vi) the reputation and experience of the management teams of Spires,
PMT and TEI, with whom certain numbers of the HWG board have had prior
dealings;
(vii) the Transactions would provide the HWG Shareholders with a
significant increase in liquidity and, HWG believes, increased shareholder
value;
(viii) the advice of tax professionals that the PGG Common Stock
issuable to the HWG Shareholders should be received tax-free for federal
income tax purposes; and
(ix) the board of directors of PGG would consist of 12 members, two of
whom members would be representatives of HWG so that the former HWG
Shareholders would be ensured continued representation in the leadership of
PGG, and that certain of HWG's management will have significant roles at
PGG.
The HWG board also considered the following negative factors: (i) the
uncertainty inherent in combining the operations and the strategies of TEI and
the Combining Companies and (ii) the ability of PGG to achieve the benefits
intended by the Transactions in a timely manner.
PMT. The PMT board has determined the terms and conditions of the PMT
Merger are in the best interests of PMT and the PMT Shareholders. In making such
determination, the PMT board considered, among other things, the following
factors:
(i) the Transactions would combine the complementary businesses of the
Combining Companies with limited overlap and present the potential for
cross-selling opportunities;
(ii) the Transactions would effectively diversify the Combining
Companies into a broader array of financial services and give them a
competitive edge in the consolidating financial services industry;
(iii) the Transactions would provide PGG, as successor to TEI, with
regional name recognition within the financial services industry and an
experienced and knowledgeable management team necessary to compete in the
consolidating financial services market;
28
<PAGE>
(iv) the Combining Companies would possess greater financial resources
by being a part of a publicly held company as well as by having access to
TEI's current liquid resources;
(v) with greater financial resources, the Combining Companies would be
able to pursue internal and external (e.g., acquisitions) growth
opportunities as well as diversification and enhanced recruiting
opportunities;
(vi) the reputation and experience of the management teams of Spires,
HWG and TEI, with whom certain numbers of the PMT board have had prior
dealings;
(vii) the Transactions would provide the PMT Shareholders with a
significant increase in liquidity and, PMT believes, increased shareholder
value;
(viii) the advice of tax professionals that the PGG Common Stock
issuable to the PMT Shareholders should be received tax-free for federal
income tax purposes; and
(ix) the board of directors of PGG would consist of 12 members, two of
whom members would be representatives of PMT so that the former PMT
Shareholders would be ensured continued representation in the leadership of
PGG, and that certain of PMT's management will have significant roles at
PGG.
The PMT board also considered the following negative factors: (i) the
uncertainty inherent in combining the operations and the strategies of TEI and
the Combining Companies and (ii) the ability of PGG to achieve the benefits
intended by the Transactions in a timely manner.
SPIRES. The general partners of Spires have determined that the terms and
conditions of the Spires Transaction are in the best interests of Spires and the
Spires Partners. In making such determination, the Spires general partners
considered, among other things, the following factors:
(i) the Transactions would combine the complementary businesses of the
Combining Companies with limited overlap and present substantial
cross-selling opportunities;
(ii) the combined enterprises would possess greater financial
resources with which to pursue internal growth opportunities in Spires'
core business, as well as diversification opportunities into other related
and complimentary businesses and enhanced recruiting capabilities;
(iii) the reputation and knowledge of the management teams at HWG and
PMT, several of whom are known to Spires management;
(iv) the Transactions will provide to partners of Spires a significant
increase in liquidity as a result of ownership of a public company as
compared to a private partnership;
(v) the board of directors of PGG would be expanded to 12 members, two
of whom members would be representatives of Spires, so that the former
partners of Spires would be ensured continued representation in the
leadership of the combined enterprise; and
(vi) the advice of tax professionals that the PGG Common Stock
issuable to the Spires Transferors should be received tax-free for federal
income tax purposes.
The Spires General Partners also considered the following negative factors:
(i) the uncertainty that converting from an entrepreneurial partnership to a
publicly held corporation may produce different business conditions that
adversely impact partners or employees; and (ii) the uncertainty inherent in
combining the operations and the strategies of TEI and the Combining Companies.
BUSINESS COMBINATION COSTS -- ANTICIPATED CONSOLIDATION BENEFITS
TEI and the Combining Companies expect to incur non-recurring merger
related costs estimated between $1.1 and $1.4 million. Such estimate includes
direct transaction costs consisting of investment banking, legal, accounting,
printing, listing application and miscellaneous shareholder meeting fees and
expenses. It is anticipated that there may be opportunities for operational and
administrative cost savings, though any such savings have not yet been
quantified.
29
<PAGE>
OPINION OF J.P. MORGAN
Pursuant to an engagement letter dated May 4, 1998, TEI retained J.P.
Morgan to deliver a fairness opinion in connection with the proposed
Transactions.
At the meeting of the board of directors of TEI on August 18, 1998, J.P.
Morgan rendered its oral opinion to the board of directors of TEI that, as of
such date, the consideration to be paid by TEI in the proposed Transactions was
fair from a financial point of view to the TEI Shareholders. J.P. Morgan has
confirmed its August 18, 1998 oral opinion by delivering its written opinion to
the board of directors of TEI, dated the date of this Proxy
Statement/Prospectus, that, as of such date, the consideration to be paid by PGG
in the proposed Transactions is fair from a financial point of view to the TEI
Shareholders. No limitations were imposed by TEI's board of directors upon J.P.
Morgan with respect to the investigations made or procedures followed by it in
rendering its opinions, except that J.P. Morgan was not requested to, and did
not, provide advice concerning the structure, the specific amount of the
consideration, or any other aspects of the Transactions, or to provide services
other than the delivery of its opinion. J.P. Morgan did not participate in
negotiations with respect to the terms of the Transactions, and has assumed that
such terms are the most beneficial terms from TEI's perspective that could under
the circumstances be negotiated among the parties to the Transactions.
The full text of the written opinion of J.P. Morgan, dated the date of this
Proxy Statement/Prospectus, which sets forth the assumptions made, matters
considered and limits on the review undertaken, is attached as Appendix E to
this Proxy Statement/Prospectus and is incorporated herein by reference. The TEI
Shareholders are urged to read the opinion in its entirety. J.P. Morgan's
written opinion is addressed to the board of directors of TEI, is directed only
to the consideration to be paid in the Transactions and does not constitute a
recommendation to any TEI Shareholder as to how such shareholder should vote at
the TEI Special Meeting. The summary of the opinion of J.P. Morgan set forth in
this Proxy Statement/Prospectus is qualified in its entirety by reference to the
full text of such opinion.
In arriving at its opinion, J.P. Morgan reviewed, among other things: the
Agreement; this Proxy Statement/Prospectus; the audited financial statements of
TEI and the Combining Companies for the fiscal year ended December 31, 1997, and
the unaudited financial statements of TEI and the Combining Companies for the
period ended June 30, 1998; certain publicly available information concerning
the businesses of the Combining Companies and of certain other companies engaged
in businesses comparable to those of the Combining Companies, and the reported
market prices for certain other companies' securities deemed comparable;
publicly available terms of certain transactions involving companies comparable
to the Combining Companies and the consideration paid for such companies; the
terms of other business combinations deemed relevant by J.P. Morgan; and certain
internal financial analyses and forecasts prepared by TEI and the Combining
Companies and their respective managements. J.P. Morgan also held discussions
with certain members of the management of TEI and the Combining Companies with
respect to certain aspects of the Transactions, the past and current operations
of TEI and the Combining Companies, the financial condition and future prospects
and operations of TEI and the Combining Companies, and certain other matters
believed necessary or appropriate to J.P. Morgan's inquiry. In addition, J.P.
Morgan visited certain representative facilities of TEI and the Combining
Companies, and reviewed such other financial studies and analyses and considered
such other information as it deemed appropriate for the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by TEI and the Combining Companies or otherwise reviewed by
J.P. Morgan, and J.P. Morgan has not assumed any responsibility or liability
therefor. J.P. Morgan has not conducted any valuation or appraisal of any assets
or liabilities, nor have any valuations or appraisals been provided to J.P.
Morgan. In relying on financial analyses and forecasts provided to J.P. Morgan,
J.P. Morgan has assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of TEI and the Combining Companies to which such analyses or forecasts
relate. J.P. Morgan also assumed that the Transactions will have the tax
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consequences described in this Proxy Statement/Prospectus, and in discussions
with, and materials furnished to J.P. Morgan by, representatives of TEI, and
that the other transactions contemplated by the Agreement will be consummated as
described in the Agreement and this Proxy Statement/Prospectus.
The projections furnished to J.P. Morgan for TEI and the Combining
Companies were prepared by the respective managements of each company. Neither
TEI nor the Combining Companies publicly disclose internal management
projections of the type provided to J.P. Morgan in connection with J.P. Morgan's
analysis of the Transactions, and such projections were not prepared with a view
toward public disclosure. These projections were based on numerous variables and
assumptions that are inherently uncertain and may be beyond the control of
management, including, without limitation, factors related to general economic
and competitive conditions, prevailing interest rates, and the securities
markets. Accordingly, actual results could vary significantly from those set
forth in such projections.
J.P. Morgan's opinion is based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the date
of such opinions. Subsequent developments may affect the written opinion dated
the date of this Proxy Statement/Prospectus, and J.P. Morgan does not have any
obligation to update, revise, or reaffirm such opinion. J.P. Morgan expressed no
opinion as to the price at which PGG Common Stock will trade at any future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its August 18, 1998 oral opinion.
PUBLIC TRADING MULTIPLES. Using publicly available information, J.P.
Morgan compared selected financial data of the Combining Companies with similar
data for selected publicly traded companies engaged in businesses which J.P.
Morgan judged to be analogous to the Combining Companies. The companies selected
by J.P. Morgan were Legg Mason, Raymond James, Jefferies Group, Morgan Keegan,
Hambrecht & Quist, McDonald & Co., Interstate Johnson Lane, and Southwest
Securities. These companies were selected because, among other reasons, they
represent similar businesses and target customer bases. For each comparable
company, publicly available financial performance through the latest twelve
months ("LTM") ended June 30, 1998 and forward earnings per share estimates
from Institutional Brokers Estimate System (IBES) were measured. J.P. Morgan
selected a range around the median value for each multiple, specifically: (i)
the price to book value multiple (median of 2.9x with a range from 1.7x to
3.4x); (ii) the price to LTM net income multiple (median of 19.9x with a range
from 7.5x to 22.7x); (iii) the price to 1998 net income multiple (median of
14.7x with a range from 9.8x to 28.0x); (iv) the price to 1999 net income
multiple (median of 13.6x with a range from 8.9x to 20.5x). These multiples were
then applied to the Combining Companies' book value, LTM net income, 1998
estimated net income, and 1999 estimated net income, yielding implied values for
the Combining Companies of approximately $30 to $45 million.
SELECTED TRANSACTION ANALYSIS. Using publicly available information, J.P.
Morgan examined selected transactions involving financial service companies.
Specifically, J.P. Morgan reviewed the following transactions (buyer/seller):
Keycorp/McDonald & Co., BankBoston/Robertson Stephens, Societe
Generale/Cowen, BankAtlantic/Ryan, Beck & Co., Fifth Third/Ohio Co., U.S.
Bancorp/Piper Jaffray, First Chicago/Roney & Co., Travelers/Salomon, Fleet/Quick
& Reilly, ING Barings/Furman Selz, First Union/Wheat First, CIBC/Oppenheimer,
NationsBank/Montgomery, BankAmerica/Robertson Stephens, SBC Warburg/Dillon Read,
Bankers Trust/Alex Brown, and Dean Witter/Morgan Stanley. In arriving at the
total consideration, J.P. Morgan calculated the upfront payment plus the
estimated after-tax value of deferred payments and retention bonuses, if any.
J.P. Morgan selected a range around the median value for each multiple,
specifically: (i) the price to book value multiple (median of 3.2x with a range
from 1.3x to 8.7x), (ii) the price to LTM revenues (median of 1.3x with a range
from 0.6x to 3.9x), (iii) the price to LTM net income (median of 14.4x with a
range from 10.7x to 22.8x), (iv) the price to forward 12 months net income
multiple (median of 15.1x with a range from 9.9x to 20.1x), and (v) the price to
forward 24 months net income multiple (median of 15.2x with a range from 8.8x to
18.7x). J.P. Morgan applied the range of multiples derived from such analysis to
the Combining Companies' book value, LTM revenues, LTM net income, forward 12
months net income, and forward 24 months net income, and arrived at an estimated
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range of equity values for the Combining Companies of between $30 and $45
million. Excluding an assumed 20% merger premium implicit in each of these
transactions, the estimated range of equity values for the Combining Companies
is between $24 and $36 million.
DISCOUNTED CASH FLOW ANALYSIS. J.P. Morgan conducted a discounted cash
flow analysis for the purpose of determining the combined value of the Combining
Companies. J.P. Morgan calculated the free cash flows that the Combining
Companies are expected to generate during fiscal years 1998 through 2003 based
upon financial projections prepared by the management of the Combining Companies
through the years ended 2003 ("management case") and upon management
projections adjusted by J.P. Morgan to reflect more moderate growth in revenues
and lower operating margins ("base case") during the six-year period. J.P.
Morgan also calculated a range of terminal asset values of the Combining
Companies at the end of the six-year period ending December 31, 2003 by applying
an exit price to net income multiple ranging from 12.0x to 16.0x of the net
income of the Combining Companies during the final year of the six-year period.
The free cash flows and the range of terminal asset values were then discounted
to present values using a range of discount rates from 12% to 16%. Based on the
base case projections and a discount rate range of 12% to 16%, the discounted
cash flow analysis indicated a range of equity values of between $43 and $65
million on a stand-alone basis (i.e., without synergies). Based on the
management case projections and a discount rate range of 12% and 16%, the
discounted cash flow analysis indicated a range of equity values of between $81
and $120 million on a stand-alone basis.
In connection with its opinion dated the date of this Proxy
Statement/Prospectus, J.P. Morgan reviewed the analyses used to render its
August 18, 1998 oral opinion to the board of directors of TEI by performing
procedures to update certain of such analyses and by reviewing the assumptions
upon which such analyses were based and the factors considered in connection
therewith.
The summary set forth above does not purport to be a complete description
of the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set forth
above and their analyses must be considered as a whole and that selecting
portions thereof, without considering all of its analyses, could create an
incomplete view of the processes underlying its analyses and opinion. J.P.
Morgan based its analyses on assumptions that it deemed reasonable, including
assumptions concerning general business and economic conditions and
industry-specific factors. The other principal assumptions upon which J.P.
Morgan based its analyses are set forth above under the description of each such
analysis. J.P. Morgan's analyses are not necessarily indicative of actual values
or actual future results that might be achieved, which values may be higher or
lower than those indicated. Moreover, J.P. Morgan's analyses are not and do not
purport to be appraisals or otherwise reflective of the prices at which
businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to deliver an opinion to
TEI's Board of Directors with respect to the Transactions on the basis of such
experience.
For the delivery of its opinion, TEI has agreed to pay J.P. Morgan a fee of
$250,000, 50% of which has been paid with the remaining 50% payable on delivery.
In addition, TEI has agreed to reimburse J.P. Morgan for its expenses incurred
in connection with its services, including the fees and disbursements of
counsel, and will indemnify J.P. Morgan and certain related persons against
certain liabilities that may arise out of the engagement by TEI and the
rendering of its opinion.
In the ordinary course of their businesses, affiliates of J.P. Morgan may
actively trade the debt and equity securities of TEI (and its successor, PGG)
for their own accounts or for the accounts of customers and, accordingly, they
may at any time hold long or short positions in such securities.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a summary of the opinions of each of Porter &
Hedges, L.L.P., counsel to TEI, and PricewaterhouseCoopers LLP, advisor to the
Combining Companies, as to the material federal income tax consequences
associated with participation in the Transactions, particularly with respect to
TEI, PGG, HWG, PMT, Spires and the Transaction Subs, and the holders of (i) TEI
Common Stock, (ii) HWG capital stock (iii) PMT capital stock, (iv) Spires
limited partnership interests, (v) SFF limited partnership interests, (vi)
Spires General Partners capital stock and (vii) SFP capital stock (such holders
collectively referred to as the "Participants"). Copies of the opinion issued
by Porter & Hedges, L.L.P. and PricewaterhouseCoopers LLP are included as
exhibits to the Registration Statement filed with the SEC of which this Proxy
Statement/Prospectus is a part. Participants should be aware that such opinions
are not binding on the Internal Revenue Service ("IRS") or the courts, nor are
the IRS or the courts precluded from adopting contrary positions. No ruling has
been requested from the IRS with respect to any of the opinions and statements
set forth herein. Accordingly, there can be no assurance that such opinions and
statements will be sustained by the IRS or by a court if challenged by the IRS.
This summary and the opinions do not discuss all aspects of federal income
taxation that may be relevant to a Participant in light of his or her particular
circumstances, or to certain types of Participants which are subject to special
treatment under federal income tax laws (including dealers in securities,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, S corporations, and foreign corporations and persons who are not
citizens or residents of the United States, nor does it include persons who hold
equity securities of TEI or the Combining Companies as part of a hedge,
straddle, "synthetic security" or other integrated investment). In addition,
this summary and the opinions do not describe any tax consequences under state,
local or foreign tax laws. This summary and the opinions are based on the Code,
Treasury Regulations, IRS rulings and pronouncements, and judicial decisions now
in effect, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied retroactively
in a manner that could adversely affect a Participant.
The IRS Restructuring and Reform Act of 1998 was enacted in July of 1998.
It contains an assortment of complex changes to the Code, some of which could
affect the Participants. In particular, net gains of individuals from the sale
or exchange of capital assets held more than one year will be eligible for a
maximum capital gain tax rate of 20% (with a maximum rate of 10% for net capital
gains of individuals otherwise taxed at a 15% ordinary income rate). The
provision applies to amounts from capital asset transactions properly taken into
account on or after January 1, 1998.
THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO RESULT FROM THE
TRANSACTIONS. PROSPECTIVE PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO THEM
IN CONNECTION WITH PARTICIPATING IN THE TRANSACTIONS, PARTICULARLY IN LIGHT OF
RECENT LEGISLATIVE TAX CHANGES AS WELL AS THE APPLICATION TO THEM OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
THE TEI MERGER. Based on certain factual representations by TEI, PGG, the
Transaction Subs, the Combining Companies and certain of the TEI Shareholders,
the HWG Shareholders, the PMT Shareholders and the Spires Transferors, as well
as certain assumptions set forth in its opinion, Porter & Hedges, L.L.P. has
rendered the following opinions as to the material federal income tax
consequences of the TEI Merger:
(i) Considered in combination with the Acquisition Transactions, the
TEI Merger will qualify as a transfer under Section 351 of the Code;
(ii) No income, gain or loss will be recognized by TEI or PGG as a
result of the TEI Merger;
(iii) No income, gain, or loss will be recognized by any TEI
Shareholder as a result of the TEI Merger with respect to the exchange of
such TEI Shareholder's TEI Common Stock for PGG Common Stock;
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(iv) The aggregate tax basis of PGG Common Stock received by a TEI
Shareholder in the TEI Merger will be the same as the aggregate tax basis
of the TEI Common Stock exchanged for the PGG Common Stock;
(v) The holding period of PGG Common Stock received by a TEI
Shareholder in exchange for TEI Common Stock pursuant to the TEI Merger
will include the holding period of the TEI Common Stock that was converted
into the PGG Common Stock; provided that such TEI Common Stock was held as
a capital asset at the Effective Time of the TEI Merger; and
(vi) No gain or loss will be recognized by the holders of options to
purchase TEI Common Stock upon the receipt of options to purchase PGG
Common Stock due to the conversion of their TEI options.
THE ACQUISITION TRANSACTIONS. Based on certain factual representations by
TEI, PGG, the Transaction Subs, the Combining Companies and certain of the TEI
Shareholders, the HWG Shareholders, the PMT Shareholders and the Spires
Transferors, as well as certain assumptions set forth in its opinion,
PricewaterhouseCoopers LLP has rendered the following opinions as to the
material federal income tax consequences of the Acquisition Transactions:
(i) Considered in combination with the TEI Merger, the Acquisition
Transactions will qualify as a transfer under Section 351 of the Code or as
a "reorganization" under Section 368 of the Code.
(ii) No income, gain or loss will be recognized by HWG, PMT, Spires,
Spires General Partners, SFF, SFP or the Transaction Subs as a result of
the Acquisition Transactions; and
(iii) No income, gain or loss will be recognized by any HWG
Shareholder, PMT Shareholder or Spires Transferors as a result of the
Acquisition Transactions and the aggregate basis and holding period of
their respective PGG Common Stock will be the same as the aggregate tax
basis and holding period of the respective HWG capital stock, PMT capital
stock, Spires General Partner capital stock, SFP capital stock, Spires
limited partnership interests and SFF limited partnership interests
exchanged for such PGG Common Stock.
BACKUP WITHHOLDING. Under the backup withholding rules, a TEI Shareholder,
HWG Shareholder, PMT Shareholder or Spires Transferor may be subject to backup
withholding at the rate of 31% with respect to dividends and proceeds of
redemption unless such shareholder or transferor (a) is a domestic corporation
or comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a correct taxpayer identification number, certifies
as to no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Any amount withheld
under these rules will be credited against the shareholder's or transferor's
federal income tax liability. PGG may require such shareholders or transferors
to establish an exemption from backup withholding or to make arrangements
satisfactory to PGG with respect to the payment of backup withholding. Any such
shareholder or transferor who does not provide PGG with his current taxpayer
identification number may be subject to penalties imposed by the IRS.
ACCOUNTING TREATMENT
The Transactions will be accounted for as "purchases" by TEI of PGG, HWG,
PMT and Spires under GAAP. Accordingly, results of operations of each of PGG,
HWG, PMT and Spires will be included in TEI's consolidated results of operations
from and after the Effective Time of the Transactions. For purposes of preparing
TEI's consolidated financial statements, TEI will establish a new accounting
basis for the assets and liabilities of those entities based upon the fair
market value thereof and TEI's purchase price, including the cost of the
acquisitions.
QUOTATION ON THE NASDAQ NATIONAL MARKET
PGG will apply to have the PGG Common Stock issuable in the Transactions
approved for quotation on the Nasdaq National Market. While the TEI Common Stock
is currently included for quotation on the Nasdaq National Market, because
consummation of the Transactions will cause a "change in control" of
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TEI under rules of The Nasdaq Stock Market, Inc. ("Nasdaq"), PGG must file an
original application with Nasdaq to approve such PGG Common Stock for quotation
on the Nasdaq National Market. The consummation of the Transactions is
conditioned upon the approval of such PGG shares for quotation on the Nasdaq
National Market.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of PGG Common Stock received by TEI Shareholders, the
shareholders of HWG, PMT and the Spires General Partners, and the Spires Limited
Partners, as applicable, in the Transactions will be freely transferable, except
for persons subject to the lock-up agreement being executed in connection with
the Agreement and shares of PGG Common Stock received by persons who are deemed
to be "affiliates" (as defined under the Securities Act) of TEI or any of the
Combining Companies prior to or upon consummation of the Transactions. Shares
received by affiliates may be resold by them only in transactions permitted by
the resale provisions of Rule 145 promulgated under the Securities Act (or Rule
144 or after registration in the case of such persons who become affiliates of
PGG upon consummation of the Transactions) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of TEI, the Combining
Companies or PGG generally include individuals or entities which control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal shareholders
of such party. The Agreement requires that certain affiliates of PGG (after
giving effect to the Agreement) execute a written agreement to the effect that
such affiliates will not offer or sell or otherwise dispose of any shares of PGG
Common Stock issued to them in or pursuant to the Transactions in violation of
the Securities Act or the rules and regulations promulgated by the SEC
thereunder. See "The Agreement -- Terms of the Agreement -- Conditions to the
Transactions and -- Lock-Up Agreements."
NO APPRAISAL RIGHTS
None of the TEI Shareholders, HWG Shareholders, PMT Shareholders or the
Spires Transferors will be afforded the opportunity to dissent from the
respective Transactions or receive an agreed or judicially appraised value for
their respective capital stock of TEI, HWG, PMT and the Spires General Partners
or respective limited partnership interests of Spires or SFF, as applicable.
Under the TBCA, no appraisal rights exist for shares designated as a national
market security on an interdealer quotation system of the NASD, provided, that
pursuant to the terms of the respective merger agreement such shareholder is not
required to accept for the exchange of such shares (i) consideration that is
different than the consideration to any other holder of shares of the same class
or series held by such shareholder and (ii) consideration other than shares of
the surviving corporation which are approved for quotation as a national market
security on an interdealer quotation system of the NASD. Accordingly, no
appraisal rights will exist with respect to the TEI Merger since both the TEI
Common Stock and the PGG Common Stock are or will be approved for quotation on
the Nasdaq National Market, and under the terms of the TEI Merger Agreement, TEI
Shareholders will receive in exchange for their shares of TEI Common Stock
solely shares of PGG Common Stock. In addition, under the TTCA, the TBCA, the
DGCL and the DLPA, no appraisal rights exist for a holder of equity securities
to the extent such holder votes to approve the transaction in which the exchange
of securities will occur. Thus, none of HWG Shareholders, the PMT Shareholders
or the Spires Transferors will have appraisal rights with respect to their
capital stock of HWG, PMT or the Spires General Partners or their limited
partnership interests of Spires or SFF, as applicable, since each shareholder or
partner of such entities has agreed to vote to approve the respective
Acquisition Transactions.
CONFLICTS OF INTEREST
Messrs. Donald R. Campbell, Tony Coelho, W. Blair Waltrip, James Greer and
T.G. Bogle, each of whom is currently a director of TEI, will become directors
of PGG on consummation of the Transactions. Messrs. Titus H. Harris, Jr., Robert
E. Garrison, II, Richard C. Webb, Stephen M. Reckling, Peter W. Badger and Sean
Dobson, each of whom is an executive officer and/or a director of one or more of
the Combining Companies, will be appointed directors of PGG on consummation of
the Transactions.
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On consummation of the Transactions, certain directors and officers of TEI
and the Combining Companies will become executive officers of PGG, including
Titus H. Harris, Jr. -- Chairman; Donald R. Campbell -- Vice Chairman; and
Robert E. Garrison, II -- President and Chief Executive Officer.
The Combining Companies have certain common directors, executive officers
and shareholders/partners. Robert E. Garrison, II serves as a director and
executive officer of each of HWG and PMT. Titus H. Harris, Jr. and Richard C.
Webb, each of whom is a director and executive officer of HWG, also serve as
directors of PMT. Shareholders who own capital stock in each of HWG and PMT
together own approximately 68.5% and 32.0% of the outstanding common stock of
HWG and PMT, respectively, including shares held by Messrs. Garrison, Harris and
Webb. Peter W. Badger beneficially owns approximately 21.8% and 6.2% of the
outstanding partnership interests and common stock of Spires and PMT,
respectively.
Based on their ownership of capital stock of TEI and the Combining
Companies, the following persons, each of whom is a current director and/or
executive officer of TEI or will become a director and/or executive officer of
PGG when the Transactions close, will beneficially own the following number of
shares of PGG Common Stock on closing of the Transactions: Titus H. Harris,
Jr. -- 165,056; Robert E. Garrison, II -- 305,488; Richard C. Webb -- 128,468;
Stephen M. Reckling -- 133,262; Peter W. Badger -- 332,906; Sean
Dobson -- 256,302; Donald R. Campbell -- 34,165; W. Blair Waltrip -- 369,792; R.
L. Waltrip -- 188,230; [TEI designee] -- ; T. G. Bogle -- 78,292; James
H. Greer -- 27,000; Tony Coelho -- 16,166; and T. Craig Benson -- 12,000. All of
the above shares are being received as a result of conversion of the respective
securities of TEI, each of the Combining Companies and the Spires General
Partners as contemplated under the Agreement and are on the same conversion
terms as other holders of these securities.
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THE TEI SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE TEI SPECIAL MEETING
At the TEI Special Meeting, holders of TEI Common Stock will be asked to
consider and vote to approve (i) the TEI Merger Agreement, (ii) the Share
Issuances and (iii) such other business as may properly be presented to the TEI
Special Meeting.
RECOMMENDATIONS OF THE TEI BOARD OF DIRECTORS
The board of directors of TEI has unanimously approved the TEI Merger
Agreement and the Share Issuances and unanimously recommends that the TEI
Shareholders vote FOR approval and adoption of the TEI Merger Agreement and the
Share Issuances. See "The Transactions -- Conflicts of Interest."
VOTING AT THE TEI SPECIAL MEETING; RECORD DATE
TEI has established November 6, 1998, as the record date for the
determination of the TEI Shareholders entitled to notice of and to vote at the
TEI Special Meeting. Only holders of record of TEI Common Stock at the close of
business on such date are entitled to notice of and to vote at the TEI Special
Meeting. On the record date for the TEI Special Meeting, there were shares
of TEI Common Stock outstanding. A majority of such shares, present in person or
represented by proxy, is necessary to constitute a quorum at the TEI Special
Meeting, and each issued and outstanding share of TEI Common Stock is entitled
to one vote with respect to the approval of the TEI Merger Agreement and the
Share Issuances. The affirmative vote of the holders of (i) at least two-thirds
of the outstanding shares of TEI Common Stock is required to adopt the TEI
Merger Agreement and (ii) at least a majority of the shares of TEI Common Stock
present, in person or by proxy, at the TEI Special Meeting is required to
approve the Share Issuances. TEI Shareholders holding an aggregate of 5,618,912
shares of TEI Common Stock, or 39.4% of all outstanding shares, have agreed in
writing to vote their respective shares in favor of the TEI Merger and the Share
Issuances. This agreement to vote their respective shares is irrevocable.
PROXIES
Shares of TEI Common Stock represented by a proxy in the form enclosed,
duly executed and returned to TEI prior to or at the TEI Special Meeting, and
not revoked, will be voted at the TEI Special Meeting in accordance with the
voting instructions contained therein. Shares of TEI Common Stock represented by
proxies for which no voting instructions are given will be voted FOR adoption of
the TEI Merger Agreement and the Share Issuances.
Holders of TEI Common Stock are requested to complete, sign, date and
return promptly the enclosed proxy card in the postage paid envelope provided
for this purpose in order to ensure that their shares are voted at the TEI
Special Meeting. A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by (i) the
execution and delivery of a later-dated proxy with respect to the same shares,
(ii) giving notice thereof in writing to the Secretary of TEI at any time prior
to the vote on the matters to be considered at the TEI Special Meeting or (iii)
attending the TEI Special Meeting and voting in person. Attendance at the TEI
Special Meeting by a TEI Shareholder who signed a proxy will not in itself
revoke the proxy.
If a holder of TEI Common Stock does not return a signed proxy card (and
does not vote in person at the TEI Special Meeting), his or her shares will not
be voted at the TEI Special Meeting. Such failure to vote will have the effect
of a vote against the approval of the TEI Merger Agreement and the Share
Issuances. Since approval of the TEI Merger Agreement requires the affirmative
vote of at least two-thirds of the outstanding shares of TEI Common Stock and
approval of the Share Issuances requires the affirmative vote of at least a
majority of the outstanding shares of TEI Common Stock present at the TEI
Special Meeting, abstentions and broker non-votes with respect to shares of TEI
Common Stock will also have the effect of voting against approval of the TEI
Merger Agreement and the Share Issuances.
The board of directors of TEI knows of no matters to be presented at the
TEI Special Meeting other than those described in this Proxy
Statement/Prospectus. If other matters are properly brought before the
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TEI Special Meeting, it is the intention of the persons named as proxies to vote
with respect to such matters in accordance with their judgment.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the TEI Special Meeting may be made in
person or by mail, telephone, telecopy or telegram. TEI will bear the cost of
the solicitation of proxies from the TEI Shareholders. Officers and employees of
TEI, who will receive no compensation in excess of their regular salaries for
their services, may solicit proxies from the TEI Shareholders in person or by
mail, telephone, telecopy or telegram. TEI has requested banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of TEI Common Stock held of
record by such entities, and TEI will, upon request of such holders, reimburse
reasonable forwarding expenses.
TEI SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
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<PAGE>
THE AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE
AGREEMENT, A COPY OF WHICH IS INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS AS
APPENDIX A. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE AGREEMENT, WHICH IS INCORPORATED HEREIN BY REFERENCE.
EFFECTIVE TIME OF THE TRANSACTIONS
The Agreement provides that the Mergers will be consummated at the same
time and will become effective at the date and time specified in the articles of
merger filed with respect to each of the TEI Merger, the HWG Merger and the PMT
Merger. The Spires Transaction will be consummated at the same time as the
effective time of the Mergers. It is anticipated that, if the TEI Merger
Agreement and the Share Issuances are approved by the TEI Shareholders and all
of the other conditions to the Transactions have been satisfied or waived, the
Effective Time will occur not later than the fifth business day after the TEI
Special Meeting.
MANNER AND BASIS OF CONVERTING SECURITIES
CONVERSION OF TEI COMMON STOCK. At the Effective Time, each share of
outstanding TEI Common Stock will be automatically converted into the right to
receive .25 of a share of PGG Common Stock. As a result of this conversion, the
former holders of TEI Common Stock will own approximately 50.02% of the
outstanding PGG Common Stock as of the Effective Time. As soon as practicable
after the Closing Date, PGG will cause the Exchange Agent to mail each record
holder of TEI Common Stock a letter of transmittal and other information
advising the holder of the consummation of the TEI Merger and for use in
exchanging certificates representing TEI Common Stock for PGG Common Stock.
After the Effective Time, there will be no further registration of transfers on
the stock transfer books of TEI with respect to TEI Common Stock outstanding
prior to the Effective Time. TEI SHAREHOLDERS SHOULD NOT SURRENDER THEIR TEI
COMMON STOCK CERTIFICATES FOR EXCHANGE UNTIL AFTER THE TEI MERGER CLOSES AND THE
SHAREHOLDER RECEIVES A LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
No fractional shares of PGG Common Stock will be issued in the TEI Merger.
Instead, the number of shares of PGG Common Stock to be exchanged for shares of
TEI Common Stock will be rounded upward to the nearest whole share. Until a
holder of TEI Common Stock surrenders his outstanding certificate to the
Exchange Agent, together with a letter of transmittal, the existing certificate
will be considered to represent the right to receive a certificate representing
PGG Common Stock to be issued in exchange for the certificate under the TEI
Merger.
Each outstanding option to purchase TEI Common Stock will be automatically
converted at the Effective Time into an option to purchase the number of shares
of PGG Common Stock equal to one-fourth the number of shares of TEI Common Stock
that could be purchased under the converted TEI option, at an exercise price per
share equal to four times the per share exercise price of the converted TEI
stock option. The term, vesting schedule and all other terms and conditions of
the replacement PGG options will be the same as the converted TEI options.
CONVERSION OF SECURITIES OF COMBINING COMPANIES AND RELATED ENTITIES. At
the Effective Time, all of the outstanding capital stock of HWG and PMT will be
automatically converted into the right to receive an aggregate of 2,375,000
shares of PGG Common Stock, with the former HWG Shareholders, as a group, and
PMT Shareholders, as a group, each being entitled to receive 1,187,500 shares of
PGG Common Stock. At the Effective Time, all of the outstanding capital stock of
the Spires General Partners and SFP and all of the outstanding limited
partnership interests of SFF and Spires (other than Spires limited partnership
interests held by SFF) will be exchanged for an aggregate of 1,187,500 shares of
PGG Common Stock pursuant to the Spires Transaction. At the time the Acquisition
Transactions close, the former HWG Shareholders, PMT Shareholders and Spires
Transferors will own in the aggregate approximately 49.98% of the PGG Common
Stock outstanding as of the Effective Time, or approximately 16.66% per
shareholder/partner group. Promptly after the Closing Date, PGG will cause the
Exchange Agent to deliver the PGG Common Stock to the former HWG Shareholders,
PMT Shareholders and Spires Transferors, since such shareholders and
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<PAGE>
transferors are required to provide to PGG prior to the Effective Time their
certificates representing their capital stock interest or partnership interest
in the respective Combining Company or related entity. After the Effective Time,
there will be no further registration of transfers on the stock/partnership
interest transfer books of the Combining Companies or related entity of equity
securities of any such companies or entities outstanding prior to the Effective
Time.
TERMS OF THE AGREEMENT
REPRESENTATIONS AND WARRANTIES. In the Agreement, the TEI Parties and
Non-TEI Parties each made various customary representations and warranties as
to, among other things, their respective corporate or partnership organizations
and compliance with law, their respective capitalizations, the authority and
enforceability of the Agreement, absence of conflicts, their respective
businesses and financial condition, required approvals or consents, financial
statements, litigation, material contracts, compliance with broker-dealer
regulatory requirements or the TTCA, as applicable, employee benefit matters,
labor matters, tax matters and environmental matters. Representations and
warranties made by the Spires Passive Investor Parties are based solely on their
knowledge. The foregoing representations and warranties of each of the TEI
Parties and the Non-TEI Parties will expire upon consummation of the
Transactions.
The HWG Shareholders, PMT Shareholders and Spires Transferors have made
additional customary private company representations as to, among other things,
the ownership and unencumbered status of the respective equity securities of the
Combining Companies and related entities, authority and enforceability of the
Agreement, approval of the respective Acquisition Transactions, absence of
conflicts and litigation, absence or waiver of preemptive rights and interests
in related businesses. These shareholders and transferors also agreed to vote
their respective shares and partnership interests in the Combining Companies and
the related entities, as applicable, in favor of the Transactions on which their
respective equity interests are entitled to vote (collectively with the
representations and warranties described in the preceding sentence, the
"Transferor Representations"). PGG, TEI and the HWG Shareholders, PMT
Shareholders and Spires Transferors made additional representations and
warranties as to matters relevant to the anticipated treatment of the
Transactions as a "transfer" within the meaning of Section 351 of the Code
(collectively, the "Transaction Tax Representations"). OVH, the shareholders
of the Spires General Partners, SFP and SFF also made certain representations
and warranties relating to the Spires General Partners, SFF and SFP including,
among, other things, corporate or partnership organization, absence of
conflicts, litigation, capitalization and the absence of unrelated assets and
liabilities of the Spires General Partners, SFP and SFF, as applicable (subject
to certain limited exceptions). The foregoing representations and warranties
will survive without limitation the consummation of the Transactions.
CONDITIONS TO THE TRANSACTIONS. The obligations of the Parties to
consummate the Transactions are subject to satisfaction of certain conditions or
the waiver thereof on or prior to the Closing Date, including (i) the
representations and warranties of the TEI Parties and the Non-TEI Parties must
be true in all material respects as of the Closing Date, and no order entered or
law enacted by any governmental entity which would prevent consummation of any
of the Transactions, and the TEI Parties and the Non-TEI Parties must have
complied in all material respects with their respective covenants set forth in
the Agreement; (ii) no order entered or law enacted by any governmental entity
which would prevent consummation of any of the Transactions, and no action or
proceeding may be pending before any court or other governmental entity which
would prevent or materially delay or restructure any of the Transactions; (iii)
the Texas Banking Commissioner must have approved the PMT Merger and the
acquisition of control of PMT by PGG in accordance with the TTCA; (iv) all
consents, authorizations, filings or exemptions required under all applicable
broker-dealer regulatory requirements (as defined in the Agreement) with respect
to the HWG Merger and the Spires Transaction, respectively, must have been
obtained; (v) the requisite TEI Shareholder approval of the TEI Merger Agreement
and the Share Issuances must have been obtained; (vi) the requisite approval of
the HWG Shareholders, the PMT Shareholders, and the Spires Partners with regard
to the HWG Merger, the PMT Merger and the Spires Transaction, respectively, must
have been obtained; (vii) the absence of any event which has or could reasonably
be expected to have a material adverse effect (as defined in the Agreement) on
TEI, its subsidiaries or any Combining Company; (viii) TEI and the
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<PAGE>
Combining Companies must have received opinions of counsel covering such matters
as are customarily covered in opinions delivered in transactions of the type
contemplated by the Agreement, including tax opinions delivered by counsel to
TEI and independent public accountants; (ix) a proxy/prospectus must have been
declared effective under the Securities Act and the shares of PGG Common Stock
issued in connection with the Transactions must have become eligible for
quotation on the Nasdaq National Market; (x) as of the end of the last calendar
month ended at least 30 days before the Closing Date, the consolidated adjusted
current assets, the consolidated net working capital and the consolidated
adjusted net worth of TEI and its consolidated subsidiaries (computed in
accordance with the Agreement) must equal or exceed $29.0 million, $27.6 million
and $26.6 million, respectively; (xi) at the Closing Date, the cash, cash
equivalents and short-term investments of TEI and its consolidated subsidiaries,
plus all expenses of the Transactions paid after June 30, 1998 and before the
Closing Date, must equal or exceed $27.0 million; (xii) all outstanding options
to purchase shares of capital stock of HWG or PMT must be exercised prior to the
Closing; (xiii) the TEI Parties and each Combining Company must have received
from each of the HWG Shareholders, PMT Shareholders and Spires Transferors a
release in the form attached to the Agreement; and (xiv) all persons who are
"affiliates" of each Combining Company as defined under the Securities Act
and/or Exchange Act must have executed and delivered to the TEI Parties an
affiliates' letter in the form attached to the Agreement.
OBLIGATIONS OF THE TEI PARTIES AND COMBINING COMPANIES PENDING
CLOSING. Each of the TEI Parties and the Combining Companies has agreed that
for the period between October 2, 1998 to the Closing Date, it will (i) continue
its present business in the usual and ordinary manner so as to preserve its
present business organization; (ii) permit the other party to inspect its
records during normal business hours for the purpose of making such
investigation as they deem necessary; (iii) deliver to the other party certain
monthly and quarterly supplemental financial statements through the Closing
Date; (iv) promptly notify the other party of any unexpected emergency or
material change in the normal course of business, or any event or significant
development in any regulatory or governmental proceeding or investigation which
would make any representation or warranty untrue with respect to such party; (v)
maintain confidentially all information and data furnished by the other party
under the Agreement and return such information to the other party as soon as
practicable after any termination of the Agreement; (vi) use its best efforts to
obtain all required third party consents and approvals, which are not otherwise
conditions to Closing and (vii) use its best efforts to perform all of its
conditions and obligations under the Agreement so as to consummate the
Transactions.
TEI and each of the Combining Companies have also agreed that for the
period between October 2, 1998 to the Closing Date it will not (i) amend its
articles of incorporation, bylaws, certificate of limited partnership, agreement
of limited partnership or other material organizational documents; (ii) issue or
sell, or enter into any contract to issue or sell, any shares of its capital
stock or any partnership interests or in any way split, combine or reclassify
any shares of its capital stock or partnership interests, except for shares of
common stock of HWG or PMT issued in connection with the exercise of outstanding
stock options; (iii) declare, set aside or pay any dividend or other
distributions on shares of its capital stock or partnership interests, subject
to exceptions for PMT and Spires to the extent such distributions do not reduce
shareholders' equity and partners' capital to less than approximately $2.9
million and $1.7 million, respectively; (iv) incur, directly or indirectly,
indebtedness for borrowed money, subject to limited exceptions; (v) increase the
compensation levels of its officers or management level employees or grant any
salary, other than merit increases in the ordinary course; (vi) enter into lease
agreements or other long-term commitments, subject to limited exceptions; (vii)
acquire or negotiate for the acquisition of any business; or (viii) sell or
agree to sell all or substantially all, or any material portion, of its assets,
(other than inventory sold in the ordinary course) or merge or consolidate with
any other entity.
TEI has also agreed that for the period between October 2, 1998 to the
Closing Date to: (i) prepare and file with the SEC a proxy statement/prospectus
under the Securities Act for purposes of registering the shares of PGG Common
Stock being issued in the Transactions and (ii) lend up to $825,000 to holders
of options to purchase shares of PMT common stock for the purpose of enabling
such holders to exercise their respective PMT options prior to the Closing Date.
Each of the Combining Companies has also agreed for
41
<PAGE>
the period between October 2, 1998 and the Closing Date not to: (i) enter into,
or agree to enter into, an agreement granting any preferential right to purchase
any of its assets; (ii) pay any obligation or liability other than current
liabilities; (iii) enter into any collective bargaining agreement; or (iv) make
any capital expenditures in excess of $50,000 in the aggregate.
OTHER AGREEMENTS. TEI and each of the Combining Companies have agreed to
(i) call a special meeting of its shareholders or partners, as the case may be,
as soon as practicable after the effectiveness of the registration statement
filed in connection with the Transactions and (ii) hold such meeting of
shareholders or partners, as the case may be (A) within 40 days following the
mailing of the definitive proxy statement/prospectus, in the case of TEI and (B)
within 30 days following the effectiveness of the registration statement, in the
case of the Combining Companies. HWG agreed, as soon as practicable after the
execution of the Agreement, to request the consent of its noninvestment company
advisory clients with respect to the assignment of their investment advisory
related agreements (as defined in the Agreement) in connection with the HWG
Merger and in accordance with the Investment Advisers Act. TEI and PMT have
agreed, as soon as practicable after the execution of the Agreement, to (i)
prepare and file an application in accordance with the TTCA with the Texas
Banking Commissioner seeking its approval of the PMT Merger and the acquisition
of control of PMT by PGG and (ii) cooperate in connection with any further
requests by the Texas Banking Commissioner in the processing of such
application. Each TEI Party, each Combining Company and each Spires General
Partner has agreed to release each shareholder of HWG, PMT and the Spires
General Partners and each Spires limited partner from any claims or liabilities
that any of them may have against such parties prior to the Effective Time or
which are based on an act or omission occurring prior to the Effective Time,
except with respect to their respective obligations under the Agreement.
PRE-CLOSING DISTRIBUTIONS AND REDEMPTIONS BY SPIRES AFFILIATED
ENTITIES. Immediately before the SFP Redemption (as defined below) and the
Effective Time, SFF will distribute to SFP and OVH all cash and cash equivalents
then owned and held by SFF.
Immediately before the Effective Time, SFP shall purchase and redeem from
the SFP Shareholders, pro rata, at an aggregate redemption price equal to cash
then owned and held by SFP, a portion of the currently outstanding SFP shares
(the "SFP Redemption"). In connection with the SFP Redemption, the SFP
Shareholders have agreed to deposit (the "Escrow Deposit") an amount of cash
equal to 110% of the estimated SFP closing date federal income tax liability
(less any estimated tax payments) (the "Estimated SFP Tax Liability") for the
tax period beginning January 1, 1998 and ending on the Closing Date (the "SFP
Short Tax Period"), as determined jointly by PricewaterhouseCoopers LLP and
Margolis Phipps & Wright P.C. The Escrow Deposit will be disbursed to PGG to the
extent necessary to pay the actual federal income tax liability for the SFP
Short Tax Period, with the excess, if any, to be disbursed to the SFP
Shareholder representative.
LOCK-UP AGREEMENTS. At the Effective Time, the HWG Shareholders, PMT
Shareholders, certain Spires Transferors and TEI Shareholders comprising the
Waltrip Group Shareholders (as defined in the Agreement), who on closing of the
Transactions will be (i) an officer or director of PGG, (ii) a holder of 2.5% or
more of the total PGG Common Stock outstanding as of the Effective Time or (iii)
a member of a group (as defined in Rule 13d-1 promulgated under the Exchange
Act) which holds 10% or more of the PGG Common Stock outstanding as of the
Effective Time, is required to deliver to PGG a letter under which such persons
agree for a period of one year not to sell, offer to sell, grant any option or
otherwise transfer any shares of PGG Common Stock or securities convertible into
or exercisable for shares of PGG Common Stock. For purposes of the Agreement,
the "Waltrip Group Shareholders" means the following TEI Shareholders: R. L.
Waltrip, T. Craig Benson, W. Blair Waltrip, Holly Waltrip Benson, Robert L.
Waltrip, Jr., the William Blair Waltrip Trust, the William Blair Waltrip
Children's Trust of 1985, the Robert L. Waltrip, Jr. Trust, the Robert L.
Waltrip 1992 Trust #1 and the Waltrip 1987 Grandchildren's Trust.
RULE 144 REPORTS. For so long as any former HWG Shareholder, PMT
Shareholder or Spires Transferor remains subject to Rule 144 or 145 promulgated
under the Securities Act with respect to such shareholder's or transferor's sale
of shares of PGG Common Stock, PGG has agreed to make and keep
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<PAGE>
current public information available within the meaning of Rule 144(c) and
furnish a written statement to such effect to the extent reasonably requested by
such shareholder or partner.
TERMINATION. The Agreement may be terminated at any time prior to Closing
Date by: (i) mutual consent of the boards of directors of TEI and each Combining
Company; (ii) the board of directors of TEI or any Combining Company, or the
Spires General Partners, if the Transactions are not consummated by January 31,
1999 (or such later date as mutually agreed by the board of directors of TEI and
each Combining Company), other than as a result of a breach of the Agreement by
the terminating party; (iii) by either the TEI Parties or the Non-TEI Parties,
if the TEI Shareholders fail to approve the TEI Merger Agreement and the Share
Issuances at the TEI Special Meeting; or (iv) by the board of directors of any
Combining Company, or the Spires General Partners, if the board of directors of
TEI (A) withdraws, or modifies in a manner adverse to the Non-TEI Parties, its
recommendation for approval of the Transactions or (B) approves or recommends an
Alternative Transaction (as defined in the Agreement). For purposes of the
Agreement, an "Alternative Transaction" generally means any third party
proposal for a merger, consolidation, acquisition, business combination, sale of
all or a substantial portion of the assets or other reorganization involving TEI
or any of its subsidiaries, or any proposal or offer for the acquisition of a
substantial equity position in TEI or any of its subsidiaries, other than the
Transactions.
INDEMNIFICATION. The Agreement provides that the TEI Parties will
indemnify each Non-TEI Party from all losses, expenses (including reasonable
attorneys' fees and expenses) or liabilities, arising out of (i) any breach or
default in the performance by any TEI Party of any covenant or agreement of such
TEI Party contained in the Agreement and (ii) any breach by such TEI Party
relating to the Transaction Tax Representations contained in Article VIII of the
Agreement. The Agreement also provides that the HWG Shareholders, PMT
Shareholders and Spires Transferors will severally indemnify the TEI Parties,
the Combining Companies and each other shareholder or transferor of the
Combining Companies or the related Spires entities from all losses, expenses
(including reasonable attorneys' fees and expenses) or liabilities arising out
of (i) any breach or default in the performance by such shareholder or
transferor of any covenant or agreement of such shareholder or transferor
contained in the Agreement, (ii) any breach of representation or warranty
relating to the Transferor Representations contained in Article VII of the
Agreement or (iii) any breach by such shareholder or transferor relating to the
Transaction Tax Representations contained in Article VIII of the Agreement. The
Agreement further provides that the shareholders of the Spires General Partners
will jointly and severally indemnify the TEI Parties, the Combining Companies
and each other shareholder or transferor of the Combining Companies and the
related Spires entities from all losses and expenses (including reasonable
attorneys' fees and expenses) or liabilities arising out of any income tax
liability of the Spires General Partner.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined balance sheet as of
June 30, 1998 gives effect to the Transactions as if they had occurred on that
date. The following unaudited pro forma condensed combined statements of
operations for the six months ended June 30, 1998 and for the year ended
December 31, 1997 give effect to the Transactions as if they had occurred on
January 1, 1997. The unaudited pro forma condensed combined financial statements
have been derived from and should be read in connection with the respective
unaudited condensed financial statements of TEI, HWG, PMT and Spires for the six
months ended June 30, 1998 and the respective audited historical financial
statements of TEI, HWG, PMT and Spires for the year ended December 31, 1997
included elsewhere in this Proxy Statement/Prospectus.
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 TEI
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 PGG's financial position or results of operations
would have been had the Transactions occurred on the dates indicated or to
project PGG's 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
consummation of the Transactions.
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<PAGE>
TEI AND THE COMBINING COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
TEI HWG PMT SPIRES ADJUSTMENTS PRO FORMA
--------- ---------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ 13,192 1,387 $ 93 $ 164 $ 484 A
(326)B
(1,968)B
(1,100)D $ 11,926
Deposits held by clearing brokers.... -- -- -- 1,100 -- 1,100
Investment securities................ 14,456 184 2,960 -- -- 17,600
Securities inventory................. -- -- -- 22,491 -- 22,491
Accounts and commissions receivable,
net................................ 926 104 36 701 -- 1,767
Notes receivable..................... -- -- -- -- 1,259 A
(1,259)F --
Due from brokers/dealers............. -- 237 -- 5,016 -- 5,253
Income tax receivable................ 1,512 119 -- -- -- 1,631
Property and equipment, net.......... 4,932 89 115 353 -- 5,489
Intangible assets, net............... 2,185 -- -- -- 19,908 D 22,093
Other assets......................... 1,863 36 140 720 -- 2,759
--------- ---------- --------- ------- ----------- ---------
Total assets............... $ 39,066 $ 2,156 $ 3,344 $30,545 $16,998 $ 92,109
========= ========== ========= ======= =========== =========
Accounts payable and accrued
liabilities........................ $ 1,399 $ 207 $ 25 $ 397 $-- $ 2,028
Due to clearing broker/dealer........ -- -- -- 21,444 -- 21,444
Securities sold not yet purchased.... -- 11 -- 5,000 -- 5,011
--------- ---------- --------- ------- ----------- ---------
Total liabilities.......... 1,399 218 25 26,841 -- 28,483
--------- ---------- --------- ------- ----------- ---------
Shareholders' equity:................
Common stock.................... 152 26 150 -- 55 A
(231)E
36 D
(117)C 71
Additional paid-in capital...... 33,135 3,928 3,586 -- 1,688 A
(9,202)E
27,182 D
(4,071)C 56,246
Notes receivable for shares
issued........................ -- -- -- -- (1,259)F (1,259)
Unearned compensation........... -- (76) -- -- 76 E --
Retained earnings (deficit)..... 8,568 (1,940) (518) -- 2,458 E 8,568
Partners' capital............... -- -- -- 3,704 (3,704)E --
Unrealized gain on securities
available for sale............ -- -- 101 -- (101)E --
Treasury stock.................. (4,188) -- -- -- 4,188 C --
--------- ---------- --------- ------- ----------- ---------
Total shareholders'
equity.................. 37,667 1,938 3,319 3,704 16,998 63,626
--------- ---------- --------- ------- ----------- ---------
Total liabilities and
shareholders' equity.... $ 39,066 $ 2,156 $ 3,344 $30,545 $16,998 $ 92,109
========= ========== ========= ======= =========== =========
</TABLE>
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<PAGE>
TEI AND THE COMBINING COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TEI HWG PMT SPIRES ADJUSTMENTS PRO FORMA
------ ------ ----- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Liquid waste revenues................ $2,726 $ -- $-- $ -- $-- $ 2,726
Commissions.......................... -- 4,151 -- 6,692 -- 10,843
Investment banking................... -- 2,544 -- -- -- 2,544
Fees and services.................... -- -- 1,078 -- -- 1,078
Interest and dividends............... 1,492 57 98 800 -- 2,447
Securities gains and other........... 45 290 233 749 -- 1,317
------ ------ ----- ------ ----------- ---------
Total revenues.................. 4,263 7,042 1,409 8,241 -- 20,955
------ ------ ----- ------ ----------- ---------
Liquid waste operating expenses...... 2,190 -- -- -- -- 2,190
Compensation and benefits............ 956 5,096 667 3,392 824 I 10,935
Brokerage and clearance.............. -- 567 -- 222 -- 789
Interest expense..................... 8 38 -- 615 -- 661
Other general and administrative..... 1,669 898 358 1,827 796 H 5,548
------ ------ ----- ------ ----------- ---------
Total expenses.................. 4,823 6,599 1,025 6,056 1,620 20,123
------ ------ ----- ------ ----------- ---------
Income (loss) before income taxes.... (560) 443 384 2,185 (1,620) 832
Income tax provision (benefit)....... (160) 142 -- -- 668 J 650
------ ------ ----- ------ ----------- ---------
Income (loss) from continuing
operations......................... $ (400) $ 301 $ 384 $2,185 $(2,288) $ 182
====== ====== ===== ====== =========== =========
Basic earnings (loss) per share from
continuing operations.............. $(0.03) $ 0.03
====== =========
Weighted average shares
outstanding........................ 14,244 (7,120)G 7,124
====== =========== =========
Diluted earnings (loss) per share
from continuing operations......... $(0.03) $ 0.03
====== =========
Weighted average shares
outstanding........................ 14,244 (7,120)G 7,124
====== =========== =========
</TABLE>
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TEI AND THE COMBINING COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TEI HWG PMT SPIRES ADJUSTMENTS PRO FORMA
--------- --------- ----- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Liquid waste revenues................ $ 1,556 $ -- $-- $ -- $ -- $ 1,556
Commissions.......................... -- 1,717 -- 3,337 -- 5,054
Investment banking................... -- 1,202 -- -- -- 1,202
Fees and services.................... -- -- 665 -- -- 665
Interest and dividends............... 769 61 43 523 -- 1,396
Securities gains and other........... -- 177 188 356 -- 721
--------- --------- ----- --------- ------------ ---------
Total revenues.................. 2,325 3,157 896 4,216 -- 10,594
--------- --------- ----- --------- ------------ ---------
Liquid waste operating expenses...... 975 -- -- -- -- 975
Compensation and benefits............ 546 2,177 368 1,754 422 I 5,267
Brokerage and clearance.............. -- 264 -- 123 -- 387
Interest expense..................... -- 1 -- 538 -- 539
Other general and administrative..... 817 540 202 1,037 398 H 2,994
--------- --------- ----- --------- ------------ ---------
Total expenses.................. 2,338 2,982 570 3,452 820 10,162
--------- --------- ----- --------- ------------ ---------
Income (loss) before income taxes.... (13) 175 326 764 (820) 432
Income tax provision (benefit)....... (3) 60 -- -- 252 J 309
--------- --------- ----- --------- ------------ ---------
Income (loss) from continuing
operations......................... $ (10) $ 115 $ 326 $ 764 $ (1,072) $ 123
========= ========= ===== ========= ============ =========
Basic earnings (loss) per share from
continuing operations.............. $ 0.00 $ 0.02
========= =========
Weighted average shares
outstanding........................ 14,251 (7,126)G 7,125
========= ============ =========
Diluted earnings (loss) per share
from continuing operations......... $ 0.00 $ 0.02
========= =========
Weighted average shares
outstanding........................ 14,251 (7,126)G 7,125
========= ============ =========
</TABLE>
47
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
A. To reflect the increase in PMT and HWG shareholders' equity for the exercise
of 52,358 PMT warrants and 2,604 HWG options whereby 33,000 PMT shares and
2,604 HWG shares will be issued for notes receivable of $825 and $434,
respectively, and 19,358 PMT shares will be issued for cash of $484.
B. To reflect the distribution of PMT fiscal year 1998 earnings of $326 and the
distribution of Spires partners' capital of $1,968 so that ending partners'
capital is $1,736 in accordance with the terms of the Transactions.
C. To reflect the change in common stock, additional paid-in capital, and
treasury stock as a result of 1 for .25 exchange and shares issued in the
Transactions.
D. To record the purchase of the Combining Companies based on the issuance of
3,562,500 shares at $7.64 per share, plus $1,100,000 of estimated
transaction costs.
Purchase price $ 28,318
Less identifiable net assets
acquired 8,410
---------
Goodwill $ 19,908
=========
E. To eliminate the adjusted historical equity accounts of the Combining
Companies.
HWG historical equity $ 1,938
Shares issued -- Note A 434
PMT historical equity 3,319
Less distribution -- Note B (326)
Shares issued -- Note A 1,309
Spires historical equity 3,704
Less distribution -- Note B (1,968)
---------
Adjusted historical equity $ 8,410
=========
F. To reclassify notes receivable for shares issued as a reduction of equity.
G. To adjust the weighted average shares for shares issued in the Transactions:
6/30/98 12/31/97
- -------------- --------------
3,562,753 3,561,003 PGG shares exchanged for TEI shares
PGG shares issued to acquire the
3,562,500 3,562,500 Combining Companies
- -------------- --------------
7,125,253 7,123,503 Pro forma weighted average shares
(14,251,012) (14,244,012) TEI weighted average shares
(7,125,759) (7,120,509) Reduction in weighted average shares
============== ==============
48
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS -- CONTINUED
H. To record amortization of goodwill over 25 years on a straight-line basis.
I. To record the increase in compensation and benefits of Spires based upon
contracts whereby certain employees of Spires will receive total
compensation equal to 10% of Spires revenues.
J. To record the provision for income taxes at 37%:
6/30/98 12/31/97
--------- ---------
Historical pretax income of the Combining Companies $ 1,265 $ 3,012
Less additional Spires compensation and benefits (422) (824)
--------- ---------
843 2,188
37% 37%
--------- ---------
312 810
Less historical income tax provision of the Combining
Companies 60 142
--------- ---------
Adjustment $ 252 $ 668
========= =========
49
<PAGE>
BUSINESS OF TEI
GENERAL
TEI is a holding company that conducts business through its wholly owned
subsidiaries. TEI was incorporated in the State of Texas in June 1989, for the
purpose of acquiring all of the outstanding stock of Tanknology Corporation
International ("Tanknology") in a reorganization in connection with a private
offering of securities by TEI. During 1995, 1996 and 1997, TEI disposed of all
of its operations, except for ERRI, which it acquired during 1994. ERRI provides
liquid waste management services including collection, processing, recovery and
disposal services. TEI's operations focus primarily on commercial and industrial
wastewater treatment, waste oil recycling and handling of other non-hazardous
fluid wastes for owners and operators of underground storage tanks ("USTs"),
aboveground storage tanks ("ASTs") and other commercial and industrial waste
generators. These operations are conducted principally in Charlotte, North
Carolina and surrounding areas.
The operations discontinued by TEI include: (i) Tanknology, a provider of
leak detection services for USTs and ASTs using the VacuTectT process, a
patented nonvolumetric method owned by Tanknology (Tanknology was incorporated
in 1988 and sold in October 1996); (ii) Tanknology Canada (1988), Inc.,
("Tanknology Canada"), a provider of leak detection services in Canada
(Tanknology Canada was incorporated in 1988 and sold in October 1996); (iii)
USTMAN Industries, Inc. ("USTMAN"), a provider of statistical inventory
reconciliation ("SIR") leak detection services to owners and operators of USTs
(USTMAN was purchased in 1992 and sold in October 1996); (iv) Mankoff Equipment,
Inc. ("Mankoff"), a provider of remediation services, tank upgrades, and other
environmental products and services to owners and operators of USTs and ASTs
(Mankoff was acquired in 1993 and sold in December 1995); (v) Engineered
Systems, Inc. ("ESI"), a designer and manufacturer of automated systems and
products for petroleum-oriented companies for use in bulk liquid loading
terminals, fuel management, pipeline supervision, environmental data gathering,
and access control (ESI was purchased in 1993 and disposed of in December 1997).
Tanknology, including its cathodic protection division d/b/a Tanknology Cathodic
Protection, USTMAN, and Tanknology Canada are known collectively as the Tank
Testing Group. As a result of these dispositions, TEI had cash and liquid
investments of approximately $28.3 million and $27.6 million at December 31,
1997 and June 30, 1998, respectively.
OPERATIONS AND SERVICES PROVIDED
TEI collects, processes and recovers liquid waste, such as industrial and
commercial wastewater, petroleum fuels and other non-hazardous fluids. During
1997, TEI served over 600 customers, principally owners and operators of ASTs,
USTs and other storage facilities located in Charlotte, North Carolina and
surrounding areas. In addition to the collection of fees relating to the liquid
waste management services, TEI derives revenues from the sale of by-products,
consisting primarily of sales of industrial low grade fuels to owners and
operators of manufacturing facilities.
Industrial and commercial wastewaters, such as hydrocarbon contaminated
water and landfill leachate, used oil and non-hazardous solids and sludge are
transported by TEI and third parties in vacuum trucks, trailers and other
transportable containers to TEI's processing facility located in the Charlotte,
North Carolina area. Using a variety of processing techniques, the wastewater is
broken down into constituent components. The water extracted from the liquid is
processed to satisfy local quality standard requirements and then discharged
into the public-operated treatment works ("POTW"), and solid materials, if
any, are dried and disposed of in a solid waste landfill.
TEI also provides waste-oil recycling services. Contaminated or
off-specification fuel oils and used oil are transported to the North Carolina
facility by TEI and third parties in vacuum trucks, trailers and other
transportable oil containers. Using various separation techniques, TEI processes
those materials to produce low-grade fuel oil which is resold to asphalt plants,
fuel blending companies and various industrial facilities, such as concrete and
textile plants.
50
<PAGE>
MARKETING AND CONTRACTS
TEI's services are marketed through a sales force comprised of two
commissioned independent sales agents and three in-house sales managers, as of
June 30, 1998. The in-house personnel are responsible both for maintaining
existing client relationships and identifying new clients, projects and markets.
TEI's marketing efforts include advertisements in trade publications, trade-show
presentations and personal sales calls targeted primarily to wastewater and
waste oil generators.
TEI performs its liquid waste management services under a variety of
arrangements, including standard written service orders, specified contract and
long-term negotiated agreements. In accordance with industry practices, most of
TEI's contracts are subject to termination at the discretion of the customer
with TEI entitled to reimbursement of costs and payment of fees earned through
the date of termination. TEI's contracts also provide for losses and expenses
incurred by the customer as a result of TEI's negligence or failure to dispose
of the customer's liquid waste in accordance with applicable federal, state and
local laws, rules and regulations. See "-- Risk Management; Litigation."
CUSTOMERS
During 1997 and 1996, TEI provided liquid waste management services to
approximately 635 and 700 customers, respectively. TEI's customer base covers a
broad range of industries, and includes many repeat customers. During 1997,
Universal Refining, Chem-Group and Holston Companies accounted for approximately
15.8%, 13.4% and 12.3%, respectively, of TEI's total revenues from continuing
operations. Also, during 1996, Holston Companies accounted for approximately
12.0% of TEI's total revenues from continuing operations. The loss of any of the
foregoing customers would have a material adverse effect on TEI's businesses and
operating results.
COMPETITION
The liquid waste industry is highly fragmented and very competitive.
Competitors compete primarily on the basis of proximity to collection
operations, tipping fees charged, quality of service and plant capacities. TEI
operates primarily within the 150-mile radius of Charlotte, North Carolina and
competes with other liquid waste processing facilities and alternative methods
of disposal of certain waste streams provided by area landfills, as well as
alternative methods of illegal disposal. In addition, competitive products and
services will continue to be successfully developed and marketed by others. The
market for the various by-products recovered by TEI for sale to third parties is
also competitive and is served by several large companies and a number of
smaller, owner-operated companies. TEI also faces competition from customers who
seek to enhance and develop their own methods of disposal instead of using the
services of third parties. Certain competitors offer a broader range of
services, have greater name recognition, may be able to offer services or
products at a lower cost and have greater financial and other resources than
TEI. In addition, as the liquid waste business matures, competition can be
expected to increase.
TEI believes that there are certain barriers to entry in the liquid waste
industry. These barriers include formalized procedures of customers' acceptance,
licenses, permits, and the need for specially-equipped facilities and trained
personnel.
PROPERTIES
TEI leases its principal executive offices in Houston, Texas, consisting of
approximately 3,610 square feet. This lease expires in November 1998 and is on
rental and other terms that TEI believes are commercially reasonable. ERRI owns
the real property located in Charlotte, North Carolina, consisting of an
approximately six-acre tract and related office space and a processing plant
constructed in 1997 aggregating approximately 14,800 square feet. TEI believes
that the existing facilities are well-maintained and adequate for TEI's existing
and planned operations.
51
<PAGE>
EMPLOYEES
At June 30, 1998, TEI had approximately 59 employees. Neither TEI nor any
of its subsidiaries is a party to any collective bargaining agreement covering
employees. TEI believes its relationships with its employees are satisfactory.
GOVERNMENT REGULATION
TEI's business operations are affected, directly and indirectly, by
governmental regulations, including various federal, state and local pollution
control and health and safety programs that are administered and enforced by
regulatory agencies. These programs are applicable or potentially applicable to
one or more of TEI's existing operations. TEI believes that it is not presently
required to make material capital expenditures to remain in compliance with
federal, state and local laws and regulations relating to the protection of the
environment.
THE CLEAN WATER ACT. TEI treats and discharges wastewaters at its North
Carolina liquid waste facility. These activities are subject to the requirements
of the Clean Water Act and comparable state statues and federal and state
enforcement of these regulations. The Clean Water Act regulates the discharge of
pollutants into waters of the United States. The Clean Water Act establishes a
system of standards, permits and enforcement procedures for the discharge of
pollutants from industrial and municipal wastewater sources. The law sets
treatment standards for industries and wastewater treatment plants and provides
federal grants to assist municipalities in complying with the new standards. In
addition to requiring permits for industrial and municipal discharges directly
into the waters of the United States, the Clean Water Act also requires
pretreatment of industrial wastewater before discharge into municipal systems.
The Clean Water Act gives the Environmental Protection Agency (the "EPA") the
authority to set pretreatment lists for direct and indirect industrial
discharges. In addition, the Clean Water Act prohibits certain discharges of
oil, authorizes the federal government to remove or arrange for removal of such
oil and requires the adoption of the National Contingency Plan to cover removal
of such materials. Under the Clean Water Act, the owner or operator of a vessel
or facility may be liable for penalties and costs incurred by the federal
government in responding to a discharge of oil.
RCRA. RCRA affects TEI's operations at its North Carolina liquid waste
facility by prohibiting, among other things, the disposal of certain liquid
wastes in landfills. This prohibition increases demand for TEI services provided
through ERRI.
RCRA is also the principal federal statute governing hazardous and solid
waste generation, treatment, storage and disposal. RCRA and state hazardous
waste management programs govern the handling and disposal of "hazardous
waste." The EPA has issued regulations pursuant to RCRA, and states have
promulgated regulations under comparable state statutes, that govern hazardous
waste generators, transporters and owners and operators of hazardous waste
treatment, storage or disposal facilities. TEI does not accept, nor does the
Company intend to accept in the future, hazardous waste at any of its
facilities, and thus, TEI's activities are not subject to the requirements
adopted under Subtitle C of RCRA.
CERCLA. CERCLA provides for immediate response and removal actions
coordinated by the U.S. EPA for releases of hazardous substances into the
environment and authorizes the government, or private parties, to respond to the
release or threatened release of hazardous substances. The government may also
order persons responsible for the release to perform any necessary cleanup.
Liability extends to the present owners and operators of waste disposal
facilities from which a release occurs, persons who owned or operated such
facilities at the time the hazardous substances were released, persons who
arranged for disposal or treatment of hazardous substances and waste
transporters who selected such facilities for treatment or disposal of hazardous
substances. CERCLA has been interpreted to create strict, joint and several
liability of the cost of removal and remediation, other necessary response costs
and damages for injury to natural resources.
Despite that TEI does not accept, nor does it intend to accept in the
future, hazardous waste at any of its facilities, if TEI's operations resulted
in the release or improper disposal of hazardous substances, TEI could incur
CERCLA liability. Although TEI is not aware of any such event, TEI may have
disposed or
52
<PAGE>
arranged for disposal of hazardous substances that could result in the
imposition of CERCLA liability on the Company in the future. In addition, the
Company would incur CERCLA liability if any hazardous substances at ERRI's
facilities leached down into groundwater.
TEI is not aware of any claims against it or any of its subsidiaries that
are based on CERCLA. Nonetheless, the identification of one or more sites at
which cleanup action is required could subject the Company to liabilities which
could have a material adverse effect on its business, financial condition and
results of operations.
THE CLEAN AIR ACT. The Clean Air Act provides for federal, state and local
regulation of emissions of air pollutants into the atmosphere. Any modification
or construction of a facility with regulated air emissions must be a permitted
or authorized activity. The Clean Air Act provides for administrative and
judicial enforcement against owners and operators of regulated facilities,
including substantial penalties. In 1990, the Clean Air Act was reauthorized and
amended, substantially increasing the scope and stringency of the Clean Air
Act's regulations. Compliance with the Clean Air Act is not expected to have a
material effect on TEI's business, results of operations or financial condition.
STATE AND LOCAL REGULATIONS. TEI's North Carolina liquid waste processing
facility is subject to direct regulation by state and local authorities. TEI is
required to obtain processing, wastewater discharge and air quality permits from
state and local authorities to operate this facility and to comply with
applicable regulations concerning, among other things, the generation and
discharge of odors and wastewater.
RISK MANAGEMENT; LITIGATION
TEI's business involves substantial risks of liability. For example, TEI's
services routinely involve the handling, storage and disposal of non-hazardous
regulated materials and wastes for its customers which are the generators of
such wastes. TEI could be held liable for improper cleanup and disposal, which
liability could be based upon statute, negligence, strict liability, contract or
otherwise. In addition, TEI often is required to indemnify its customers or
other third parties against certain risks related to the services performed by
TEI, including damages stemming from environmental contamination. See
"-- Marketing and Contracts."
TEI has implemented various procedures designed to insure compliance with
applicable regulations and reduce the risk of damage or loss. These include
specified handling procedures and guidelines for regulated waste, ongoing
training and monitoring of employees and maintenance of insurance coverage. TEI
carries a broad range of insurance coverages that management considers adequate
for the protection of its assets and operations. This coverage includes general
liability, comprehensive property damages, workers' compensation and other
coverage customary in its industries; however, this insurance is subject to
coverage limits and certain policies exclude coverage from damages resulting
from environmental contamination. A claim that is not covered or only partially
covered by insurance could have a material adverse effect on TEI's business,
results of operations and financial condition. There is no assurance that
insurance will continue to be available to the Company or at rates it considers
reasonable, potential liabilities will be covered by its insurance, TEI's
insurance carriers will meet their obligations or the dollar amount of such
liabilities will not exceed TEI's policy limits.
From time to time, TEI is a party to litigation arising in the normal
course of its business. In addition, TEI is contingently liable for up to $1.25
million for liabilities relating to services performed by the Tank Testing Group
prior to October 25, 1996. At June 30, 1998, TEI has recorded an approximately
$0.8 million liability for such contingency. TEI is not currently involved in
any litigation that TEI believes will have a material adverse effect on its
financial condition or its results of operations.
53
<PAGE>
TEI SELECTED FINANCIAL DATA
The following selected historical financial data as of and for each of the
years ended December 31, 1993, 1994, 1995, 1996 and 1997 is derived from the
audited consolidated financial statements of TEI. The historical financial data
for the six months ended June 30, 1997 and 1998 is derived from the unaudited
consolidated financial statements of TEI. In the opinion of management, this
data contains all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the six months ended June 30, 1997 and 1998. The
selected financial data set forth below should be read in conjunction with "TEI
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the TEI Consolidated Financial Statements and notes thereto
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
OPERATING DATA:
Revenues............................. $ -- $ 2,478 $ 2,375 $ 2,199 $ 2,726 $ 1,297 $ 1,556
Cost of services..................... -- 1,338 1,317 1,554 2,191 1,090 975
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................... -- 1,140 1,058 645 535 207 581
Selling, general and administrative
expenses........................... 1,335 1,922 2,197 2,428 2,625 1,337 1,363
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............ (1,335) (782) (1,139) (1,783) (2,090) (1,130) (782)
Other income (expense), net.......... 324 251 749 910 1,530 772 769
--------- --------- --------- --------- --------- --------- ---------
Loss from continuing operations
before income taxes................ (1,011) (531) (390) (873) (560) (358) (13)
Benefit for income taxes............. (384) (200) (150) (339) (160) (49) (3)
--------- --------- --------- --------- --------- --------- ---------
Loss from continuing operations...... (627) (331) (240) (534) (400) (309) (10)
Income (loss) from discontinued
operations, net of tax............. 5,544 1,874 (8,349) 1,289 (2,382) (990) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............... $ 4,917 $ 1,543 $ (8,589) $ 755 $ (2,782) $ (1,299) $ (10)
========= ========= ========= ========= ========= ========= =========
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.04) $ (0.02) $ (0.01) $ (0.04) $ (0.03) $ (0.02) $ 0.00
From discontinued operations.... 0.37 0.13 (0.59) 0.09 (0.17) (0.07) --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per share... $ 0.33 $ 0.11 $ (0.60) $ 0.05 $ (0.20) $ (0.09) $ 0.00
========= ========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding........................ 14,741 14,420 14,230 14,237 14,244 14,244 14,251
========= ========= ========= ========= ========= ========= =========
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 6,344 $ 6,250 $ 14,967 $ 11,422 $ 12,810 $ 13,192
Short-term investments.......... 9,841 7,483 3,695 18,426 15,516 14,456
Working capital................. 29,146 26,301 24,896 29,002 30,034 29,689
Total assets.................... 55,358 52,917 42,277 43,034 39,043 39,066
Long-term obligations........... -- -- -- -- -- --
Shareholders' equity............ 48,841 48,238 39,665 40,433 37,665 37,667
</TABLE>
- ------------
54
<PAGE>
TEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "TEI
SELECTED FINANCIAL DATA" AND TEI'S CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO INCLUDED ELSEWHERE HEREIN. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACTS INCLUDED IN THE FOLLOWING DISCUSSION REGARDING TEI'S FINANCIAL
POSITION, BUSINESS STRATEGY, AND PLANS OF MANAGEMENT FOR FUTURE OPERATIONS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH TEI BELIEVES THAT THE EXPECTATIONS
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
GENERAL
The following table sets forth, for continuing operations for the periods
indicated, the percentage relationship that certain items in TEI's Statement of
Operations bear to revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services..................... 55.4 70.7 80.4 84.0 62.6
--------- --------- --------- --------- ---------
Gross profit......................... 44.6 29.3 19.6 16.0 37.4
Selling, general and administrative
expenses........................... 92.6 110.4 96.3 103.1 87.6
--------- --------- --------- --------- ---------
Loss from operations................. (48.0) (81.1) (76.7) (87.1) (50.2)
Other income (expense), net.......... 31.6 41.4 56.1 59.5 49.4
--------- --------- --------- --------- ---------
Loss from continuing operations
before income
taxes.............................. (16.4) (39.7) (20.6) (27.6) (0.8)
Income tax benefit................... (6.3) (15.4) (5.9) (3.8) (0.2)
--------- --------- --------- --------- ---------
Loss from continuing operations...... (10.1) (24.3) (14.7) (23.8) (0.6)
Income (loss) from discontinued
operations and gain (loss) on sale
of discontinued operations......... (351.6) 58.6 (87.3) (76.3) --
--------- --------- --------- --------- ---------
Net income (loss).................... (361.7)% 34.3% (102.0)% (100.1)% (0.6)%
========= ========= ========= ========= =========
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues from wastewater treatment and waste oil recycling services at
TEI's ERRI subsidiary increased by 20% from $1,297,000 during the six months
ended June 30, 1997 to $1,556,000 during the six months ended June 30, 1998.
Such revenue improvement is mainly due to a greater volume of wastewater
processed during 1998 versus 1997.
Gross profit increased by 181% to $581,000 during the first half of 1998
from $207,000 during the prior-year period. When measured as a percentage of
sales, the gross margin increased to 37% during the first six months of 1998
from 16% during 1997. Such gross profit and margin improvement is due to the
revenue increase as well as improved operating efficiencies brought about by the
implementation of new processing techniques and the addition of new processing
equipment that have reduced such operating costs as chemicals and supplies,
utilities, and repairs and maintenance.
Selling, general and administrative expenses increased by $26,000 to
$1,363,000 during the January to June 1998 period from $1,337,000 during the
comparable half of 1997.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
totaled $769,000 during the first six months of 1998 compared to $772,000 during
the first six months of 1997.
55
<PAGE>
During the six months ended June 30, 1998, TEI recorded a loss of $10,000
compared to a loss of $1,299,000 during the first six months of 1997. Such 1997
loss includes a $990,000 provision for disposition of ESI.
1997 COMPARED TO 1996
Revenues from wastewater treatment and oil recycling services at TEI's ERRI
subsidiary increased by 24% from $2,199,000 during the year ended December 31,
1996 to $2,726,000 during the year ended December 31, 1997. Such revenue
improvement is primarily due to a greater volume of wastewater reprocessed
during 1997.
Gross profit declined by $110,000 to $535,000 during 1997 from $645,000
during 1996. When measured as a percentage of sales, the gross margin declined
to 19.6% during 1997 from 29.3% during the previous year. During 1997, all
processing operations were conducted from TEI's newly constructed treatment
facility in the Charlotte, North Carolina area. The new facility is larger, has
greater processing capabilities, and has higher associated fixed operating costs
such as depreciation and personnel than the old plant in which TEI operated
during most of 1996. Additionally, during 1997, processing operations in the new
facility were not as efficient as that of the old facility due to the new
equipment and processing techniques employed, the learning curve involved with
its operations, and the costs of moving to the new plant. As a result of these
issues, TEI is continuing to make modifications to the plant designed to improve
operations in the future. Management believes that in the future such operating
costs will decline as a percentage of sales as revenues increase.
Selling, general, and administrative expenses increased by $197,000 to
$2,625,000 during 1997 from $2,428,000 during 1996, principally due to
depreciation and the addition of management and supervisory personnel at the new
wastewater treatment processing plant at ERRI, professional fees, which amounts
were partially offset by personnel reductions and lower facility costs at TEI's
headquarters in Houston.
Other income and expense, consisting mainly of interest earned on TEI's
investments, and gains and losses on the disposition of fixed assets, grew from
$910,000 during 1996 to $1,530,00 during 1997. This is principally due to an
increase in the amount of cash invested as a result of TEI's sale of the Tank
Testing Group during the fourth quarter of 1996.
Losses from discontinued operations, net of tax, were $2,382,000 in 1997
compared to a gain of $1,289,000 in 1996. The 1996 gain consisted of $672,000 of
income from operations and $1,277,000 of gain on disposition of the Tank Testing
Group partially offset by losses of $660,000 at ESI. TEI originally expected to
complete the disposition of ESI prior to December 31, 1996. However, as of
year-end 1996, ESI had not been sold. As a result of 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. Such loss consisted
of $2,194,000 due to operating losses at ESI, including a change in estimated
income tax expense of approximately $517,000, resulting from unanticipated
delays in the disposition and $188,000 of loss on disposition, which occurred in
December 1997.
1996 COMPARED TO 1995
Revenues from wastewater treatment and waste oil recycling services at ERRI
declined by 7.4% from $2,375,000 during the year ended December 31, 1995 to
$2,199,000 during the year ended December 31, 1996. Such revenue decrease was
primarily due to operational delays caused by the relocation of ERRI's
processing equipment to the newly constructed treatment facility in the
Charlotte, North Carolina area. The transfer of the processing equipment took
place in stages over the course of the year, but was essentially completed by
year-end 1996.
Gross profit declined by $413,000 to $645,000 from $1,058,000 during 1995.
When measured as a percentage of sales, the gross margin declined to 29.3%
during 1996 from 44.6% during the previous year. During 1996, TEI incurred
personnel and transportation costs associated with ERRI's move to its new
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location. Other duplicative costs related to the operation of two processing
plants were also incurred during 1996. Additionally, during 1996 processing
operations in the new facility were not as effective as that of the old facility
due to the new equipment and processing techniques employed and the learning
curve involved with its operation.
Selling, general, and administrative expenses increased $231,000 to
$2,428,000 in 1996 from $2,197,000 during 1995, primarily due to the addition of
management and supervisory personnel needed to start-up and operate the new more
complex processing facility.
Other income and expense, consisting mainly of interest earned on TEI's
investments, and gains and losses on the disposition of fixed assets, grew from
$749,000 during 1995 to $910,000 during 1996, principally due to an increase in
the amount invested as a result of the TEI's sale of the Tank Testing Group
during the fourth quarter of 1996. A substantial portion of selling, general,
and administrative expense represents general corporate overhead, which
management did not allocate to discontinued operations.
During 1996, the Company sold the Tank Testing Group to an independent
third party. TEI recorded a gain on the sale of the Tank Testing Group of
$1,277,000, net of a provision for income taxes of $788,000. The Tank Testing
Group earned $672,000 from operations during 1996, versus $1,055,000 during
1995, principally as a result of higher revenues during 1995. During 1995, TEI
sold its Mankoff subsidiary to a private investor for cash and notes totaling
$2.3 million. The sale resulted in a loss from discontinued operations of
$3,610,000. In addition, Mankoff incurred operating losses of $364,000 during
1995. During 1995, the board of directors authorized TEI to dispose of its ESI
subsidiary. In conjunction with the planned disposition, TEI recorded loss from
discontinued operations of its ESI operation of $3,715,000 during 1995, net of
an income tax benefit of $1,914,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, TEI had cash, cash equivalents, and short-term
investments of $27,648,000 and had no significant cash commitments of such funds
other than the normal requirements to operate the Company's continuing
operations. These funds are being invested in liquid high credit quality
instruments pending any decision by TEI's Board of Directors regarding TEI's
future direction. For the six months ended June 30, 1998, net cash used in
operations totaled $714,000 versus $3,038,000 during the same period in 1997.
Current year cash used in operations is the result of a net loss of $10,000,
non-cash revenue and expenses of $66,000, and working capital changes totaling
$638,000.
Working capital changes during the January to June 1998 period include the
reduction of accounts payable and accrued liabilities of $323,000, primarily
related to the payment of accrued compensation expenses. Working capital changes
also include an increase in accounts receivable and inventories partially as a
result of increased revenues at ERRI.
Due to the weak demand for oil in ERRI's operating area over the last six
months and the resulting low oil prices, its customers are experiencing
declining demand and margins and are purchasing smaller volumes of reclaimed
oil, despite the fact that wastewater processing volume is increasing. As a
result ERRI has experienced increases in the levels of accounts receivable and
inventory. Plans are in place to reduce accounts receivable and inventory levels
over the next six months and those balances to return to more normal levels;
however, if oil prices remain at current levels for an extended period or if
significant customers experience continued liquidity problems, ERRI may incur
losses due to bad debts or excess inventory.
Capital expenditures for the six months ended June 30, 1998 totaled
$403,000, and were primarily for the purchase of machinery and processing
equipment of ERRI.
TEI is involved in litigation and routine claims from time to time. Certain
of TEI's litigation and claims are covered by insurance with a maximum
deductible of $50,000. In addition, TEI is contingently liable for up to $1.25
million of liabilities relating to services performed by the Tank Testing Group
prior to October 25, 1996. TEI has recorded an $829,000 liability for that
contingency as of June 30, 1998. In
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management's opinion, the litigation and claims in which TEI is currently
involved are not material to TEI's consolidated financial position, results of
operations or liquidity.
In December 1997, TEI sold certain assets of ESI for a $500,000
interest-bearing note due in 2002. The purchaser also agreed to complete
customer contracts in process at the time of sale; however, TEI remains
primarily responsible for these contracts. Should the purchasers' cost to
complete the contracts exceed the amount remaining to be collected from
customers of approximately $2,000,000, TEI will be required to reimburse the
purchaser, which will result in losses to TEI, should the amounts collected from
customers exceed the cost to complete the contracts, a portion of the excess
collections will be paid to TEI resulting in income. TEI does not expect to
incur losses on the contracts; however, the estimates of expected costs of such
contracts have been significantly revised in the past and significant revisions
may occur in the future.
SEASONALITY
TEI experiences no noticeable seasonal variations in its continuing liquid
waste business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
TEI presently has no plans to dispose of its liquid waste treatment
business. However, should circumstances change such that TEI decides to sell
rather than operate ERRI, TEI may not be able to recover all of its investment
in ERRI.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources and includes all changes
in equity during a period, except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for TEI for the year ended
December 31, 1998. Initial adoption of this standard had no impact on the
Company's financial statements.
YEAR 2000
The "Year 2000" problem refers to the inability of computer programs to
correctly interpret the century from a date in which the year is represented by
only two digits. A computer system that is not Year 2000 compliant would not be
able to correctly process certain data, or in extreme situations, could cause
the entire system to be disabled. In 1992, TEI purchased and developed new
software, which it has tested and believes is Year 2000 compliant. TEI believes
that its current systems, which are significant to operations are, or are
expected to be, Year 2000 compliant.
TEI has initiated discussions with its significant suppliers and customers
to determine the extent to which their failure to correct their own Year 2000
issues could affect TEI. TEI cannot guarantee the Year 2000 problems, if any, in
other companies' systems on which it relies will be timely resolved or that
other companies' failure to resolve such problems, or resolutions incompatible
with the TEI's systems, would not have a material adverse effect on TEI.
However, since TEI does not generally interface its computer systems with its
suppliers or customers, the failure of TEI's suppliers and customers to achieve
Year 2000 compliance should not have a material adverse effect on TEI's
financial condition and results of operations.
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BUSINESS OF HWG
GENERAL
HWG is a full-service regional retail brokerage, investment banking and
financial services firm serving a diverse group of individual, institutional and
corporate clients. HWG's primary activities are investment banking services and
retail securities brokerage within the southwest region of the United States.
Other significant activities include participation in the underwriting of
corporate securities, merchant banking, trading of fixed-income and equity
securities, equity research and distribution of mutual fund, insurance and other
investment products. Retail brokerage services and investment banking services
accounted for approximately 59% and 36%, respectively, of HWG's 1997 revenues.
Founded in 1994, HWG is headquartered in Houston, Texas. HWG performs its
financial services through a staff of over 60 professionals and support
personnel, which professionals average more than 15 years experience in the
securities business. HWG believes its primary strengths include (i) the
experience, reputation and tenure of its investment executives, which have often
led to long-term client and business relationships; (ii) its high level of
employee commitment, evidenced by significant employee ownership in HWG; (iii)
its personalized, service-oriented culture emphasizing responsiveness to client
and regional market demands; (iv) its focus on emerging and middle market
companies in target industries in which HWG has specialized expertise or a
regional presence; and (v) its ability to manage and control operating costs
through centralization of certain services and other cost effective solutions,
including its clearing and processing arrangements with S.G. Cowen & Company
("S.G Cowen").
HWG commenced operations in February 1994, and thus, has a limited
operating history upon which to base an evaluation of HWG's operating
performance and prospects. However, revenues of HWG have steadily increased
since formation, totaling approximately $2.9 million, $4.0 million and $7.0
million in 1995, 1996 and 1997, respectively. HWG achieved its first year of
profitable operations in 1997 with net income of approximately $0.3 million. In
the first six months of 1998, HWG generated net income of approximately $0.1
million. HWG incurred operating losses in both 1995 and 1996 and had an
accumulated deficit at June 30, 1998 of approximately $(1.9) million.
SERVICES PROVIDED
BROKERAGE SERVICES
RETAIL BROKERAGE. HWG'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 ("OTC") agency transactions in accordance with
commission rate tables formulated by HWG. Discounts from these rates are granted
in certain cases and the commission rate table may change from time to time. 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,
consisting primarily of S.G. Cowen. 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. Its retail sales force is comprised of 20 commissioned sales persons,
who average in excess of 15 years experience in the securities brokerage
business. HWG believes that its strategy of providing its brokers with a high
level of support, the flexibility to operate in an entrepreneurial manner and a
corporate culture which encourages performance,
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employee ownership, advanced technologies and competitive compensation packages,
has allowed HWG to recruit and retain experienced and productive brokers.
HWG management believes that its retail service business will continue to
be a significant source of its revenues for the foreseeable future. For 1995,
1996 and 1997, commissions and sales credits constituted approximately 48%, 73%
and 59%, respectively, of HWG's total revenues.
EQUITY RESEARCH. HWG believes that the services provided by its research
department have a significant impact on all of HWG's revenue generating
activities, including retail brokerage, investment banking and market-making.
HWG's research department, consisting of six professional research analysts at
June 30, 1998, focuses its efforts on selected sectors of consumer services,
energy services, biotech, health care, oil and gas exploration and production,
real estate and technology/telecommunications industries. HWG believes that its
proximity to, and niche focus on, companies based in the southwestern United
States provides it with a competitive advantage over broker-dealers based
outside the southwest region. The firm's research analysts work closely with its
sales and trading professionals to provide HWG's retail clients with current
company and industry analysis.
INVESTMENT BANKING AND UNDERWRITING ACTIVITIES
HWG's investment banking strategy is directed at building 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. The financial advisory services offered by HWG
include advice on mergers, acquisitions and divestures, fairness opinions and
financing strategies. HWG also has the capability to 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 the underwriting syndicate or of the selling group lead-managed by
national investment banking firms. As of June 30, 1998, HWG has participated in
14 underwritten public securities offerings in 1998. As its business matures and
develops, HWG'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 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.
Historically, private debt and equity financing activities have accounted
for a majority of HWG's investment banking revenues. For 1995, 1996 and 1997,
HWG's total investment banking revenue accounted for 38%, 18% and 36%,
respectively, of HWG's total revenues.
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 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. HWG has conducted certain of these merchant
banking activities through HWG Capital, L.L.C., which is owned 50% by HWG and
50% by a shareholder and officer of HWG. In addition, HWG currently holds a
significant equity position in BioCyte Therapeutics, Inc. ("BioCyte"), an
early stage biotechnology company dedicated to the development of marketable
products and services for the treatment of genetic diseases. No assurance can be
given that BioCyte will develop any commercially marketable products.
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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 June 30, 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.
RELATIONSHIP WITH S.G. COWEN
HWG clears all transactions, and carries accounts for clients, with S.G.
Cowen under a fully disclosed clearing arrangement. S.G. Cowen executes all
trades and furnishes HWG with information necessary to generate HWG's commission
runs, transaction summaries, data feeds for various reports including compliance
and risk management, execution reports, trade confirmations, monthly account
statements, cashiering functions and the handling of margin accounts. As a
result of its correspondent relationship with S.G. Cowen, HWG has achieved
substantial savings in its clearing and related operations. HWG management
believes its clearing costs are competitive with industry costs.
HWG currently has an uncommitted financing arrangement with S.G. Cowen
pursuant to which HWG finances its customer accounts, certain broker-dealer
balances and firm trading positions through S.G. Cowen. Although the customer
accounts and such broker-dealer balances are not reflected on the HWG's
Statements of Financial Condition for financial accounting reporting purposes,
HWG has agreed to indemnify S.G. Cowen for losses it may sustain in connection
with accounts of HWG's clients and therefore retains risk with respect thereto.
HWG seeks to control the risks associated with these activities by requiring
clients to maintain margin collateral in compliance with various regulatory and
internal guidelines. HWG and S.G. Cowen monitor required margin levels daily
and, pursuant to such guidelines, request customers to deposit additional
collateral or reduce securities positions when necessary.
EFFECTS OF INTEREST RATES
HWG's 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 HWG's 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.
HWG's revenues relating to asset-based advisory services and managed
accounts are typically derived 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 as a result of changes in interest rates
or changes in other economic factors, may materially affect the amount of assets
under management, and thus, HWG's revenues and profitability.
COMPETITION
All aspects of HWG's business, and of the securities business in general,
are highly competitive. The principal competitive factors influencing HWG's
business are its professional staff, its reputation in the marketplace, its
existing client relationships, the ability to commit capital to client
transactions, its mix of market capabilities and pricing of its products and
services. HWG's ability to compete effectively in 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.
HWG competes directly with national and regional full service
broker-dealers and, to a lesser extent, with discount brokers, dealers,
investment banking firms, investment advisers and certain commercial
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banks. In addition to competition from firms currently in the securities
business, domestic and international commercial banks and an increased number of
investment banking boutiques have recently entered the business. In recent
years, large international banks have also entered the markets historically
served by United States investment banks, including markets in which HWG
competes. HWG 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 certain restrictions on
commercial banks relating to the sale of securities. The financial services
industry has become considerably more concentrated as numerous securities firms
have either ceased operations or have been acquired by or merged into other
firms. Such mergers and acquisitions have increased competition from these
firms, many of which have significantly greater equity capital and financial and
other resources than HWG. Many of these firms, because of their significantly
greater financial capital and scope of operations, are able to offer their
clients more product offerings, broader research capabilities, access to
international markets and other products and services not offered by HWG, which
may provide such firms with competitive advantages over HWG.
HWG also faces competition from a rapidly developing industry comprised of
companies offering discount and/or electronic brokerage services. These
competitors may have lower costs and may offer their clients more attractive
pricing or other terms than those offered by HWG. HWG also anticipates
competition from underwriters who attempt to effect public offerings for
emerging and middle-market companies through new means of distribution,
including transactions effected using electronic media such as the Internet. In
addition, issuers may attempt to sell their securities directly to purchasers,
including through the Internet and other electronic media. To the extent that
issuers and purchasers of securities are able to transact business without the
assistance of financial intermediaries, such as HWG, HWG'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 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, these
SROs adopt rules that govern the industry and conduct periodic examinations of
the operations of HWG. In addition, HWG is subject to regulation under the laws
of certain states and Puerto Rico 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.
As a registered broker-dealer, HWG is subject to certain net capital
requirements set forth in 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: (i) require that broker-dealers
notify the SEC, in writing, two business days prior to making withdrawals or
other distributions of equity capital or lending money to certain related
persons if those withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer's excess net capital, and that they provide such notice 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; (ii) prohibit a
broker-dealer from withdrawing or otherwise distributing equity capital or
making related party loans if after such 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 (iii) 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
such withdrawals would be
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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 is also subject to "Risk Assessment Rules" imposed by the SEC which
require, among other things, 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 regulation by the SEC. 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 the requirements of regulation
pursuant to both the Investment Advisers Act and certain state securities laws
and regulations. Such requirements relate to, among other things, limitations on
the ability of investment advisers to charge performance-based or non-refundable
fees to clients, record-keeping and reporting requirements, disclosure
requirements, limitations on principal transactions between an advisor or its
affiliates and advisory clients, as well as 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
such contract may not be assigned by the investment adviser without the consent
of the client. Under the Investment Company Act, every investment adviser's
agreement with a registered investment company must provide for the agreement's
automatic termination in the event 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
to such assignments. On consummation of the HWG Merger, a deemed assignment of
HWG's investment advisory agreements will occur under the Investment Advisers
Act and the Investment Company Act. Under the terms of the Agreement, HWG is
required prior to closing of the HWG Merger to obtain the consent of each of its
non-investment company advisory clients to such deemed assignment.
FACILITIES
HWG's facilities consist of an office facility leased in Houston, Texas,
aggregating approximately 22,000 square feet. HWG recently entered into a new
five-year lease which commences in March 1999. This lease is on rental and other
terms that HWG believes are commercially reasonable. HWG believes that the
existing facility is well-maintained and adequate for HWG's existing and planned
operations.
EMPLOYEES
At June 30, 1998, HWG had a total of 60 employees, of whom 33 were engaged
in retail brokerage, 21 in investment banking and 6 in accounting,
administration and operations. Of these employees, 35 were classified as
professionals and 25 were classified in support positions. None of HWG's
employees are subject to a collective bargaining agreement. HWG believes that
its relations with its employees generally are good.
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RISK MANAGEMENT; LITIGATION
HWG's financial services business involves substantial risks of liability.
From time to time HWG may be named as a defendant in civil litigation and
arbitration arising from its business activities as a retail broker-dealer. The
plaintiffs in such litigation or arbitration may allege misconduct on the part
of HWG's investment executives, claiming, for example, that investments sold to
such plaintiffs by such investment executives were unsuitable for their
portfolios, or that the investment executives engaged in excessive trading with
respect to the plaintiffs' accounts. While historically HWG has not incurred
material liability with respect to such litigation or arbitration, there can be
no assurance that substantial liabilities in connection with such matters will
not 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 HWG, are subject
to substantial potential liability, including for material misstatements or
omissions in prospectuses and other communications with respect to underwritten
offerings of securities or statements made by securities analysts, under federal
laws, such as Rule 10b-5 promulgated 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 such companies. The defense of these or any other lawsuits or arbitrations
may divert the efforts and attention of HWG's management and staff from other
responsibilities within HWG, and HWG may incur significant legal expense in
defending such litigation or arbitration.
HWG's ability to comply with applicable laws and rules relating to its
financial services business is dependent in large part upon the establishment
and maintenance of a compliance system designed to monitor compliance with such
laws and rules, as well as HWG's ability to attract and retain qualified
compliance personnel. Although HWG believes that it is in material compliance
with such rules and regulations, there can be no assurance that HWG in the
future will not be subject to disciplinary or other actions due to claimed
noncompliance which could have a material adverse effect on HWG's business,
financial condition and operating results.
HWG is a party to various legal proceedings which are of an ordinary or
routine nature incidental to HWG's operations. HWG believes that it has
adequately reserved for such litigation matters and that they will not have a
material adverse effect on HWG's financial condition or results of operations.
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HWG SELECTED FINANCIAL DATA
The following selected historical financial data as of and for each of the
years ended December 31, 1994, 1995, 1996 and 1997 is derived from the audited
financial statements of HWG. The historical financial data for the six months
ended June 30, 1997 and 1998 is derived from the unaudited financial statements
of HWG. In the opinion of management, this data contains all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly the
six months ended June 30, 1997 and 1998. The selected financial data set forth
below should be read in conjunction with "HWG Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the HWG
Financial Statements and notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- --------------------
1994 1995 1996 1997 1997 1998
---------- --------- --------- --------- --------- ---------
(IN THOUSAND, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commissions..................... $ 692 $ 1,364 $ 2,896 $ 4,151 $ 2,158 $ 1,717
Investment banking.............. 713 1,085 722 2,544 309 1,202
Interest and dividends.......... 17 25 38 57 25 61
Securities gains and other...... 60 395 340 290 181 177
---------- --------- --------- --------- --------- ---------
Total revenues............. 1,482 2,869 3,996 7,042 2,673 3,157
---------- --------- --------- --------- --------- ---------
Compensation and benefits....... 1,217 1,981 3,461 5,096 2,026 2,177
Brokerage and clearance......... 144 343 419 567 254 264
Other........................... 742 1,005 1,293 936 429 541
---------- --------- --------- --------- --------- ---------
Total expense.............. 2,103 3,329 5,173 6,599 2,709 2,982
---------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes......................... (621) (460) (1,177) 443 (36) 175
Income tax provision............ -- -- -- 142 -- 60
---------- --------- --------- --------- --------- ---------
Net income (loss)............... $ (621) $ (460) $ (1,177) $ 301 $ (36) $ 115
========== ========= ========= ========= ========= =========
Basic and diluted earnings
(loss) per share.............. $ (289.24) $ (82.72) $ (94.52) $ 16.80 $ (4.45) $ 4.87
========== ========= ========= ========= ========= =========
Weighted average shares
outstanding................... 2,147 5,560 12,455 17,906 7,996 23,659
========== ========= ========= ========= ========= =========
<CAPTION>
DECEMBER 31,
------------------------------------------ JUNE 30,
1994 1995 1996 1997 1998
--------- --------- --------- --------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment securities........... $ 65 $ 361 $ 101 $ 144 $ 184
Total assets.................... 581 1,215 1,247 1,947 2,156
Shareholder's equity............ (156) 308 117 885 1,938
</TABLE>
65
<PAGE>
HWG MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
HWG began operations in February 1994, and thus, has a limited operating
history upon which an evaluation of HWG's operating performance and prospects
can be made. However, revenues of HWG have steadily increased since formation,
totaling approximately $2.9 million, $4.0 million and $7.0 million in 1995, 1996
and 1997, respectively. HWG achieved its first year of profitable operations in
1997, with net income of approximately $0.3 million. In the first six months of
1998, HWG generated net income of approximately $0.1 million. HWG incurred
operating losses in both 1995 and 1996 and had an accumulated deficit at June
30, 1998 of approximately $(1.9) million.
HWG was formed to fill the void created by the consolidation of local
financial and brokerage firms into larger national counterparts. HWG believes
that a strong regional financial services firm is needed to serve the multitude
of small and mid-sized companies domiciled in Texas and surrounding states. HWG
is dedicated to be a leading investment banking and securities firm in the
Southwest by providing high quality individualized services and advice to
corporate, individual and institutional clients. HWG's operations are conducted
in Houston.
Since inception, revenues from commissions have increased significantly,
while investment banking revenues increased in 1997 as compared to 1996 but
decreased in 1996 as compared to 1995. Revenues grew at an average annual rate
of 56.6% from 1995 to 1997, from $2.9 million to $7.0 million. Expenses grew at
an average annual rate of 38.3% from 1995 to 1997, from $3.3 million to $6.6
million. Pre-tax profitability grew from a loss of $0.5 million in 1995 to $0.7
million in 1997.
The growth in HWG's commissions from 1995 to 1997 was primarily
attributable to an increase in the number of retail brokers from 15 to 24. HWG's
investment banking revenues have grown due to HWG's participation in a larger
number of transactions resulting principally from an increase in the number of
investment banking personnel and increased marketing efforts. HWG experienced a
decline in its investment banking revenue in 1996 caused primarily by a delay in
the timing and closing of certain transactions until 1997. HWG does not
recognize income from its investment banking activity until the transactions
close. HWG generally achieves higher profit margins from its investment banking
activities than from its retail brokerage business and other commission
generating activities. HWG's investment banking business, corporate finance and
merchant banking activities are characterized by a moderate number of
transactions that normally generate substantial fee-based income.
The increase in HWG's expenses from 1995 to 1997 was principally due to,
among other things, (1) an increase in the number of brokers, support staff and
investment banking professionals and (2) a corresponding increase in support
services and rent expense. As a "start-up" company in the financial services
industry, HWG made a significant front-end investment for personnel, operations,
trading, compliance and administration which it believed was necessary to
effectively enter and compete in the industry.
During the last several years, strong equity markets and record returns
have stimulated the retail brokerage business. Additionally, the strong markets
and economy, at least up until the middle of 1998, have driven an increase in
HWG's investment banking business. HWG's retail brokerage division is generally
affected more by stock market volatility than the investment banking division.
As HWG's corporate investment banking clients focus less on public or private
underwritings of equity due to a volatile or declining stock market, many of
these clients have shifted their focus to mergers and acquisitions and
alternative financing sources and have retained HWG for assistance in connection
with these activities. If stock market volatility dictates a general shift away
from retail brokerage, HWG believes that it has the ability to shift its focus
to more investment banking type activities, such as mergers and acquisitions and
various other types of financial advisory services. HWG has plans to increase
its retail brokerage division's focus on asset management type services as well
as providing specialized products, such as private placements of equity and debt
securities, to its retail brokerage clients. Although no assurance can be given,
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<PAGE>
HWG believes that such alternative services and products will reduce the
volatility of revenues in its retail brokerage division.
COMPONENTS OF REVENUES AND EXPENSES
REVENUES. HWG's revenues are composed primarily of: (1) commission revenue
derived from retail brokerage transactions, fees from asset-based advisory
services and principal transactions and (2) investment banking revenue derived
from corporate finance fees, mergers and acquisitions fees and merchant banking
fees. HWG also earns revenue from interest and dividends and other sources.
Corporate finance fees include fees from financial advisory assignments (i.e.,
valuations and litigation support), private placements of equity and debt
securities, underwritings of public offerings of equity and debt, fairness
opinions and venture capital financings. Historically, merchant banking fees
consist primarily of fees from consolidation and roll-up transactions for
private companies where HWG's merchant banking affiliate, HWG Capital, L.L.C.,
provides the initial funding. HWG's commissions are primarily affected by (1)
the number and production of its commissioned brokers, (2) competition within
the retail brokerage industry from discount brokerage firms (including brokerage
services provided over the Internet) that can affect the commission rates HWG
charges, (3) the overall economy and (4) the volatility, level and direction of
the stock market. HWG's investment banking revenues are affected primarily by
(1) competition from other investment banking and related companies, (2) the
volume of mergers and acquisitions and corporate finance transactions by
existing clients and by other companies in the southwest region, (3) the overall
economy and (4) the volatility, level and direction of the stock market.
As a part of its compensation from corporate finance transactions, HWG
often receives a combination of warrants and/or common stock in addition to
cash, and in a few cases in lieu of cash, on many of its assignments.
Interest and dividends revenue is derived primarily from interest earned on
investments in HWG's capital account. Other sources of revenue include revenue
earned from account management fees.
EXPENSES. HWG's expense structure consists of three components: (1)
compensation and benefits (2) brokage and clearance costs and (3) other
expenses. Compensation and benefits include commissions to retail brokers and
investment and merchant bankers and represents HWG's single largest expense
component. During 1997, compensation and benefits accounted for 77.2% of total
expenses, and represented 72.4% as a percentage of total revenues. Retail
commissions are variable and are based on a competitive commission schedule. The
investment banking and merchant banking group generally receives 50% of all
transaction fees as compensation. The variable nature of HWG's expenses is
mainly driven by revenue production, revenue-based commissions, sales
volume-based clearing and settlement expenses, and bonuses, incentives and
management compensation.
Brokerage and clearance expenses include clearing and settlement costs
associated with the retail brokerage business. HWG clears it transactions
through S.G. Cowen.
Other expenses include occupancy, equipment, communications, supplies,
travel and entertainment, promotions, interest and regulatory and professional
fees. Occupancy and equipment expenses include rent and utility charges paid for
HWG's facilities, expenditures for facilities repairs and depreciation of
equipment and furniture. Historically, occupancy and equipment expenses has been
HWG's largest category of other expenses, accounting for 6.4% of total expenses
in 1997.
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<PAGE>
RESULTS OF OPERATIONS
HWG's financial results have been and may continue to be subject to
fluctuations due to the factors described above. Consequently, the results of
operations for a particular period may not be indicative of results to be
expected for other periods. The following table sets forth for the periods
indicated, the percentage relationship that certain items in HWG's Statements of
Operations bear to revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Commissions...................... $ 1,364 47.5% $ 2,896 72.5% $ 4,151 59.0% $ 2,158 80.7%
Investment banking............... 1,085 37.8 722 18.0 2,544 36.1 309 11.6
Interest and dividends........... 25 0.9 38 1.0 57 0.8 25 0.9
Securities gains and other....... 395 13.8 340 8.5 290 4.1 181 6.8
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 2,869 100.0 3,996 100.0 7,042 100.0 2,673 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Compensation and benefits........ 1,981 69.0 3,461 86.6 5,096 72.4 2,026 75.8
Brokerage and clearance.......... 343 12.0 419 10.5 567 8.0 254 9.5
Other............................ 1,005 35.0 1,293 32.4 936 13.3 429 16.0
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses.............. 3,329 116.0 5,173 129.5 6,599 93.7 2,709 101.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax...... (460) (16.0) (1,177) (29.5) 443 6.3 (36) (1.3)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (460) (16.0)%$ (1,177) (29.5)%$ 301 4.3% $ (36) (1.3)%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
REVENUES:
Commissions...................... $ 1,717 54.4%
Investment banking............... 1,202 38.0
Interest and dividends........... 61 2.0
Securities gains and other....... 177 5.6
--------- ---------
Total revenues.............. 3,157 100.0
--------- ---------
EXPENSES:
Compensation and benefits........ 2,177 69.0
Brokerage and clearance.......... 264 8.4
Other............................ 541 17.1
--------- ---------
Total expenses.............. 2,982 94.5
--------- ---------
Income (loss) before income tax...... 175 5.5
--------- ---------
Net income (loss).................... $ 115 3.6%
========= =========
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues increased 17.8% from $2.7 million to $3.2 million principally from
an 289.0% increase in HWG's investment banking revenues from approximately $0.3
million for the six months ended June 30, 1997 to approximately $1.2 million for
the comparable period in 1998. The increased investment banking revenues were
mainly due to an increased number of transactions that closed during the first
six months of 1998. This increase was partially offset by a 20.4% decrease in
commissions from approximately $2.2 million for the six months ended June 30,
1997 to approximately $1.7 million for the comparable period in 1998 primarily
due to market volatility and reduced volume.
Total expenses increased 10.1%, primarily due to an increase in personnel.
HWG expanded its corporate finance group during the six months ended June 30,
1998 by adding five investment bankers and related staff personnel. The number
of commissioned brokers was the same for each of the six month periods.
HWG recorded net income of $115,144 for the six months ended June 30, 1998
compared to a net loss of $35,562 for the six months ended June 30, 1997.
1997 COMPARED TO 1996
Revenues increased 76.2% from approximately $4.0 million in 1996 to $7.0
million in 1997. Investment banking revenues increased from $0.7 million in 1996
to $2.5 million in 1997 primarily from an increased number of transactions that
closed during 1997. Commissions increased 43.4% from $2.9 million to $4.2
million primarily due to higher sales volume.
Total expenses increased 27.6% from approximately $5.2 million in 1996 to
approximately $6.6 million in 1997. This increase resulted primarily from a $1.6
million increase in compensation and benefits from approximately $3.5 million in
1996 to approximately $5.1 million in 1997 mainly from increased fees and
commissions from higher sales volume the inclusion of approximately $0.1 million
of deferred compensation expense and $0.2 million of stock compensation expense
in 1997. This increase was partially offset by an approximately $0.4 million
reduction in other expenses from approximately $1.3 million in 1996 to
approximately $0.9 million in 1997 as a result of lower professional fees and
other expenses.
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<PAGE>
HWG recorded its first profit for a full year period during 1997,
generating net income of $0.5 million compared to a net loss of $1.2 million in
1996.
1996 COMPARED TO 1995
Revenues increased 39.3% from $2.9 million in 1995 to $4.0 million in 1996
primarily from a 112.3% increase in commissions from approximately $1.4 million
in 1995 to approximately $2.9 million in 1997 due to the increased sales volume
generated by the addition of 7 retail brokers. This increase was partially
offset by a 33.5% decrease in investment banking revenues from approximately
$1.1 million in 1995 to approximately $0.7 million in 1996 primarily due to a
delay in the timing and closing of certain transactions until 1997.
Total expenses increased 55.4% from $3.3 million in 1995 to $5.2 million in
1996. This increase is primarily attributable to an approximately $1.5 million
increase in compensation and benefits from approximately $2.0 in 1995 to
approximately $3.5 million in 1997 mainly from the addition of a number of new
employees, including one municipal trader and several retail brokerage
personnel. In addition, in 1996, HWG made renovations to its leased Houston
office facility costing approximately $73,000 which doubled the number of
available desk locations for brokers from its 1995 levels.
HWG recorded a net loss of $1.2 million in 1996 compared to a net loss of
$0.5 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
HWG's corporate structure was changed from an S Corporation to a C
Corporation effective June 1, 1997. In November 1997, an offering was commenced
which resulted in the infusion of $272,532 by December 31, 1997. Subsequent
sales of common stock resulted in an additional equity contribution of $998,934
by April 1998, when the offering was terminated. During 1997, HWG repaid in full
its short-term bank debt using funds raised in the offering described above and
cash flow from operating activities. At December 31, 1996, this bank debt had a
balance of approximately $399,000. Since January 1998, HWG has not incurred any
funded debt other than the infrequent use of temporary bank lines approved by
the NASD exclusively for HWG's underwriting of public offerings of common stock.
Shareholders' equity totaled $885,298 at December 31, 1997 compared to $116,608
at December 31, 1996.
HWG had cash, cash equivalents and receivables of $1,387,479 at June 30,
1998, or 82% of total assets. At this same time, current liabilities were
$176,047 with accrued commissions payable the largest component. At June 30,
1998, HWG had no liabilities for borrowed money but maintained available short-
term bank lines in the amount of $500,000, which bear interest at the rate of
the respective bank's base rate (as defined) plus between 0.5% and 0.75%.
Shareholders' equity was $1,937,481 at June 30, 1998. Additionally, certain
principals and employees have options to purchase up to a total of 2,070 shares
of HWG common stock at a price of $166.67 per share. It is anticipated that
these options will be exercised prior to closing of the Transactions, adding
approximately $345,000 in capital to HWG over a ten-year period.
HWG's two largest off balance sheet obligations include (i) its office
lease for the headquarters in Houston and (ii) the furniture, fixtures, and
equipment lease with an affiliated entity, St. James Corporation. A new office
lease, going into effect in March 1999, was recently consummated with the
landlord for a term of five years. The increase in the base rent versus the
current rent, including the normal pass through of operating expenses above base
year levels, will be about $5.00 per square foot or $75,000 annually.
HWG, as a fully disclosed introducing broker-dealer, is subject to the
SEC's Uniform Net Capital Rule (the "Rule"), which requires the maintenance of
minimum net capital. HWG has elected to use the basic method, permitted by the
Rule, which requires that it maintain minimum net capital, as defined in Rule
15c3-1 under the 1934 Act, equal to $100,000. At June 30, 1998, HWG had net
capital of $1,455,672 or approximately 12% of aggregate debit balances, which is
$1,355,672 in excess of its minimum net capital requirement of $100,000 at that
date.
HWG has historically financed capital expenditures through internally
generated cash and its bank credit facilities. During 1997, HWG had capital
expenditures of approximately $23.4 million, which were
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<PAGE>
funded from operations and its equity offering. HWG currently does not intend to
incur material capital expenditures in the near term.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on HWG'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 HWG charges for its services. Inflation can have
significant effects on interest rates that in turn can affect prices and
activities in the financial services markets. These fluctuations could have an
adverse impact on HWG's operations.
YEAR 2000
The Year 2000 problem ("Year 2000 Problem") refers to the inability of
some computer programs and systems to correctly interpret the century from a
date in which the year is represented by only two digits. A computer program or
system that has not resolved the Year 2000 Problem may not be able to correctly
process certain data, or in extreme situation, the program or system may become
disabled.
In addition to dependence on its own computer programs and systems that may
be affected by the Year 2000 Problem, HWG has material relationships with third
parties that must also address the Year 2000 Problem.
HWG has developed a multi-phase plan to resolve its potential Year 2000
Problems. That plan consists of the following phases:
Phase I: Awareness -- making employees,
clients and vendors aware of the
potential Year 2000 Problems
including potential problems with
third-party providers.
Phase II: Assessment -- assessing the steps HWG
must take to avoid the Year 2000
Problem.
Phase III: Implementation -- implementation of
those steps to avoid the year 2000
Problem.
Phase IV: Testing Validation -- integrated
testing of computer software and
systems designed to avoid the Year
2000 Problem internally and with
third-party providers.
Phase V: Repair & Replace -- repairing or
replacing equipment, which fails
during the testing phase.
Phase VI: Follow-up -- the re-checking of all
written verification of systems and
re-testing of simulated problems with
third-party vendors.
Phase VII: Contingency Plan (Total of three
phases) -- strategy to resume
business in case of mass confusion.
To date HWG has completed Phases I through III, and has partially completed
Phases IV and V, of its plan at a cost of $1,200 for modifying or purchasing new
software and $31,500 for upgrading or purchasing new computer systems. HWG
expects to complete Phases IV through VI of its plan by May, 1999 at an
additional estimated cost of $10,000.
While there can be no assurance, HWG believes that its internal computer
software and systems will not experience significant disruption in connection
with the Year 2000 Problem. There can be no assurance that a third-party
provider's failure to resolve the Year 2000 Problem would not have an adverse
effect on HWG. In particular, if HWG's internal computer software and systems or
those of a third-party providers experience any significant disruption in
connection with the Year 2000 Problem, such disruption could affect HWG's
ability to conduct business and may have a material adverse effect on HWG's
results of operations. HWG has developed a contingency plan to minimize the
impact of such a disruption. The contingency plan generally consists of the
following two phases:
The first phase of HWG's contingency plan will go into effect as early as
March 1999. If by this date SG Cowen has not proven that its system is
compliant, HWG will begin negotiations with one of two other clearing firms.
Conversion would commence in June 1999, if SG Cowen was still not compliant.
Compliance would be one of the main issues in negotiations. Conversion should by
complete by December 1999. Testing would be completed in October 1999.
The second phase of HWG's contingency plan will go into effect at the turn
of the century if anything outside its local systems happens to fail. HWG's
current systems will have been fully tested and examined prior to the turn of
the century and will be proven completely operational. This phase will consist
of the team locating any failing external systems and replacing them with their
backups.
70
<PAGE>
BUSINESS OF PMT
GENERAL
PMT is a Texas chartered private independent trust company serving a broad
array of individual, charitable, corporate and institutional clients. PMT
specializes in asset management and fiduciary services, deriving its revenues
primarily from fees based on a percentage of assets under management. Founded in
1994, PMT is headquartered in Houston, Texas with operations in Victoria, Texas.
PMT provides its trust services through a staff of 13 employees. Its
professionals average more than 19 years experience in the trust, banking and
portfolio management industries. PMT believes it offers its clients, among other
things, (i) direct access to an experienced, knowledgeable and service-oriented
staff with local decision-making authority and (ii) a record of strong
investment performance results.
PMT commenced operations in June 1994, and thus, has a limited operating
history upon which to base an evaluation of PMT's operating performance and
prospects. PMT has increased revenues for each year of operations, generating
revenues of approximately $0.5 million, $0.7 million and $1.4 million, for 1995,
1996 and 1997, respectively. PMT achieved its first year of profitable
operations in 1997 and again in the first six months of 1998 with net income of
$0.4 million and $0.3 million, respectively. PMT incurred operating losses in
both 1995 and 1996 and had an accumulated deficit at June 30, 1998 of
approximately $(0.5) million.
SERVICES PROVIDED
PMT 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 believes the quality of its investment management services sets it apart
from other private trust companies by providing PMT's clients with a complete
outsourcing vehicle for their investment management functions. 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. PMT believes this total investment
management approach provides clients with increased diversification, reduced
risk and greater control over their portfolios.
PMT's employees are expected to periodically monitor its clients through
direct telephone calls and personal visits to ensure that the client's needs are
being 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 primarily from asset management and fiduciary fees
based on a percentage of assets under administration. At June 30, 1998, PMT had
$439 million of assets under administration representing an increase of 32.6%
from $331 million at June 30, 1997. The actual fee charged is based on a rate
schedule formulated by PMT from time to time, which rates vary depending on the
services being provided and the amount of assets involved. PMT believes that
this fee structure, as opposed to transactional commissioned-based arrangements,
more closely aligns PMT's interests with its clients and facilitates the
development of long-term client relationships. For 1995, 1996 and 1997, fees and
services accounted for approximately 79%, 89% and 77%, respectively, of PMT's
total revenues.
CLIENTS AND MARKETING
At June 30, 1998, PMT provided trust services to approximately 150 clients
consisting primarily 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. No single client accounted for more than 10%
of the PMT's 1997 total revenues.
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<PAGE>
PMT believes marketing and business development is a company-wide
responsibility, and all employees are encouraged to be actively involved in
business development efforts through maintenance of professional and personal
relationships and active involvement in community events. PMT markets its
specific client groups through mailouts, telephone calls, multi-media client
presentations and company-sponsored or co-sponsored workshops and seminars.
EFFECTS OF INTEREST RATES
PMT's 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. PMT's revenues relating to
asset-based advisory services and managed accounts are typically derived 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 as a result of changes in interest rates or changes in other economic
factors, may materially affect the amount of assets under management, and thus,
PMT's revenues and profitability.
COMPETITION
The trust service business is highly competitive. The primary competitive
factors influencing PMT business are its reputation in the marketplace, its
professional staff, the quality and level if its client support service, the
consistency and stability of its business relationships with clients, the
breadth, quality and pricing of the products and services it offers.
PMT competes with other southwestern based private trust companies as well
as the trust departments of national, regional and local commercial banks and a
variety of money managers. Due to the level of consolidations in the financial
services, banking and other related industries, the trust services industry has
become more concentrated. Several of PMT's competitors offer a broader range of
services, have greater name recognition, may be able to offer services at a
lower cost and have greater financial resources than PMT, which may provide such
competitors with competitive advantage over PMT.
GOVERNMENT REGULATION
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 TTCA, the rules and regulations promulgated
thereunder and supervision by the Texas Banking Commissioner (the "Bank
Regulator"). These laws are intended primarily for the protection of PMT's
clients, rather than for the benefit of investors. The TTCA provides for, and
regulates, a variety of matters, including: periodic examinations by the office
of the Bank Regulator; furnishing periodic financial statements to the Bank
Regulator; minimum net capital maintenance requirements; fiduciary
record-keeping requirements; bonding requirements for the protection of clients;
restrictions on investments of restricted capital; lending and borrowing
limitations; prohibitions against engaging in certain activities; prior approval
from the Bank Regulator 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); broad regulatory powers in the event
the trust company violates certain provisions of TTCA or is determined to be in
a "hazardous condition" (as defined by the TTCA); and other matters. While PMT
believes it is in material compliance with these laws, rules and regulations,
there can be no assurance that PMT will be able to continue such compliance in
the future or that these laws, rules or regulations will not change adversely,
either of which could have a material adverse effect on PMT's business,
financial condition and results of operations.
FACILITIES
PMT's facilities consist of an office facility leased in Houston, Texas,
aggregating approximately 3,500 square feet. PMT leases its Houston office space
from HWG, which lease expires in February 1999.
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<PAGE>
PMT has entered into a new five year sublease with HWG relating to this property
which commences in March 1999. This lease is on rental and other terms that PMT
believes are commercially reasonable. PMT believes that the existing facility is
well-maintained and adequate for PMT's existing and planned operations.
EMPLOYEES
At June 30, 1998, PMT had a total of 13 employees, seven of whom were trust
service professionals and six were in administrative support. None of PMT's
employees are subject to a collective bargaining agreement. PMT believes that
its relations with its employees generally are good.
RISK MANAGEMENT; LITIGATION
PMT's business involves substantial risks of liability. From time to time
PMT may be named as a defendant in civil litigation and arbitration arising from
its business activities as a fiduciary and in connection with its investment
management functions. The plaintiffs in such litigation or arbitration may
allege breach of fiduciary obligations or misconduct on the part of PMT's trust
service professionals, claiming, for example, that investments were unauthorized
or unsuitable for the account, or that the trust service professionals engaged
in excessive trading with respect to the plaintiffs' accounts. While
historically PMT has not incurred material liability with respect to such
litigation or arbitration and in certain cases PMT is provided indemnification
in connection with certain fiduciary actions authorized by contract, there can
be no assurance that substantial liabilities in connection with such matters
will not occur in the future.
PMT's ability to comply with applicable laws and rules relating to its
trust services business is dependent in large part upon the establishment and
maintenance of a compliance system designed to monitor compliance with such laws
and rules. Although PMT believes that it is in material compliance with such
rules and regulations, there can be no assurance that PMT in the future will not
be subject to disciplinary or other actions due to claimed noncompliance which
could have a material adverse effect on PMT's business, financial condition and
operating results.
Since its inception in June 1994, PMT has not been a party to any
litigation.
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<PAGE>
PMT SELECTED FINANCIAL DATA
The following selected historical financial data as of and for each of the
years ended December 31, 1994, 1995, 1996 and 1997 is derived from the audited
financial statements of PMT. The historical financial data for the six months
ended June 30, 1997 and 1998 and as of June 30, 1998 is derived from the
unaudited financial statements of PMT. In the opinion of management, this data
contains all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the six months ended June 30, 1997 and 1998 and as
of June 30, 1998. The selected financial data set forth below should be read in
conjunction with "PMT Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the PMT Financial Statements and
notes thereto included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Fees and services............... $ 28 $ 379 $ 653 $ 1,078 $ 465 $ 665
Interest and dividends.......... 32 68 67 98 55 43
Securities gains and other...... -- 33 10 233 124 188
--------- --------- --------- --------- --------- ---------
Total revenues............. 60 480 730 1,409 644 896
--------- --------- --------- --------- --------- ---------
Compensation and benefits....... 200 417 487 667 271 368
Other general and
administrative................ 179 384 458 358 189 202
--------- --------- --------- --------- --------- ---------
Total expenses............. 379 801 945 1,025 460 570
--------- --------- --------- --------- --------- ---------
Net income (loss)............... $ (319) $ (321) $ (215) $ 384 $ 184 $ 326
========= ========= ========= ========= ========= =========
<CAPTION>
DECEMBER 31,
------------------------------------------ JUNE 30,
1994 1995 1996 1997 1998
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Investment securities........... $ 891 $ 411 $ 681 $ 1,793 $ 2,960
Total assets.................... 1,351 1,078 2,342 2,457 3,344
Shareholders' equity............ 1,337 1,019 2,288 2,288 3,318
</TABLE>
- ------------
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<PAGE>
PMT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since inception, PMT's revenues have increased significantly, the largest
portion being derived from fees and services which accounted for 76.5% of total
revenues in 1997 and 74.2% of revenues for the six months ended June 30, 1998.
Revenues grew at an average annual rate of 71% from 1995 to 1997, from $0.5
million to $1.4 million. Expenses grew at an average annual rate of 13% from
1995 to 1997, from $0.8 million to $1.0 million. Pre-tax profitability grew from
a loss of $0.3 million in 1995 to income of $0.4 million in 1997.
The growth in PMT's revenues from 1995 to 1997 was attributable to, among
other things, the following factors: (1) an increase in the number of managed
accounts and the aggregate amount of assets under administration, (2) increased
marketing, (3) strong investment performance results, (4) increased average fees
charged by PMT for each account under administration and (5) management's
emphasis on personalized customer service. Although PMT's expenses increased
from 1995 to 1997, they did not increase proportionately with revenues. The
increase in PMT's expenses was mainly attributable to (1) an increase in
personnel from seven individuals to 13 individuals and (2) increased marketing
efforts.
PMT's profitability is affected by many factors, including: (1) its ability
to retain and increase its client base, (2) competition entering PMT's business
and the fees charged by PMT's competitors, (3) the average fee charged by PMT
for each account, (4) the overall economy and (5) the volatility, level and
direction of the stock market. Since PMT's expenses are relatively fixed, PMT
can steadily increase its margins and profitability as it increases revenue.
In March 1998, PMT moved its bookkeeping and data processing operations
in-house, utilizing the "SunGard" Trust Accounting system. The operations
conversion, which cost approximately $25,000 (and has been successfully
completed), gives PMT greater flexibility and control over the settlement of
securities and reporting functions. The system also enhances administrative and
performance reporting capabilities and has added features such as customer
account access via PMT's website on the Internet. The internalizing of
operations required the addition of two employees in 1998. PMT believes it now
has the capacity to substantially increase its asset base under administration
without incurring significant incremental administrative expense.
During the last several years, investors have seen record returns in the
equity markets, thus stimulating the investment management business. Recent
market conditions, however, have been highly volatile. Given the recent
uncertainty in the market, PMT anticipates a trend toward professional
investment and asset management to continue as investors seek guidance and
expertise to manage their portfolios. As PMT's philosophy is focused toward
long-term management and growth of assets, regardless of each individual
client's asset mix, PMT does not believe that it will experience significant
volatility in its business as the stock market rises and falls. There can be no
assurance, however, that PMT's clients will continue to maintain accounts with
PMT during periods of significant volatility.
COMPONENTS OF REVENUES AND EXPENSES
REVENUES. PMT's revenues are composed primarily of: (1) fees and services
revenues derived from asset management and fiduciary services and (2) interest
and dividends revenue derived from interest earned on the cash held and
dividends received from the equity securities held by PMT for its corporate
capital account. PMT typically earns fees based on the value of assets under
administration in each account. PMT's largest client sector for asset management
and fiduciary services consists of trust accounts. PMT's fees and services
revenues are primarily affected by (1) the number of managed accounts and the
average fee of each, (2) the aggregate amount of assets under management, (3)
competition entering PMT's business and the fees charged by PMT's competitors,
(4) PMT's marketing efforts, (5) the volatility, level and direction of the
stock market and (6) the overall economy.
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<PAGE>
Other sources of revenue include revenue earned from gains on the sale of
securities that are held in PMT's corporate account.
EXPENSES. The company's expense structure consists of two components: (1)
compensation and benefits and (2) other expenses. Compensation and benefits
include wages, salaries and employee benefits and is the largest expense
component, accounting for 65.1% of total expenses and representing 47.3% as a
percentage of total revenues in 1997. Other expenses include, among other
things, data processing, occupancy, marketing, furniture and equipment,
insurance, communications, supplies and travel and entertainment. The largest
component of PMT's other expenses is data processing, accounting for 23.9% of
other expenses in 1997. PMT's expenses increase as accounts are added, mainly
due to increased data processing and marketing expenses.
RESULTS OF OPERATIONS
PMT's financial results have been and may continue to be subject to
fluctuations due to the factors described above. Consequently, the results of
operations for a particular period may not be indicative of results to be
expected for other periods. The following table sets forth for the periods
indicated, the percentage relationship that certain items in PMT's Statements of
Operations bear to revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Fees and services................ $ 379 79.0% $ 653 89.4% $ 1,078 76.5% $ 465 72.2%
Interest and dividends........... 68 14.1 67 9.2 98 7.0 55 8.5
Securities gains and other....... 33 6.9 10 1.4 233 16.5 124 19.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 480 100.0 730 100.0 1,409 100.0 644 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Compensation and benefits........ 417 86.9 487 66.7 667 47.3 271 42.1
Other............................ 384 80.0 458 62.7 358 25.4 189 29.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses.............. 801 166.9 945 129.4 1,025 72.7 460 71.4
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (321) (66.9)% $ (215) (29.4)% $ 384 27.3% $ 184 28.6%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
REVENUES:
Fees and services................ $ 665 74.2%
Interest and dividends........... 43 4.8
Securities gains and other....... 188 21.0
--------- ---------
Total revenues.............. 896 100.0
--------- ---------
EXPENSES:
Compensation and benefits........ 368 41.1
Other............................ 202 22.5
--------- ---------
Total expenses.............. 570 63.6
--------- ---------
Net income (loss).................... $ 326 36.4%
========= =========
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues increased 39% from $644,000 during the six months ended June 30,
1997 to $896,000 for the comparable period in 1998. This increase was
principally due to a $200,000 increase in fees and services for the six months
ended June 30, 1998 as compared to the same period in 1997. PMT's total assets
under management grew from $331 million at June 30, 1997 to $439 million at June
30, 1998, as a result of 91 new relationships that were added during this
period. This increase was partially offset by a decrease in interest and
dividends from $55,000 for the six months ended June 30, 1997 to $43,000 for the
comparable period in 1998 due primarily to a change in the type of investment
mix in the corporate portfolio.
Compensation and benefits increased from $271,000 during the first six
months of 1997 to $368,000 in the comparable 1998 period. PMT added two officers
during this period to assist in the management of operations.
Net income increased 76.6% from $184,000 (28.6% of revenues) to $326,000
(36.3% of revenues) during the six months ended June 30, 1998.
1997 COMPARED TO 1996
Revenues from fees and services increased by 65.2%, from $653,000 in 1996
to approximately $1.1 million during 1997 primarily as a result of (1) an
increase in the number of managed accounts and (2) an increase in the average
fee charged for PMT's services. In May, 1997, PMT hired a portfolio manager who
managed approximately $45.0 million in assets representing approximately
$135,000 in annualized revenues. Interest and dividends increased from $67,000
in 1996 to $98,000 in 1997 due to
76
<PAGE>
increased levels of securities held in PMT's capital accounts during 1997. Other
revenues, which consist mainly of gains on assets sold, increased $223,000 from
$10,000 in 1996 to $233,000 in 1997.
PMT's expenses increased 8.5% from $945,000 in 1996 to approximately $1.0
million in 1997. The increase in expenses resulted primarily from a 36.9%
increase in compensation and benefits due to the addition of two salaried
officers. Other expenses decreased in 1997 as compared to 1996 largely due to
the complete write-off in 1996 of remaining unamortized organizational expenses,
equal to approximately $112,000. Prior to 1996, PMT was amortizing its
organizational costs over a period of five years.
PMT's net income for 1997 was $384,000 (27.3% of revenues) compared to a
net loss of $215,000 in 1996.
1996 COMPARED TO 1995
PMT's first full year of operations was 1995. PMT's revenues grew 52.1%
from $480,000 in 1995 to $730,000 in 1996 principally due to a $274,000 increase
in fees and services from 1995 to 1996. PMT's total assets under management grew
from $184 million at December 31, 1995 to $382 million at December 31, 1996 as a
result of 51 new relationships added during the year.
Total expenses increased from $801,000 in 1995 to $945,000 in 1996 due
mainly to an increase in personnel and increased operating expenses such as data
processing and marketing. Additionally, other expenses were increased by a
$112,000 charge to amortization from the remaining unamortized organizational
expenses.
PMT recorded net losses of $321,000 in 1995 and $215,000 in 1996. PMT
generated a profit in May 1996 for the first time, however the remainder of 1996
earnings were reduced due to costs and expenses attributable to the addition of
a new president, a chief financial officer and two other officers to the
management team.
LIQUIDITY AND CAPITAL RESOURCES
PMT's original shareholders were granted "founders' warrants" that allow
the holder thereof to purchase a number of shares of common stock based on 50%
of the shareholders original investment in the company (33,150 shares or
$829,000) at a price of $25.00 per share. As of June 30 1998, 23,792 warrants
have been exercised, increasing capital by a total of $661,000. Additionally,
certain employees of PMT have options to purchase 33,000 shares of common stock
at a price of $25.00 per share. In 1997, two new directors were granted options
to purchase 10,000 shares of common stock at $25.00 per share. It is anticipated
that the remainder of the "founders' warrants" and all the outstanding options
will be exercised prior to the closing of the Transactions, adding $1.3 million
in capital to PMT, using, in part, funds loaned by TEI in accordance with the
terms of the Agreement.
PMT had $3.3 million in capital and no funded debt as of June 30, 1998. PMT
plans to distribute 100% of the fiscal year 1998 net income prior to the closing
of the Transactions. At June 30, 1998, liquid assets represented approximately
92% of PMT's total assets. PMT's capital surplus is maintained in liquid
securities consisting of cash, U.S. Government and equity securities and is well
in excess of regulatory requirements.
Total assets were approximately $3.3 million as of June 30, 1998.
Shareholders' equity was approximately $3.3 million in the same period.
As required by the State of Texas Department of Banking, PMT maintains
minimum net capital of $1.5 million. At June 30, 1998, PMT had capital of $3.3
million, which is in excess of the $1.5 million requirement of the Department of
Banking. In addition, under Texas law, PMT generally cannot have liabilities
which exceed five times its capital stock plus surplus. At June 30, 1998, PMT
had total liabilities of only $25,000 against total shareholders' equity of
approximately $3.3 million.
PMT has historically financed capital expenditures through internally
generated cash. During 1997, PMT had capital expenditures of approximately
$42,000 which were funded from operations. PMT's generally does not intend to
incur material capital expenditures in the near term.
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<PAGE>
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 and rent. Increases in these expenses may not be readily
recoverable in the prices that PMT charges for its services. Inflation can have
significant effects on interest rates that in turn can affect prices and
activities in the financial services markets, including the fees PMT earns on
its managed accounts. These fluctuations could have an adverse impact on PMT's
operations.
YEAR 2000
The Year 2000 Problem refers to the inability of some computer programs and
systems to correctly interpret the century from a date in which the year is
represented by only two digits. A computer program or system that has not
resolved the Year 2000 Problem may not be able to correctly process certain
data, or in extreme situations, the program or system may become disabled.
In addition to dependence on its own computer programs and systems that may
be affected by the Year 2000 Problem, PMT has material relationships with third
parties that must also address the Year 2000 Problem.
PMT has developed a multi-phase plan to resolve its potential Year 2000
Problem. That plan consists of the following phases:
Phase I: Identification of mission-critical
systems including potential problems
with third-party
providers.
Phase II: Performance of risk analysis of each
core business process and assessment of
the steps that PMT must take to avoid
the Year 2000 Problem.
Phase III: Implementation of a process to make its
systems Year 2000 compliant.
Phase IV: Testing of internal computer software
and systems and certification of Year
2000 compliance.
Phase V: Participation and evaluation of proxy
testing of third-party provider's
computer software and systems.
Phase VI: Implementation of computer software and
systems designed to avoid the Year 2000
Problem and review to ensure the
integrity and functionality of the
modified systems.
To date, PMT has completed Phases I through IV of its plan at an estimated
costs of $1,500 for replacing one computer workstation that failed during the
testing phase. PMT expects to complete Phases V and VI of its plan by June 30,
1999 and does not anticipate any additional costs for computer systems
renovation.
PMT believes that its internal computer software and systems will not
experience significant disruption in connection with the Year 2000 Problem.
However, there can be no assurance that a third-party provider's failure to
resolve the Year 2000 Problem would not have an adverse effect on PMT. In
particular, if PMT's internal computer software and systems or those of a
third-party provider experience any significant disruption in connection with
the Year 2000 Problem, such disruption could affect PMT's ability to conduct
business and may have a material adverse effect on operations. PMT has developed
a business continuation plan to minimize the impact of such a disruption. The
contingency plan consists of key assumptions that define the plan; a business
impact analysis; alternatives for critical processing functions; a timeline for
implementation, action and trigger dates for activation, an assignment of event
plan roles and responsibilities, and, a process for validation and independent
review of the plan.
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<PAGE>
BUSINESS OF SPIRES
GENERAL
Spires is a regional investment banking and brokerage services firm serving
a broad range of institutional clients. Spires specializes in the brokering and,
to a lesser extent, trading in fixed-income securities. Other significant
activities include brokering of residential, consumer and commercial loans, and
the placement of mortgage servicing on a national basis. During 1997, Spires
executed over $4.8 billion in fixed-income trades for more than 700
institutional accounts in the United States, Europe and Japan.
Founded in January 1995, Spires is headquartered in Houston, Texas with
branch offices in Houston and Austin, Texas; Morris Plains, New Jersey; New
York, New York; and Westport, Connecticut. Spires performs its financial
services through a staff of over 40 professionals and support personnel, which
professionals average more than eight years experience in the securities
business. Management believes its success is based in a large part, on its (i)
state-of-the-art set of integrated proprietary trading tools delivered to
institutional clients over the Internet, (ii) experienced, knowledgeable and
specialized professional staff focused primarily on the fixed-income securities
markets and (iii) commitment to unique, personalized service and support for its
clients.
Spires commenced operations in January 1995, and thus, has a limited
operating history upon which to base an evaluation of Spires' operating
performance and prospects. Spires has been profitable since inception generating
net income for 1995, 1996 and 1997 of approximately $4.1 million, $3.2 million
and $2.2 million, respectively, on revenues of approximately $7.5 million, $8.3
million and $8.2 million, respectively.
SERVICES PROVIDED
INSTITUTIONAL BROKERAGE. Spires 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 from time to time. During 1995,
1996 and 1997, commissions on institutional sales represented 35%, 36% and 39%,
respectively, of Spires total revenues.
TRADING. Rather than trading a wide variety of securities in direct
competition with Wall Street firms, Spires has developed a niche strategy to the
proprietary trading of certain fixed-income securities, including U.S.
government securities, certain mortgage related securities and collateralized
mortgage obligations. In its trading activities, Spires generally acts as a
wholesaler, buying round-lot and odd-lot positions, selling round-lot and
odd-lot positions and acting 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. During 1995, 1996 and 1997, revenues from Spires' trading activities
represented approximately 56%, 42% and 25%, respectively, of Spires' total
revenues.
The level of positions carried in Spires' trading accounts fluctuates
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. In particular, it employs a hedging strategy that is
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 associated with interest rate fluctuations for some of the
fixed-income securities that Spires trades, primarily
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<PAGE>
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 various risks associated with its
proprietary trading activities by subjecting its trading inventory positions and
profit and loss statements to daily review by senior management of Spires.
Senior management reviews daily the profit and loss and inventory positions of
the trading desks. There can be no assurance, however, that such procedures will
prevent any such loss, and any such loss could have a material adverse effect on
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 historically income
from interest charged has not been a significant source of revenue, in the
future, the financing of margin purchases can be an important revenue source,
since the interest rate paid by the client on funds loaned through Spires
exceeds Spires' interest costs for net customer debit balances paid to Daiwa.
The amount of Spires' gross interest revenues is 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 also derives revenue from the placement of
mortgage servicing and newly "securitized" mortgaged collateral on a
nationwide basis.
During 1995, 1996 and 1997, revenues from other activities (I.E., whole
loan sales and net interest income) represented approximately 9%, 22% and 36%,
respectively, of Spires total revenues.
CLIENTS
At March 31, 1998, Spires had in excess of 700 institutional clients
located throughout the United States, Europe and Japan. Spires institutional
clients consist primarily of pension funds, money managers, mutual and hedge
funds, insurance companies, commercial banks and thrift companies.
INTELLECTUAL PROPERTY
As the structures of fixed-income securities have become increasingly more
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" (SFN), which 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 located in Houston, Texas with only
mouse clicks and screen graphics being transmitted back and forth over the
Internet.
SFN proprietary databases provide current and fourteen-year historical
market information relating to, among other things, mortgage-backed securities
and collateralized mortgage obligations. The proprietary search engines and
analytics offered by SFN include, among others: (i) Portfolio Pro, which 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 (ii) Bond Locator, which permits database searching capabilities by CUSIP,
description or profile. Through the various applications offered by SFN, Spires
and its clients are better able to (i) achieve liquidity and execution by
matching buyers and sellers of similar
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<PAGE>
securities and (ii) 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 enabling Spires to redistribute selected Bloomberg data
through SFN to its clients. As one of the few entities entitled to
redistribution of this data, Spires can provide its customers with additional
market information not available from its competitors.
SFN is supported by a staff of five full-time system development,
programming and support personnel. These persons are responsible for system
maintenance and support, as well as development of proprietary software tools
based on information provided by Spires' brokerage and trading professionals and
its institutional clients.
Spires management believes that SFN is a key element in the success of
Spires institutional brokerage and trading activities.
MARKETING
Spires' marketing efforts are conducted primarily by its marketing division
which consists of 24 employees located at Spires' headquarters in Houston and
its four branch offices. Spires targets its client groups through mailouts,
telephone calls, in-person presentations and firm-sponsored workshops. Several
representatives of Spires have also given presentations at national and regional
trade conventions and conferences. Management believes its SFN proprietary
technology has been critical to its client development success.
RELATIONSHIP WITH CLEARING BROKERS
Spires clears all transactions, and carries accounts for clients, primarily
through Daiwa and other clearing brokers. In its arrangement with Daiwa, Spires
acts as an introducing broker for Daiwa, and thus, Spires arranges the trades,
while Daiwa serves as both principal and clearing agent on those transactions.
Other clearing brokers utilized by Spires act solely as clearing broker. These
clearing brokers furnish Spires with information necessary to generate Spires'
commission runs, transaction summaries, data feeds for various reports including
compliance and risk management, execution reports, trade confirmations, monthly
account statements, cashiering functions and the handling of margin accounts. As
a result of its arrangement with these clearing brokers, Spires has achieved
substantial savings in its clearing and related operations. Under these clearing
broker arrangements, management believes that Spires' cost of clearing its
transactions is very competitive with the industry's costs. Spires is generally
entitled to pay a set fee per trade, subject to an aggregate annual minimum
payment for clearing trades through these clearing brokers. Spires' current
trading volume allows Spires to realize substantially all of the benefit of the
per trade price, although Spires believes that its arrangement with Daiwa and
its other clearing brokers furnishes substantial cost advantages to Spires even
during periods with reduced trading volumes.
Spires currently has an uncommitted financing arrangement with these
clearing brokers pursuant to which Spires 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 are not
reflected on the Spires' Statements of Financial Condition for financial
accounting reporting purposes, Spires has generally agreed to indemnify these
clearing brokers for losses it may sustain in connection with accounts of
Spires' clients, and therefore, retains risk with respect thereto. Spires is
required to maintain certain cash or securities on deposit with these clearing
brokers, which at June 30, 1998 aggregated approximately $1.1 million.
EFFECTS OF INTEREST RATES
Spires' business is affected by general economic conditions, including
movements of interest rates. Spires' inventory of fixed-income securities may
fluctuate as interest rates change, and Spires' interest income and interest
expense may likewise change as interest rates change. However, interest rates
have indirect effects on other aspects of Spires' business as well.
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<PAGE>
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.
COMPETITION
All aspects of Spires' business, and of the securities business in general,
are highly competitive. The principal competitive factors influencing Spires'
business are its professional staff, its reputation in the marketplace, its
existing client relationships, the ability to commit capital to client
transactions, its mix of market and technological capabilities and pricing.
Spires' ability to compete effectively in institutional brokerage and investment
banking activities will also be influenced by the adequacy of its capital levels
and by its ability to raise additional capital.
Spires competes directly with national and regional full service
broker-dealers and, to a lesser extent, with discount brokers, dealers,
investment banking firms, investment advisers and certain commercial banks. In
addition to competition from firms currently in the securities business,
domestic commercial banks and investment banking boutiques have recently entered
the business. In recent years, large international banks have also entered the
markets served by United States investment banks, including the markets in which
Spires competes. Spires 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 certain
restrictions on commercial banks relating to the sale of securities. The
financial services industry has become considerably more concentrated as
numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. Such mergers and acquisitions have increased
competition from these firms, many of which have significantly greater equity
capital and financial and other resources than Spires. Many of these firms,
because of their significantly greater financial capital and scope of
operations, are able to offer their customers more product offerings, broader
research capabilities, larger capital commitments and other products and
services not offered by Spires, which may provide such firms with competitive
advantages over Spires.
Spires also faces competition from a rapidly developing industry comprised
of companies offering discount and/or electronic brokerage services. These
competitors may have lower costs and may offer their customers more attractive
pricing or other terms than those offered by Spires. In addition, issuers and
third party holders may attempt to sell securities directly to purchasers,
including through sales using electronic media such as the Internet. To the
extent that issuers and holders of securities are able to transact business
without the assistance of financial intermediaries, such as Spires, Spires'
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 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 authority, these
SROs adopt rules that govern the industry and conduct periodic examinations of
the operations of Spires. In addition, Spires is subject to regulation under the
laws of the 50 states, the District of Columbia, Puerto Rico and certain foreign
countries in which it is registered to conduct securities or investment banking
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.
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As a registered broker-dealer, Spires is subject to certain net capital
requirements set forth in Rule 15c3-1 under the Exchange Act. The net capital
rules, which specifies minimum net capital requirements for registered
broker-dealers, is designed to measure the financial soundness and liquidity of
broker-dealers. The net capital rules also (i) require that broker-dealers
notify the SEC, in writing, two business days prior to making withdrawals or
other distributions of equity capital or lending money to certain related
persons if those withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer's excess net capital, and that they provide such notice 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; (ii) prohibit a
broker-dealer from withdrawing or otherwise distributing equity capital or
making related party loans if after such 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 (iii) provide that the SEC
may, by order, prohibit withdrawals from capital from 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
such 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.
Spires is also subject to "Risk Assessment Rules" imposed by the SEC
which require, among other things, that certain broker-dealers maintain and
preserve certain information, describe risk management policies and procedures
and report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have 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 regulation by the SEC.
FACILITIES
Spires' facilities consist of office facilities leased in Houston and
Austin, Texas; Morris Plains, New Jersey and Westport, Connecticut, aggregating
approximately 18,000 square feet. The firm's Houston, Austin, Morris Plains and
Westport leases expire in 2003, 2000, 2000 and 2003, respectively. Each of the
above leases are on rental and other terms that Spires believes are commercially
reasonable. Spires believes that the existing facilities are well maintained and
adequate for Spires' existing and planned operations.
EMPLOYEES
At June 30, 1998, Spires had a total of 43 employees, of whom 26 were
engaged in institutional sales, five in trading, five in systems development and
support and seven in accounting, administration and operations. Of these
employees, 31 were classified as professionals and 12 were classified in support
positions. None of Spires' employees are subject to a collective bargaining
agreement. Spires believes that its relations with its employees generally are
good.
RISK MANAGEMENT; LITIGATION
Spires' financial services business involve substantial risks of liability.
From time to time Spires may be named as a defendant in civil litigation and
arbitrations arising from its business activities as a broker-dealer. The
plaintiffs in such litigation or arbitration may allege misconduct on the part
of Spires' institutional sales persons, claiming, for example, that investments
sold to such plaintiffs by such institutional sales persons were unsuitable for
their portfolios, or that the institutional sales persons engaged in excessive
trading with respect to the plaintiffs' accounts. While historically Spires has
not incurred material liability with respect to such litigation or arbitration,
there can be no assurance that substantial liabilities in connection with such
matters will not occur in the future. The defense of these or any other lawsuits
or arbitrations may divert the efforts and attention of Spires' management and
staff from other responsibilities within Spires, and Spires may incur
significant legal expense in defending such litigation or arbitration.
Spires' ability to comply with applicable laws and rules relating to its
financial services business is dependent in large part upon the establishment
and maintenance of a compliance system designed to
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monitor compliance with such laws and rules, as well as Spires' ability to
attract and retain qualified compliance personnel. Although Spires believes that
it is in material compliance with such rules and regulations, there can be no
assurance that Spires in the future will not be subject to disciplinary or other
actions due to claimed noncompliance which could have a material adverse effect
on Spires' business, financial condition and operating results.
Since its inception in January 1995, Spires has not been a party to any
litigation or legal proceedings other than regulatory proceedings involving
state licensing and registration issues, which Spires has since resolved.
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<PAGE>
SPIRES SELECTED FINANCIAL DATA
The following selected historical financial data as of and for each of the
years ended December 31, 1995, 1996 and 1997 is derived from the audited
financial statements of Spires. The historical financial data for the six months
ended June 30, 1997 and 1998 is derived from the unaudited financial statements
of Spires. In the opinion of management, this data contains all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly the
six months ended June 30, 1997 and 1998. The selected financial data set forth
below should be read in conjunction with "Spires Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Spires
Financial Statements and notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commissions..................... $ 6,841 $ 7,322 $ 6,692 $ 3,033 $ 3,337
Interest and dividends.......... 237 564 800 351 523
Securities gains and other...... 455 394 749 215 356
--------- --------- --------- --------- -----------
Total revenues............. 7,533 8,280 8,241 3,599 4,216
--------- --------- --------- --------- -----------
Compensation and benefits....... 2,169 3,023 3,392 1,386 1,754
Brokerage and clearance......... 111 235 222 115 123
Interest expense................ -- 228 615 275 538
Other general and
administrative................ 1,157 1,548 1,827 843 1,037
--------- --------- --------- --------- -----------
Total expenses............. 3,437 5,034 6,056 2,619 3,452
--------- --------- --------- --------- -----------
Net income...................... $ 4,096 $ 3,246 $ 2,185 $ 980 $ 764
========= ========= ========= ========= ===========
<CAPTION>
DECEMBER 31,
------------------------------- JUNE 30,
1995 1996 1997 1998
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Securities inventory............ $ 2,600 $ 5,455 $ 18,056 $22,491
Total assets.................... 8,236 11,271 35,224 30,545
Partners' capital............... 5,405 4,920 4,790 3,704
</TABLE>
- ------------
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SPIRES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since Spires' inception in January 1995, its fixed-income sales volume has
grown significantly, revenues have grown modestly, and profitability has
declined. From 1995 to 1997 sales volume increased at an average annual rate of
68.9%, to $4.2 billion from $1.5 billion. Revenues grew at an average annual
rate of 4.7% from 1995 to 1997, to $8.2 million from $7.5 million. During the
same period, expenses grew at an average annual rate of 28.6%, to $6.1 million
from $3.4 million. However, profitability declined at an average annual rate of
35.7%, to $0.9 million in 1997 from $2.2 million in 1995.
The growth rate of Spires' sales volume was primarily attributable to the
addition of its branch offices and the increase in number of institutional
brokers, from four to 18. The lower growth in revenues was principally due to
market factors including: (1) the historically low long-term interest rate
environment, (2) the decline in the relative price volatility of fixed-income
products, (3) the slow-down in institutional purchases of mortgage-related
securities and (4) a decline in trading activity among dealers. The combination
of these factors resulted in a narrowing in the Spires' average transaction
margin, known as the "spread", or difference, between the "bid" (the price
Spires pays for a bond) and the "offering" (the price Spires sells a bond). In
other words, Spires sold more, but made less.
The increase in expenses was primarily the result of (1) an increase in
Spires' variable costs caused by a shift in the Spires' business mix from Spires
generated trading activity and inter-dealer business (requiring no commission
expense) to broker generated institutional commission business (requiring
commission expense) and (2) an increase in the fixed costs required to support
the addition of Spires' branches and Spires' corresponding increase in number of
brokers and the electronic data processing ("EDP") services required to build
a technology-based fixed-income broker-dealer platform.
Spires' profitability is affected by many factors, including: (1) the
volatility, level, and direction of interest rate movements, (2) the level of
securities trading volume and the average profit per transaction, (3) the mix of
business between Spires' various components, i.e. whether from its trading desk
or commission brokers, and with respect to its commission brokers, whether from
dealer sales, institutional sales or whole loan sales, (4) the number of
commission brokers and the average production of each, (5) the impact of hedging
activities and (6) the amount of capital available to support inventory
positions and new product creation. While the Spires' compensation expense is
variable, many of its activities have fixed operating costs that do not decrease
with reduced levels of activity.
Strong equity markets, low interest rates, a flat yield curve, low interest
rate volatility, and a shifting business mix contributed to declining margins in
1995, and these trends continued throughout 1996, 1997, and into 1998. With the
Dow Jones Industrial Average rising 12.4% during the first half of 1998,
institutional investor attention was focused on the equity markets and asset
allocations were heavily weighted toward equities. Low interest rates and a flat
yield curve (long-term interest rates were at thirty-year lows on June 30, 1998,
with the ten-year treasury at 5.45% and the thirty-year treasury at 5.63%)
created little incentive for investors to purchase the longer maturity
fixed-income products that are more profitable for Spires. Finally, interest
rate volatility, a key factor in bond transaction volume, was low during the
first half of 1998 (rates fluctuated less than 50 basis points.) As a result of
these factors, Spires' average transaction margin declined to the lowest level
in Spires' history during the first half of 1998.
COMPONENTS OF REVENUES AND EXPENSES
REVENUES. Spires' revenues are derived primarily from commission income
from principal and agent transactions, interest income, and gains (or losses)
taken in its inventory account. Principal transaction revenues include net
revenues from the trading of fixed-income securities by Spires as a principal
(including sales credits and trading profits and losses) that are primarily
derived from its wholesale (inter-dealer) trading activity and activities for
the benefit of its institutional clients. Principal transaction revenues are
affected primarily by: (1) the volatility, level, and direction of interest rate
movements, (2) the level of
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securities trading volume, including both dealer volume and client volume and
(3) the number of commission brokers and the average production of each. Agent
transaction revenues primarily include revenues resulting from whole loan and
loan servicing transactions arranged as an agent on behalf of clients.
Interest income results from the interest earned on fixed income securities
while they are in Spires' inventory awaiting sale. Spires receives the interest
on these securities from the date of purchase until the date of sale. Other
sources of income include both realized and unrealized gains, or losses, net of
hedging activities that occur while securities are in Spires' possession.
EXPENSES. The Spires' expense structure consists of four categories: (1)
compensation and benefits, (2) clearing expenses, (3) interest expense and (4)
other expenses. Compensation and benefits represents the Company's largest
expense item, accounting for 56.0% of total expenses in 1997 and representing
41.1% as a percentage of 1997 total revenues. Compensation and benefits has both
a variable component based on revenue production and a fixed component. The
variable component includes institutional sales commissions, bonuses, overrides,
trading desk incentives, and management compensation. The fixed component
includes administrative and executive salaries, payroll taxes, employee benefits
and temporary employee costs. In order to normalize the partnership's net income
into corporate form, management has agreed to a competitive compensation package
equal to 10% of revenues.
Brokerage and clearance costs include those costs associated with the
clearing and settlement process required for fixed-income securities. Spires
clears over 95% of its trades through Daiwa Securities America, Inc., New York,
New York. Interest expense reflects the interest paid by Spires to finance its
inventory of fixed-income securities. Spires finances its inventory either
through loans or repurchase agreements.
Other expenses include EDP services and supplies, occupancy and equipment,
communications, travel and entertainment, and other fixed costs associated with
running the business. EDP services and supplies include third party systems,
data, and software program providers and development and maintenance expenses
associated with the SFN. Occupancy and equipment expenses include rent and
utility charges paid for Spires' facilities, expenditures for facilities repairs
and upgrades, and depreciation of computer, telecommunications, and office
equipment. Communications expenses including charges for third party providers
of telecommunications services and printing and mailing costs for customer
communications. Travel and entertainment expenses include those costs associated
with attending trade association conferences and visiting and entertaining the
Company's international institutional clientele.
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<PAGE>
RESULTS OF OPERATIONS
The Company's financial results have been and may continue to be subject to
fluctuations due to the factors described above, or other factors. Consequently,
the results of operations for a particular period may not be indicative of
results to be expected for other periods. The following table sets forth for the
periods indicated, the percentage relationship that certain items in Spires'
Statements of Operations bear to revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Commissions...................... $ 6,841 90.8% $ 7,322 88.4% $ 6,692 81.2% $ 3,033 84.2%
Interest and dividends........... 237 3.2 564 6.8 800 9.7 351 9.8
Other............................ 455 6.0 394 4.8 749 9.1 215 6.0
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 7,533 100.0 8,280 100.0 8,241 100.0 3,599 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Compensation and benefits........ 2,169 28.8 3,023 36.5 3,392 41.1 1,386 38.5
Brokerage and clearance.......... 111 1.5 235 2.8 222 2.7 115 3.2
Interest expense................. -- -- 228 2.8 615 7.5 275 7.7
Other general and
administrative................. 1,157 15.3 1,548 18.7 1,827 22.2 843 23.4
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses:............. 3,437 45.6 5,034 60.8 6,056 73.5 2,619 72.8
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME........................... $ 4,096 54.4% $ 3,246 39.2% $ 2,185 26.5% $ 980 27.2%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
REVENUES:
Commissions...................... $ 3,337 79.2%
Interest and dividends........... 523 12.4
Other............................ 356 8.4
--------- ---------
Total revenues.............. 4,216 100.0
--------- ---------
EXPENSES:
Compensation and benefits........ 1,754 41.6
Brokerage and clearance.......... 123 2.9
Interest expense................. 538 12.8
Other general and
administrative................. 1,037 24.6
--------- ---------
Total expenses:............. 3,452 81.9
--------- ---------
NET INCOME........................... $ 764 18.1%
========= =========
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
During the first sixth months of 1998, revenues increased 17.1% over the
same period in 1997, to $4.2 million from $3.6 million. Commission income
increased 10%, to $3.3 million from $3.0 million. The average revenue per
securities trade increased 17.5%, to $4,700 from $4,000, and after a long
declining trend, average transaction margin on its securities business increased
10.0%, to .00172% from .00156% during the previous period.
Interest income rose 49.0%, to $523,000 from $351,000 as a result of
maintaining a larger inventory of fixed income securities during the first six
months of 1998 as compared to the same period in 1997. Other income, composed of
realized and unrealized gains (losses) rose 65.6%, to $356,000 from $215,000.
Total expenses increased 31.8%, to $3.5 million from $2.6 million due
primarily to a 26.6% increase in compensation and benefits associated with the
continued change in Spires' business mix toward broker generated business. This
shift in business mix required higher commission pay-outs, bonuses, and over-
rides than were experienced in the prior period. Clearing expenses increased
7.0%, to $123,000 from $115,000, which was consistent with the overall increase
in securities transactions that produced an increase in revenues. Interest
expense rose 95.6%, to $538,000 from $275,000 primarily the result of financing
a much larger inventory.
Other expenses increased 23.0%, to $1.0 million from $843,000. This
increase was primarily attributable to a 35.7% increase in EDP services, to
$285,000 from $210,000, as Spires increased its development investment in the
SFN. Spires also hired several high quality sales/trading personnel during the
period to capitalize on this proprietary technology. Increased revenues from
those investments will not appear until late 1998.
Net income during the period declined 22.0%, to $764,000 from $980,000.
1997 COMPARED TO 1996
In 1997, Spires completed its third full year in business. During the year,
short term interest rates dropped 30 basis points, long-term interest rates
dropped 70 basis points, and the yield curve flattened by 40 basis points. These
factors continued to reduce institutional investor demand for longer-term, more
profitable fixed-income products. It also reduced the incentive for Spires (and
other fixed-income dealers)
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to position inventories. Finally, the low volatility in interest rates during
the period, reduced the incentive for investors to enter into the fixed-income
securities market.
Spires' sales volume increased 55.6% during 1997, to $4.2 billion from $2.7
billion. However, 1997 revenues of $8.2 million showed little increase over the
previous year revenues, and commission income declined 8.6%, to $6.7 million
from $7.3 million. As a result, Spires' average transaction margin declined by
18%, to .0016% from .0020%.
Spires' business mix continued to change as revenue from Spires' generated
securities transactions declined 42.9%, to $2.0 million from $3.5 million, while
revenue from broker generated securities transactions increased 10.3%, to $3.2
million from $2.9 million, and revenue from broker generated whole loan
transactions increased 66.7%, to $3.0 million from $1.8 million.
Interest income increased 41.8%, to $800,000 from $564,000 as a result of
carrying more inventory. Other income, composed of realized and unrealized gains
(losses) increased 90.1%, to $749,000 from $394,000 principally due to the
larger inventory.
Total expenses increased 20.3% during 1997 compared to the previous year,
to $6.1 million from $5.0 million. Compensation and benefits increased 12.2%, to
$3.4 million from $3.0 million primarily as a result of Spires' continued shift
in business mix away from Spires generated business toward broker generated
business. This shift in business mix required higher commission pay-outs,
bonuses, and overrides than were experienced in the prior period.
Clearing costs declined slightly during 1997, to $222,000 from $235,000
mainly as a result of the decline in revenue associated with fewer trades.
Interest expense increased 170% to $615,000 from $228,000, primarily the result
of financing a larger inventory.
Other expenses increased 18.0%, to $1.8 million from $1.5 million
principally due to a 31.0% increase in EDP services, to $477,000 from $364,000.
Net income declined 32.7%, to $2.2 million from $3.2 million.
1996 COMPARED TO 1995
In 1996, Spires completed its second full year in business. During the
year, short-term interest rates increased 70 basis points and long-term interest
rates increased 80 basis points. Rising rates were accompanied by lower prices
for fixed-income securities which dampened institutional investor demand for the
more profitable long-term fixed-income products that Spires sells. They also
reduced the incentive for Spires (and other fixed-income dealers) to position
inventories.
In late 1995, capitalizing on available talent, Spires expanded its sales
staff by opening two branch offices. An Austin, Texas office was opened with a
group of experienced fixed-income securities brokers and a Morris Plains, New
Jersey office was opened with a group of experienced whole loan and loan
servicing brokers.
Spires' sales volume increased 80.0% during 1996, to $2.7 billion from $1.5
billion. However, revenues increased only 9.9% during 1996, to $8.3 million from
$7.5 million and commission income increased just 7.0%, to $7.3 million from
$6.8 million. As a result, Spires' average transaction margin declined in 1966
by 33.0%, to .002% from .003%
In addition, Spires business mix began to change as revenue from Spires
generated securities transactions declined 16.7%, to $3.5 million from $4.2
million, while revenue from broker generated securities increased 15.4%, to $3.0
million from $2.6 million and revenues from broker generated whole loan
transactions increased 191%, to $1.9 million from $652,000.
Interest income increased 138%, to $564,000 from $237,000 as a result of
carrying more inventory. Other income, composed of realized and unrealized gains
(losses) declined 13.4%, to $394,000 from $455,000.
Total expenses increased 46.5% during 1996 compared to the previous year,
to $5.0 million from $3.4 million. Compensation and benefits increased 39.4%, to
$3.0 million from $2.2 million primarily from a
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shift in the business mix away from Spires generated business toward broker
generated business. This shift in business mix required higher commission
pay-outs, bonuses, and over-rides than were experienced in the prior period.
Clearing costs increased 112% during 1996, to $235,000 from $111,000
primarily the result of a 46% increase in transaction volume. Interest expense
increased to $228,000 as Spires began its program to finance as much inventory
as its capital would allow.
Other expenses increased 33.8%, to $1.5 million from $1.2 million. Most of
this expense was associated with (1) the increase in staff to support a larger
organization, (2) increased EDP expenses associated with the proprietary Spires
Financial Network system development, and (3) the addition of two branch
offices. EDP expenses during 1996 increased 34.2%, to $365,000 from $272,000.
Net income declined 20.8%, to $3.2 million from $4.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Spires was funded initially in January, 1995 with $3.5 million in capital.
Spires has been profitable each year since inception. During the period from
1995 to 1997, the Company recorded over $7 million in net income prior to an
adjustment for an increase in compensation and benefits of Spires where certain
previous partners of Spires will receive total compensation equal to 10% of
Spires revenues and before taxes on revenues of $22.5 million.
Spires distributed all net earnings as required by its partnership
agreement to its partners four times a year. The first three distributions were
sufficient to cover the estimated quarterly income taxes of each of the
partners. The last distribution brought the partnership's capital position back
to the original $3.5 million by distributing all of that year's remaining net
earnings.
Spires has always maintained, at minimum, its initial capital of $3.5
million. Total equity on June 30, 1998 was $3.7 million and working capital was
$2.6 million. Prior to the closing of the Transactions, Spires will distribute
to its partners all of its 1998 year-to-date net earnings and enough capital to
bring its capital account down to $1.8 million. As of June 30, 1998, Spires had
no long-term debt.
Spires has historically financed capital expenditures through internally
generated cash. During 1997, Spires had capital expenditures of approximately
$75,000 which were funded from operations. Spires expects to incur capital
expenditures of approximately $225,000 during 1998 relating primarily to
leasehold improvements.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on Spires' financial
condition, results of operations or cash flows. The rate of inflation, however,
affects the price of fixed-income securities, as prices and yields are adjusted
to reflect the rate of inflation in the economy. Typically, with expectations of
higher inflation rates, interest rates rise, prices of fixed-income investments
fall, and the volume of institutional fixed-income transactions declines. With
expectations of lower inflation rates, interest rates fall, prices of
fixed-income investments rise, and the volume of institutional fixed-income
transactions rises. As a result, inflation may have a material effect on Spires'
financial condition, results of operations, or cash flows in the future. The
rate of inflation also can be expected to affect Spires' expenses, such as
employee compensation, rent, and communications.
YEAR 2000
The Year 2000 Problem refers to the inability of some computer programs and
systems to correctly interpret the century from a date in which the year is
represented by only two digits. A computer program or system that has not
resolved the Year 2000 Problem may not be able to correctly process certain
data, or in extreme situations, the program or system may become disabled.
Spires has taken into account the Year 2000 Problem in the development of all of
its proprietary trading and software systems. Spires, its internal computer
programs, and its software and trading systems are fully Year 2000 compliant.
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In addition to dependence on its own computer programs and systems that may
be affected by the Year 2000 Problem, Spires has material relationships with
third parties that must also address the Year 2000 Problem.
Spires has developed a multi-phase plan to resolve its potential Year 2000
Problems. That plan consists of the following phases:
Phase I: Identifying Spires' potential Year
2000 Problems including potential
problems with third- party providers.
Phase II: Assessing the steps Spires must take
to avoid the Year 2000 Problem.
Phase III: Implementation of steps to avoid the
Year 2000 Problem.
Phase IV: Internal testing of computer software
and systems designed to avoid the
Year 2000 Problem.
Phase V: Integrated testing of computer
software and systems designed to
avoid the Year 2000 Problem with
third-party providers.
Phase VI: Implementation of computer software
and systems designed to avoid the
Year 2000 Problem.
As a registered NASD member, Spires is required to conduct a complete
review of the potential impact of the Year 2000 Problem and report its findings
to the NASD no later than by December 31, 1998. An initial report was due and
submitted to the NASD by August 31, 1998. To date Spires has completed Phases I
through III of its plan at a cost of $10,000 for modifying or purchasing new
software and upgrading or purchasing new computer systems. As required by the
NASD, Spires expects to complete Phases IV through VI of its plan by December
31, 1998. The additional cost to complete this activity is expected to be less
than $10,000.
While there can be no assurance, Spires believes that its internal computer
software and systems will not experience significant disruption in connection
with the Year 2000 Problem. There can be no assurance that a third party
provider's failure to resolve the Year 2000 Problem would not have an adverse
effect on Spires. In particular, if Spires' internal computer software and
systems or those of a third-party provider experience any significant disruption
in connection with the Year 2000 Problem, such disruption could affect Spires'
ability to conduct business and may have a material adverse effect on Spires'
results of operations.
Spires intends to develop a contingency plan to minimize the impact of such
a disruption. The contingency plan will consist of in-house programming
solutions and third party patches downloaded via the Internet or dial-up file
transfers.
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MANAGEMENT OF PGG AFTER THE TRANSACTIONS
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information representing the
individuals who will be PGG's directors and executive officers on consummation
of the Transactions (ages as of September 20, 1998):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITIONS CLASS
- ------------------------------------- --- --------------------------------------------- ----------
<S> <C>
Titus H. Harris, Jr.................. 67 Chairman of the Board, Director Class III
Robert E. Garrison, II(1)............ 56 President, Chief Executive Officer, Director Class III
Donald R. Campbell(1)................ 58 Vice Chairman, Director Class III
Stephen M. Reckling.................. 36 Chairman and Chief Executive Class I
Officer of PMT, Director
Peter W. Badger(3)................... 51 President of Spires, Director Class III
Richard C. Webb...................... 65 President of HWG, Director Class I
Sean Dobson.......................... 29 Executive Vice President of Spires, Director Class I
Richard J. Martin.................... 40 President of ERRI
Tony Coelho(3)....................... 56 Director Class II
W. Blair Waltrip(2).................. 43 Director Class II
James H. Greer(1)(2)(3).............. 71 Director Class II
T.G. Bogle........................... 67 Director Class I
[TEI Designee](2).................... -- Director Class II
</TABLE>
- ------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
TITUS H. HARRIS will be appointed the Chairman of the Board and a director
of PGG on consummation of the Transactions. Mr. Harris co-founded HWG in
February 1994 and currently serves as HWG's Chief Executive Officer and as a
director of HWG and PMT. From September 1991 to February 1994, he served as a
Registered Representative at S.G. Cowen, HWG's correspondent broker. Prior to
that time, Mr. Harris served as Senior Vice President of Lovett Underwood
Neuhaus & Webb, (a division of Kemper Securities Group, Inc.) ("Lovett") from
January 1983 to August 1991, and as Regional Sales Manager for the
Houston-office of E.F. Hutton and Co., Inc. from January 1978 to December 1982.
Mr. Harris has over 39 years experience in the securities industry.
ROBERT E. GARRISON, II will be appointed the President, Chief Executive
Officer and a director of PGG on consummation of the Transactions. Mr. Garrison
co-founded HWG and currently serves as its Executive Vice President and a
director. He also serves as Chairman, Chief Executive Officer and as a director
of PMT which he founded in 1994. Mr. Garrison also serves as Chairman and a
director of Biocyte, and as a director of HWG Capital, L.L.C., both of which
entities are affiliates of HWG. From 1990 to 1991, Mr. Garrison served as
President and Chief Executive Officer of Medical Center Bank & Trust Company.
Prior to that time, he served as managing partner of Lovett from 1983 to 1987,
and Director of Research for Underwood Neuhaus and Co. from 1971 to 1982. Mr.
Garrison currently serves as a director of FFP Partners, a public real estate
company, and Intelect Communications, Inc., a public telecommunications
equipment company. He has over 33 years experience in the securities industry.
Mr. Garrison is a Chartered Financial Analyst.
DONALD R. CAMPBELL currently serves as a director and will also become Vice
Chairman, of PGG on consummation of the Transactions. Mr. Campbell has been
President and Chief Operating Officer of TEI since 1991, a director of TEI since
September 1990, and Chief Executive Officer since April 1994. Prior to that
time, he served in various executive capacities for TEI, including Chief
Financial Officer.
STEPHEN M. RECKLING will be appointed Chairman and Chief Executive Officer
of PMT and a director of PGG on consummation of the Transactions. Mr. Reckling
is one of the founders of PMT and from June
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1994 to the present has served in various executive capacities at PMT, currently
serving as its Executive Vice President and Chief Investment Officer and as a
director. He has over 13 years of investment management experience, including
experience at one national and two regional investment banking firms.
PETER W. BADGER will serve as President of Spires and become a director of
PGG on consummation of the Transactions. Since inception, Mr. Badger has been
partner and served as President of Spires, which he co-founded in January 1995.
He also serves as a director of PMT. From April 1976 to July 1994, he served as
a securities broker and executive vice president of Westcap corporation. Mr.
Badger has over 22 years experience in the institutional securities market. He
has NASD Series 24, 7 and 63 licenses.
RICHARD C. WEBB will serve as a director of PGG on consummation of the
Transactions. Mr. Webb co-founded HWG and currently serves as HWG's President
and a director of HWG and PMT. From 1991 to 1994, he was Regional Partner of
S.G. Cowen, the correspondent broker of HWG. Prior to that time, Mr. Webb served
in various capacities with Lovett, which he co-founded in 1981. He also serves
as a director of Kent Electronics, Inc., a public electronic distribution
company. Mr. Webb has served on the boards of several Houston-based community
organizations, including science museum, education and hospital groups. He has
over 38 years experience in the securities industries.
SEAN DOBSON will serve as a director of PGG on consummation of the
Transactions. Mr. Dobson is a founding partner of Spires and serves as its
Executive Vice President -- Trading & New Business Development. Mr. Dobson has
over twelve years experience in the mortgage securities market. Prior to joining
Spires, he served as a registered representative for the Westcap Corporation
("Westcap") from February 1994 to July 1994, registered representative for
Arbour Financial Corp. ("Arbour Financial") from January 1994 to February
1994, mortgage securities trader for the MMAR Group ("MMAR") from November
1989 to January 1994 and research director for Robert Thomas Securities ("RT
Securities") from October 1987 to November 1989. He has a NASD Series 7 and 63
licenses.
RICHARD J. MARTIN has been President of ERRI since January 1997 and Vice
President since March 1996. From 1992 to 1996, he served as executive Vice
president and Chief Operating Officer of Culp Petroleum Company, an oil
distribution company. From 1991 to 1996, Mr. Martin was owner of Core Business
Services, a provider of financial and marketing services to businesses.
TONY COELHO will serve as a director of PGG on consummation of the
Transactions and has served as a director of TEI since March 1990. Since
September 1997, Mr. Coelho has served as a consultant to Tele-Communications,
Inc., a company that operates call television and other telecommunications
services. From October 1995 to September 1997, he was Chairman and Chief
Executive Officer of ETC w/tci, Inc., an education and training technology
subsidiary of TeleCommunications, Inc. From 1989 to June 1995, he was a Managing
Director of Wertheim Schroder & Co., incorporated, an investment banking firm in
New York. From 1990 to June 1995, he served as President and Chief Executive
Officer of Wertheim Schroder Investment Services. Mr. Coelho currently serves as
Chairman of the Board of International Thoroughbred Breeders, Inc., an owner and
operator of diversified gaming properties in New Jersey and Nevada, and is a
director of Service Corporation International, a public company which owns and
operates funeral homes, cemeteries and related businesses ("SCI"). Mr. Coelho
also serves as director of several private companies.
W. BLAIR WALTRIP will serve as a director of PGG on consummation of the
Transactions and has served as a director of TEI since July 1988. He has been
employed in various capacities for SCI since 1977 and currently serves as SCI's
Executive Vice President and as a director.
JAMES H. GREER will serve as director of PGG on consummation of the
transaction and has served as a director of TEI since March 1990. He has been
Chairman of Shelton W. Greer Co., Inc., a building specialty products company,
for over 25 years. Mr. Greer is also a director of SCI and AmeriCredit
Corporation, a consumer credit company.
T.G. BOGLE will serve as a director of PGG on consummation of the
Transactions and has served as a director of TEI since July 1988. Mr. Bogle
served as TEI's president and chief operating officer from July 1988 to December
1991. From 1977 to 1988, he was owner and president of Houston International,
Inc.
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TEI DIRECTOR DESIGNEE [TO COME]
KEY EMPLOYEES
The following employees are expected to make significant contributions to
the business of the Company:
HWG
W. WAYNE PATTERSON serves as President of HWG Capital, LLC, an affiliate of
HWG, a position he has held since its inception in November 1997. Mr. Patterson
is a director of HWG and serves on its management committee. He also serves as
chairman of the board of International Graphic Industries, Inc. and of
Integrated Service and Industrial Supply. Mr. Patterson served as a chairman and
chief executive officer of each of Texas Micro Systems and Briskheat Corporation
from 1989 to 1996. Prior to that time, he served in various executive capacities
for Keystone International, Inc. ("Keystone"), a publicly-listed manufacturer
of flow control products, and continued to serve as director of Keystone until
November 1997. Mr. Patterson is a certified public accountant and a member of
the Texas State Bar.
BRUCE G. GARRISON serves as Chief Operating Officer and Director of
Research for HWG, which positions he has held since September 1996. Mr. Garrison
was managing director of PaineWebber Incorporated from February 1992 to May
1996. He also serves as a director of PMT and Harvard Property Trust, a private
real estate investment trust specializing in office buildings. Mr. Garrison has
over 26 years experience in the research of publicly traded real estate and
related companies. He is a member and former governor of the National
Association of Real Estate Investment Trusts. Mr. Garrison is a chartered
financial analyst.
JERALD S. COBBS serves as President and Chief Executive Officer of BioCyte
Therapeutics, Inc., a corporation majority-owned by HWG and certain affiliates,
which positions he has held since 1996. From 1992 to 1994, Mr. Cobbs served as
the assistant director of technology development at the University of
Texas -- M. D. Anderson Cancer Center. Prior to that time, Mr. Cobb spent twelve
years as an investment research analyst, last serving as senior investment
analyst with Raucher Pierce Refsnes, Inc. in 1990.
HOWARD Y. WONG serves as Senior Vice President and Chief Financial Officer
for both HWG and PMT, which positions he has held since August 1996. Mr. Wong
formerly served as vice president and trust officer with River Oaks Trust
Company from March 1989 to July 1996. He has a NASD Series 27 license.
PMT
STEPHEN D. STRAKE serves as president and Chief Operating Officer for PMT.
Mr. Strake has over 13 years of banking experience which concentrated on
marketing and relationship management for high net worth individuals and their
related businesses. He served in various officer positions for Comerica Bank --
Texas, N.A. from April 1993 to May 1996, and for First City Bank -- Texas, N.A.
from December 1989 to April 1993. During his banking career, Mr. Strake was
involved in corporate finance, oil and gas exploration and production lending,
cash management and trust/investment activities.
LYNN A. BERNARD, JR. serves as Executive Vice President -- Global
Investment Strategies of PMT. In 1990, Mr. Bernard founded and served as a
principal of L.A. Bernard & Associates, Ltd., an investment counseling firm
specializing in global asset management, until he joined PMT in 1997. Prior to
that time, he spent thirteen years with the investment banking firm of Goldman,
Sachs & Co. in various officer capacities, last serving as vice president in the
securities sales division in Houston where he represented private individual and
institutional clients. Mr. Bernard has over 21 years of investment management
experience.
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LINDA HALCOMB serves as Vice president and Manager of Operations of PMT.
Ms. Halcomb has over 20 years of experience in trust and financial services. She
is a current member of the National Association of Trust Auditors and Compliance
Professionals and was formerly the Southern Regional Director of the National
Trust Systems Association.
SPIRES
TRACY G. ADAMS is a founding partner of Spires and serves as its Executive
Vice President -- Trading. Ms. Adams has twelve years experience in the mortgage
securities market. Prior to joining Spires, she served as a registered
representative for Westcap from February 1994 to July 1994, senior analyst for
Arbour Financial from January 1994 to February 1994, senior analyst for MMAR
from November 1989 to January 1994, and financial analyst for RT Securities form
August 1987 to November 1989. She has N.A.S.D. Series 24, 7 and 63 licenses.
STEVE M. GORMAN is a founding partner of Spires and serves as its Director
of Systems Development. Mr. Gorman has thirteen years experience as a designer
of fixed-income analytical software and database applications. Prior to joining
Spires, he served as a vice president for Westcap from February 1994 to October
1994, vice president for MMAR from January 1992 to January 1994, and vice
president for Bear, Stearns & Company from May 1986 to August 1992.
RON FURMAN is in charge of the whole loan and servicing sales division of
Spires. Mr. Furman is a Senior Managing Director and Branch Manager of Spires'
Morris Plains, New Jersey office. He has twenty-five years experience trading
secondary market whole loans and loan servicing. Prior to joining Spires, Mr.
Furman served as a senior vice president for Westcap from February 1984 to
October 1995, senior vice president for Prudential Securities from October 1982
to February 1984, executive vice president for Ameribond from September 1981 to
October 1982, and senior vice president for G.A. Thompson from September 1978 to
September 1981. He is a member of the Mortgage Bankers Association of America
and has NASD Series 7, Series 24, and Series 63 licenses.
DEBBIE SHELLING REYNOLDS serves as Managing Director -- Trading and Branch
Manager of Spires' Westport, Connecticut office. Ms. Reynolds has over fifteen
years experience trading mortgage securities. Prior to joining Spires, she
served as a mortgage securities trader for Donaldson, Lufkin, & Jenrette from
February 1993 to February 1998, mortgage securities trader for Kidder Peabody
from March 1990 to February 1993, and mortgage securities trader for Drexel
Burnham Lambert from September 1983 to March 1990. She has a NASD Series 7 and
63 licenses.
CRAIG SALZGABER serves as Senior Vice President -- Trading. Mr. Salzgaber
has over eight years experience trading mortgage securities. Prior to joining
Spires, he served as a mortgage securities trader for Donaldson, Lufkin, &
Jenrette from May 1995 to March 1998 and fixed-income securities trader for
Concord Securities from July 1985 to May 1995. He has a NASD Series 7 and 63
licenses.
DENNIS P. CIOLA serves as Managing Director and Branch Manager of Spires'
Austin, Texas office. Mr. Ciola has over fifteen years experience in marketing
and over seven years experience in the mortgage securities market. Prior to
joining Spires he served as a registered representative for the Westcap
Corporation from February 1994 to July 1994 and a registered representative for
MMAR from April 1991 to December 1993. He has the NASD Series 63 and 7 licenses.
LAWRENCE H. FORRESTER serves as Executive Vice President, Chief Financial
and Compliance Officer of Spires, a position he has held since January, 1997.
Mr. Forrester has fifteen years experience in financial and compliance matters
with various broker-dealer firms in the Houston area. Prior to joining Spires he
served as senior vice president and chief financial officer of Lynn Hayes
Financial, Inc. from May 1994 to November 1995. He has the NASD Series 63, 53,
27, 24, and 7 licenses.
BOARD OF DIRECTOR CLASSES; DIRECTOR COMPENSATION
The PGG board of directors (the "Board of Directors") is divided into
three classes, each of which, following a transition period, will serve for
three years, with one class being elected each year at the annual shareholders'
meeting. During the transition period, the terms of the Class I directors will
expire at the 1999
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annual meeting, while the terms of the Class II directors and the Class III
directors will expire at the 2000 annual meeting and the 2001 annual meeting,
respectively. Classification of the Board of Directors could have the effect of
lengthening the time necessary to change the composition of a majority of the
members comprising the PGG board. In general, at least two meetings of
shareholders will be necessary for shareholders to effect a change in a majority
of the members of the PGG board.
Each director will receive a fee of $1,500 for each meeting of the PGG
Board of Directors attended and each director who is not an employee of the
Company will receive a fee of $1,000 for each Executive Committee attended, a
fee of $750 for each other committee meetings attended. Directors may also be
periodically granted Incentive Awards under the Incentive Plan.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding 1997, 1996 and
1995 compensation earned from HWG, PMT and Spires by executive officers of such
entities who will become executive officers of PGG (the "Named Executives").
All executive compensation information with respect to executive officers of TEI
who will become executive officers of PGG has been incorporated by reference
into this Proxy Statement/Prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SHARES
ANNUAL COMPENSATION UNDERLYING
FISCAL -------------------- STOCK
NAME AND POSITION(S) YEAR SALARY BONUS OPTIONS
- ------------------------------------- ------ -------- -------- ------------
<S> <C> <C>
Titus H. Harris, Jr.................. 1997 299,015
Chief Executive Officer of HWG 1996 329,409
1995 95,007
Robert E. Garrison, II(1), (2)....... 1997 229,194 6,500
Executive Vice President of HWG and
Chairman 1996 140,004
and Chief Executive Officer of PMT 1995 132,000
Richard C. Webb...................... 1997 403,034
President of HWG 1996 178,049
1995 53,807
Stephen M. Reckling(2)............... 1997 99,000 25,000 9,500
Executive Vice President and Chief
Investment 1996 81,000
Officer of PMT 1995 66,000
Peter W. Badger(3)................... 1997 474,568
President of Spires 1996 684,683
1995 922,359
Sean Dobson(3)....................... 1997 474,568
Executive Vice President -- Trading 1996 684,683
and New Business Development of
Spires 1995 922,359
Tracy G. Adams(3).................... 1997 474,568
Executive Vice President -- Trading
of Spires 1996 684,683
1995 922,359
</TABLE>
- ------------
(1) Mr. Garrison's salary is his combined salaries from PMT and HWG.
(2) All shares underlying options are shares of PMT common stock.
(3) Represents partnership distributions.
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STOCK OPTION GRANTS
The following table sets forth certain information with respect to stock
option grants made to the Named Executives during 1997 under stock option plans
of the Combining Companies. No equity option grants were made (i) by HWG to
Messrs. Harris, Garrision or Webb during 1997 or (ii) by Spires to Messrs.
Badger or Dobson or Ms. Adams during 1997. PMT is the only Combining Company
that granted stock options during 1997.
NUMBER OF
SECURITIES % TOTAL
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE
NAME GRANTED 1997 $/SHARE
- ------------------------------------- ----------- ------------- --------
Robert E. Garrison, II............... 6,500 19.7% 25.00
Stephen M. Reckling.................. 9,500 28.8% 25.00
Under the terms of the Agreement, all outstanding options to purchase HWG
and PMT stock must be exercised prior to closing the Transactions.
INCENTIVE PLAN
The description set forth below summarizes the principal terms and
conditions of PGG's 1998 Incentive Plan (the "Incentive Plan") does not
purport to be complete and is qualified in its entirety by reference to the
Incentive Plan, a copy of which has been filed as an exhibit to the Registration
Statement of which this Memorandum is a part.
GENERAL. The objectives of the Incentive Plan, which was approved by PGG's
board of directors and stockholders, are to attract and retain selected key
employees, consultants and outside directors, encourage their commitment,
motivate their performance, facilitate their obtaining ownership interests in
PGG (aligning their personal interests to those of PGG's stockholders) and
enable them to share in the long-term growth and success of the Company.
SHARES SUBJECT TO INCENTIVE PLAN. Under the Incentive Plan, PGG may issue
Incentive Awards (as defined below) covering at any one time an aggregate of the
greater of (i) 1,100,000 shares of PGG Common Stock and (ii) 15% of the number
of shares of PGG Common Stock issued and outstanding on the last day of the then
preceding calendar quarter. No more than 1,100,000 shares of PGG Common Stock
will be available for ISOs (as defined below). As of the closing of the
Transactions, options covering 170,625 shares of PGG Common Stock will be
outstanding and 929,375 shares of Common Stock then will be available for
subsequent Incentive Awards. The number of securities available under the
Incentive Plan and outstanding Incentive Awards are subject to adjustments to
prevent enlargement or dilution of rights resulting from stock dividends, stock
splits, recapitalization or similar transactions or resulting from a change in
applicable laws or other circumstances.
ADMINISTRATION. The Incentive Plan will be administered by the
compensation committee of the PGG board of directors (the "Committee").
Following the Offering, the Committee will consist solely of non-employee
directors ("Outside Directors"). Following the closing of the Transactions,
the Committee will consist solely of directors ("Outside Directors") each of
whom is (i) an "outside director" under Section 162(m) of the Code and (ii) a
"non-employee director"under Rule 16b-3 under the Exchange Act. The Committee
may delegate to the chief financial officer or other senior officers of PGG its
duties under the Incentive Plan, except with respect to the authority to grant
Incentive Awards or take other action with respect to persons who are subject to
Section 16 of the Exchange Act of Section 162(m) of the Code. In the case of an
Incentive Award to an Outside Director, the PGG board of directors shall act as
the Committee. Subject to the express provisions of the Incentive Plan, the
Committee is authorized to, among other things, select grantees under the
Incentive Plan and determine the size, duration and type, as well as the other
terms and conditions (which need not be identical), of each Incentive Award. The
Committee also construes and interprets the Incentive Plan and any related
agreements. All determinations and decisions of the Committee are final,
conclusive and binding on all parties. PGG will indemnify members of the
Committee against any damage, loss, liability, cost or expenses arising in
connection with any claim, action, suit or proceeding by
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reason of any action taken or failure to act under the Incentive Plan, except
for any such act or omission constituting willful misconduct or gross
negligence.
ELIGIBILITY. Key employees, including officers (whether or not they are
directors), and consultants of the Company and non-employee directors are
eligible to participate in the Incentive Plan. A key employee generally is any
employee of the Company who, in the opinion of the Committee, is in a position
to contribute materially to the growth and development and to the financial
success of the Company.
TYPES OF INCENTIVE AWARDS. Under the Incentive Plan, the Committee may
grant (i) incentive stock options ("ISO's"), as defined in Section 422 of the
Code, (ii) "nonstatutory" stock options ("NSOs"), (iii) stock appreciation
rights ("SARs"), (iv) shares of restricted stock, (v) performance units and
performance shares, (vi) other stock-based awards, and (vii) supplemental
payments dedicated to the payment of income taxes (collectively, "Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options." The terms of each Incentive Award will be reflected in an agreement
(the "Incentive Agreement") between the Company and the participant.
OPTIONS. Generally, Options must be exercised within 10 years of the grant
date. ISOs may be granted only to employees, and the exercise price of each ISO
may not be less than 100% of the fair market value of a share of PGG common
Stock on the date of grant. The Committee will have the discretion to determine
the exercise price of each NSO granted under the Incentive Plan. To the extent
the aggregate fair market value of shares of PGG Common Stock with respect to
which ISOs are exercisable for the first time by any employee during any
calendar year exceeds $100,000, those Options must be treated as NSOs.
The exercise price of each Option is payable in cash or, in the discretion
of the Committee, by the delivery of shares of Common Stock owned by the
Optionee, or the withholding of shares that would otherwise be acquired on the
exercise of the Option, or by any combination of the foregoing.
An employee will not recognize any income for federal income tax purposes
at the time an ISO is granted, or on the qualified exercise of an ISO, but
instead will recognize capital gain or loss (as applicable) upon the subsequent
sale of shares acquired in a qualified exercise. The exercise of an ISO is
qualified if a participant does not dispose of the shares acquired by the
participant's exercise within two years after the ISO grant date and one year
after such exercise. The Company is not entitled to a tax deduction as a result
of the grant or qualified exercise of an ISO.
An optionee will not recognize any income for federal income tax purposes,
nor will the Company be entitled to a deduction, at the time an NSO is granted.
However, when an NSO is exercised, the optionee will recognize ordinary income
in an amount equal to the difference between the fair market value of the shares
received and the exercise price of the NSO, and the Company will generally
recognize a tax deduction in the same amount at the same time.
The foregoing federal income tax information is a summary only, does not
purport to be a complete statement of the relevant provisions of the Code and
does not address the effect of any state, local or foreign taxes.
SARS. Upon the exercise of an SAR, the holder will receive cash, shares of
PGG Common Stock or a combination thereof, as specified in the related Incentive
Agreement, the aggregate value of which equals the amount by which the fair
market value per share of the PGG Common Stock on the date of exercise exceeds
the exercise price of the SAR, multiplied by the number of shares underlying the
exercised portion of the SAR. An SAR may be granted in tandem with or
independently of an NSO. SARs will be subject to such terms and conditions and
will be exercisable at such times as determined by the Committee, provided, that
the exercise price per share must equal at least 100% of the fair market value
of a share of Common Stock on the date of grant. The value of an SAR may be paid
in cash, shares of Common Stock or both in combination, as determined by the
Committee.
RESTRICTED STOCK. Restricted stock may be subject to substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal of PGG, as determined by the Committee. Unless otherwise determined by
the Committee, during the period of restriction, the grantee will have all other
rights of a stockholder, including the right to vote and receive dividends on
the shares.
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PERFORMANCE UNITS AND PERFORMANCE SHARES. Performance units and
performance shares may be granted only to employees and consultants. For each
performance period (to be determined by the Committee), the Committee will
establish specific financial or non-financial performance objectives, the number
of performance units or performance shares and their contingent values, which
values may vary depending on the degree to which such objectives are met.
OTHER STOCK-BASED AWARDS. Other stock-based awards are awards denominated
or payable in, valued in whole or in part by reference to or otherwise related
to shares of PGG Common Stock. Subject to the terms of the Incentive Plan, the
Committee may determine any terms and conditions of other stock-based awards,
provided that, in general, the amount of consideration to be received by PGG
shall be either (i) no consideration other than services actually rendered or to
be rendered (in the case of the issuance of shares) or (ii) in the case of an
award in the nature of a purchase right, consideration (other than services
rendered) at least equal to 50% of the fair market value of the shares covered
by such grant on the date of grant. Payment or settlement of other stock-based
awards will be in shares of Common Stock or in other consideration related to
such shares.
SUPPLEMENTAL PAYMENTS FOR TAXES. The Committee may grant, in connection
with an Incentive Award (except for ISOs), a supplemental payment in an amount
not to exceed the amount necessary to pay the federal and state income taxes
payable by the grantee with respect to the Incentive Award and the receipt of
the supplemental payment.
OTHER TAX CONSIDERATIONS. Upon accelerated exercisability of Options and
accelerated lapsing of restrictions upon restricted stock or other Incentive
Awards in connection with a Change in Control (as defined in the Incentive
Plan), certain amounts associated with such Incentive Awards could, depending
upon the individual circumstances of the participant constitute "excess
parachute payments" under Section 280G of the Code, thereby subjecting the
participant to a 20% excise tax on those payments and denying the Company a
corresponding deduction. The limit on deductibility of compensation under
Section 162(m) of the Code is also reduced by the amount of any excess parachute
payments. Whether amounts constitute excess parachute payments depends upon,
among other things, the value of the Incentive Awards accelerated and the past
compensation of the participant.
Taxable compensation earned by executive officers who are subject to
Section 162(m) of the Code with respect to Incentive Awards is subject to
certain limitations set forth in the Incentive Plan generally intended to
satisfy the requirements for "qualified performance-based compensation," but
no assurance can be given that PGG will be able to satisfy these requirements in
all cases, and the Company may, in its sole discretion, determine in one or more
cases that it is in its best interest not to satisfy these requirements even if
it is able to do so.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. Except as otherwise
provided in the applicable Incentive Agreement, if a participant's employment or
other service with the Company (or its subsidiaries) is terminated (i) other
than due to his death, Disability, Retirement or for Cause (each capitalized
term as defined in the Incentive Plan), his then exercisable Options will remain
exercisable for 60 days after such termination, (ii) by reason of Disability or
death, his then exercisable Options will remain exercisable for one year
following such termination, (iii) due to his retirement, his then exercisable
Options will remain exercisable for six months (except for ISOs, which will
remain exercisable for three months), or (iv) for Cause, all his Options will
expire at the commencement of business on the date of such termination.
Upon a Change in Control of PGG, any restrictions on restricted stock and
other stock-based awards will be deemed satisfied, all outstanding Options and
SARs may become immediately exercisable and all the performance shares and units
and any other stock-based awards may become fully vested and deemed earned in
full, at the discretion of the Committee. These provisions could in some
circumstances have the effect of an "anti-takeover" defense because, as a
result of these provisions, a Change in Control of PGG could be more difficult
or costly.
INCENTIVE AWARDS NONTRANSFERABLE. No Incentive Award may be assigned, sold
or otherwise transferred by a participant, other than by will or by the laws of
descent and distribution, or be subject to any
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encumbrance, pledge, lien, assignment or charge. An Incentive Award may be
exercised during the participant's lifetime only by the participant or the
participant's legal guardian.
AMENDMENT AND TERMINATION. The Board of Directors may amend or terminate
the Incentive Plan at any time, except that the Incentive Plan may not be
modified ar amended, without stockholder approval, if such amendment would (i)
increase the number of shares of Common Stock which may be issued thereunder,
except in connection with a recapitalization of the Common Stock, (ii) amend the
eligibility requirements for employees to purchase Common Stock under the
Incentive Plan, or (iii) extend the term of the Incentive Plan. No termination
or amendment of the Incentive Plan shall adversely affect in any material way
any outstanding Incentive Award previously granted to a participant without his
consent.
On the closing of the Offering, the Company expects Options to purchase a
total of 170,625 shares of Common Stock will be outstanding. All of these
Options represent replacement options for TEI options outstanding prior to the
closing of the Transactions, including 15,000 TEI options held by Mr. Campbell
and 9,000 TEI options held by each of Messrs. Waltrip, Bogle, Greer and Coelho.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Agreement, TEI will loan to Messrs. Garrison and Reckling
$162,500 and $237,500, respectively. All of the proceeds of the loan will be
used by them to exercise options to purchase 6,500 and 9,500 shares of PMT
common stock, respectively, at an exercise price of $25 per share. The loans
will bear interest at the monthly applicable federal rate published by the
Internal Revenue Service for obligations of comparable maturity (ten years). The
loans will be secured by pledges of all the PGG shares to be issued to them in
the Transactions in exchange for the shares of PMT common stock they will
receive on exercise of their respective options.
Members of HWG management own 3,354,060 shares of Biocyte, or 38.0% of the
outstanding shares on a fully diluted basis, including 1,332,670 shares, or
15.1% on a fully diluted basis, held by Mr. Garrison. HWG owns 2,000,000 shares
in Biocyte, or 22.7% on a fully diluted basis. See "Business of HWG -- Services
Provided -- Merchant Banking."
Mr. Martin, the president of ERRI, is the Chairman and majority stockholder
of Culp Petroleum Co. Inc. ("Culp"), an entity that provides fuels and
lubricants to ERRI. During fiscal year 1997, Culp supplied fuel and lubricants
to ERRI costing approximately $158,000 and is expected to supply TEI with fuels
and lubricants costing an estimated $185,000 during fiscal year 1998.
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SUMMARY BUSINESS STRATEGY OF PGG
INDUSTRY OVERVIEW
FINANCIAL SERVICES. In recent years, the financial markets have grown in
size and complexity, characterized by a proliferation of investment products and
services, frequent innovations, increased globalization, strong capital flows
and heavy trading volume. These trends have increased the number and variety of
choices available to investors and the range of financing alternatives available
to businesses and other issuers of securities. Management believes these trends
will continue in the future and consequently believes that the needs of both
investors and issuers for high quality professional financial advice and
services, such as those offered by the Company, will continue to increase.
Demand for investment products has increased significantly as large numbers
of baby boomers have begun to invest for their children's education and for
their own retirement. In 1996, the first 3.4 million baby boomers turned 50. The
impact of this generation on the capital markets is expected to continue to
build through the year 2010, when 57 million people will be in what has
historically been their prime investing years (ages 50 through 65).
Additionally, it is estimated that these individuals will inherit over $10
trillion (adjusted for inflation) from the previous generation between 1990 and
2040, representing the largest absolute transference of wealth in history.
Changes in household investing patterns have also contributed to the
increase in demand for investment products. In 1980, households owned $1.3
trillion of marketable securities, representing 48% of their liquid financial
assets. By September 30, 1997, the household sector's ownership of marketable
securities had risen by more than 660% to $9.9 trillion, or 76% of household
liquid financial assets. Over the same period, bank deposits decreased from 52%
to 24% of household liquid financial assets.
The volume of equity securities offered to the public illustrates the
growth in supply of investment products. Initial public offerings ("IPOs")
underwritten and total common equity issued in the United States public market
grew from $1.4 billion and $12.8 billion, respectively, in 1980, to $10.2
billion and $19.2 billion, respectively, in 1990, to $43.9 billion and $118.4
billion, respectively, in 1997. Management believes that a significant portion
of the growth in equity offerings has come from emerging and middle-market
companies and that the increase in emerging and middle-market issuers has been
facilitated by large increases in the flow of cash into equity mutual funds and
other managed funds as a result of these changes in household investing
patterns.
The combination of increasing flows of funds into the equity markets and
new issuance activity has contributed to significantly higher trading volumes.
From 1980 to 1997, average daily trading volume grew at a compound annual rate
of 15.6% on the NYSE and 20.7% on the Automated Quotation System of the NASD
(the "Nasdaq"). More recently, the combined NYSE and Nasdaq average daily
trading volumes grew at a compound annual rate of 22.2% for the five years ended
1997 and increased 22.9% in 1997 over 1996.
LIQUID WASTE. The wastewater treatment market is generally divided into
two segments: industrial and commercial wastewater treatment, and municipal
wastewater treatment. Industrial and commercial companies produce various types
of wastewater (including hydrocarbon contaminated water, landfill leachate,
unsaleable beverages and grease and grip trap waste) that must be treated prior
to disposal in POTWs or for which municipalities charge higher rates to treat.
Similarly, oil and gas exploration and production companies produce liquid waste
that must be disposed of in accordance with federal and state regulations.
Municipalities utilize or contract with third parties for the utilization of
water treatment technology to treat municipal wastewater.
According to The McIlvaine Company, the global water and wastewater
treatment market was approximately $335 billion in 1995. The McIlvaine Company
further estimated that, in 1995, the worldwide costs of treating municipal
wastewater were $90 billion and the worldwide costs of treating industrial
wastewater were $25 billion.
In the United States, the growth in demand for wastewater treatment
services has been driven by many factors, including (i) municipalities refusing
to accept certain industrial wastewaters due to limited
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treatment capabilities and a lack of the resources needed to expand or modernize
their POTWs, (ii) industrial and commercial businesses avoiding POTW surcharges
by using third parties to process and dispose of their wastewater, (iii)
industrial and commercial businesses outsourcing their wastewater treatment
needs, (iv) continued industrial and commercial expansion and (v) increasingly
strict regulations governing the disposal of wastewater, as well as more
stringent enforcement of such regulations.
BUSINESS STRATEGY
FINANCIAL SERVICES. On consummation of the Transactions, PGG management
intends to implement a business strategy to (i) enhance the services the Company
offers its clients; (ii) improve the profitability of its brokerage operations;
(iii) expand its equity capital markets activities; (iv) expand its fixed-income
securities trading activities; and (v) increase its money management and trust
business. Management also plans to supplement the Company's internal growth with
strategic acquisitions. The principal elements of the Company's business
strategy relating to its financial service business are set forth below:
o INCREASE ASSET MANAGEMENT BUSINESS. Management intends to grow the
Company's business by expanding its fiduciary activities and asset
management related business by improving coordination with PMT and 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. The Company believes that the SFN technology developed
by Spires provides it with an opportunity to profitably expand its
fixed-income securities trading business. The Company believes the
increased capital and inventory purchasing power created as a result
of the Transactions is critical to the successful implementation of
this strategy.
o EXPAND REGIONAL AND SPECIALTY EQUITY CAPITAL MARKETS ACTIVITIES. The
Company intends to continue to increase its investment banking
business by committing greater resources to, and by carefully focusing
their research and investment banking 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 the Company. 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. The Company intends to
continue to improve the profitability of its brokerage operations
primarily by hiring additional experienced and highly productive
investment executives and by providing its investment executives with
enhanced training, product offerings, information systems and support.
Management believes that the implementation of this strategy will be
aided by the Company's entrepreneurial culture and strategy of
providing a high level of support for its investment executives. The
Company also believes certain cross-selling opportunities among the
Combining Companies will be available, as well as certain potential
operating efficiencies.
o ENHANCE PERSONALIZED, HIGH-END SERVICE. The Combining Companies have
traditionally sought to attract and retain clients by offering a high
level of personal service responsive to client needs. The Company
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 which would strengthen or expand the firms's
geographic or product offering base. Management believes that
attractive acquisition opportunities exist particularly among smaller
regional firms that want to affiliate with a large firm while still
retaining their regional identity and focus and entrepreneurial
culture. In addition, the
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Company 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 smaller,
entrepreneurial and independent firm. Management believes that
acquisitions may also allow the Company to realize cost benefits by
leveraging its infrastructure.
LIQUID WASTE. PGG management intends to implement a growth strategy for
the Company's liquid waste business by (1) more fully utilizing the excess
capacity at its new North Carolina facility through expanding the geographic
area served; (2) entering the custom fuel blending business; and (3) providing
integration of new industrial services to both new and current customers.
The principal elements of the Company's business strategy relating to its
liquid waste business are set forth below:
o GEOGRAPHIC EXPANSION. The Company intends to expand the region it
serves by offering on-site rail service at its new North Carolina
facility by the Fall of 1998.
o CUSTOM FUEL BLENDING. The Company intends to enter the custom fuel
blending business by direct sales to large industrial and asphalt
plants.
o INTEGRATION OF NEW INDUSTRIAL SERVICES. As current and new customers
move toward consolidating vendors, the Company intends to offer them
integrated services, specifically vacuum truck services and drum and
solids disposal services.
While the Company presently intends to continue the operations of its
liquid waste business and to implement the above strategy, this intention is
subject to change and the Company will continue to evaluate all of its
alternatives with respect to this business and the related facility.
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PRINCIPAL SHAREHOLDERS OF TEI
The following table sets forth certain information regarding the beneficial
ownership of TEI's Common Stock as of August 31, 1998 by (i) each person known
by TEI to be the beneficial owner of more than 5% of TEI's Common Stock, (ii)
each of TEI's directors and executive officers and (iii) all directors and
executive officers as a group.
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
- ------------------------------------- ------------------ --------
W. Blair Waltrip(1)(2)(3)(4)......... 1,473,166 10.3%
Robert L. Waltrip, Jr.(1)(3)(4)(5)... 1,427,000 10.0
Holly Waltrip Benson(1)(3)(6)........ 1,339,166 9.4
R. L. Waltrip(1)(7)(8)............... 746,920 5.2
Donald R. Campbell(9)................ 136,660 *
Richard J. Martin.................... -- *
Samuel W. Rizzo(8)(10)............... 658,000 4.6
T. G. Bogle(7)....................... 307,169 2.2
James H. Greer(11)................... 102,000 *
T. Craig Benson(12).................. 42,000 *
Tony Coelho(7)....................... 58,665 *
All directors and executive officers
as a group (9 persons)(2)-(12)..... 3,524,580 24.7%
- ------------
* Less than 1% of outstanding shares.
(1) The principal business address of such beneficial owner is 1929 Allen
Parkway, Houston, Texas 77019.
(2) Includes 36,000 shares issuable on exercise of stock options, 142,292
shares owned by Mr. Waltrip as custodian for his minor children, 1,061,874
shares owned by the William Blair Waltrip Trust, of which Mr. Waltrip is
the trustee and beneficiary, and 10,000 shares owned by the William Blair
Waltrip Children's Trusts of 1985 (see item (5) below).
(3) Includes 105,000 shares owned by the Robert L. Waltrip 1992 Trust #1, of
which Robert L. Waltrip, Jr., W. Blair Waltrip, and Holly Waltrip Benson
are co-trustees.
(4) Includes 112,000 shares owned by the Waltrip 1987 Grandchildren's Trust for
the benefit of the grandchildren of R. L. Waltrip, of which Robert L.
Waltrip, Jr. and W. Blair Waltrip are co-trustees, as to which both Robert
L. Waltrip, Jr. and W. Blair Waltrip disclaim beneficial ownership.
(5) Represents 1,200,000 shares owned by the Robert L. Waltrip, Jr. Trust, of
which Robert L. Waltrip, Jr., is the trustee and beneficiary. Also includes
10,000 shares held as trustee for the minor children of W. Blair Waltrip
under the William Blair Waltrip Children's Trusts of 1985, as to which both
W. Blair Waltrip and Robert L. Waltrip, Jr. disclaim beneficial ownership.
(6) Includes 1,234,166 shares owned by the Holly Waltrip Trust, of which Mrs.
Benson is the trustee and beneficiary.
(7) Includes 36,000 shares issuable on exercise of stock options.
(8) Includes 12,500 shares owned by the Texas Aviation Hall of Fame, Inc., a
Texas nonprofit corporation, of which R. L. Waltrip and Samuel W. Rizzo are
each members of the board of directors. Each of Messrs. Waltrip and Rizzo
disclaim beneficial ownership in such shares.
(9) Includes 60,000 shares issuable on exercise of stock options.
(10) Includes 120,000 shares owned by the 1985 Sedad Trust of which Mr. Rizzo is
the settlor and a co-trustee with his wife, 164,000 shares owned by the
1992 Rizzo Family Trusts of which Samuel W. Rizzo is a settlor and
co-trustee with his wife, and 36,000 shares issuable on exercise of stock
options.
(11) Includes 36,000 shares issuable on exercise of stock options and 60,000
shares owned by Mr. Greer's wife.
(12) Includes 36,000 shares, issuable on exercise of stock options. Does not
include shares owned by Mr. Benson's wife, Holly Waltrip Benson, and
included in the table as owned by her.
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PRINCIPAL SHAREHOLDERS OF HWG
The following table sets forth certain information regarding beneficial
ownership of HWG's Common Stock as of August 31, 1998 by (i) each person who is
the beneficial owner of more than 5% of HWG's Common Stock, (ii) each of HWG's
directors and executive officers and (iii) all directors and executive officers
as a group.
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED(1) OF CLASS
- ------------------------------------- --------------------- ---------
Robert E. Garrison, II(2)............ 3,084 10.8%
Titus H. Harris, Jr.(2).............. 3,039 10.7
Wayne W. Patterson(2)................ 2,763 9.7
Richard C. Webb(2)................... 2,622 9.2
Bruce G. Garrison(2)................. 2,489 8.7
John H. Styles(2).................... 1,963 6.9
Howard Y. Wong....................... 400 1.4
All directors and executive officers
as a group (7 persons)............. 16,360 57.4%
- ------------
(1) Includes the following shares issuable on exercise of options held as
follows: Robert E. Garrison, II -- 270; Titus H. Harris, Jr. -- 270; Richard
C. Webb -- 270; John H. Styles -- 270; and Howard Wong -- 50. Under the
Agreement, these options are required to be exercised prior to the Closing
Date.
(2) The principal business address of such beneficial owner is 5599 San Felipe,
Suite 301, Houston, Texas 77056.
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PRINCIPAL SHAREHOLDERS OF PMT
The following table sets forth certain information regarding beneficial
ownership of PMT's Common Stock as of August 31, 1998 by (i) each person who is
the beneficial owner of more than 5% of PMT's Common Stock, (ii) each of PMT's
directors and executive officers and (iii) all directors and executive officers
as a group.
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED(1) CLASS
- ------------------------------------- --------------------- --------------
Robert E. Garrison, II(2)............ 30,142 14.9%
Stephen M. Reckling(2)............... 22,698 11.2
Estate of Harris Masterson(2)........ 13,245 6.6
Peter W. Badger...................... 12,542 6.2
5151 San Felipe, Suite 1300
Houston, Texas 77056
Stephen D. Strake (2)................ 10,500 5.2
Titus H. Harris, Jr.................. 6,542 3.2
Lynn A. Bernard, Jr.................. 5,500 2.7
Harvey Houck......................... 5,000 2.5
Baine Kerr........................... 5,000 2.5
Don M. Woo........................... 4,289 2.1
Bruce G. Garrison.................... 4,000 2.0
Edward C. Hutcheson.................. 4,000 2.0
Richard C. Webb...................... 3,270 1.6
John C. Kerr......................... 3,000 1.5
Howard Y. Wong....................... 2,500 1.2
John H. Styles, Jr................... 2,000 1.0
Charles Crocker...................... 400 *
David Nance.......................... -- *
All directors and executive officers
as a group (17 persons)............ 121,383 60.0%
- ------------
* Less than 1% of outstanding shares.
(1) Includes the following shares issuable on exercise of options or warrants
held as follows: Robert E. Garrison, II -- 6,500; Stephen M.
Reckling -- 9,500; Stephen D. Strake -- 6,500; Lynn A. Bernard,
Jr. -- 5,000; Harvey Houck -- 5,000; Baine Kerr -- 5,000; Richard C.
Webb -- 1,090; John C. Kerr -- 1,000; and Howard Y. Wong -- 500. Under the
Agreement, these options and warrants are required to be exercised prior to
the Closing Date.
(2) The principal business address of such beneficial owner is 5599 San Felipe,
Suite 301, Houston, Texas 77056.
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PRINCIPAL OWNERS OF SPIRES
The following table sets forth certain information regarding percentage
ownership of Spires as of August 31, 1998 by (i) each person who is the
beneficial owner of more than 5% of Spires, (ii) each of Spires General Partners
and executive officers and (iii) all Spires General Partners and executive
officers as a group.
PERCENTAGE OF
NAME OWNERSHIP
- ------------------------------------- ---------------
Spires Financial G.P., Inc.(1)(2).... 1.0%
Capital Financial Partner, Inc.(3)... 0.1
Spires Financial Funding, L.P.(4).... 24.9
5151 San Felipe, Suite 1350
Houston, Texas 77056
Interfin Commercial Funding
Corporation(5)..................... 5.0
1400 Post Oak Blvd.
Houston, Texas 77057
Peter W. Badger(1)(6)................ 21.8
Tracy G. Adams(1)(7)................. 21.6
Sean Dobson(1)(8).................... 21.6
Steve M. Gorman(1)(9)................ 5.0
All general partners and executive
officers as a group
(6 persons/entities)............... 70.1%
- ------------
* Less than 1% of partnership units.
(1) The principal business address of such beneficial owner is 5151 San Felipe,
Suite 1300, Houston, Texas 77056.
(2) Serves as managing general partner of Spires. The board of directors of
Spires Financial G.P., Inc. has investment and voting power with respect to
the ownership interest held by that entity.
(3) Serves as secondary general partner of Spires. The board of directors of
Capital Financial Partner, Inc. ("CFP") has investment and voting power
with respect to the ownership interest held by CFP.
(4) The board of directors of SFF as managing general partner of Spires
Financial Funding, L.P. ("Spires Funding") has investment, and voting
power with respect to the ownership interest held by Spires Funding.
(5) The board of directors of Interfin Commercial Funding Corporation ("ICF")
has investment and voting power with respect to the ownership interest held
by ICF.
(6) Includes (i) one-half of the 1.0% interest held by Spires Financial G.P.,
Inc., an entity 50% owned by Mr. Badger and (ii) a 21.3% ownership interest
held by Spires Financial P.B., Inc., an entity 100% owned by Mr. Badger.
(7) Includes (i) 25% of the 1.0% interest held by Spires Financial G.P., Inc.,
an entity 25% owned by Ms. Adams and (ii) 21.3% ownership interest held by
Spires Financial T.A., Inc., an entity 100% owned by Ms. Adams.
(8) Includes (i) 25% of the 1.0% interest held by Spires Financial G.P., Inc.,
an entity 25% owned by Mr. Dobson and (ii) 21.3% ownership interest held by
Spires Financial S.D., Inc., an entity 100% owned by Mr. Dobson.
(9) Includes 5.0% ownership interest held by Spires Financial S.G., Inc., an
entity 100% owned by Mr. Gorman.
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PRINCIPAL SHAREHOLDERS OF PGG AFTER TRANSACTIONS
The following table sets forth certain information regarding beneficial
ownership of PGG Common Stock as of the Effective Time and after giving effect
to the Transactions by (i) each person who is the beneficial owner of more than
5% of PGG Common Stock (ii) each of PGG's directors and executive officers and
(iii) all directors and executive officers of PGG as a group.
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
- ------------------------------------- ------------------- --------
W. Blair Waltrip(1)(2)(3)(4)......... 368,292 5.2%
Peter W. Badger...................... 332,906 4.7
Robert E. Garrison, II............... 305,488 4.3
Titus H. Harris, Jr.................. 165,056 2.3
Donald R. Campbell(5)................ 34,165 *
Stephen M. Reckling.................. 133,262 1.9
Richard W. Webb...................... 128,468 1.8
Sean Dobson.......................... 256,302 3.6
Richard J. Martin.................... -- *
T. G. Bogle(6)....................... 76,792 1.1
James H. Greer(7).................... 25,500 *
Tony Coelho(6)....................... 14,666 *
[TEI Designee]....................... -- --
All directors and executive officers
as a group
(13 persons) (1-7)................. 1,840,897 25.7%
- ------------
* Less than 1% of outstanding shares.
(1) The principal business address of such beneficial owner is 1929 Allen
Parkway, Houston, Texas 77019.
(2) Includes 9,000 shares issuable on exercise of stock options, 35,573 shares
owned by Mr. Waltrip as custodian for his minor children, 265,468 shares
owned by the William Blair Waltrip Trust, of which Mr. Waltrip is the
trustee and beneficiary, and 2,500 shares owned by the William Blair Waltrip
Children's Trusts of 1985.
(3) Includes 26,250 shares owned by the Robert L. Waltrip 1992 Trust #1, of
which Robert L. Waltrip, Jr., W. Blair Waltrip, and Holly Waltrip Benson are
co-trustees.
(4) Includes 28,000 shares owned by the Waltrip 1987 Grandchildren's Trust for
the benefit of the grandchildren of R. L. Waltrip, of which Robert L.
Waltrip, Jr. and W. Blair Waltrip are co-trustees, as to which both Robert
L. Waltrip, Jr. and W. Blair Waltrip disclaim beneficial ownership.
(5) Includes 15,000 shares issuable on exercise of stock options.
(6) Includes 9,000 shares issuable on exercise of stock options.
(7) Includes 9,000 shares issuable on exercise of stock options and 15,000
shares owned by Mr. Greer's wife.
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DESCRIPTION OF PGG CAPITAL STOCK
PGG's Articles of Incorporation, as amended (the "PGG Charter") provides
for authorized capital stock of 110,000,000 shares, consisting of 100,000,000
shares of PGG Common Stock and 10,000,000 shares of preferred stock, par value
$.01 per share ("PGG Preferred Stock"). The following summary description of
the capital stock of PGG is a summary, does not purport to be complete or to
give effect to applicable statutory or common law, is subject in all respects to
the applicable provisions of the PGG Charter, a copy of which is attached to
this Proxy Statement/Prospectus as Appendix F, and the information is qualified
in its entirety by this reference.
COMMON STOCK
Holders of PGG Common Stock are entitled to one vote per share in the
election of directors and on all other matters on which shareholders are
entitled or permitted to vote. Holders of PGG Common Stock are not entitled to
cumulative voting rights. Therefore, subject to the voting rights that may be
granted to holders of PGG Preferred Stock, pursuant to the PGG bylaws, as
amended (the "PGG Bylaws") which will become effective if the Transactions are
consummated, holders of a plurality of the shares of PGG Common Stock present in
person or represented by proxy at the meeting and entitled to vote can elect all
of the directors of PGG. Subject to the terms of any outstanding series of PGG
Preferred Stock, the holders of PGG Common Stock are entitled to dividends in
such amounts and at such times as may be declared by PGG's board of directors
out of funds legally available therefor. The PGG Common Stock is not subject to
any calls or assessments. Upon liquidation or dissolution, holders of PGG Common
Stock are entitled to share ratably in all net assets available for distribution
to shareholders after payment of any liquidation preferences to holders of PGG
Preferred Stock. Holders of PGG Common Stock have no redemption, conversion or
preemptive rights.
PREFERRED STOCK
Shares of PGG Preferred Stock may be issued without shareholder approval.
The PGG board of directors is authorized to issue up to 10,000,000 shares of PGG
Preferred Stock in one or more series and to determine, with respect to any
series of PGG Preferred Stock, the terms and rights of such series, including,
without limitation (i) the number of shares, designation and stated value of the
series, (ii) the rate and times at which dividends will be payable on the shares
of the series, and the status of such dividends as cumulative or non-cumulative
and as participating or non-participating, (iii) the voting rights, if any, to
be provided for shares of the series, (iv) the prices, times and terms, if any,
at or upon which shares of the series will be subject to redemption, (v) the
rights and preferences, if any, of shares of the series upon any liquidation,
dissolution or winding up of the affairs of, or upon any distribution of the
assets of, PGG, (vi) the rights, if any, to convert such shares into, or
exchange such shares for, shares of any other class of stock of PGG, (vii) the
terms of the retirement or sinking fund, if any, to be provided for shares of
the series, (viii) the limitations, if any, applicable while the series is
outstanding, on the payment of dividends or making of distributions on, or the
acquisition of, PGG Common Stock or any other class of stock that does not rank
senior to the shares of the series, (ix) conditions or restrictions, if any, on
the creation of indebtedness of PGG or on the issuance of any additional stock
and (x) any other powers, preferences and relative, participating, optional and
other special rights and any qualifications, limitations and restrictions
thereof. PGG has no current plans for issuance of any shares of PGG Preferred
Stock. Any issuance of shares of PGG Preferred Stock may adversely affect the
voting powers or rights of the holders of PGG Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The PGG Charter and the PGG Bylaws contain certain provisions that could
make more difficult the acquisition of PGG by means of a tender or exchange
offer, a proxy contest or otherwise. The description of such provisions set
forth below is intended only as a summary and is qualified in its entirety by
reference to the pertinent sections of the PGG Charter, the PGG Bylaws and the
TBCA.
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PREFERRED STOCK. Although the PGG board of directors has no intention at
the present time of doing so, it could issue a series of PGG Preferred Stock
that could, depending on the terms of such series, impede the completion of a
merger, tender offer or other takeover attempt. The PGG board of directors will
make any determination to issue such shares based on its judgment as to the best
interests of PGG and its shareholders. The PGG board of directors, in so acting,
could issue PGG Preferred Stock having terms that could discourage an
acquisition attempt through which an acquiror may be otherwise able to change
the composition of the board of directors, including a tender or exchange offer
or other transaction that some, or a majority, of PGG's shareholders might
believe to be in their best interests or in which shareholders might receive a
premium for their stock over the then-market price of such stock.
REMOVAL OF DIRECTORS. The PGG Charter provides that directors may be
removed only for cause, and then only by the affirmative vote of holders of at
least two-thirds of all outstanding voting stock.
SHAREHOLDER MEETINGS. The PGG Charter provides that shareholder action may
be taken at an annual or special meeting. The PGG Charter is silent as to
shareholder action by written consent in lieu of a meeting. Therefore, under the
TBCA, shareholder action by unanimous consent is permitted. The PGG Charter and
the PGG Bylaws provide that special meetings of shareholders can be called only
by a majority of the board of directors, the chairman of the board or the
president. The business permitted to be conducted at any special meeting of
shareholders is limited to the business brought before the meeting pursuant to
the notice of the meeting. These provisions would prevent non-director
shareholders of PGG from taking action by written consent or otherwise without
proper notice to the board of directors.
PGG's Bylaws contain certain provisions requiring advance notice be
delivered to PGG of any business to be brought by a shareholder before an annual
meeting of shareholders and establishing certain procedures to be followed by
shareholders in nominating persons for election to the PGG board of directors.
Generally, these provisions provide that written notice must be given to the
secretary of PGG by a shareholder (i) if the shareholder proposes to bring any
business before an annual meeting and (ii) if the shareholder desires to
nominate any person for election to the PGG board of directors, in each case not
less than 60 nor more than 180 days prior to the anniversary date of the
immediately preceding annual meeting of shareholders (with certain exceptions if
the date of the annual meeting is different by more than specified periods from
the anniversary date). The shareholder's notice must set forth specific
information regarding the shareholder and his business and director nominee, as
described in PGG's Bylaws. The foregoing is a summary of the material terms and
provisions relating to shareholders proposals contained in PGG's Bylaws, which
are filed as an exhibit to the Registration Statement of which this Proxy
Statement/Proxy is a part.
ANTI-TAKEOVER LEGISLATION. As a Texas corporation, PGG is subject to
Article 13 of the TBCA. In general, Article 13 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in the TBCA) with a Texas corporation for three years
following the date such person became an interested stockholder unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Article 13, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three
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years or who became an interested stockholder with the approval of the majority
of the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Texas law authorizes a Texas corporation to limit or eliminate the personal
liability of its directors to the corporation and its shareholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Texas law, directors are
accountable to Texas corporations and their shareholders for monetary damages
for conduct constituting gross negligence in the exercise of their duty of care.
Texas law enables Texas corporations to limit available relief to equitable
remedies such as injunction or rescission. The PGG Charter limits the liability
of directors of PGG to PGG or its shareholders to the fullest extent permitted
by Texas law. Specifically, no member of the PGG board of directors will be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the member's duty of
loyalty to PGG or its shareholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
in the TBCA or (iv) for any transaction from which the member derived an
improper personal benefit. This PGG Charter provision may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited PGG and its shareholders. The PGG
Charter and PGG Bylaws provide indemnification to PGG's officers and directors
and certain other persons with respect to certain matters, and upon consummation
of the Transactions, PGG intends to enter into agreements with each of its
directors and certain executive officers providing for indemnification with
respect to certain matters.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the PGG Common Stock is Harris Trust
and Savings Bank, New York, New York.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF PGG, TEI, HWG AND PMT
GENERAL
TEI AND PGG. If the Transactions are consummated, TEI shareholders will
receive shares of PGG Common Stock, and the rights of such shareholders will be
governed by the PGG Charter and PGG Bylaws. Both PGG and TEI are incorporated in
Texas. Pursuant to the TEI Merger, PGG will adopt, upon consummation of the TEI
Merger, articles of incorporation and bylaws which are substantively similar to
the articles of incorporation and bylaws of TEI, as amended, except as to the
following matters:
AUTHORIZED CAPITAL. The number of authorized shares of capital stock of
PGG will be one-fourth of that of TEI, to give effect to the .25-for-one
exchange ratio used in the TEI Merger.
NUMBER OF DIRECTORS. The number of directors will be increased from six to
12, six of which will be designated by TEI and six by the Combining Companies.
REMOVAL OF DIRECTORS. Under the current TEI articles of incorporation
directors can be removed by the affirmative vote of holders of two-thirds of the
outstanding shares at a meeting at which a quorum is present. Under the PGG
Charter directors may be removed only for cause, and then only by the
affirmative vote of holders of at least two-thirds of all outstanding voting
stock.
SHAREHOLDER MEETINGS. The TEI Charter provides that a special meeting of
shareholders can be called by the TEI board of directors, the chairman of the
board, the president or holders of at least 10% of the outstanding voting stock.
The PGG Charter and Bylaws provide that special meeting of shareholders can be
called only by a majority of the board of directors, the chairman of the board
or the president.
SHAREHOLDER PROPOSALS. The TEI articles of incorporation and bylaws have
no advance notice requirements for business sought to be brought by any
shareholder at an annual meeting nor any required procedures for shareholders
nominating persons to be elected to the board of directors. PGG's bylaws contain
provisions as to both of these matters. Generally, these provisions provide that
written notice must be given to the secretary of PGG by a shareholder (i) if the
shareholder proposes to bring any business before an annual meeting, and (ii) if
the shareholder desires to nominate any person for election to the PGG board of
directors, in each case not less than 60 nor more than 180 days prior to the
anniversary date of the immediately preceding annual meeting of shareholders
(with certain exceptions if the date of the annual meeting is different by more
than specified periods from the anniversary date). The shareholder's notice must
set forth specific information regarding the shareholder and his business and
director nominee, as described in PGG's Bylaws.
HWG, PMT AND PGG. If the Transactions are consummated, HWG Shareholders
and PMT Shareholders will receive shares of PGG Common Stock, and the rights of
such shareholders will be governed by the PGG Charter and PGG Bylaws. HWG and
PMT are each incorporated in Texas. This summary does not purport to be a
complete statement of the rights of holders of PGG, HWG, and PMT common stock
under, and is qualified in its entirety by reference to, the TBCA, the TTCA, and
the respective articles of incorporation and bylaws of PGG, HWG and PMT.
AUTHORIZED CAPITAL
PGG. The authorized capital stock of PGG consists of 110,000,000 shares,
100,000,000 of which are shares of PGG Common Stock and 10,000,000 of which are
shares of preferred stock, par value of $0.01. The PGG Charter grants specific
authority to the board of directors, without action by the shareholders, to
issue preferred stock with such designations, preferences, and special rights
and qualifications, limitations, and restrictions as may be designated by the
board of directors. As of the November 6, 1998, 1,000 shares of PGG Common Stock
were outstanding, and no outstanding shares of PGG Preferred Stock. The PGG
Charter expressly denies shareholders the right of cumulative voting and
preemptive rights. PGG Shareholders are entitled to such dividends and as may be
declared from time to time by the board of directors from funds legally
available therefor, and upon liquidation are entitled to receive pro rata all
assets of PGG available for distribution to such holders in accordance with
applicable statutes.
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HWG. The authorized capital stock of HWG consists of 50,000 shares of
common stock, par value of $1.00 per share. As of [HWG Record Date], 26,425
shares were outstanding. The HWG articles of incorporation expressly deny
shareholders the right of cumulative voting and preemptive rights. The HWG
Shareholders are entitled to such dividends as may be declared from time to time
by the board of directors from funds legally available therefor, and upon
liquidation are entitled to receive pro rata all assets of HWG available for
distribution to such holders in accordance with applicable statutes.
PMT. The authorized capital stock of PMT consists of 2,000,000 shares
divided into one class of 1,000,000 shares of common stock with a par value of
$1.00 per share and one class of preferred stock with a par value of $0.01 per
share. The board of directors is authorized, from time to time, to divide the
preferred stock into series, to designate each series, and to fix and determine
separately for each series the relative rights and preferences of the preferred
stock. The PMT articles of association expressly deny shareholders preemptive
rights. The TTCA denies cumulative voting rights, in the absence of a contrary
provision in the articles of organization. As of [PMT Record Date], 152,551
common shares were outstanding and no outstanding preferred shares. The PMT
Shareholders are entitled to such dividends as may be declared from time to time
by the board of directors from funds legally available therefor, and upon
liquidation are entitled to receive pro rata all assets of PMT available for
distribution to such holders in accordance with applicable statutes.
VOTING REQUIREMENTS AND QUORUMS OF SHAREHOLDER MEETINGS
PGG. The PGG Bylaws provide that a quorum shall be present at a meeting of
shareholders if the holders of a majority of shares entitled to vote are
represented at the meeting in person or by proxy. The PGG Bylaws provide that
except as otherwise required by law, the articles of incorporation, or the
bylaws, the act of the holders of a majority of the stock entitled to vote at
any meeting at which a quorum is present shall be the act of the shareholders at
the meeting.
HWG. The HWG bylaws provide that a quorum shall be present at a meeting of
shareholders if the holders of a majority of shares entitled to vote are
represented at the meeting in person or by proxy. The HWG bylaws provide that
with respect to any matter, other than the election of directors or other for
which the affirmative vote of the holders of a specified portion of the shares
entitled to vote is required by the TBCA, the affirmative vote of the holders of
a majority of shares entitled to vote on that matter and represented at the
meeting at which a quorum is present shall be the act of the shareholders.
PMT. The PMT bylaws provide that a quorum shall be present at a meeting of
the shareholders if the holders of a majority of shares entitled to vote are
represented at the meeting in person or by proxy. The PMT bylaws provide that
except as otherwise required by law, the articles of association, or the bylaws,
the act of the holders of a majority of the stock entitled to vote at any
meeting at which a quorum is present shall be the act of the shareholders at the
meeting.
SHAREHOLDER PROPOSALS
PGG. PGG's Bylaws contain certain provisions requiring advance notice be
delivered to PGG of any business to be brought by a shareholder before an annual
meeting of shareholders and establishing certain procedures to be followed by
shareholders in nominating persons for election to the PGG board of directors.
Generally, these provisions provide that written notice must be given to the
secretary of PGG by a shareholder (i) if the shareholder proposes to bring any
business before an annual meeting and (ii) if the shareholder desires to
nominate any person for election to the PGG board of directors, in each case not
less than 60 nor more than 180 days prior to the anniversary date of the
immediately preceding annual meeting of shareholders (with certain exceptions if
the date of the annual meeting is different by more than specified periods from
the anniversary date). The shareholder's notice must set forth specific
information regarding the shareholder and his business and director nominee, as
described in PGG's Bylaws.
HWG. The HWG articles and incorporation and bylaws have no advance notice
requirement for business sought to be brought by shareholder before an annual
meeting nor any procedures to be followed by shareholders to nominate persons to
the board of directors.
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PMT. The PMT articles and incorporation and bylaws have no advance notice
requirement for business sought to be brought by shareholder before an annual
meeting nor any procedures to be followed by shareholders to nominate persons to
the board of directors.
ELECTION OF DIRECTORS
PGG. The PGG Charter provides that the directors shall be classified into
three classes with each class being as nearly equal in number as possible. One
class of directors is elected each year for a three year term. The PGG Charter
expressly denies cumulative voting by the shareholders.
HWG. The HWG articles of incorporation expressly denies cumulative voting
by the shareholders.
PMT. The PMT bylaws provide the board shall, within thirty days after the
election of a new board and prior to any new director taking office, convene a
regular or special meeting of the board and administer an oath to each new
director that he accepts the position as director, that he will not violate, nor
knowingly permit any officer, director, or employee of the company to violate,
the laws of the State of Texas in the conduct of the business of PMT. The TTCA
denies cumulative voting rights, in the absence of a contrary provision in the
articles of organization.
VACANCIES ON THE BOARD OF DIRECTORS
PGG. The PGG Bylaws provide that any vacancies on the board of directors
may be filled by the affirmative vote of the remaining directors, though less
than a quorum of the board or may be filled by an election at an annual or
special meeting of the shareholders called for that purpose.
HWG. The HWG bylaws provide that any vacancies on the board of directors
may be filled by an affirmative vote of the remaining directors, though less
than a quorum of the entire board. Any directorship to be filled by reason of an
increase in the number of directors may be filled by the board of directors for
a term of office continuing only until the next election of one or more
directors by the shareholders, provided that the board of directors may not fill
more than two such directorships during the period between any two successive
annual meetings of the shareholders. Any vacancy may be filled by election at an
annual or special meeting of the shareholders called for that purpose.
PMT. The PMT bylaws provide that any vacancy or vacancies on the board of
directors may be filled by an affirmative vote of a majority of the remaining
directors. Any directorship to be filled by reason of an increase in the number
of directors may be filled by a majority of the full board, when authorized by a
resolution adopted at any regular meeting of the shareholders, or special
meeting of the shareholders called for such purpose.
NUMBER AND TERM OF DIRECTORS
PGG. The PGG Bylaws provide for not less than three nor more than fifteen
directors, and that the board may increase or decrease the number of directors
within this range from time to time by a resolution of the board of directors,
provided that no decrease shall have the effect of shortening the term of any
incumbent directors. The PGG Charter provides that the directors shall be
classified into three classes with each class being as nearly equal in number as
possible. One class of directors is elected each year for a three-year term.
HWG. The HWG bylaws provide that the number of directors may be increased
or decreased from time to time by resolution of the board of directors, provided
that no decrease shall have the effect of shortening the term of any incumbent
director. Directors elected serve until the next annual shareholders' meeting,
unless sooner removed.
PMT. The PMT bylaws provide for not less than five nor more than
twenty-five directors, a majority of which shall be residents of Texas and
shareholders of the company. The exact number of directors shall be fixed and
determined from time to time, by a resolution adopted at any regular meeting of
the shareholders, or any adjournment thereof, or any special meeting of the
shareholders called for such purpose, or any adjournment thereof with a copy of
any such resolution adopted to be filed with the Texas Banking Commission. In
addition, a majority of the full board, when authorized by a resolution adopted
at
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any regular meeting of the shareholders, or special meeting of the shareholders
called for such purpose, may at any time increase the number of directors and
appoint persons to fill the resulting positions, but the board shall never
exceed the maximum allowed by law. Directors elected serve from the time they
qualify until the next regular annual meeting of the shareholders, and until
their successors have been elected and qualified or until their death, removal,
resignation, or retirement.
REMOVAL OF DIRECTORS
PGG. The PGG Bylaws provide that any director may be removed only for
cause, and then only by the affirmative vote of holders of at least two-thirds
of all outstanding voting stock.
HWG. The HWG bylaws provide that any and all directors may be removed,
with or without cause, at any special meeting of the shareholders by an
affirmative vote of a majority of the outstanding shares entitled to vote at
elections of directors.
PMT. The PMT bylaws and articles of association are silent on removal of
directors. Therefore, the TTCA controls and provides that any director or the
entire board of directors may be removed, with or without cause, by a vote of
the holders of a majority of the shares then entitled to vote at an election of
the directors.
AMENDMENT OF BYLAWS
PGG. The PGG Bylaws provide that the bylaws may be altered, amended, or
repealed by the affirmative vote of the holders of a majority of the outstanding
stock at any annual meeting, or at any special meeting if notice of the proposed
amendment is contained in the notice of such special meeting, or by the
affirmative vote of a majority of the full board of directors at any regular or
special meeting, provided that notice of the proposed amendment is contained in
the notice of the meeting.
HWG. The HWG bylaws provide that the board of directors has the power to
amend or repeal the bylaws or adopt new bylaws, unless the shareholders, in
amending, repealing, or adopting a new bylaw, expressly provide that the board
of directors may not amend or repeal the bylaw. The board of directors may
exercise this power at any regular or special meeting at which a quorum is
present by the affirmative vote of a majority of the directors present at the
meeting and without any notice of the action taken with respect to the bylaws
having been contained in the notice or waiver of notice of such meeting. The
shareholders may amend, repeal or adopt bylaws unless the articles of
incorporation or a bylaw adopted by the shareholders provide otherwise. The
shareholders may exercise this right at any annual meeting of the shareholders
or any special meeting of the shareholders at which a quorum is present or
represented, provided that notice of the proposed alteration or repeal is
contained in the notice of such special meeting, by affirmative vote of a
majority of the shares entitled to vote at such meeting. The directors shall not
amend the bylaws to effect a change in the time or place of the meeting for the
election of directors within sixty days before the meeting is to be held.
PMT. The PMT bylaws provide that the bylaws may be altered, amended, or
repealed by the affirmative vote of the holders of a majority of outstanding
stock at any annual meeting, or any special meeting if notice of the proposed
amendment is contained in the notice of the special meeting. The shareholders
may, by resolution at any annual meeting or any special meeting called for such
purpose, delegate to the board the power to alter, amend or repeal the bylaws or
to adopt new bylaws, but the shareholders may rescind a board action with regard
to the bylaws at a meeting at which the amendment of bylaws is permitted. No
amendment of the bylaws shall be effective until filed with and approved by the
Texas Banking Commissioner.
ACTION BY WRITTEN CONSENT AND SPECIAL MEETINGS OF SHAREHOLDERS
PGG. The PGG Charter and PGG Bylaws are silent as to shareholder action by
written consent in lieu of a meeting. Therefore, under the TBCA, shareholders
can take action only by unanimous written consent of shareholders. The PGG
Bylaws provide that a special meeting of the shareholders may be called
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at any time only by a majority of the board of directors, the chairman, or by
the president. Written or printed notice stating the purpose or purposes for
which the meeting is called is required.
HWG. The HWG articles of incorporation provide that any action required by
the TBCA to be taken at an annual or special meeting of the shareholders, or
that any action that may be taken at an annual or special meeting, may be taken
without a meeting and without notice if written consents, setting forth the
action so taken, are signed by the holders of shares having no less than the
minimum number of votes that would be necessary to take such action at a meeting
at which the holders of all shares entitled to vote on the action were present
and voted. The HWG bylaws provide that special meetings of the shareholders may
be called at any time by the president or board of directors. Special meetings
may also be called by the secretary upon the written request of holders of at
least ten percent of the outstanding stock entitled to vote at such meeting.
Such request shall state the purpose or purposes of such meeting and the matters
proposed to be acted on at the meeting.
PMT. The PMT bylaws provide that any action required to be taken at any
annual or special meeting of shareholders of the company, or any action which
may be taken at any annual or special meeting of such shareholders, may be taken
without a meeting, without prior notice and without a vote by written consent
signed by all shareholders entitled to vote on the action. Such consents shall
have the same force and effect as a unanimous vote at a meeting. The PMT bylaws
provide that a special meeting of the shareholders may be called at any time and
for any lawful purpose by a majority of the full board of directors or by any
three or more shareholders owning, in aggregate, not less than twenty-five
percent of the outstanding stock entitled to vote at such meeting. Only such
business shall be transacted at a special meeting as may be stated or indicated
in the notice of such meeting.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
PGG. The PGG Charter provides that the corporation shall indemnify persons
for whom indemnification is permitted by the TBCA to the fullest extent
permissible under the TBCA, and may purchase such indemnification insurance as
the board of directors from time to time shall determine. In addition, upon
consummation of the Transactions, PGG intends to enter into agreements with each
of its directors and certain executive officers providing for indemnification
with respect to certain matters. The PGG Charter provides that no director is
liable to the corporation or its shareholders or members for monetary damages
for an act or omission in the director's capacity as director, except as
otherwise provided by statute.
HWG. The HWG articles of incorporation provide that a director is not be
liable to the corporation or its shareholders for monetary damages for an act or
omission, or alleged act or omission, in the director's capacity as a director,
except that a director's liability is not eliminated or limited to the extent
the director is found liable for: (i) a breach of the director's duty of loyalty
to the corporation or its shareholders, (ii) an act or omission not in good
faith that constitutes a breach of the director to the corporation or an act or
omission that involved intentional misconduct or a knowing violation of the law,
(iii) a transaction from which the director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office, or (iv) an act or omission for which the liability of a
director is expressly provided by an applicable statute. The HWG bylaws provide
indemnification and/or advance expenses to a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding because
the person (i) is or was a director, officer, employee or agent of the
corporation, or (ii) 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, to the fullest extent provided by, and in accordance with the
procedures set forth in Article 2.02-1 of the TBCA and any other applicable
laws, provided, however, that Article 2.02-1 is modified in the following
respects: (i) the indemnification of any person who (A) conducted himself in
good faith, (B) reasonably believed that his conduct was in the best interest of
the corporation (or, if the person is not a director, that the person's conduct
was at least not opposed to the corporation's best interest), and (C) in the
case of any criminal proceeding, had no reasonable cause to believe his conduct
was unlawful, is mandatory rather than optional; (ii) a determination that the
person acted in accordance with the standards set forth in (i) above constitutes
authorization of
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indemnification under Section G of Article 2.02-1 of the TBCA, (iii) the
advancement of expenses to a person who has satisfied the indemnification
requirements set forth above is mandatory rather than optional, and (iv) the
payment or reimbursement of expenses to a person pursuant to Section N of the
Article 2.02-1 of the TBCA is mandatory rather than optional. The bylaws also
provide that HWG may purchase and maintain insurance or other arrangements on
behalf of any person against any liability asserted against him and incurred by
him in such a capacity or arising out of his status as such a person, whether or
not the corporation would have the power to indemnify him against liability
under the bylaws.
PMT. The PMT articles of association provide that a director of the
corporation is not liable to the corporation or to its shareholders for monetary
damages for an act or omission in the director's capacity as a director, to the
fullest extent permitted by law. The PMT bylaws provide that the company, by
action of its board, will indemnify or reimburse any person for reasonable
expenses, including judgments, penalties, fines and settlements, incurred by him
in connection with any action, suit or proceeding to which he is a party by
reason of his being or having been a director, officer or employee of the
company or having served as a director, officer, partner, venturer, proprietor,
trustee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, at the request of the company. If there is a
compromise of such an action or threatened action, there is no indemnification
or reimbursement for the amount paid to settle the claim or for reasonable
expenses incurred in connection with such claim without the vote, or written
consent, of the owners of record of a majority of the stock of the company. No
such person is indemnified or reimbursed if he has been finally adjudged to have
been guilty of, or liable for, willful misconduct, gross neglect of duty or a
criminal act. Expenses incurred by any person subject to indemnification as set
forth above in defending any pending, threatened or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such action, suit or proceeding and any inquiry or
investigation that could lead to such an action, suit or proceeding, may be paid
by the company in advance of the final disposition of such action, suit or
proceeding as authorized by the board in the specified case, in the manner and
to the extent permitted by law. PMT's obligation to indemnify pursuant to the
bylaws is not deemed to be exclusive of any other rights to which an indemnified
person is entitled under any other agreement, pursuant to a vote of the
shareholders, as a matter of law, or otherwise, either as to action in his
official capacity or as to action in another capacity while holding such office,
and continues as to a person who has ceased to be a director or officer and
inures to the benefit of the heirs, executors, and administrators of such a
person. The PMT bylaws provide that it may, upon an affirmative vote of a
majority of the board, purchase insurance for the purpose of indemnifying its
directors, officers, and other employees. Such insurance may, but need not, be
for the benefit of all directors, officers or employees.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF PGG AND PARTNERS OF SPIRES
GENERAL
If the Spires Transaction is consummated, owners of Spires partnership
interests will receive shares of PGG Common Stock, and the rights of interest
holders will be governed by the PGG Charter and PGG Bylaws. Spires is a Delaware
limited partnership and is governed by the DLPA. PGG is a Texas corporation and
is governed by the TBCA. Differences in the rights of Spires interest holders
and PGG Shareholders arise from the difference in the laws governing limited
partnerships and laws governing corporations, as well as specific differences
between the terms of the Spires Second Amended and Restated Agreement of Limited
Partnership, as amended (the "Partnership Agreement"), and the PGG Charter and
PGG Bylaws. This summary is not, and does not purport to be, a complete
statement of the rights of Spires interest holders and holders of PGG Common
Stock under, and is qualified in its entirety by reference to, the TBCA, the
DLPA, the Partnership Agreement, and the PGG Charter and PGG Bylaws. Capitalized
terms used in this section which are not defined elsewhere shall have the
meaning assigned to them in the Partnership Agreement.
LIQUIDITY AND MARKETABILITY
PGG. Application has been made to approve the PGG Common Stock for
quotation on the Nasdaq National Market.
SPIRES. There is no trading market for Spires partnership interests.
TRANSFERABILITY
PGG. The PGG Common Stock will be freely transferable, subject to (i)
shares received by Spires Partners who are determined to be "affiliates" (as
defined under the Securities Act) of Spires or PGG, (ii) Spires Partners who are
required to execute lock-up letters with PGG at closing of the Transactions,
pursuant to which such persons agree not to sell or otherwise dispose for any
shares of PGG Common Stock for a period of one year after such closing and (iii)
applicable state and federal securities law restrictions. See "The
Transactions -- Federal Securities Law Consequences" and "The
Agreement -- Terms of the Agreement -- Lock-Up Agreements."
SPIRES. Spires partnership interests are subject to significant
restrictions on transfer. Any transfer of a Spires partnership interest is
subject to the following conditions: (i) no limited partner can transfer his
Units without the consent of the Managing General Partner and a Majority in
Interest of each Class of Limited Partners, voting separately (unless the
transfer is an Involuntary Transfer), (ii) execution and delivery of documents
and instruments necessary or appropriate in the opinion of the partnership's
counsel to effect the transfer and to confirm the transferee's agreement to be
bound by all provisions of the Partnership Agreement, (iii) reimbursement by the
transferor or transferee for all costs and expenses the Partnership reasonably
incurs in connection with the transfer, (iv) delivery to the Partnership of an
opinion of counsel that the transfer will not cause the partnership to be
terminated for federal income tax purposes, (v) the transferor and transferee
must furnish the transferee's taxpayer identification number and sufficient
information in order to determine the transferee's initial tax basis in the
Units transferred, and any other information reasonably necessary to permit the
partnership to file all federal and state tax returns and other legally required
information statements or tax-related information, (vi) either (A) the Units
being transferred are registered under the Securities Act and any applicable
state securities law, or (B) the transferee must provide an opinion of counsel
that the transfer is exempt from all applicable registration requirements and
will not violate any applicable laws regulating the transfer of securities,
(vii) the transferor must provide an opinion of counsel that the transfer will
not cause the Partnership to be treated as an "investment company" under the
Investment Company Act, and (viii) the transferee must demonstrate to the
reasonable satisfaction of the Managing General Partner that the transfer does
not cause the partners or the partnership to violate any law or regulation and
that all necessary filings by the transferee have been made and that sufficient
provision has been made for the payment of any necessary fees or expenses of the
partnership or any partners with respect to any filings or amendments that must
be made with respect to the transfer. In
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addition, (i) no transfer is effective if the transfer would, in the opinion of
the Managing General Partner's counsel, result in the termination of the
partnership or the treatment of the partnership as an association taxable as a
corporation, and (ii) any transfer which would result in the partnership having
more than 500 partners is not effective.
Only specifically permitted transfers are allowed. Permitted transfers
include: (i) a transfer of Class A Units to any other Class A limited partner,
(ii) a transfer of Class A Units or Class B Units other than in connection with
a pledge or other encumbrance to secure payment or performance of a Debt,
subject to a first refusal right granted to other limited partners, (iii)
transfer of the Managing General Partner Units other than in connection with a
pledge or other encumbrance to secure the payment or performance of a Debt,
subject to (A) approval of all other general partners and a Majority in Interest
of each Class of limited partners, and (B) the partnership's counsel delivering
an opinion that such transfer will not cause the partnership to become taxable
as a corporation for federal income tax purposes, and (iv) a transfer by the
Secondary General Partner of its interest, subject to the consent of the
Managing General Partner and a Majority in Interest of the Class A limited
partners.
PURCHASE AND REPURCHASE RIGHTS
PGG. The PGG Common Stock will not be subject to any purchase or
repurchase rights.
SPIRES. Spires partnership interests are subject to various repurchase
rights. Permitted transfers of limited partnership interests are subject to a
first refusal right granted to other limited partners. Class B Units are subject
to buy back provisions upon the occurrence of a Termination Event. Termination
Events include: (i) a Class B limited partner is subject to a Regulatory
Revocation, (ii) a Class B limited partner's employment agreement is terminated,
or (iii) a Class B limited partner, in his or its capacity as a Principal,
breaches any of the covenants contained in the Partnership Agreement. Upon the
occurrence of a Termination Event, (i) the other Principals have the opportunity
to purchase the Class B partnership interests, (ii) if not purchased by the
Principals, the Class A limited partners have the right to purchase the Class B
interests, and (iii) if not purchased by the Principals or Class A limited
partners, the Class B limited partners have the right to purchase the units. The
purchase price under the buy back provision is determined by a formula provided
in the Partnership Agreement.
ANTIDILUTION RIGHTS
PGG. The PGG Common Stock will not be subject to any antidilution,
preemptive or other similar rights.
SPIRES. In the event that additional Class A or Class B partnership
interests are offered for sale, the current holders of Class A and Class B
partnership interests have the right to purchase their pro rata share of the
additional interests offered in accordance with each limited partner's
Percentage Interest.
FINANCIAL REPORTING
PGG. PGG will be subject to the reporting requirements of the Exchange Act
and will file annual and quarterly reports thereunder.
SPIRES. As a registered broker-dealer, Spires is subject to certain
reporting requirements under Section 17 of the Exchange Act. Under the Spires
Partnership Agreement, the Managing General Partner must provide monthly
unaudited financial statements together with information regarding the
partnership's investments to each partner. The Managing General Partner must
also provide audited financial statements together with information regarding
the partnership's investments on an annual basis.
TAXATION
PGG. PGG is a corporation, a taxable entity under the Code, and
accordingly, is subject to taxes on its income at current rates up to 35%.
Shareholders will also be subject to tax on any dividends that are declared and
paid (or deemed paid) on the PGG Common Stock. Shareholders that are
corporations will generally be entitled to exclude from their income 70% of the
taxable dividends received from PGG.
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SPIRES. Spires, as a partnership, is not a taxable entity under the Code.
However, holders of Spires partnership interests report and pay taxes on their
allocable share of partnership income, gains, losses and deductions as set forth
in the Partnership Agreement, whether or not any cash distributions are actually
made. Generally, allocations by a partnership to a holder of partnership
interests are not taxable, except to the extent they are made in cash and exceed
the tax basis in such holder's partnership interests. For this purpose, a
reduction in a partner's "share of indebtedness" as determined under the Code
is treated as a cash distribution. Income from the partnership is treated as
passive income under the Code. Such passive income cannot be offset by losses or
credits from a holder's other passive activities. Partnership losses, if any,
can only be used to offset subsequent income from the partnership and any unused
passive losses are suspended.
CASH DISTRIBUTIONS
PGG. The holders of PGG Common Stock will be entitled to receive dividends
only as, if and when declared by the board of directors of PGG out of funds
legally available therefor. Payment of dividends of PGG will be within the sole
discretion of the PGG board of directors and will depend on, among other
factors, earnings, financial condition and capital requirements.
SPIRES. The Spires Partnership Agreement provides for quarterly cash
distributions, based generally upon the partners' percentage interest in the
limited partnership and the maximum federal income tax rate. No cash
distributions may be made if, after giving effect to the distribution, the
liabilities of the limited partnership, excluding non-recourse liabilities of
the limited partnership and liabilities to the partners with respect to their
partnership interests, would be greater than the fair market value of its
assets.
LIQUIDATION RIGHTS
PGG. In the event of the liquidation, dissolution, or winding-up of PGG,
holders of PGG Common Stock are entitled to share ratably in all assets
remaining after payment to creditors and payments required to be made in respect
to any PGG preferred stock that may then be outstanding.
SPIRES. In the event of the dissolution, liquidation, or winding-up of
Spires, a full account of the partnership's liabilities and Property shall be
taken, the Property liquidated as promptly as is consistent with obtaining the
fair market value thereof, and shall cause the proceeds to be applied and
distributed to pay (i) all partnership Debts, except Debts owed to the
Principals or Managing General Partner, (ii) any special distribution amount due
and payable to the Secondary General Partner and Class A limited partners, (iii)
the Secondary General Partner and Class A limited partners in amounts sufficient
to satisfy all accrued but unpaid Preferred Returns, (iv) the Secondary General
Partner and Class A limited partners in an amount sufficient to reduce the
Aggregate Equalization Balance to zero, (v) the Principals and the Managing
General Partner an amount sufficient to discharge the partnership's Debts to
such persons, (vi) to the Unit Holders, in accordance with their Capital
Accounts, after giving effect to all contributions, distributions, and
allocations for all periods and so that the balance in all such capital accounts
shall equal zero, and (vii) the balance, if any, to the partners, pro rata
according to their percentage interest in the partnership.
RIGHT TO COMPEL DISSOLUTION
PGG. Under Texas law, shareholders of PGG may not vote to compel
dissolution of PGG without prior action by its board of directors. Under Texas
law, a corporation may be dissolved with the unanimous written consent of the
shareholders without any action by the corporation's board of directors.
SPIRES. The Spires Partnership Agreement provides that the partnership
shall dissolve and commence winding up and liquidating upon the written consent
of all partners that the partnership should be dissolved.
LIMITED LIABILITY
PGG. Shares of PGG Common Stock will be fully paid and nonassessable. PGG
Shareholders will not have personal liability for the obligations of PGG.
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SPIRES. Holders of limited partnership interests in Spires have economic
and certain other rights of limited partners in a Delaware partnership. Holders
of limited partnership interests are not personally liable for the obligations
of Spires, although certain events could cause the holders of limited
partnership interests to lose their protection against limited personal
liability.
CONTINUITY OF EXISTENCE
PGG. Subject to the provisions of the TBCA providing for the dissolution
of a Texas corporation, Texas law and the PGG Charter provide for perpetual
existence for PGG.
SPIRES. The Spires Partnership Agreement provides for a ten-year period of
existence commencing on January 20, 1995 or until the winding up and liquidation
of the partnership and its business is completed.
ISSUANCE OF SENIOR SECURITIES
PGG. The PGG Charter provides for the issuance of preferred stock, which
will be senior to the PGG Common Stock as to payment of dividends and
distributions upon liquidation. See "Description of PGG Capital
Stock -- Preferred Stock."
SPIRES. No additional Class A or Class B partnership interests and no
other partnership interest, right or privilege can be created without the
affirmative vote, or written consent, of the Managing General Partner and a
Majority in Interest of each class of the limited partners, voting separately.
VOTING RIGHTS
PGG. Holders of PGG Common Stock are entitled to one vote per share on all
matters submitted to them for a vote, including the election of directors,
amendments to the articles of incorporation, certain mergers and share
exchanges, dissolution and sale of all or substantially all of the assets of PGG
if not in the usual and regular course of business of the corporation. The PGG
Charter expressly denies cumulative voting rights. Former holders of Spires
partnership interests will own a smaller percentage interest in PGG than they
currently own in Spires, resulting in a corresponding decrease in their voting
power.
SPIRES. The holders of each class of Spires' limited partnership interests
have the right to vote, as a class, on several matters pursuant to the
Partnership Agreement and the DLPA, including: (i) permission to engage in any
business other than the business activities permitted by the Partnership
Agreement, (ii) permission to demand return of a Capital Contribution or to
withdraw from the partnership, (iii) permission for a Partner to lend or advance
money to the partnership, (iv) resolution of a Deadlock by the board of
directors of the Managing General Partner, (v) amendment of the Partnership
Agreement, (vi) permission for the Managing General Partner to transfer any or
all of its interest in the partnership, (vii) permission for the Secondary
General Partner to transfer any or all of its interest in the partnership,
(viii) permission for any limited partner to transfer his or its interest in the
partnership, (ix) admission of assignees as limited partners, (x) the creation
of additional Class A, Class B, or any other interest, right or privilege as a
partner or holder of an interest in the partnership, (xi) admission of a
Managing General Partner, (xii) removal of the Managing General Partner, and
(xiii) dissolution, winding-up, or liquidation of the partnership.
MEETINGS OF PARTNERS/SHAREHOLDERS
PGG. PGG is required, pursuant to the TBCA and its bylaws, to hold annual
meetings of the shareholders. The PGG Bylaws provide that a special meeting of
the shareholders may be called at any time only by a majority of the board of
directors, the chairman, or by the president. Written or printed notice stating
the purpose or purposes for which the meeting is called is required. The PGG
Charter and PGG Bylaws are silent as to shareholder action by written consent in
lieu of a meeting. Therefore, under the TBCA, shareholders can take action only
by unanimous written consent of shareholders.
The PGG Bylaws also contain provisions requiring advance notice be
delivered to PGG of any business to be brought by a shareholder before an annual
meeting of shareholders and establishing certain procedures to be followed by
shareholders in nominating persons for election to the PGG board of directors.
Generally, these provisions provide that written notice must be given to the
secretary of PGG by a
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shareholder (i) if the shareholder proposes to bring any business before an
annual meeting and (ii) if the shareholder desires to nominate any person for
election to the PGG board of directors, in each case not less than 60 nor more
than 180 days prior to the anniversary date of the immediately preceding annual
meeting of shareholders (with certain exceptions if the date of the annual
meeting is different by more than specified periods from the anniversary date).
The shareholder's notice must set forth specific information regarding the
shareholder and his business and director nominee, as described in the PGG
Bylaws.
SPIRES. The Spires Partnership Agreement provides that the partnership
shall hold an annual meeting of the partners. Other meetings of the partners may
be called by the Managing General Partner and shall be called upon the written
request of limited partners who hold a Majority in Interest of any Class of
Units. The request for a meeting of the partners shall include the nature of the
business to be transacted. Action required to be taken at a meeting of partners
or consent required to be given by any partner or class thereof, may be taken
without a meeting, without prior notice, and with a call or other action by the
Managing Partner and without a vote, if a consent or consents in writing,
setting forth the action so taken or consented to, shall have been signed by the
holders of units having not less than the Percentage Interest that would be
required for such action at a meeting at which all the holders of all Units
entitled to vote on the action or to give the consent were present and voted.
RIGHT TO LIST OF PARTNERS/SHAREHOLDERS
PGG. The PGG Bylaws provide that a complete list of shareholders entitled
to vote at each shareholders' meeting, including address of and the number of
shares held by each, shall be prepared by the secretary of the corporation and
subject to inspection by any stockholder during usual business hours for a
period of ten days prior to such meeting and shall be produced at such meetings
and at all time during such meeting be subject to inspection by any shareholder.
SPIRES. The Spires Partnership Agreement provides that the limited
partners shall have full and unfettered access to the Managing General Partner's
and/or the partnerships books and records and other information related to the
Managing General Partner and/or the partnership.
REPLACEMENT OF GENERAL PARTNER/DIRECTORS
PGG. The PGG Bylaws provide that any director may be removed only for
cause, and then only by the affirmative vote of holders of at least two-thirds
of all outstanding voting stock.
SPIRES. The Spires Partnership Agreement provides that the Managing
General Partner will cease to be the Managing General Partner upon the vote of a
Majority in Interest of each Class of limited partners. Upon ceasing to be the
Managing General Partner, the Secondary General Partner may elect to become the
Managing General Partner, entitled to exercise any and all rights and powers of,
and subject to the duties and responsibilities of, the Managing General Partner.
No Person can be admitted to the partnership as a Managing General Partner
without the unanimous consent of the Partners, including the Secondary General
Partner.
AMENDING THE PARTNERSHIP AGREEMENT/ARTICLES OF INCORPORATION AND BYLAWS
PGG. Under the TBCA, amendment of the articles of incorporation of PGG
requires (i) adoption of a resolution by the board of directors setting forth
the proposed amendment, and (ii) an affirmative vote of holders of two-thirds of
the shares of capital stock entitled to vote. The PGG Bylaws provide that the
bylaws may be altered, amended, or repealed by the affirmative vote of the
holders of a majority of the outstanding stock at any annual meeting, or at any
special meeting if notice of the proposed amendment is contained in the notice
of such special meeting, or by the affirmative vote of a majority of the full
board of directors at any regular or special meeting, provided that notice of
the proposed amendment is contained in the notice of the meeting.
SPIRES. Amendments to the Partnership Agreement may be proposed by the
Managing General Partner or a Majority in Interest of any Class of limited
partners. Following the proposal, the Managing
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General Partner must submit to the limited partners the proposed amendment,
provided that the partnership's counsel has approved the form of the amendment,
along with the Managing General Partner's recommendation as to the proposed
amendment. The amendment must be approved if it receives the affirmative vote of
(i) the Managing General Partner, and (ii) a Majority in Interest of each Class
of limited partners. The Partnership Agreement may not be amended with out the
consent of each partner adversely affected if such amendment would: (i) convert
a limited partner's interest in the partnership into a general partner's
interest, (ii) modify the limited liability of a limited partner, or (iii) alter
the interest of a partner in Profits, Losses, other items, or any partnership
distributions as set forth in the Partnership Agreement. The Partnership
Agreement may be amended by the Managing General Partner, without the consent of
any of the limited partners, to add to the representations, duties, or
obligations of the Managing General Partner or to surrender any right or power
granted to the Managing General Partner, provided that no amendment shall be
adopted unless the adoption is for the benefit of or not adverse to the
interests of the limited partners. The consent of all partners is required to
amend the Partnership Agreement if such amendment would: (i) change the form of
the partnership to a general partnership, (ii) cause the partnership to be
classified, for federal income tax purposes, as a Person other than a
partnership, or (iii) amend the section of the Partnership Agreement which
addresses amendments to the Partnership Agreement.
CERTAIN ANTI-TAKEOVER PROVISIONS
PGG. PGG is subject to provisions of the TBCA which prohibit business
combinations with any affiliate or associate under certain circumstances. In
addition, PGG's Charter contains certain provisions which may delay, discourage,
inhibit, prevent or render more difficult an attempt to obtain control of PGG,
whether by means of a tender offer, business combination, proxy context or
otherwise. These provisions include the authorization of "blank check"
preferred stock, classification of board of directors, limiting the removal of a
director only on approval of two-thirds of the outstanding voting stock and a
restriction on the ability of shareholders to take action by written consent.
See "Management of PGG After the Transactions -- Board of Director Classes;
Director Compensation" and "Description of PGG Capital Stock -- Preferred
Stock and -- Certain Anti-Takeover Provisions."
SPIRES. The Spires Partnership Agreement does not contain any provisions
regarding business combinations. The DLPA requires that a merger or
consolidation shall be approved by all general partners and by each class of
limited partners by a majority vote.
CERTAIN LEGAL RIGHTS
PGG. The TBCA affords shareholders of a corporation the right to bring
shareholder derivative actions when the corporation has failed to enforce a
right which may properly be asserted by it, and actions to recover damages from
directors for violations of their fiduciary duties. Shareholders may also have
rights to bring actions in federal courts to enforce federal rights.
SPIRES. The DLPA affords a limited partner the right to bring an action in
the right of a limited partnership to recover a judgment in its favor if general
partners with authority to do so have refused to bring action or if an effort to
cause those general partners to bring the action is not likely to succeed. In
addition, limited partners may institute legal action on behalf of themselves or
other similarly situated limited partners (a class action) to recover damages
from a general partner for violation of fiduciary duties to holders of limited
partnership units. Limited partners may also have the rights to bring actions in
federal courts to enforce federal rights.
FIDUCIARY DUTIES
PGG. The fiduciary duties owed by the directors of a corporation to its
shareholders under the TBCA and remedies available for a breach of those
responsibilities are similar to those applicable to the duties a general partner
owes to the limited partners in a Delaware limited partnership. Therefore, the
Spires Transaction generally will not involve any reduction in the standard of
care owed to investors or in the remedies available for breach of those duties.
SPIRES. The general partner's fiduciary duties to the limited partners
include the duties of loyalty, care and good faith.
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LIMITS ON DIRECTORS' AND MANAGEMENT'S LIABILITIES
PGG. The PGG Charter provides that the corporation must indemnify persons
for whom indemnification is permitted by the TBCA to the fullest extent
permissible under the TBCA, and may purchase such indemnification insurance as
the board of directors from time to time shall determine. In addition, upon
consummation of the Transactions, PGG intends to enter into agreements with each
of its directors and certain executive officers providing for indemnification
with respect to certain matters. The PGG Charter provides that no director is
liable to the corporation or its shareholders or members for monetary damages
for an act or omission in the director's capacity as director, except as
otherwise provided by statute.
SPIRES. The Spires Partnership Agreement provides that General Partners,
Principals, employees and agents must be indemnified and held harmless from and
against all losses, costs, liabilities, damages and expenses any of them may
incur which arise out of any action or inaction by the indemnified party in the
actual conduct of Permitted Business by and on behalf of the partnership if (i)
the indemnified party, in good faith, reasonably believed that such course of
conduct was in the best interests of the partnership, and (ii) in fact such
course of conduct did not constitute a breach of the Partnership Agreement or
would otherwise constitute bad faith, gross negligence, recklessness, or willful
misconduct on the part of the indemnified party, provided, however, no
indemnification is provided with respect to the Managing General Partner or a
Principal to the extent that the act or omission resulted in a Regulatory Loss
to the partnership attributable to the Managing General Partner or a Principal
or any losses, damages, or expenses associated with or arising from an action by
or on behalf of the Managing General Partner, the partnership, or any of the
partners or any Class thereof. Indemnification will be provided from the assets
of the partnership only and to extent the Managing General Partner may
reasonably determine.
LEGAL MATTERS
Porter & Hedges, L.L.P., Houston, Texas, will pass on certain legal matters
in connection with the Transactions, including the validity of the shares of PGG
Common Stock offered by this Proxy Statement/Prospectus and certain United
States federal income taxation matters on behalf of TEI, PGG and the TEI
Shareholders. PricewaterhouseCoopers LLP, Houston, Texas, is acting as special
tax advisor to the Combining Companies with respect to certain United States
federal income tax matters relating to the Transactions.
EXPERTS
The audited consolidated financial statements of Pinnacle Global Group,
Inc., TEI, Inc. and Spires Financial, L.P. included herein and in the
Registration Statement have been audited by PricewaterhouseCoopers LLP,
independent public accountants, as indicated in their reports thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The audited consolidated financial statements of Harris Webb & Garrison,
Inc. included in this Proxy Statement/Prospectus and elsewhere in this
registration statement have been audited by Cheshier & Fuller, L.L.P.,
independent public accountants, as indicated in their report thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Pinnacle Management & Trust Company as of
December 31, 1997 and for the year ended December 31, 1997 have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The audited financial statements of Pinnacle Management & Trust Company as
of December 31, 1996 and for each of the two years in the period ended December
31, 1996 included in this Proxy Statement/Prospectus and elsewhere in this
registration statement have been audited by Grant Thornton LLP, independent
public accountants, as indicated in their report thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
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WHERE YOU CAN FIND MORE INFORMATION
TEI files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information that TEI files at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference rooms. TEI public
filings are also available to the public from commercial document retrieval
services and at the Internet World Wide Web site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information
concerning TEI also may be inspected at the offices of the NASD, 1735 K Street,
Washington, D.C. 20006.
TEI filed the Registration Statement to register with the SEC the shares of
PGG Common Stock to be issued in the Transactions. This Proxy
Statement/Prospectus is a part of the Registration Statement and constitutes a
prospectus of PGG and a proxy statement of TEI for the TEI Special Meeting.
As allowed by SEC rules, this Proxy Statement/Prospectus does not contain
all the information that TEI Shareholders can find in the Registration Statement
or the exhibits to the Registration Statement.
The SEC allows TEI to "incorporate by reference" information into this
Proxy Statement/Prospectus, which means that TEI can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Proxy Statement/Prospectus, except for any information superseded by information
contained directly in the Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that TEI has previously filed with the SEC. These documents contain important
information about TEI and its financial condition.
<TABLE>
<CAPTION>
SEC FILINGS (FILE NO. 0-18899) PERIOD
- ------------------------------------- ---------------------------------------------------------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly reports on Form 10-Q Three months ended March 31, 1998 and June 30, 1998
</TABLE>
TEI incorporates by reference additional documents that TEI may file with
the SEC between the date of this Proxy Statement/Prospectus and the date of the
TEI Special Meeting. These include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
If you are a TEI Shareholder, TEI may have sent you some of the documents
incorporated by reference, but you can obtain any of them through TEI or the SEC
or the SEC's Internet World Wide Web site described above. Documents
incorporated by reference are available from TEI without charge, excluding all
exhibits unless specifically incorporated by reference as an exhibit to this
Proxy Statement/Prospectus. Documents incorporated by reference in this Proxy
Statement/Prospectus may be obtained by requesting them in writing or by
telephone from TEI at the following address:
TEI, Inc.
2900 North Loop West, Suite 1230
Houston, Texas 77092
Attention: Donald R. Campbell
If you would like to request documents from TEI, please do so by
, 1998 to receive them before the TEI Special Meeting.
If you request any incorporated documents from us we will mail them to you by
first-class mail, or other equally prompt means, within one business day of our
receipt of your request.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement/Prospectus to vote your shares at the TEI
Special Meeting. TEI has not authorized anyone to provide you with information
that is different from what is contained in this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus is dated , 1998. You
should not assume that the information contained in the Proxy
Statement/Prospectus is accurate as of any date other than that date, and
neither the mailing of this Proxy Statement/Prospectus to the TEI Shareholders
nor the issuance of PGG Common Stock in the Transactions shall create any
implication to the contrary.
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GLOSSARY OF TERMS
"ACQUISITION TRANSACTIONS" means the HWG Merger, the PMT Merger and the
Spires Transaction, collectively.
"AGREEMENT" means the Amended and Restated Agreement and Plan of
Organization, dated October 2, 1998, among TEI, PGG, HWG Merger Sub, PMT Merger
Sub, Spires Merger Sub, HWG, PMT, Spires, the HWG Shareholders, the PMT
Shareholders and the Spires Transferors, which contemplates, among other things,
the Transactions, a copy of which Agreement is attached hereto as Appendix A.
"CERCLA" means the Comprehensive Environmental Response Compensation and
Liability Act , as amended.
"CLOSING DATE" means the date on which the Transactions are consummated.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMBINING COMPANIES" means HWG, PMT and Spires, collectively.
"COMPANY" means PGG, together with its subsidiaries TEI, HWG, PMT and
Spires G.P. Sub and Spires L.P. Sub and their respective subsidiaries,
including, without limitation, ERRI and Spires, after giving effect to the
Transactions.
"DGCL" means the Delaware General Corporation Law, as amended.
"DLPA" means the Delaware Revised Limited Partnership Act, as amended.
"EXCHANGE ACT" means the securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated under that act.
"EXCHANGE AGENT" means Harris Trust & Savings Bank, New York, New York,
the exchange agent selected by PGG to facilitate the exchange of the TEI Common
Stock in the TEI Merger.
"EFFECTIVE TIME" means the time and date when (i) the Mergers become
effective pursuant to the Merger Agreements, and the TBCA and the TTCA, as
applicable and (ii) the Spires Transaction is consummated.
"ERRI" means Energy Recovery Resources, Inc., a Delaware corporation and
wholly owned subsidiary of TEI.
"GAAP" means generally accepted accounting principles.
"HWG" means Harris Webb & Garrison, Inc., a Texas corporation, together
with its subsidiaries.
"HWG MERGER" means the merger of the HWG Merger Sub with and into HWG, as
contemplated by the Agreement and the HWG Merger Agreement, with HWG being the
surviving corporation and becoming a wholly owned subsidiary of PGG.
"HWG MERGER AGREEMENT" means the Plan of Merger between HWG and the HWG
Merger Sub, for purposes of effecting the HWG Merger, a copy of which is
attached hereto as Appendix C.
"HWG MERGER SUB" means HWG Combination Corp., a newly formed Texas
corporation and wholly owned subsidiary of PGG, which corporation was created
solely to facilitate the HWG Merger.
"HWG SHAREHOLDERS" means the holders of HWG capital stock.
"INVESTMENT ADVISERS ACT" means the Investment Advisers Act of 1940, as
amended, and the rules and regulations promulgated under that act.
"J.P. MORGAN" means J.P. Morgan Securities Inc., financial advisor to
TEI.
"MERGER AGREEMENTS" means the TEI Merger Agreement, the HWG Merger
Agreement and the PMT Merger Agreement.
"MERGERS" means the TEI Merger, the HWG Merger and the PMT Merger,
collectively.
"NASD" means the National Association of Securities Dealers, Inc.
126
<PAGE>
"NASDAQ NATIONAL MARKET" means the National Market System of The Nasdaq
Stock Market, Inc.
"NON-TEI PARTIES" means HWG, PMT, Spires, the HWG Shareholders, the PMT
Shareholders and the Spires Transferors, collectively, as parties to the
Agreement.
"OVH" means OVH, Inc., a Texas corporation and sole limited partner of
SFF.
"PARTIES" means the TEI Parties and the Non-TEI Parties, collectively, as
parties to the Agreement.
"PGG" means Pinnacle Global Group, Inc., a newly formed Texas corporation
and wholly owned subsidiary of TEI, which company will become the new public
holding company after the Transactions.
"PGG COMMON STOCK" means the common stock of PGG.
"PGG SHAREHOLDERS" means holders of PGG Common Stock.
"PMT" means Pinnacle Management & Trust Company, a state trust company
chartered under the laws of the State of Texas.
"PMT MERGER" means the merger of the PMT Merger Sub with and into PMT, as
contemplated by the Agreement and the PMT Merger Agreement, with PMT being the
surviving corporation and becoming a wholly owned subsidiary of PGG.
"PMT MERGER AGREEMENT" means the Plan of Merger between PMT and the PMT
Merger Sub, for purposes of effecting the PMT Merger, a copy of which is
attached hereto as Appendix D.
"PMT MERGER SUB" means PMT Combination Corp., a newly formed Texas
corporation and wholly owned subsidiary of PGG, which corporation was formed
solely to facilitate the PMT Merger.
"PMT SHAREHOLDERS" means the holders of PMT capital stock.
"PROXY STATEMENT/PROSPECTUS" means this document relating to the TEI
Special Meeting and the issuance of the PGG Common Stock in the Transactions.
"RCRA" means the Resource Conservation and Recovery Act of 1976, as
amended.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated under that act.
"SFF" means Spires Financial Funding, L.P., a Delaware limited
partnership and a limited partner of Spires.
"SFP" means Spires Financial Partners, Inc., a Delaware corporation and
sole general partner of SFF.
"SFP SHAREHOLDERS" means the holders of all the capital stock of SFP.
"SHARE ISSUANCES" means the issuance of 1,187,500 shares of PGG Common
Stock by PGG to each of the HWG Shareholders, the PMT Shareholders and the
Spires Transferors in the Acquisition Transactions (or a total of 3,562,500
shares of PGG Common Stock).
"SPIRES" means Spires Financial, L.P., a Delaware limited partnership.
"SPIRES G.P. SUB" means Spires G.P. Combination Corp., a newly formed
Texas corporation and wholly owned subsidiary of PGG, which corporation was
formed solely to facilitate the Spires Transaction.
"SPIRES GENERAL PARTNERS" means, collectively, the two corporate general
partners of Spires, Spires Financial GP, Inc., a Texas corporation, and Capital
Financial Partner, Inc., a Delaware corporation.
"SPIRES GENERAL PARTNER SHAREHOLDERS" means the holders of the capital
stock of the Spires General Partners.
"SPIRES LIMITED PARTNERS" means the holders of the limited partnership
interests of Spires.
"SPIRES L.P. SUB" means Spires L.P. Combination Corp., a newly formed
Texas corporation and wholly owned subsidiary of PGG, which corporation was
formed solely to facilitate the Spires Transaction.
"SPIRES PARTNERS" means the holders of the general and limited
partnership interests of Spires.
127
<PAGE>
"SPIRES PASSIVE INVESTOR PARTIES" mean Capital Financial Partners, Inc.,
general partner of Spires, its stockholders, SFF, Interfin Commercial Funding
Corporation, a Delaware corporation and limited partner of Spires, the SFP
Shareholders and OVH.
"SPIRES TRANSACTION" means (i) the contribution by OVH and the Spires
Limited Partners (other than SFF) of all of their respective limited partnership
interests of SFF and Spires to PGG in exchange for shares of PGG Common Stock,
and immediately thereafter, the contribution by PGG of all of such limited
partnership interests to Spires L.P. Sub and (ii) the contribution by the Spires
General Partners Shareholders and the SFP Shareholders of all their respective
capital stock of the Spires General Partners and SFP to PGG in exchange for
shares of PGG Common Stock, and immediately thereafter, the contribution by PGG
of all of such shares to Spires G. P. Sub.
"SPIRES TRANSFERORS" means OVH, the Spires Limited Partners (other than
SFF), the Spires General Partner Shareholders and the SFP Shareholders,
collectively, which persons will be transferring securities to PGG pursuant to
the Spires Transaction.
"TBCA" means the Texas Business Corporation Act, as amended.
"TEI" means TEI, Inc., a Texas corporation, together with its
subsidiaries.
"TEI COMMON STOCK" means the common stock of TEI.
"TEI MERGER" means the merger of TEI with TEI Merger Sub, as contemplated
by the Agreement and the TEI Merger Agreement, with TEI being the surviving
corporation and becoming a wholly owned subsidiary of PGG.
"TEI MERGER AGREEMENT" means the Plan of Merger between TEI, PGG and the
TEI Merger Sub, for purposes of effecting the TEI Merger, a copy of which is
attached hereto as Appendix B.
"TEI MERGER SUB" means TEI Combination Corp., a newly formed Texas
corporation and wholly owned subsidiary of PGG, which corporation was formed
solely to facilitate the TEI Merger.
"TEI PARTIES" means TEI, PGG and the Transaction Subs, collectively, as
parties to the Agreement.
"TEI RECORD DATE" means November 6, 1998.
"TEI SHAREHOLDERS" means holders of TEI Common Stock.
"TEI SPECIAL MEETING" means the special meeting of shareholders of TEI to
be held with respect to adoption and approval by the TEI Shareholders of the TEI
Plan of Merger and the Share Issuances.
"TRANSACTION SUBS" means the TEI Merger Sub, HWG Merger Sub, PMT Merger
Sub, Spires G.P. Sub and Spires L.P. Sub, collectively.
"TRANSACTIONS" means the TEI Merger, the HWG Merger, the PMT Merger and
the Spires Transaction, collectively, as contemplated by the Agreement.
"TTCA" means the Texas Trust Company Act, as amended.
128
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
PINNACLE GLOBAL GROUP, INC.
Report of Independent
Accountants.................... F-3
Consolidated Balance Sheet as of
October 1, 1998................ F-4
Notes to Consolidated Financial
Statements..................... F-5
TEI, INC. AND SUBSIDIARIES
Report of Independent
Accountants.................... F-6
Consolidated Balance Sheet as of
December 31, 1997 and 1996..... F-7
Consolidated Statement of
Operations for the three years
in the period ended
December 31, 1997............. F-8
Consolidated Statement of
Shareholders' Equity for the
three years in the period ended
December 31, 1997.............. F-9
Consolidated Statement of Cash
Flows for the three years in
the period ended
December 31, 1997............. F-10
Notes to Consolidated Financial
Statements..................... F-11
Condensed Consolidated Balance
Sheet as of June 30, 1998
(unaudited).................... F-21
Condensed Consolidated Statement
of Operations for the six
months ended June 30, 1998 and
1997 (unaudited)............... F-22
Condensed Consolidated Statement
of Cash Flows for the six
months ended June 30, 1998 and
1997 (unaudited)............... F-23
Notes to Condensed Consolidated
Financial Statements
(unaudited).................... F-24
HARRIS WEBB & GARRISON, INC.
Independent Auditors' Report.... F-27
Statements of Financial
Condition as of December 31,
1997 and 1996.................. F-28
Statements of Income for the
three years ended December 31,
1997........................... F-29
Statements of Changes in
Stockholders' Equity for the
three years ended
December 31, 1997............. F-30
Statements of Cash Flows for the
three years ended December 31,
1997........................... F-31
Notes to Financial Statements... F-33
Condensed Statement of Financial
Condition as of June 30, 1998
(unaudited).................... F-39
Condensed Statements of Income
for the six months ended June
30, 1998 and 1997
(unaudited).................... F-40
Condensed Statements of Cash
Flows for the six months ended
June 30, 1998 and 1997
(unaudited).................... F-41
Notes to Condensed Financial
Statements (unaudited)......... F-43
F-1
<PAGE>
PAGE
-----
PINNACLE MANAGEMENT & TRUST COMPANY
Independent Auditors' Report.... F-47
Report of Independent Certified
Public Accountants............. F-48
Balance Sheets as of December
31, 1997 and 1996.............. F-49
Statements of Operations for the
years ended December 31, 1997,
1996, and 1995................. F-50
Statements of Shareholders'
Equity for the years ended
December 31, 1997, 1996 and
1995........................... F-51
Statements of Cash Flows for the
years ended December 31, 1997,
1996, and 1995................. F-52
Notes to Financial Statements... F-53
Condensed Balance Sheet as of
June 30, 1998 (Unaudited)...... F-56
Condensed Statements of
Operations for the six months
ended June 30, 1998 and 1997
(Unaudited).................... F-57
Condensed Statements of Cash
Flows for the six months ended
June 30, 1998 and 1997
(Unaudited).................... F-58
Notes to Condensed Interim
Financial Statements
(Unaudited).................... F-59
SPIRES FINANCIAL, L.P.
Report of Independent
Accountants.................... F-60
Statements of Financial
Condition as of December 31,
1997 and 1996.................. F-61
Statements of Operations for the
years ended December 31, 1997
and December 31, 1996 and for
the period from inception
(January 18, 1995) to December
31, 1995....................... F-62
Statements of Changes in
Partners' Capital for the years
ended December 31, 1997 and
December 31, 1996 and for the
period from inception (January
18, 1995) to December 31,
1995........................... F-63
Statements of Cash Flows for the
years ended December 31, 1997
and December 31, 1996 and for
the period from inception
(January 18, 1995) to December
31, 1995....................... F-64
Notes to Financial Statements... F-65
Condensed Statement of Financial
Condition as of June 30, 1998
(unaudited).................... F-70
Condensed Statements of Income
and Comprehensive Income for
the six months ended June 30,
1998 and 1997 (unaudited)...... F-71
Condensed Statements of Cash
Flows for the six months ended
June 30, 1998 and 1997
(unaudited).................... F-72
Notes to Condensed Interim
Financial Statements
(unaudited).................... F-73
F-2
<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 presents
fairly, in all material respects, the financial position of Pinnacle Global
Group, Inc. as of October 1, 1998 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
October 1, 1998
F-3
<PAGE>
PINNACLE GLOBAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 1,
1998
----------
ASSETS
Cash................................. $5,000
----------
Total assets.................... $5,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value;
10,000,000 shares authorized; no
shares issued and outstanding......
Common stock, $.01 par value;
100,000,000 shares authorized;
1,000 shares issued and
outstanding........................ $ 10
Additional paid-in capital........... 4,990
----------
Total liabilities and
shareholders' equity........... $5,000
==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PINNACLE GLOBAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
1. FORMATION
Pinnacle Global Group, Inc. (the "Company"), a Texas corporation was
formed in August 1998 to become a new public holding company for TEI, Inc.
("TEI"), Harris Webb & Garrison, Inc., Pinnacle Management & Trust Company and
Spires Financial, L.P. (collectively referred to as "Combining Companies")
upon consummation of a reorganization agreement.
Under the merger agreement, TEI common stock will be converted into .25 of
a share of the Company and 3,562,500 shares of Company common stock will be
issued to the shareholders and owners of the Combining Companies. As a result,
former TEI shareholders will own approximately 50.02% of the outstanding common
stock of the Company and former shareholders and owners of the Combining
Companies, and certain related entities of Spires Financial, L.P., will own
approximately 49.98% of the outstanding stock of the Company.
2. 1998 INCENTIVE PLAN
The Board of Directors has reserved the greater of 1,100,000 authorized
shares of Company common stock or 15% of the number of shares of Company common
stock issued and outstanding on the last day of the then preceding quarter for
the purpose of issuing nonincentive "nonstatutory" stock options, incentive
stock options, stock appreciation rights ("SARs"), and restricted stock awards
to key employees under its 1998 Incentive Plan ("the Incentive Plan"). The
exercise price for each nonincentive stock option granted will be determined by
the compensation committee of the Company's Board of Directors. The exercise
price for each incentive stock option granted may not be less than 100% of the
fair market value of a share of Company common stock on the date of the grant.
No more than 1,100,000 shares of Company common stock will be available for
incentive stock options. The exercise price for each SAR may not be less than
100% of the fair market value of a share of Company common stock 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. As of October 1, 1998, no options or other awards
have been granted.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
TEI, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of TEI, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TEI, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 17, 1998
F-6
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 12,810,100 $ 11,421,710
Short-term investments.......... 15,516,366 18,425,979
Accounts receivable, net........ 639,678 511,905
Deferred tax asset.............. 515,611 447,202
Income tax receivable........... 1,512,115 --
Other current assets............ 417,542 796,033
------------ ------------
Total current assets....... 31,411,412 31,602,829
PROPERTY AND EQUIPMENT, NET.......... 4,789,141 5,547,864
INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION....................... 2,288,479 2,494,873
DEFERRED TAX ASSET................... 176,383 1,450,248
NET ASSETS OF DISCONTINUED OPERATIONS
AND OTHER ASSETS................... 377,306 1,938,080
------------ ------------
Total assets............... $ 39,042,721 $ 43,033,894
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 344,040 $ 333,676
Accrued liabilities............. 1,033,534 2,267,245
------------ ------------
Total current
liabilities............ 1,377,574 2,600,921
------------ ------------
COMMITMENTS AND CONTINGENCIES (See
Note 9)
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;
15,199,237 and 15,192,237
shares issued at December 31,
1997 and 1996, respectively.... 151,992 151,922
Additional paid-in capital...... 33,123,377 33,109,657
Retained earnings............... 8,577,449 11,359,065
Treasury stock at cost, 955,225
shares, at December 31, 1997
and 1996....................... (4,187,671) (4,187,671)
------------ ------------
Total shareholders'
equity................. 37,665,147 40,432,973
------------ ------------
Total liabilities and
shareholders' equity... $ 39,042,721 $ 43,033,894
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES............................. $ 2,725,749 $ 2,199,154 $ 2,374,637
COST OF SERVICES..................... 2,190,367 1,554,132 1,316,499
-------------- -------------- --------------
Gross profit.................... 535,382 645,022 1,058,138
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,625,133 2,428,537 2,197,363
-------------- -------------- --------------
Loss from operations............ (2,089,751) (1,783,515) (1,139,225)
-------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income................. 1,491,913 1,056,874 745,568
Interest expense................ (6,748) (4,715) (33)
Other income (expense), net..... 45,099 (142,017) 3,478
-------------- -------------- --------------
Total other income
(expense), net.......... 1,530,264 910,142 749,013
-------------- -------------- --------------
Loss before income taxes... (559,487) (873,373) (390,212)
INCOME TAX BENEFIT................... (159,585) (339,476) (150,687)
-------------- -------------- --------------
Loss from continuing
operations.................... (399,902) (533,897) (239,525)
Net income (loss) from
discontinued operations, net
of tax........................ (2,193,860) 12,098 (4,739,338)
Gain (loss) on disposition of
discontinued operations, net
of tax........................ (187,854) 1,276,899 (3,610,242)
-------------- -------------- --------------
Net income (loss)............... $ (2,781,616) $ 755,100 $ (8,589,105)
============== ============== ==============
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
From continuing operations...... $ (0.03) $ (0.04) $ (0.01)
From discontinued operations.... (0.17) 0.09 (0.59)
-------------- -------------- --------------
Net earnings (loss) per share... $ (0.20) $ 0.05 $ (0.60)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................ 14,244,012 14,237,012 14,230,012
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
----------- -------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........... 15,178,237 $151,782 (955,225) $(4,187,671) $33,081,307 $ 19,193,070
Issuance of common stock to
nonemployee directors.............. 7,000 70 -- -- 15,680 --
Net loss............................. -- -- -- -- -- (8,589,105)
----------- -------- --------- ---------- ----------- ------------
Balance, December 31, 1995........... 15,185,237 151,852 (955,225) (4,187,671) 33,096,987 10,603,965
Issuance of common stock to
nonemployee directors.............. 7,000 70 -- -- 12,670 --
Net income........................... -- -- -- -- -- 755,100
----------- -------- --------- ---------- ----------- ------------
Balance, December 31, 1996........... 15,192,237 151,922 (955,225) (4,187,671) 33,109,657 11,359,065
Issuance of common stock to
nonemployee directors.............. 7,000 70 -- -- 13,720 --
Net loss............................. -- -- -- -- -- (2,781,616)
----------- -------- --------- ---------- ----------- ------------
Balance, December 31, 1997........... 15,199,237 $151,992 (955,225) $(4,187,671) $33,123,377 $ 8,577,449
=========== ======== ========= ========== =========== ============
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
--------------
Balance, December 31, 1994........... $48,238,488
Issuance of common stock to
nonemployee directors.............. 15,750
Net loss............................. (8,589,105)
--------------
Balance, December 31, 1995........... 39,665,133
Issuance of common stock to
nonemployee directors.............. 12,740
Net income........................... 755,100
--------------
Balance, December 31, 1996........... 40,432,973
Issuance of common stock to
nonemployee directors.............. 13,790
Net loss............................. (2,781,616)
--------------
Balance, December 31, 1997........... $37,665,147
==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ (2,781,616) $ 755,100 $ (8,589,105)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Provision for disposition of
discontinued operations....... 2,187,210 1,000,000 7,521,209
(Gain) loss on disposition of
discontinued operations....... 187,854 (2,065,228) 3,610,242
ESI operating loss charged to
reserve for discontinued
operations.................... (2,193,860) (2,163,317) --
Depreciation and amortization... 674,538 2,598,411 3,758,893
Net amortization of premiums and
discounts on short-term
investments................... (752,069) (234,897) (216,110)
Gain on disposal of assets...... (63,664) -- (8,529)
Deferred income taxes........... 1,205,456 (232,838) (2,388,559)
Deferred income................. -- (16,430) (20,160)
Common stock issued to
directors..................... 13,790 12,740 15,750
Changes in assets and
liabilities, including
discontinued operations:
(Increase) decrease in
accounts receivable,
net..................... (135,806) (136,149) 2,028,855
Decrease (increase) in
costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 309,375 (230,304) (672,616)
(Increase) decrease in
inventories, net........ (530,633) 595,206 1,004,140
(Increase) decrease in
income tax receivable... (1,512,115) 2,106,678 (2,106,678)
Decrease (increase) in
other current assets.... 549,354 (834,414) 604,231
(Decrease) increase in
accounts payable and
accrued liabilities..... (1,241,198) 556,113 1,109,363
-------------- -------------- --------------
Total adjustments....... (1,301,768) 955,571 14,240,031
-------------- -------------- --------------
Net cash provided by
(used in) operating
activities............ (4,083,384) 1,710,671 5,650,926
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............ (682,192) (1,987,458) (2,472,825)
Proceeds from the disposition of
discontinued operations....... -- 12,000,000 1,500,000
Proceeds from the sale of
assets........................ 2,492,284 -- 322,149
Purchases of short-term
investments................... (35,693,443) (20,193,368) (11,703,150)
Proceeds from maturities of
short-term investments........ 39,355,125 5,697,159 15,707,462
Increase in intangible assets... -- (44,763) (139,006)
-------------- -------------- --------------
Net cash provided by
(used in) investing
activities............ 5,471,774 (4,528,430) 3,214,630
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes
payable....................... -- (28,939) (148,085)
-------------- -------------- --------------
Net cash used in financing
activities.................... -- (28,939) (148,085)
-------------- -------------- --------------
CASH OF BUSINESSES SOLD.............. -- (698,699) --
-------------- -------------- --------------
Net increase (decrease)
in cash and cash
equivalents........... 1,388,390 (3,545,397) 8,717,471
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 11,421,710 14,967,107 6,249,636
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 12,810,100 $ 11,421,710 $ 14,967,107
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of TEI, Inc. 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 Mankoff, Inc. ("Mankoff"), Engineered Systems, Inc. ("ESI"),
Tanknology Corporation International ("TCI"), Tanknology Canada (1988), Inc.,
("TCS"), and USTMAN Industries, Inc. ("USTMAN"), as discussed in Note 2. All
footnote amounts related to the statement of operations are from continuing
operations unless otherwise indicated.
The Company is a holding company whose only current continuing business is
wastewater processing and waste oil recycling in the Central Eastern United
States.
REVENUE RECOGNITION
The Company generates revenues primarily through the treatment of
wastewater and the sale of recycled waste oil. Revenues are recognized at the
time the services are rendered. During the year ended December 31, 1997, three
customers accounted for approximately 15.8%, 13.4%, and 12.3%, respectively, of
the Company's total revenues from continuing operations. During the year ended
December 31, 1996, one customer accounted for approximately 12% of the Company's
total revenues from continuing operations.
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. Gains and
losses are recorded upon the sales of short-term investments based upon the
specific identification method.
INVENTORIES
Inventories, which are classified in other current assets, are stated at
the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method. Buildings are depreciated over 20 to 40 years and
other property and equipment are depreciated over five to ten years.
Depreciation expense was $468,142, $295,343, and $208,853 for the years ended
December 31, 1997, 1996, and 1995, 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.
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.
F-11
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company maintains cash balances with several banks. Cash and cash
equivalents includes investments in a certificate 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, municipal bonds, mutual funds, and mortgage backed securities. Such
investments are recorded at cost and adjusted for fluctuations in market values.
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. At December 31, 1996, approximately $20,326,000,
$4,469,000, $2,354,000, and $2,189,000, respectively, were held in trust by four
separate investment managers.
The Company grants credit to its customers who consist primarily of
commercial and industrial wastewater and waste oil generators. The Company
performs ongoing credit evaluations of its customers' financial conditions and,
generally, requires no collateral from its customers. The provision for doubtful
accounts for the years ended December 31, 1997, 1996, and 1995, was $31,499,
$30,996, and $65,768, respectively. The allowance for doubtful accounts at
December 31, 1997 and 1996 was $9,945 and $44,427, respectively.
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.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for the Company for the year
ended December 31, 1998. Initial adoption of this standard is not expected to
have a material impact on the Company's financial statements.
2. DISCONTINUED OPERATIONS
During 1995, the Board of Directors of the Company elected to discontinue
operations at its Mankoff and ESI subsidiaries. Mankoff's operations were
discontinued as of June 30, 1995. Mankoff's revenues were $6,353,000 for the
year ended December 31, 1995. Mankoff was sold on December 21, 1995, for
$1,500,000 in cash and two 24 month non-interest bearing notes receivable
totaling $805,000. The purchaser has also assumed the performance of all
contract obligations of Mankoff. A loss on disposition of Mankoff of $3,610,000
net of an income tax benefit of $1,892,000 was recorded in 1995 as a result of
the sale.
F-12
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESI's operations were discontinued as of December 31, 1995. Certain assets
of ESI were sold 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. The Company remains primarily responsible
for completing such contracts. Should the purchasers cost to complete the
contracts exceed the amounts collected from the customers, the Company is liable
to reimburse the purchaser for the excess contract completion costs. However,
should the amounts collected from the customers exceed the purchasers cost to
complete the contracts, a portion of the collections in excess of the cost to
complete will be paid to the Company. 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 reasonably possible that such changes could
occur in 1998. ESI's revenues were $1,954,000, $3,322,000, and $3,718,000 for
the years ended December 31, 1997, 1996, and 1995, respectively. 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 sale 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.
On October 25, 1996, the Company disposed of certain assets and
liabilities, which consisted of the stock of its wholly owned subsidiaries,
Tanknology Corporation International, including its cathodic protection division
d/b/a Tanknology Cathodic Protection, USTMAN Industries, Inc., and Tanknology
Canada (1988), Inc., collectively known as the "Tank Testing Group" to an
unrelated third party. The disposition of the Tank Testing Group was made
pursuant to a Stock Purchase Agreement (the "Agreement") dated October 7,
1996. The Company disposed of the Tank Testing Group in consideration of the
receipt of $12 million in cash. The Agreement calls for adjustments to the
purchase price of up to $1 million for any working capital deficiencies and of
up to $1.25 million for liabilities relating to services performed by the Tank
Testing Group prior to October 25, 1996. A liability totaling $829,000 has been
accrued for potential liabilities related to the Tank Testing Group. Revenues
for the Tank Testing Group were $18,926,000, and $24,607,000 for the years ended
December 31, 1996 and 1995, respectively.
A summary of discontinued operations for the three years in the period
ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues............................. $ 1,954,008 $ 18,925,828 $ 34,678,328
============== ============== ==============
Net income (loss) from discontinued
operations, net of tax............. $ (2,193,860) $ 12,098 $ (4,739,338)
Gain (loss) on disposition of
discontinued operations, net of
tax................................ (187,854) 1,276,899 (3,610,242)
-------------- -------------- --------------
Income (loss) from discontinued
operations, net of tax............. $ (2,381,714) $ 1,288,997 $ (8,349,580)
============== ============== ==============
</TABLE>
F-13
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of discontinued operations at December 31, 1997 and 1996 consist
of the following:
1997 1996
---------- --------------
Working capital...................... $ (22,694) $ 1,490,611
Long term assets..................... 400,000 1,447,469
Accrued losses....................... -- (1,000,000)
---------- --------------
Net assets........................... $ 377,306 $ 1,938,080
========== ==============
During 1997, 1996, and 1995, ESI incurred losses of $2,193,860, $2,163,317,
and $1,715,675, respectively, which were charged to the reserve for disposition.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts at December
31, 1997 and 1996 is presented below:
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Other current assets:
Interest receivable............. $ 19,401 $ 31,016
Prepaid insurance............... 190,484 127,497
Finished goods inventories...... 178,839 60,317
Other........................... 28,818 577,203
------------ ------------
Total other current
assets.................. $ 417,542 $ 796,033
============ ============
Property and equipment:
Buildings and improvements...... $ 2,347,316 $ 3,196,998
Furniture, fixtures and
equipment..................... 2,825,068 2,794,047
Land............................ 189,260 559,520
Plant construction in
progress...................... 227,751 5,344
------------ ------------
Total property and
equipment............... 5,589,395 6,555,909
Accumulated depreciation........ (800,254) (1,008,045)
------------ ------------
Net property and
equipment............... $ 4,789,141 $ 5,547,864
============ ============
Construction in progress relates to modifications to the Company's newly
constructed wastewater treatment plant. The plant has experienced start up
related issues which have limited capacity and increased the cost of the plant.
The Company believes that it will recover its investment through operations over
the life of the plant; however, the cost of the plant may be in excess of its
fair value at December 31, 1997.
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Accrued liabilities:
Compensation.................... $ 123,364 $ 322,771
Claims reserves................. 829,435 1,250,000
State, federal and foreign
income taxes.................. -- 634,590
Other taxes..................... 79,604 57,460
Other........................... 1,131 2,424
------------ ------------
Total accrued
liabilities............. $ 1,033,534 $ 2,267,245
============ ============
F-14
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHORT-TERM INVESTMENTS
The Company's investments in cash equivalents and short-term investments,
all of which mature within one year, consist of a certificate of deposit and
debt securities that are classified as available-for-sale and are recorded at
cost and adjusted for unrealized holding gains and losses due to market value
fluctuations. A summary of the estimated fair values of investments at December
31, 1997 and 1996 follows:
1997 1996
--------------- ---------------
Money market mutual funds............ $ 2,309,900 $ 2,188,667
U.S. Government agency obligations... 5,506,311 20,939,007
Corporate bonds...................... 9,046,667 4,469,000
Certificate of deposit............... 101,010 --
Commercial paper..................... 11,005,807 1,740,988
Less: Cash equivalents............... (12,453,329) (10,911,683)
--------------- ---------------
Total short-term investments.... $ 15,516,366 $ 18,425,979
=============== ===============
5. INTANGIBLE ASSETS
Excess of costs over net assets acquired resulted from the acquisition of
ERRI and is being amortized over fifteen years. Amortization expense related to
intangibles was $206,394 for each of the three years in the period ended
December 31, 1997. Accumulated amortization related to intangible assets was
$807,435 and $601,041 at December 31, 1997 and 1996, respectively. Although the
Company believes it will recover its investment in ERRI through operations, its
aggregate investment in ERRI may be greater than its fair value at December 31,
1997.
6. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1997, 1996, and 1995 were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ --------------
Continuing operations:
Federal-current............... $ (186,014) $ (126,397) $ (111,585)
Federal-deferred.............. (13,662) (148,640) (11,786)
State-current................. 20,548 (37,009) (23,992)
State-deferred................ 19,543 (27,430) (3,324)
------------ ------------ --------------
Total continuing......... (159,585) (339,476) (150,687)
Discontinued operations....... 6,650 1,036,640 (3,915,175)
------------ ------------ --------------
Total.................... $ (152,935) $ 697,164 $ (4,065,862)
============ ============ ==============
F-15
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the effective tax rate reflected in the income tax
benefit for continuing operations and the statutory federal rate is analyzed as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
Amount computed using the statutory
rate............................... $ (190,226) $ (296,946) $ (132,672)
State taxes, net of federal
benefit............................ 26,426 (42,530) (18,015)
Other................................ 4,215 -- --
------------ ------------ --------------
Total........................... $ (159,585) $ (339,476) $ (150,687)
============ ============ ==============
</TABLE>
The effective tax rates for continuing operations for the years ended
December 31, 1997, 1996, and 1995 were 28.5%, 38.9%, and 38.6%, respectively.
The effective tax rate for discontinued operations was approximately .3%, 44%,
and 32% for the years ended December 31, 1997, 1996, and 1995, respectively.
The components of the deferred tax assets and liabilities are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ------------
Current deferred tax assets
(liabilities):
Net operating loss carry
forward....................... $ 285,312 $ --
Difference in recognition of
accrued expenses.............. 163,338 87,121
Difference in recognition of
allowance for doubtful
accounts...................... 66,961 257,543
Difference in recognition of
loss on building.............. -- 51,000
Difference in recognition of
other expenses................ -- 51,538
---------- ------------
Total current deferred
asset................... 515,611 447,202
---------- ------------
Noncurrent deferred tax assets
(liabilities):
Difference in recognition of
loss on disposition of ESI.... -- 1,628,584
Difference in bases of property
and equipment acquired........ -- (312,634)
Difference in accumulated
depreciation and
amortization.................. (435,937) (378,333)
Difference in deducting
construction period
interest...................... 41,530 41,523
Difference in recognition of
accrued expenses.............. 288,660 425,750
Difference in recognition of
allowance for other
receivables................... 136,340 --
Difference in other expenses.... 145,790 45,358
---------- ------------
Total noncurrent deferred
asset................... 176,383 1,450,248
---------- ------------
Net deferred income
taxes.............. $ 691,994 $ 1,897,450
========== ============
7. COMMITMENTS AND CONTINGENCIES
Total rental expense for operating leases, none of which extend beyond
December 31, 1998, for the years ended December 31, 1997, 1996, and 1995 was
$91,718, $67,116, and $48,196, 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 $1.25 million for liabilities relating to services performed by the
Tank Testing Group prior to October 25, 1996. The Company has recorded an
$829,000 liability for that contingency as of December 31, 1997. In management's
opinion, the litigation and claims in which the Company is currently involved
are not material to the Company's consolidated financial position, results of
operations or cash flows.
F-16
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Effective January 26, 1995, the Board of Directors of
the Company approved the cancellation of 129,167 employee stock options, with
exercise prices ranging from $4.50 to $7.50 and the subsequent issuance of
160,000 stock options, with an exercise price of $2.41 to certain employees. 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 800,000 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) a Director Option
to Purchase 6,000 shares of common stock on January 1 of each year, beginning
January 1, 1993, and (ii) 1,000 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
Option to Purchase 6,000 shares of Common Stock to nonemployee directors.
The Company had 943,895, 697,295, and 549,529 shares of Common Stock
available for grant under existing stock option plans at December 31, 1997,
1996, and 1995, respectively.
The following table sets forth pertinent information regarding stock option
transactions for each of the three years in the period ended December 31, 1997:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
----------- ---------------
Outstanding at January 1,
1995.......................... 1,420,965 $ 3.75
Granted.............................. 160,000 $ 2.41
Cancelled/Forfeited.................. (462,099) $ 3.88
-----------
Outstanding at December 31,
1995.......................... 1,118,866 $ 3.47
Granted.............................. 0 $
Cancelled/Forfeited.................. (147,760) $ 5.29
-----------
Outstanding at December 31,
1996.......................... 971,106 $ 3.19
Granted.............................. 0 $
Cancelled/Forfeited.................. (246,600) $ 4.30
-----------
Outstanding at December 31,
1997.......................... 724,506 $ 2.83
===========
F-17
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 7.82%; the expected life of options is 8.2 years; and volatility of 40.6% for
the grants.
The following tables summarize information related to stock options
outstanding and exercisable at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
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> <C>
$2.41 to $5.00 672,000 7.50 $2.58 363,000 $2.67
$5.01 to $6.13 52,500 1.0 $6.01 52,500 $6.01
- ----------------- ------------ ------------ --------------- --------------- ---------------
$2.41 to $6.13 724,500 7.03 $2.83 415,500 $3.09
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- -----------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/96 CONTR. LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
- ----------------- ------------ ------------ --------------- --------------- ---------------
$2.41 to $5.00 847,000 7.83 $2.62 310,000 $2.87
$5.01 to $9.125 124,100 5.88 $7.08 111,933 $7.19
- ----------------- ------------ ------------ --------------- --------------- ---------------
$2.41 to $9.125 971,100 7.58 $3.19 421,933 $4.02
</TABLE>
During 1996 the Company adopted the disclosure provision of Statement of
Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation." The Company continues to account for its stock-based
compensation plans using the accounting prescribed by APB Opinion 25.
Had the compensation cost for the Company's stock-base 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 1997 would approximate
the pro forma amounts below:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Loss from continuing operations -- as
reported........................... $ (399,902) $ (533,897) $ (239,525)
Loss from continuing
operations -- pro forma............ $ (390,948) $ (540,197) $ (285,525)
Continuing operations (loss) per
share -- as reported............... $ (0.03) $ (0.04) $ (0.01)
Continuing operations (loss) per
share -- pro forma................. $ (0.03) $ (0.04) $ (0.02)
F-18
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per
Share." All prior periods presented have been restated to conform to the new
requirements. The calculation of the basic and diluted per-share computations
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Computation of basic and diluted
earnings (loss) per common share:
Net income (loss) applicable to
common stock.................. $ (2,781,616) $ 755,100 $ (8,589,105)
============== ============== ==============
Computation of primary earnings
(loss) per share:
Weighted average number of
common shares outstanding..... 14,244,012 14,237,012 14,230,012
Common shares issuable under
stock option plan............. -- -- --
Less shares assumed repurchased
with proceeds................. -- -- --
-------------- -------------- --------------
Weighted average common and
equivalent shares
outstanding............. 14,244,012 14,237,012 14,230,012
============== ============== ==============
Basic and diluted earnings
(loss) per common
share................... $ (0.20) $ 0.05 $ (0.60)
============== ============== ==============
</TABLE>
10. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
par value $.10 per share. Such 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 $13,790, $12,740, and $15,750 during 1997, 1996, and 1995,
respectively. The Company purchased diesel and boiler fuel from a company owned
by the President of ERRI totaling $159,000 and $59,000 during 1997 and 1996,
respectively.
12. RETIREMENT PLANS
The Company maintains defined contribution plans that allow all employees
after attaining one year of service with the Company to contribute through
payroll deductions for investment in various funds established by the plan.
Company contributions are discretionary and, in 1997, 1996, and 1995, no
contributions were made to the plan.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was approximately $6,700, $5,000, and
$12,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The
Company paid approximately $846,000, $286,000, and $1,354,000 in cash for income
taxes during the years ended December 31, 1997, 1996, and 1995, respectively,
and received approximately $72,000 and $1,588,000 in cash from income tax
refunds during the years ended December 31, 1997 and 1996, respectively. The
Company received no income tax refunds during 1995. The Company issued notes
payable for insurance premiums of approximately $145,000 for the
F-19
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year ended December 31, 1995. In 1997 and 1995, the Company issued notes
receivable of $500,000 and $805,000, respectively, in connection with
dispositions of discontinued operations.
14. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................. $ 607,000 $ 689,000 $ 770,000 $ 659,000
Cost of services..................... 549,000 540,000 474,000 627,000
----------- ----------- ----------- -----------
Gross profit......................... 58,000 149,000 296,000 32,000
General and administrative
expenses........................... 658,000 678,000 684,000 605,000
----------- ----------- ----------- -----------
Loss from operations................. (600,000) (529,000) (388,000) (573,000)
Other income (expense), net.......... 382,000 389,000 374,000 385,000
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes................ (218,000) (140,000) (14,000) (188,000)
Provision (benefit) for income
taxes.............................. (74,000) 25,000 -- (111,000)
----------- ----------- ----------- -----------
Loss from continuing
operations.................... (144,000) (165,000) (14,000) (77,000)
Loss from discontinued operations.... -- (990,000) -- (1,392,000)
----------- ----------- ----------- -----------
Net income (loss).................... $ (144,000) $(1,155,000) $ (14,000) $(1,469,000)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.01) $ (0.01) $ 0.00 $ (0.01)
From discontinued operations.... 0.00 (0.07) -- (0.10)
----------- ----------- ----------- -----------
Net earnings (loss) per share... $ (0.01) $ (0.08) $ 0.00 $ (0.11)
=========== =========== =========== ===========
Weighted average common shares
outstanding........................ 14,244,000 14,244,000 14,244,000 14,244,000
=========== =========== =========== ===========
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
----------- ----------- ----------- -----------
Revenues............................. $ 517,000 $ 588,000 $ 513,000 $ 581,000
Cost of services..................... 318,000 360,000 390,000 486,000
----------- ----------- ----------- -----------
Gross profit......................... 199,000 228,000 123,000 95,000
General and administrative
expenses........................... 577,000 612,000 612,000 627,000
----------- ----------- ----------- -----------
Loss from operations................. (378,000) (384,000) (489,000) (532,000)
Other income (expense), net.......... 256,000 234,000 225,000 196,000
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes................ (122,000) (150,000) (264,000) (336,000)
Benefit for income taxes............. (47,000) (58,000) (103,000) (130,000)
----------- ----------- ----------- -----------
Loss from continuing
operations.................... (75,000) (92,000) (161,000) (206,000)
Income (loss) from discontinued
operations......................... (268,000) 314,000 566,000 677,000
----------- ----------- ----------- -----------
Net income (loss).................... $ (343,000) $ 222,000 $ 405,000 $ 471,000
=========== =========== =========== ===========
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.00) $ (0.01) $ (0.01) $ (0.02)
From discontinued operations.... (0.02) 0.02 0.04 0.05
----------- ----------- ----------- -----------
Net earnings (loss) per share... $ (0.02) $ 0.01 $ 0.03 $ 0.03
=========== =========== =========== ===========
Weighted average common shares
outstanding........................ 14,237,000 14,237,000 14,237,000 14,237,000
=========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30,
1998
--------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 13,191,678
Short-term investments.......... 14,456,491
Accounts receivable, net........ 926,166
Deferred tax asset.............. 552,553
Income tax receivable........... 1,512,115
Other current assets............ 449,817
--------------
Total current assets....... 31,088,820
PROPERTY AND EQUIPMENT, NET.......... 4,931,798
INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION....................... 2,185,282
DEFERRED TAX ASSET................... 142,236
NET ASSETS OF DISCONTINUED OPERATIONS
AND OTHER ASSETS................... 718,274
--------------
Total assets............... $ 39,066,410
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 282,402
Accrued liabilities............. 1,117,031
--------------
Total current
liabilities............... 1,399,433
--------------
COMMITMENTS AND CONTINGENCIES (See
Note 5)
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;
15,206,237 and 15,199,237
shares issued at June 30, 1998
and December 31, 1997,
respectively................... 152,062
Additional paid-in capital...... 33,134,997
Retained earnings............... 8,567,589
Treasury stock at cost, 955,225
shares, at June 30, 1998 and
December 31, 1997.............. (4,187,671)
--------------
Total shareholders' equity...... 37,666,977
--------------
Total liabilities and
shareholders' equity........... $ 39,066,410
==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-21
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
-------------- --------------
REVENUES............................. $ 1,556,194 $ 1,296,753
COST OF SERVICES..................... 974,961 1,089,564
-------------- --------------
Gross profit.................... 581,233 207,189
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES........................... 1,363,118 1,336,642
-------------- --------------
Loss from operations............ (781,885) (1,129,453)
OTHER INCOME......................... 769,230 771,557
-------------- --------------
Income (loss) from continuing
operations before income
taxes.......................... (12,655) (357,896)
INCOME TAX EXPENSE (BENEFIT)......... (2,795) (48,786)
-------------- --------------
Income (loss) from continuing
operations..................... (9,860) (309,110)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX......................... -- (990,000)
-------------- --------------
Net income (loss).......... $ (9,860) $ (1,299,110)
============== ==============
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
From continuing operations...... $ 0.00 $ (0.02)
From discontinued operations.... -- (0.07)
-------------- --------------
Net earnings (loss) per share........ $ 0.00 $ (0.09)
============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................ 14,251,012 14,244,012
============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-22
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ (9,860) $ (1,299,110)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Provision for disposition
of discontinued
operations.............. -- 1,500,000
ESI operating loss charged
to reserve for
discontinued
operations.............. -- (1,276,032)
Depreciation and
amortization............ 356,464 341,226
Net amortization of
premiums and discounts
on short-term
investments............. (422,958) (339,111)
(Gain) loss on disposal of
assets.................. (8,871) 6,760
Deferred income taxes...... (2,795) (631,345)
Common stock issued to
directors............... 11,690 13,790
Change in assets and
liabilities:
Increase in accounts
and note
receivable, net.... (163,084) (247,162)
Decrease in earnings
in excess of
billings -- 157,689
Increase in income tax
receivable......... -- (107,676)
Increase in other
current assets..... (50,568) (520,287)
Increase in other
noncurrent
assets............. (101,033) --
Decrease in accounts
payable and accrued
liabilities........ (323,187) (636,315)
--------------- ---------------
Total
adjustments... (704,342) (1,738,463)
--------------- ---------------
Net cash used in
operating
activities.... (714,202) (3,037,573)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............ (402,787) (350,781)
Proceeds from the sale of
assets........................ 15,733 921,238
Purchase of short-term
investments................... (16,026,345) (16,841,166)
Proceeds from maturities of
short-term investments........ 17,509,179 19,510,897
--------------- ---------------
Net cash
provided by
investing
activities.... 1,095,780 3,240,188
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes
payable....................... -- --
--------------- ---------------
Net cash used in
financing
activities.... -- --
--------------- ---------------
Net increase in
cash and cash
equivalents... 381,578 202,615
CASH AND CASH EQUIVALENTS AT
BEGINNING
OF PERIOD.......................... 12,810,100 11,421,710
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 13,191,678 $ 11,624,325
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-23
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited condensed consolidated financial statements include the
accounts of TEI, Inc. and its wholly owned subsidiaries (the "Company"). The
unaudited condensed consolidated financial statements have been prepared
consistent with the accounting policies reflected in the audited consolidated
financial statements included in the Company's Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998, and should be read in
conjunction therewith.
In management's opinion, the unaudited condensed consolidated financial
statements include all adjustments necessary for a fair presentation of the
Company's consolidated financial position at June 30, 1998, the consolidated
results of its operations for the six-month periods ended June 30, 1998 and
1997, and its consolidated cash flows for the six-month periods ended June 30,
1998 and 1997. All such adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year.
During April 1998, the Company entered into letters of intent with a group
of three financial service firms. Under the terms of the agreements, the Company
would organize a newly formed subsidiary corporation that would acquire all
ownership of TEI and the three firms in a stock-for-stock transaction. TEI would
file a proxy statement and registration statement with the SEC. Upon the
appropriate approvals of the SEC and Nasdaq for the registration and stock
listing, TEI would merge with the subsidiary. Current shareholders of TEI would
own slightly more than 50% of the new company, and current shareholders and
partners of the three financial service firms would own slightly less than 50%
of the new company. The letters of intent are subject to: i) approval of
shareholders of TEI, ii) receipt of approvals by all governmental organizations
having jurisdiction over the parties involved in the transaction, iii) receipt
of a financial fairness opinion from an investment banking firm, iv) absence of
adverse changes in the financial condition of the parties involved in the
transaction, v) SEC and Nasdaq approvals for registration and listing of the new
company's shares, and vi) other related conditions. This transaction is subject
to the consummation of a definitive agreement among all the parties.
The Company presently has no plans to dispose of its wastewater treatment
business. However, should circumstances change such that the Company decides to
sell rather than operate its Energy Recovery Resources, Inc. subsidiary
("ERRI"), the Company may not be able to recover all of its investment.
EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). SFAS No.
128 specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. It replaces the
presentation of primary earnings per share with a presentation of earnings per
common share and fully diluted earnings per share with earnings per common
share - assuming dilution. In the periods presented, outstanding stock options
are not included in the computation of earnings per common share - assuming
dilution as the options effects are anti-dilutive. All prior periods presented
have been restated to conform to the new requirements.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period, except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective
F-24
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the Company for the year ended December 31, 1998. Initial adoption of this
standard had no impact on the Company's financial statements.
2. DISCONTINUED OPERATIONS:
The Board of Directors of the Company elected to discontinue operations at
its Engineered Systems, Inc. subsidiary ("ESI"), as of December 31, 1995.
Certain assets of ESI were sold on December 23, 1997, for a $500,000-note due in
2002. The purchaser has also agreed to complete customer contracts that were in
process at the time of the sale; however, the Company remains primarily
responsible for completing such contracts. Should the purchaser's cost to
complete the contracts exceed the amounts collected from the customers, the
Company is liable to reimburse the purchaser for the excess contract completion
costs. However, should the amounts collected from the customers exceed the
purchaser's cost to complete the contracts, a portion of the collections in
excess of the cost to complete will be paid to the Company. 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 reasonably possible
that such changes could occur in 1998. ESIs revenues and operating losses were
$766,000 and $1,276,000, respectively, for the six months ended June 30, 1997.
On October 25, 1996, the Company disposed of certain assets and
liabilities, which consisted of the stock of its wholly owned subsidiaries,
Tanknology Corporation International, including its cathodic protection division
d/b/a Tanknology Cathodic Protection, USTMAN Industries, Inc., and Tanknology
Canada (1988), Inc., collectively known as 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 (the
"Agreement") that calls for adjustments to the purchase price of up to $1
million for any working capital deficiencies and of up to $1.25 million for
liabilities relating to services performed by the Tank Testing Group prior to
October 25, 1996. A liability totaling $829,000 has been accrued for potential
liabilities related to the Agreement.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at June 30,
1998 and December 31, 1997 is presented below:
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
Other current assets:
Interest receivable............. $ 17,258 $ 19,401
Prepaid insurance............... 6,058 190,484
Finished goods inventories...... 309,783 178,839
Other........................... 116,718 28,818
------------ ------------
Total other current
assets................. $ 449,817 $ 417,542
============ ============
Accrued liabilities:
Compensation.................... $ 135,739 $ 123,364
Claims reserves................. 829,435 829,435
Other taxes..................... 80,778 79,604
Other........................... 71,079 1,131
------------ ------------
Total accrued
liabilities............ $ 1,117,031 $1,033,534
============ ============
F-25
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMON STOCK AND STOCK OPTIONS:
On January 1, 1998, the Company issued 7,000 shares of Restricted Stock
with a market value of $11,690 to seven directors of the Company, in accordance
with its 1991 Nonemployee Director Plan.
5. EARNINGS (LOSS) PER COMMON SHARE:
In 1997, the Company adopted the provisions of SFAS No. 128, "EARNINGS PER
SHARE." All prior periods presented have been restated to conform to the new
requirements.
1998 1997
-------------- --------------
Computation of basic and diluted
earnings per common share for the
three months ended June 30:
Net income (loss) applicable to
common stock................... $ 80,715 $ (1,154,957)
============== ==============
Weighted average number of
common shares outstanding...... 14,251,012 14,244,012
Common shares issuable under
employee stock option plan..... -- --
Less shares assumed repurchased
with proceeds.................. -- --
-------------- --------------
Weighted average common
shares outstanding..... 14,251,012 14,244,012
============== ==============
Net earnings (loss)
per common
share............. $ 0.01 $ (0.08)
============== ==============
1998 1997
-------------- --------------
Computation of basic and diluted
earnings per common share for the
six months ended June 30:
Net income (loss) applicable to
common stock................... $ (9,860) $ (1,299,110)
============== ==============
Weighted average number of
common shares outstanding...... 14,251,012 14,244,012
Common shares issuable under
employee stock option plan..... -- --
Less shares assumed repurchased
with proceeds.................. -- --
-------------- --------------
Weighted average common
shares outstanding..... 14,251,012 14,244,012
============== ==============
Net earnings (loss)
per common
share............. $ 0.00 $ (0.09)
============== ==============
6. COMMITMENTS AND CONTINGENCIES:
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 $1.25 million for liabilities relating to services performed by the
Tank Testing Group prior to October 25, 1996. The Company has recorded an
$829,000 liability for that contingency as of June 30, 1998. In management's
opinion, the litigation and claims in which the Company is currently involved
are not material to the Company's consolidated financial position, results of
operations or liquidity.
F-26
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Harris Webb & Garrison, Inc.
We have audited the accompanying statements of financial condition of
Harris Webb & Garrison, Inc., as of December 31, 1997 and 1996 and the related
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harris Webb & Garrison,
Inc., as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 14 to the financial statements, subsequent to February
3, 1998, the Company discovered errors in the accounting for stock awards and
deferred taxes in 1997. Additionally, as discussed in Note 14 to the financial
statements, the Company made additional disclosure for stock options.
Accordingly, the financial statements have been restated to correct these errors
and provide additional stock options disclosure.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
February 3, 1998
(except for Note 13 for
which the date is March 18, 1998
and Notes 7 and 14 for which the
date is October 6, 1998)
F-27
<PAGE>
HARRIS WEBB & GARRISON, INC.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Cash................................. $ 90,143 $ 90,350
Money market mutual funds............ 558,343 28,138
Receivable from correspondent brokers
and dealers........................ 442,558 197,644
Securities owned at market value..... 144,324 101,370
Notes and accounts receivable from
related parties.................... 8,112 331,319
Other receivables.................... 89,949 18,001
Property and equipment, net of
accumulated depreciation of $10,705
and $3,922, respectively........... 59,919 43,287
Secured demand notes................. 430,000 430,000
Deferred federal income taxes........ 124,000 --
Other assets......................... -- 6,831
------------ ------------
TOTAL ASSETS............... $ 1,947,348 $ 1,246,940
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 1,785 $ 35,724
Accrued expenses..................... 339,171 172,609
Payable to brokers and dealers....... 25,889 92,808
Notes payable........................ -- 399,191
Securities sold not yet purchased.... 26,245 --
State and federal income taxes
payable............................ 238,960 --
Subordinated liabilities............. 430,000 430,000
------------ ------------
TOTAL LIABILITIES.......... 1,062,050 1,130,332
------------ ------------
Stockholders' equity --
Common stock, at stated
value -- $1 par value, 50,000
and 25,000 shares authorized;
18,158 and 15,664 shares issued
and outstanding,
respectively................... 18,158 15,664
Additional paid-in capital...... 2,845,964 2,380,236
Treasury stock at par value..... (336) --
Retained earnings (deficit)..... (1,978,488) (2,279,292)
------------ ------------
TOTAL STOCKHOLDERS'
EQUITY................. 885,298 116,608
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $ 1,947,348 $ 1,246,940
============ ============
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
HARRIS WEBB & GARRISON, INC.
STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- ------------
<S> <C> <C> <C>
Revenue:
Commissions........................ $ 4,150,743 $ 2,895,032 $ 1,364,185
Investment banking fees............ 2,544,432 722,321 1,085,311
Account management fees............ 281,546 324,482 334,095
Margin interest.................... 56,850 38,086 24,956
Other.............................. 8,185 15,913 60,931
------------ -------------- ------------
7,041,756 3,995,834 2,869,478
------------ -------------- ------------
Expenses:
Employee compensation.............. 5,096,383 3,460,691 1,981,409
Clearing charges and exchange
fees............................. 566,918 419,017 343,185
Communications..................... 161,964 135,512 122,537
Occupancy and equipment............ 437,374 406,872 270,727
Promotions......................... 72,752 111,810 67,744
Interest........................... 37,650 22,418 25,292
Losses in error accounts and bad
debts............................ (2,711) 71,253 --
Regulatory fees.................... 52,615 67,735 25,960
Professional fees.................. 29,039 242,472 308,612
Other.............................. 147,468 235,280 183,915
------------ -------------- ------------
6,599,452 5,173,060 3,329,381
------------ -------------- ------------
Net income before income taxes.......... 442,304 (1,177,226) (459,903)
Provision for income taxes......... 141,500 -- --
------------ -------------- ------------
NET INCOME (LOSS)....................... $ 300,804 $ (1,177,226) $ (459,903)
============ ============== ============
Basic and diluted earnings (loss) per
common share.......................... $ 16.80 $ (94.52) $ (82.72)
============ ============== ============
Weighted average shares outstanding..... 17,906 $ 12,455 $ 5,560
============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
HARRIS WEBB & GARRISON, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL STOCK RETAINED
OUTSTANDING COMMON PAID IN SUBSCRIPTIONS TREASURY EARNINGS
& SUBSCRIBED STOCK CAPITAL RECEIVABLE STOCK (DEFICIT) TOTAL
------------- ------- ---------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........... 2,790 $2,790 $ 483,691 $ -- $ -- $ (642,163) $ (155,682)
Issuance of common stock............. 6,602 6,602 917,195 -- -- -- 923,797
Common stock subscriptions........... 580 580 96,087 (96,667) -- -- --
Net (loss)........................... -- -- -- -- -- (459,903) (459,903)
------------- ------- ---------- ------------- -------- ---------- ----------
Balance, December 31, 1995........... 9,972 9,972 1,496,973 (96,667) -- (1,102,066) 308,212
Issuance of common stock............. 5,917 5,917 920,538 -- -- -- 926,455
Redemption of common stock........... (225) (225) (37,275) -- -- -- (37,500)
Collection of stock subscriptions.... -- -- -- 96,667 -- -- 96,667
Net (loss)........................... -- -- -- -- -- (1,177,226) (1,177,226)
------------- ------- ---------- ------------- -------- ---------- ----------
Balance, December 31, 1996........... 15,664 15,664 2,380,236 -- -- (2,279,292) 116,608
Issuance of common stock............. 2,494 2,494 270,038 -- -- -- 272,532
Purchase of treasury stock........... (336) -- (30,856) -- (336) -- (31,192)
Recognition of compensation for stock
awards............................. -- -- 226,546 -- -- -- 226,546
Net income........................... -- -- -- -- -- 300,804 300,804
------------- ------- ---------- ------------- -------- ---------- ----------
Balance, December 31, 1997........... 17,822 $18,158 $2,845,964 $ -- $ (336) $(1,978,488) $ 885,298
============= ======= ========== ============= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
HARRIS WEBB & GARRISON, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............... $ 300,804 $ (1,177,226) $ (459,903)
Adjustments to reconcile net
income (loss) to net cash
provided (used) by
Depreciation and
amortization............... 9,936 5,971 8,047
Corporate finance fees
compensated by
investment stock........ -- -- (295,923)
Interest on subordinated
debt converted common
stock................... -- 3,499 --
Recognition of compensation
for stock awards........ 226,546 -- --
Unrealized gain on
investment securities... (112,699) 160,887 --
Gain on sale of investment
securities.............. (251,342) (20,083) --
Deferred Federal income
taxes................... (124,000) -- --
Change in Assets and
Liabilities:
Receivable from brokers and
dealers................. (244,914) (78,702) (68,724)
Other receivables.......... (75,100) 32,598 1,375
Securities owned (trading
account)................ 71,744 (101,370) 500
Other assets............... 6,831 -- 10,702
Accounts payable and
accrued liabilities..... 132,623 (21,737) 127,515
Payable to brokers and
dealers................. (66,919) 92,808 --
Securities sold not yet
purchased............... 26,245 -- --
Bank overdrafts............ -- -- (20,290)
State and federal income
taxes payable........... 238,960 -- --
------------ -------------- ------------
Net cash provided (used) by operating
activities......................... 138,715 (1,103,355) (696,701)
------------ -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............ (23,416) (35,790) (8,727)
Purchase of investment
securities...................... (9,600) (281,530) --
Sale of investment securities... 258,942 501,613 --
------------ -------------- ------------
Net cash provided (used) by investing
activities......................... 225,926 184,293 (8,727)
------------ -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock
subscriptions................. -- 96,667 --
Proceeds from issuance of common
stock........................... 272,532 576,354 900,897
Redemption of common stock...... (31,192) (37,500) --
Loans to related parties........ -- (156,416) (176,094)
Collection of related party
loans......................... 323,207 27,171 108,603
Bank borrowings................. -- 874,191 --
Repayment of bank loans......... (399,190) (475,000) --
------------ -------------- ------------
Net cash provided (used) by financing
activities......................... 165,357 905,467 833,406
------------ -------------- ------------
Net increase (decrease) in cash...... 529,998 (13,595) 127,978
Beginning cash balance............... 118,488 132,083 4,105
------------ -------------- ------------
Ending cash balance.................. $ 648,486 $ 118,488 $ 132,083
============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
HARRIS WEBB & GARRISON, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
SUPPLEMENTAL DISCLOSURE
1997 1996 1995
--------- --------- ---------
Cash paid for:
Interest........................... $ 37,650 $ 18,919 $ 14,875
========= ========= =========
Income taxes....................... $ 26,540 $ -- $ --
========= ========= =========
NON-CASH FINANCING AND INVESTING TRANSACTIONS -- See Note 2
1997
Employees earned stock awards aggregating $317,173 of which $226,546 is
vested.
1996
Subordinated borrowings pursuant to secured demand note collateral
agreements aggregating $325,000 were converted to common stock along with
related accrued interest of $25,101.
Subordinated borrowings pursuant to secured demand note collateral
agreements decreased by $100,000.
1995
Subordinated borrowings pursuant to accrued demand note collateral
agreements increased by $85,000. Notes payable to stockholders of $22,900 were
converted to common stock. The Company also received common stock subscriptions
aggregating $96,667.
Investment stock valued at $295,923 was received as compensation for
corporate finance fees.
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harris Webb & Garrison, Inc. ("the Company") is a broker/dealer in
securities registered with the Securities and Exchange Commission under the
exemptive provisions of (S.E.C.) Rule 15c3-3 (k)(2)(ii). These provisions
provide that all funds and securities belonging to customers be handled by a
correspondent broker/dealer. The Company is also a registered investment advisor
with the Securities and Exchange Commission.
The Company's retail customers are primarily individuals residing in the
Houston, Texas metropolitan area. Receivable from brokers or dealers is with the
Company's correspondent broker/dealer which is located in New York, New York.
Commission revenue and related expense are recorded on a settlement date
basis and, if materially different are adjusted to trade date basis. Securities
inventory transactions and related inventory gains or losses are also recorded
on a settlement date basis and, if materially different are adjusted to trade
date basis.
The Company treats money market mutual funds and all highly liquid debt
instruments with original maturities of three months or less as cash equivalents
for purposes of the statement of cash flows.
Property and equipment are recorded at cost and consist of furniture,
office equipment and leasehold improvements. Depreciation is computed using an
accelerated method over estimated useful lives of 5 years for furniture and
office equipment. Amortization of leasehold improvements is computed using the
straight-line method over an estimated useful life of 39 years.
The Company has previously elected to be an S Corporation for Federal
income tax purposes. Net income, with certain exceptions, is passed through to
the shareholders, and accordingly, the Company is not taxed. Effective June 1,
1997, the Company elected to be treated as a C Corporation. Income taxes are
provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. These differences are primarily related to
unrealized gains on investment securities and accrued receivables and payables
which have not been recognized for income tax reporting. Deferred tax assets and
liabilities represent future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Securities not readily marketable are carried at fair value as determined
by management of the Company. The increase or decrease in net unrealized
appreciation or depreciation of securities is credited or charged to operations.
The Company presently owns securities which management believes do not currently
have a fair value. Such securities may have a fair value in the future.
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.
F-33
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Borrowings under subordination agreements at December 31, 1997 and 1996
from stockholders are as follows:
1997 1996
---------- ----------
Liabilities pursuant to secured
demand note collateral agreements,
maturing fully between March 1998
and March 2000, bearing 0% interest
and collateralized by securities
with a fair market value of
$574,739 and $573,923 at December
31, 1997 and 1996, respectively.... $ 430,000 $ 430,000
========== ==========
The subordinated borrowings are covered by agreements approved by the
National Association of Securities Dealers, Inc. and are thus available in
computing net capital under the Securities and Exchange Commission's uniform net
capital rule. To the extent that such borrowings are required for the Company's
continued compliance with minimum net capital requirements, they may not be
repaid.
NOTE 3 -- NOTES PAYABLE
The Company has notes payable to banks aggregating $-0- and $399,191 under
lines of credit totaling $500,000 and $400,000 at December 31, 1997 and 1996,
respectively. The notes bear interest at the banks' base rate (8.25% at December
31, 1996) plus .75% and 1% and are due on demand and September 1997,
respectively. The notes are unsecured and guaranteed by stockholders.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Company is required to indemnify its correspondent broker/dealer for
losses it may incur in connection with accounts of the Company's customers. The
Company requires customers to maintain margin collateral in compliance with
various regulatory and internal guidelines in order to mitigate these risks. The
Company and its correspondent broker/dealer monitor required margin levels daily
and, pursuant to such guidelines, request customers to deposit additional
collateral or reduce securities positions when necessary.
The Company leases its office space and office equipment under operating
agreements. The office lease calls for a base rental plus an additional rental
due to increases in the lessor's operating cost for the property. Rental expense
under operating leases was $181,889, $180,956 and $144,555 for office space and
$198,753, $124,540 and $99,299 for equipment for the year ended December 31,
1997, 1996 and 1995 respectively. Future minimum lease payments are as follows:
YEAR ENDING OFFICE
DECEMBER 31, SPACE
--------------- ------------
1998................................. $ 220,685
1999................................. 349,718
2000................................. 83,675
2001................................. 83,675
2002................................. 83,675
2003 and later....................... 463,607
------------
$ 1,285,035
============
F-34
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- NET CAPITAL REQUIREMENTS
Pursuant to the net capital provisions of Rule 15c3-1 of the Securities and
Exchange Act of 1934, a minimum net capital requirement must be maintained, as
defined under such provisions. Net capital and the related net capital ratio may
fluctuate on a daily basis.
There were no material inadequacies in the computation of the ratio of
aggregate indebtedness to net capital at December 31, 1997, 1996 and 1995 and
the procedures followed in making the periodic computations required. At
December 31, 1997, the Company had net capital of approximately $916,218,
$124,049 and $311,345 at December 31, 1997, 1996 and 1995, respectively and net
capital requirements of $100,000 each period. The ratio of aggregate
indebtedness to net capital was .63, 4.90 and .81 to 1 at December 31, 1997,
1996 and 1995, respectively. The Securities and Exchange Commission permits a
ratio of no greater than 15 to 1.
NOTE 6 -- POSSESSION OR CONTROL REQUIREMENTS
The Company adheres to the exemptive provisions of (S.E.C.) Rule 15c3-3
(k)(2)(ii) by promptly transmitting all customer funds and securities to the
clearing broker who carries the customer accounts. Therefore, the Company does
not hold or have any possession or control of customer funds or securities.
NOTE 7 -- RELATED PARTIES
The Company collected through Pinnacle Management & Trust Co.
("Pinnacle"), an affiliate acting as custodian for accounts managed by the
Company, a total of $99,709, $69,726 and $12,484 in management fees during the
years ended December 31, 1997, 1996 and 1995. Pinnacle also paid $38,261 to the
Company for rent each year during such periods.
The Company paid St. James Place Corp., an affiliate providing furniture
and equipment, $176,768, $81,099 and $56,667 for lease payments during the years
ended December 31, 1997, 1996 and 1995, respectively. The Company also earned
insurance commissions of $396,922 and $181,902 through HWG Insurance Agency, Inc
during the years ended December 31, 1997 and 1996, respectively. The Company
paid St. James Capital Corp's ("St. James") payroll of $61,675 in 1997 and was
fully reimbursed. St. James' payroll aggregating $314,325 was paid by the
Company in 1996 and the Company was reimbursed $296,577. The Company billed HWG
Insurance Agency, Inc., an affiliate providing insurance services, $64,800 for
common overhead experiences in 1995.
During the year ended December 31, 1997 the Company sold 123,404 shares of
Texas BioTech warrants to shareholder/officers and realized a gain of $136,881.
The Company effectively owns directly and indirectly approximately 25% of
Biocyte Therapeutics, Inc. The Company paid payroll and related expenses of
$125,280 for the benefit of Biocyte during 1997 and received reimbursements
related to these expenses of $106,673 and $18,607, respectively during 1997 and
the first 6 months of 1998.
NOTE 8 -- STOCK OPTION PLAN
The Company has issued stock options according to a plan. At December 31,
1997, 1996 and 1995, respectively, there were options to purchase 1,920, 1,920
and 1,710 shares of common stock of the Company until May 31, 1999 at $166.67
per share.
F-35
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES
The provision for income taxes at December 31, 1997 is as follows:
Current federal income taxes......... $ 236,300
Current state income taxes........... 29,200
Deferred federal income taxes
benefit............................ (124,000)
----------
$ 141,500
==========
Deferred income tax assets........... $ 193,254
Deferred income tax liabilities...... 69,254
----------
Net deferred income tax assets....... $ 124,000
==========
The expected income tax provision that would result from applying statutory
tax rates to income before income taxes differs from the actual provision due to
permanent differences related to non-deductible officer life insurance premiums,
meals and entertainment.
NOTE 10 -- EMPLOYEE BENEFITS
The Company adopted a 401(k) retirement plan effective January 1, 1994,
covering substantially all full time salaried employees. The Company has paid or
accrued contributions to its salary reduction 401(k) plan for the year ended
1997 in the amount of $16,636.
NOTE 11 -- STOCKHOLDERS' EQUITY
At December 31, 1997, the Company had commitments to issue 1,903 shares of
stock awards of which 1,359 shares will be vested upon issuance. Total
compensation expense related to these awards will be $317,173 of which $226,546
was expensed during the year ended December 31, 1997.
The Company also acquired 336 shares of its common stock for $31,192 and
accounted for it by the par value method.
NOTE 12 -- EARNINGS (LOSS) PER COMMON SHARE
The calculation of the basic and diluted per-share computations follow:
1997 1996 1995
---------- -------------- ------------
Net income (loss) applicable to
common stock....................... $ 300,804 $ (1,177,236) $ (459,903)
========== ============== ============
Weighted average number of common
shares outstanding................. 17,906 12,455 5,560
Common shares issuable under stock
option plan........................ -- -- --
Less shares assumed repurchased with
proceeds........................... -- -- --
---------- -------------- ------------
Weighted average common and
equivalent shares outstanding...... 17,906 12,455 5,560
========== ============== ============
Basic and diluted earnings (loss) per
common share....................... $ 16.80 $ (94.52) $ (82.72)
========== ============== ============
F-36
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- SUBSEQUENT EVENTS
Effective January 1, 1998 stock options were granted to 3 employees to
purchase a total of 150 shares of the Company until January 1, 2003 at $166.67
per share and 1,297 shares of common stock were granted to various employees for
services rendered. 275 shares of the 1,297 shares have a vesting period as
follows: 68 shares vest immediately, 68 shares vest January 1, 1999, 68 shares
vest January 1, 2000 and 71 shares vest January 1, 2001.
The Company sold 3,850 shares of its common stock from January 1, 1998
through March 18, 1998 raising a total of $641,673.
NOTE 14 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (OCTOBER 6,
1998)
Subsequent to February 3, 1998, the Company discovered errors in the
accounting for stock awards and deferred taxes at December 31, 1997. The
financial statements have been restated as follows to correct these errors:
AS ORIGINALLY
STATEMENT OF FINANCIAL CONDITION STATED AS CORRECTED
- ------------------------------------- ------------- ------------
Assets
Deferred Federal income taxes... $ 118,000 $ 124,000
============= ============
Stockholders' Equity
Additional paid in capital...... $ 2,619,418 $ 2,845,964
Retained earnings (deficit)..... $ (1,828,942) $ (1,978,488)
============= ============
Statement of Income
Employee compensation........... $ 4,869,837 $ 5,096,384
============= ============
Provision for income taxes...... $ 147,500 $ 218,500
============= ============
STOCK OPTIONS
Also the Company added additional disclosures regarding stock options as
follows:
The Company grants options to key employees to purchase shares of its
common stock at fair value on the date of grant. Options are granted for five
years.
The Company has elected to account for the stock option plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations.
Had compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income would have been decreased
by $14,568, $14,568 and $13,770 for the years ended December 31, 1997, 1996 and
1995, respectively. The weighted average fair value of the options granted was
estimated using the Black-Scholes option pricing model in 1998 using the
following assumptions:
Risk-free interest rate.............. 5.3%
Expected life (years)................ 5
Expected volatility.................. -0-
Expected dividends................... -0-
F-37
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option transactions is shown below:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1994..... 1,710 $ 166.67
Granted.............................. 210 166.67
--------- ----------------
Outstanding at December 31, 1995..... 1,920 166.67
Granted, exercised, canceled......... -- --
--------- ----------------
Outstanding at December 31, 1996..... 1,920 166.67
Granted, exercised, cancelled........ -- --
--------- ----------------
Outstanding at December 31, 1997..... 1,920 $ 166.67
========= ================
Exercisable at December 31, 1997..... 1,920 $ 166.67
========= ================
A summary of options outstanding as of December 31, 1997 is shown below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE OF SHARES LIFE OF SHARES OF SHARES
PRICE OUTSTANDING OUTSTANDING EXERCISABLE
----------- ----------- ---------------- -----------
<S> <C> <C> <C>
$166.67.............................. 1,710 1.42 years 1,710
$166.67.............................. 210 2.50 years 210
----------- -----------
1,920 1,920
=========== ===========
</TABLE>
If the option holders' employment is terminated, the options will expire.
F-38
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30,
1998
------------
ASSETS
Cash................................. $ 122,478
Money market mutual funds............ 1,265,001
Receivable from correspondent brokers
and dealers........................ 236,465
Securities owned at market value..... 183,932
Notes and accounts receivable from
related parties.................... 103,748
Prepaid expenses and deposits........ 23,877
Property and equipment, net of
accumulated depreciation of
$16,406............................ 89,329
Federal income tax receivable........ 118,500
Secured demand notes................. --
Deferred federal income taxes........ 12,400
Intangible asset, net of accumulated
amortization of $34,732............ --
------------
TOTAL ASSETS.................... $ 2,155,730
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 4,470
Notes payable at banks............... --
Accrued expenses..................... 177,154
Securities sold not yet purchased.... 11,225
Deferred federal income taxes........ 25,400
Subordinated liabilities............. --
------------
TOTAL LIABILITIES............... 218,249
------------
Stockholders' equity --
Common stock, at stated
value -- $1 par value, 50,000
shares authorized;
25,891 shares issued and
outstanding.................... 25,891
Additional paid in capital...... 3,927,792
Treasury stock at par value..... (336)
Unearned compensation........... (75,523)
Retained earnings (deficit)..... (1,940,343)
------------
TOTAL STOCKHOLDERS' EQUITY...... 1,937,481
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........... $ 2,155,730
============
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
Revenue:
Commissions........................ $ 1,716,937 $ 2,157,632
Investment banking................. 1,201,616 309,000
Account management fees............ 171,138 129,656
Margin interest.................... 61,428 24,722
Other.............................. 6,377 51,620
------------ ------------
3,157,496 2,672,630
------------ ------------
Expenses:
Employee compensation.............. 2,176,559 2,025,597
Clearing charges and exchange
fees.............................. 263,740 254,135
Communications..................... 78,062 54,264
Occupancy and equipment............ 161,435 170,532
Promotions......................... 28,729 7,915
Interest........................... 1,057 18,844
Losses in error accounts and bad
debts............................. 9,160 --
Regulatory fees.................... 10,486 15,850
Professional fees.................. 50,626 20,049
Other.............................. 202,498 141,006
------------ ------------
2,982,352 2,708,192
------------ ------------
Net income before income taxes.......... 175,144 (35,562)
Provision for income taxes.... 60,000 --
------------ ------------
NET INCOME (LOSS)....................... $ 115,144 $ (35,562)
============ ============
Weighted average shares outstanding..... 23,659 7,996
============ ============
Basic and diluted earnings (loss) per
common share.......................... $ 4.87 $ (4.45)
============ ============
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................... $ 115,144 $ (35,562)
Adjustments to reconcile net
income to net cash provided
(used) by
Depreciation and
amortization............ 5,701 8,879
Unrealized gain on
investment securities... (56,008) (330,084)
Deferred Federal income
taxes................... 60,000 --
Recognition of compensation
for stock awards........ 15,104 --
Change in Assets and
Liabilities:
Receivable from brokers and
dealers................. 206,093 (63,220)
Other receivables.......... 82,101 18,001
Securities owned (trading
account)................ 16,400 226,651
Accounts payable and
accrued liabilities..... (159,332) 41,113
Payable to brokers and
dealers................. (25,888) (92,808)
Other assets............... (23,882) --
Securities sold not yet
purchased............... (15,020) --
State and federal income
taxes receivable........ (118,500) --
State and federal income
tax payable............. (238,960) --
------------ ------------
Net cash provided (used) by operating
activities......................... (137,047) (227,030)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............ (35,110) (2,317)
Receivable from related
parties........................ (87,784) 245,143
------------ ------------
Net cash provided (used) by investing
activities......................... (122,894) 242,826
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock.......................... 998,934 5,376
Repayment of short-term loans... -- (49,191)
Purchase of treasury stock...... -- (150)
------------ ------------
Net cash provided (used) by financing
activities......................... 998,934 (43,965)
------------ ------------
Net increase (decrease) in cash...... 738,993 (28,169)
Beginning cash balance............... 648,486 118,488
------------ ------------
Ending cash balance.................. $ 1,387,479 $ 90,319
============ ============
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE
SIX MONTHS ENDED
JUNE 30
----------------------
1998 1997
---------- ----------
Cash paid for:
Interest........................ $ 1,057 $ 18,844
========== ==========
Income taxes.................... $ 132,561 $ --
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Decrease in subordinated
borrowings......................... $ 430,000 $ --
========== ==========
Decrease in secured demand notes
receivable......................... $ 430,000 $ --
========== ==========
The Company issued 1,903 shares of common stock with a fair value of
$317,173 during the six months ended June 30, 1998 related to stock awards made
in 1997.
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harris Webb & Garrison, Inc. (the "Company") is a broker/dealer in
securities registered with the Securities and Exchange Commission under the
exemptive provisions of (S.E.C.) Rule 15c3-3 (k)(2)(ii). These provisions
provide that all funds and securities belonging to customers be handled by a
correspondent broker/dealer. The Company is also a registered investment advisor
with the Securities and Exchange Commission.
The Company's retail customers are primarily individuals residing in the
Houston, Texas metropolitan area. Receivable from brokers or dealers is with the
Company's correspondent broker/dealer which is located in New York, New York.
Commission revenue and related expense are recorded on a settlement date
basis and, if materially different are adjusted to trade date basis. Securities
inventory transactions and related inventory gains or losses are also recorded
on a settlement date basis and, if materially different are adjusted to trade
date basis.
The Company treats money market mutual funds and all highly liquid debt
instruments with original maturities of three months or less as cash equivalents
for purposes of the statement of cash flows.
Property and equipment are recorded at cost and consist of furniture,
office equipment and leasehold improvements. Depreciation is computed using an
accelerated method over estimated useful lives of 5 years for furniture and
office equipment. Amortization of leasehold improvements is computed using the
straight-line method over an estimated useful life of 39 years.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. These differences are primarily related to
unrealized gains on investment securities and accrued receivables and payables
which have not been recognized for income tax reporting. Deferred tax assets and
liabilities represent future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Securities not readily marketable are carried at fair value as determined
by management of the Company. The increase or decrease in net unrealized
appreciation or depreciation of securities is credited or charged to operations.
The Company presently owns securities which management believes do not currently
have a fair value. Such securities may have a fair value in the future.
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.
NOTE 2 -- NOTES PAYABLE
The Company has open lines of credit with two banks totaling $500,000. As
of June 30, 1998 no borrowings were outstanding under these lines.
F-43
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company is required to indemnify its correspondent broker/dealer for
losses it may incur in connection with accounts of the Company's customers. The
Company requires customers to maintain margin collateral in compliance with
various regulatory and internal guidelines in order to mitigate these risks. The
Company and its correspondent broker/dealer monitor required margin levels daily
and, pursuant to such guidelines, request customers to deposit additional
collateral or reduce securities positions when necessary.
The Company leases its office space and office equipment under operating
agreements. The office lease calls for a base rental plus an additional rental
due to increases in the lessor's operating cost for the property. Rental expense
under operating leases was $92,015 for office space and $51,458 for equipment
for the six months ended June 30, 1998. Future minimum lease payments are as
follows:
SIX MONTHS ENDING OFFICE
DECEMBER 31, SPACE
- ------------------------------------- ----------
1998............................... $ 110,343
1999............................... 372,055
2000............................... 379,500
2001............................... 379,500
2002............................... 379,500
2003 and later..................... 474,375
----------
$2,095,273
==========
NOTE 4 -- NET CAPITAL REQUIREMENTS
Pursuant to the net capital provisions of Rule 15c3-1 of the Securities and
Exchange Act of 1934, a minimum net capital requirement must be maintained, as
defined under such provisions. Net capital and the related net capital ratio may
fluctuate on a daily basis.
There were no material inadequacies in the computation of the ratio of
aggregate indebtedness to net capital at June 30, 1998 and the procedures
followed in making the periodic computations required. At June 30, 1998, the
Company had net capital of approximately $1,455,672 and net capital requirements
of $100,000. The ratio of aggregate indebtedness to net capital was .12 to 1 at
June 30, 1998. The Securites and Exchange Commission permits a ratio of no
greater than 15 to 1.
NOTE 5 -- POSSESSION OR CONTROL REQUIREMENTS
The Company adheres to the exemptive provisions of (S.E.C.) Rule 15c3-3
(k)(2)(ii) by promptly transmitting all customer funds and securities to the
clearing broker who carries the customer accounts. Therefore, the Company does
not hold or have any possession or control of customer funds or securites.
NOTE 6 -- RELATED PARTIES
The Company collected through Pinnacle Management & Trust ("Pinnacle"),
an affiliate acting as custodian for accounts managed by the Company, a total of
$52,474 in management fees. Pinnacle also paid $19,131 to the Company for rent.
The Company paid St. James Place Corp. ("St. James"), an affiliate
providing furniture and equipment, $39,841 for lease payments. The Company also
earned insurance commissions of $112,874 through HWG Insurance Agency, Inc.
The Company effectively owns directly and indirectly approximately 25.0% of
Biocyte Therapeutics, Inc. ("Bio"). The Company paid payroll and related
expenses of $68,597 for the benefit of Bio during the
F-44
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
six months ended June 30, 1998. The Company received $18,607 of reimbursements
from Bio during the period related to 1997.
NOTE 7 -- EMPLOYEE BENEFITS
The Company adopted a 401(k) retirement plan effective January 1, 1994,
covering substantially all full time salaried employees. The Company has not
paid or accrued contributions to its salary reduction 401(k) plan for the six
months ended 1998.
NOTE 8 -- STOCKHOLDERS' EQUITY
The Company sold 5,830 shares of its common stock for $166.67 a share
during the six months ended June 30, 1998. Additionally, 1,903 shares of common
stock related to stock awards were issued to employees of which 1,450 shares are
vested as of June 30, 1998. Stockholders also contributed capital of $24,850
during such period.
The Company also acquired 336 shares of its common stock for $31,192 and
accounted for it by the par value method.
NOTE 9 -- STOCK OPTIONS
The Company grants options to key employees to purchase shares of its
common stock at fair value on the date of grant. At June 30, 1998 there are
options to purchase 2,070 shares of common stock of the Company at $166.67 per
share; 1,710 of these options expire May 31, 1999; 210 options expire July 1,
2000; 150 options expire January 1, 2003. Options are granted for five years.
The Company has elected to account for the stock option plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations.
Had compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income would have been decreased
by $7,884. The weighted average fair value of the options granted was estimated
using the Black-Scholes option pricing model using the following assumptions:
Risk-free interest rate.............. 5.3-5.6%
Expected life (years)................ 5
Expected volatility.................. -0-
Expected dividends................... -0-
A summary of option transactions during the year ended June 30, 1998 is
shown below:
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
---------- -----------------
Outstanding at December 31, 1997..... 1,920 $166.67
Granted.............................. 150 166.67
Exercised............................ 0 0
Canceled............................. 0 0
----------
Outstanding at June 30, 1998......... 2,070 $166.67
==========
Exercisable at June 30, 1998......... 2,070 $166.67
==========
F-45
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of options outstanding as of June 30, 1998 is shown below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER REMAINING CONTRACTUAL NUMBER
EXERCISE OF SHARES LIFE OF SHARES OF SHARES
PRICE OUTSTANDING OUTSTANDING EXERCISABLE
- ---------------------------------------- ----------- --------------------- -----------
<S> <C> <C> <C>
$166.67................................. 1,710 1.42 years 1,710
$166.67................................. 210 2.50 years 210
$166.67................................. 150 4.50 years 150
----------- -----------
2,070 2,070
=========== ===========
</TABLE>
If the option holders' employment is terminated the options will expire.
NOTE 10 -- REORGANIZATION
During April, 1998 the Company entered into letters of intent with an
affiliate, Spires Financial, L.P. ("Spires") and TEI, Inc. ("TEI"). Under
the terms of the agreement, TEI will organize a newly formed subsidiary
corporation that will acquire all ownership of the three firms in a
stock-for-stock transaction, TEI will file a proxy statement and registration
statement with the SEC. Upon the appropriate approvals of the SEC and NASDAQ for
the registration and stock listing. TEI will merge into the subsidiary. Current
shareholders of TEI will own slightly more than 50% of the new company, and
current shareholders and partners of the Company, an affiliate, Spires and
certain Spires affiliates will own slightly less than 50% of the new company.
The letters of intent are subject to: 1) approval of shareholders of TEI, 2)
receipt of approvals by all governmental organizations having jurisdiction over
the parties involved in the transaction, 3) receipt of a financial fairness
opinion from an investment banking firm, 4) absence of adverse changes in the
financial condition of the parties involved in the transaction, 5) SEC and
NASDAQ approvals for registration and listing of the new company's shares, and
6) other related conditions. This transaction is subject to the consummation of
a definitive agreement among all the parties.
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pinnacle Management & Trust Company:
We have audited the accompanying balance sheet of Pinnacle Management &
Trust Company as of December 31, 1997 and the related statements of operations,
shareholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pinnacle Management & Trust
Company as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
March 13, 1998
F-47
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Pinnacle Management & Trust Company
We have audited the accompanying balance sheet of Pinnacle Management &
Trust Company as of December 31, 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1996. 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. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pinnacle Management & Trust
Company as of December 31, 1996, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
February 7, 1997
F-48
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1997 1996
------------ -----------
ASSETS
Cash and cash equivalents............ $ 536,832 $ 90,815
Marketable securities................ 1,793,265 680,874
Accounts receivable.................. 19,327 46,866
Common stock subscriptions
receivable......................... -- 1,435,900
Furniture and equipment, net of
accumulated depreciation of $48,701
for 1997 and $26,074 for 1996...... 87,992 69,794
Prepaid expenses and other assets.... 20,027 17,603
------------ -----------
Total assets............... $2,457,443 $ 2,341,852
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Payable to shareholders.............. $ 146,750 $ --
Accounts payable and other
liabilities........................ 22,413 54,280
------------ -----------
Total liabilities.......... 169,163 54,280
------------ -----------
Shareholders' equity:
Common stock, par value $1 per
share; 1,000,000 shares
authorized; issued and
outstanding 124,608 for 1997
and 66,300 for 1996........... 124,608 66,300
Preferred stock, par value $.01
per share; 1,000,000 shares
authorized.................... -- --
Common stock subscribed, par
value $1 per share............ -- 1,435,900
Additional paid-in capital...... 2,990,592 1,591,200
Accumulated deficit............. (844,173) (854,570)
Unrealized gain on marketable
securities.................... 17,253 48,742
------------ -----------
Total shareholders'
equity.................. 2,288,280 2,287,572
------------ -----------
Total liabilities and
shareholders' equity.... $2,457,443 $ 2,341,852
============ ===========
See accompanying notes to financial statements.
F-49
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Fiduciary and custodial fees.... $ 982,181 $ 607,758 $ 287,132
Investment advisory fees........ 95,971 44,983 91,700
Interest, dividends and other... 97,824 66,903 67,887
Gain on sale of securities...... 233,568 10,343 33,075
------------ ------------ ------------
Total revenues............. 1,409,544 729,987 479,794
------------ ------------ ------------
Costs and expenses:
Salaries and employee
benefits...................... 667,309 487,268 416,694
General and administrative...... 335,388 285,711 327,038
Depreciation and amortization... 22,626 171,620 56,783
------------ ------------ ------------
Total costs and expenses... 1,025,323 944,599 800,515
------------ ------------ ------------
Net income (loss).......... $ 384,221 $ (214,612) $ (320,721)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON ADDITIONAL GAIN (LOSS) ON
COMMON PREFERRED STOCK PAID-IN ACCUMULATED MARKETABLE
STOCK STOCK SUBSCRIBED CAPITAL DEFICIT SECURITIES
-------- ---------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............. $ 66,300 $ -- $ -- $1,591,200 $ (319,237) $ (1,719)
Change in unrealized gain (loss) on
marketable securities.............. -- -- -- -- -- 3,391
Net loss............................. -- -- -- -- (320,721) --
-------- ---------- ----------- ----------- ------------ ---------------
Balance, December 31, 1995........... 66,300 -- -- 1,591,200 (639,958) 1,672
Change in unrealized gain (loss) on
marketable securities.............. -- -- -- -- -- 47,070
Common stock subscribed.............. -- -- 1,435,900 -- -- --
Net loss............................. -- -- -- -- (214,612) --
-------- ---------- ----------- ----------- ------------ ---------------
Balance, December 31, 1996........... 66,300 -- 1,435,900 1,591,200 (854,570) 48,742
Change in unrealized gain (loss) on
marketable securities.............. -- -- -- -- -- (31,489)
Common stock issued.................. 58,308 -- (1,435,900) 1,399,392 -- --
Net income........................... -- -- -- -- 384,221 --
Dividends............................ -- -- -- -- (373,824) --
-------- ---------- ----------- ----------- ------------ ---------------
Balance, December 31, 1997........... $124,608 $ -- $ -- $2,990,592 $ (844,173) $ 17,253
======== ========== =========== =========== ============ ===============
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
--------------
Balance, January 1, 1995............. $1,336,544
Change in unrealized gain (loss) on
marketable securities.............. 3,391
Net loss............................. (320,721)
--------------
Balance, December 31, 1995........... 1,019,214
Change in unrealized gain (loss) on
marketable securities.............. 47,070
Common stock subscribed.............. 1,435,900
Net loss............................. (214,612)
--------------
Balance, December 31, 1996........... 2,287,572
Change in unrealized gain (loss) on
marketable securities.............. (31,489)
Common stock issued.................. 21,800
Net income........................... 384,221
Dividends............................ (373,824)
--------------
Balance, December 31, 1997........... $2,288,280
==============
See accompanying notes to financial statements.
F-51
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............... $ 384,221 $ (214,612) $ (320,721)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:.........
Depreciation and
amortization............ 22,626 171,620 56,783
Gain on sale of
securities.............. (233,568) (10,343) (33,075)
Changes in assets and
liabilities:
Decrease (increase) in
accounts
receivable......... 27,539 (8,929) (35,147)
(Increase) decrease in
prepaid expenses
and other assets... (2,424) (3,787) 14,448
(Decrease) increase in
accounts payable
and other
liabilities........ (31,867) (4,055) 43,739
------------ ------------ --------------
Net cash
provided by
(used in)
operating
activities.... 166,527 (70,106) (273,973)
------------ ------------ --------------
Cash flows from investing activities:
Purchase of furniture and
equipment..................... (40,824) (31,828) (9,566)
Purchase of securities.......... (2,911,957) (743,416) (951,253)
Proceeds from sale of
securities.................... 2,001,645 531,427 1,466,898
------------ ------------ --------------
Net cash (used
in) provided
by investing
activities.... (951,136) (243,817) 506,079
------------ ------------ --------------
Cash flows from financing activities:
Issuance of common stock........ 1,457,700 -- --
Increase in payable to
shareholders.................. 146,750 -- --
Dividends paid.................. (373,824) -- --
------------ ------------ --------------
Net cash
provided by
financing
activities.... 1,230,626 -- --
------------ ------------ --------------
Net increase (decrease) in cash and
cash equivalents................... 446,017 (313,923) 232,106
Cash and cash equivalents, beginning
of period.......................... 90,815 404,738 172,632
------------ ------------ --------------
Cash and cash equivalents, end of
period............................. $ 536,832 $ 90,815 $ 404,738
============ ============ ==============
Noncash financing transaction:
Common stock subscribed......... $ -- $ 1,435,800 $ --
============ ============ ==============
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Pinnacle Management & Trust Company (the Company) commenced operations on
June 10, 1994 as a nonbanking trust company under the laws of the state of Texas
and is subject to supervision by the Banking Commissioner of the State of Texas.
The Company provides fiduciary services and has custodial responsibilities
for assets of certain investment accounts for corporate, foundation, public and
individual clients. The market value of assets of the custodial accounts totaled
approximately $414 million and $382 million as of December 31, 1997 and 1996,
respectively.
CASH EQUIVALENTS
The Company considers all investments with maturities of three months or
less at the date of purchase to be cash equivalents.
MARKETABLE SECURITIES
The Company invests in U.S. agency securities and common stock to maintain
liquidity in accordance with statutory requirements of the Texas Banking Code
and the Texas Administrative Code.
All marketable securities are recorded at fair value, with the related
unrealized gains and losses reported as a separate component of shareholders'
equity until realized. Realized gains and losses are calculated using the
specific identification method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. When property is retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the respective accounts, and any gain or loss on disposition is included in
income. Depreciation is calculated over the estimated useful lives of the assets
using the straight-line method.
INCOME TAXES
The shareholders elected under provision of the Internal Revenue Code to
treat the Company as an S Corporation. As such, the shareholders are required to
report their share of the Company's net income or loss on their individual
federal income tax returns. Accordingly, no federal income tax provisions were
required by the Company.
FIDUCIARY AND CUSTODIAL FEES
Fiduciary and custodial fees are recorded monthly for most trust accounts,
based on a percentage of each individual account's market value on the last day
of the month then ended.
STOCK-BASED COMPENSATION
During 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123
allows a company to adopt a fair value based method of accounting for a
stock-based employee compensation plan or to continue to use the intrinsic value
based method as prescribed by Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company has elected to continue to
account for stock-based compensation under the intrinsic value method. Under
this method, the Company recognizes no compensation expense for stock options
granted when the exercise price of the options granted is greater than or equal
to the fair value of the Company's stock on the date of grant.
F-53
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 requires that a company
report comprehensive income and its components in the financial statements. SFAS
No. 131 requires that a public business enterprise report financial and
descriptive information about operating segments.
SFAS No. 130 and SFAS No. 131 are required for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 and SFAS No. 131 for the
year ended December 31, 1998. The implementation of SFAS No. 130 and SFAS No.
131 will result only in additional disclosure and will have no other impact on
the financial statements.
(2) MARKETABLE SECURITIES
The Company's investments as of December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C>
1997
U.S. agency securities............... $ 836,693 $10,797 -- $ 847,490
Common stock......................... 939,319 6,456 -- 945,775
---------- ----------- ----------- ----------
$1,776,012 $17,253 -- $1,793,265
========== =========== =========== ==========
1996
U.S. agency securities............... $ 290,419 $ -- $ 3,708 $ 286,711
Common stock......................... 341,713 52,450 -- 394,163
---------- ----------- ----------- ----------
$ 632,132 $52,450 $ 3,708 $ 680,874
========== =========== =========== ==========
</TABLE>
The U.S. agency securities mature at various dates through November 2026.
(3) FAIR VALUES
The Company's financial instruments include cash and cash equivalents,
marketable securities (carried at market value), accounts receivable and
accounts payable. The fair values of financial instruments are determined by
reference to various market data and other valuation techniques, as appropriate.
The fair values of financial instruments approximated their carrying values at
December 31, 1997.
(4) RELATED-PARTY TRANSACTIONS
The Company obtained legal services from a Board member. Included in
general and administrative expense is $1,442, $8,158 and $23,359 in legal fees
paid to the Board member during 1997, 1996 and 1995, respectively.
The Company provides services for and shares expenses with Harris Webb &
Garrison, Inc., a related party. At December 31, 1997 and 1996, respectively,
the Company had receivables of $61 and $2,042 from the related party. Included
in operating expenses as of December 31, 1997, 1996 and 1995, respectively, is
$39,396, $41,056 and $40,525 of rent expense which was paid to the related
party.
F-54
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) REGULATORY REQUIREMENTS
The Company is required by its regulator, the Texas Department of Banking,
to maintain minimum capital of $1,500,000. As of December 31, 1997, the Company
is in compliance with this requirement.
(6) COMMON STOCK
During December 1996, the Company initiated a private offering of 80,000
shares of its $1 par value common stock at a price of $25 per share. At December
31, 1996, the Company had received subscriptions for 57,436 shares. In January
1997, 58,308 shares were issued for $1,457,700 and the offering was terminated.
The Company's original shareholders were granted "founder's" options or
warrants that allow the holder thereof to purchase at a price of $25 per share,
a number of shares based on 50% (33,150 shares or $828,750) of the shareholders'
original investment in the Company. The "founder's" options or warrants shall
be exercisable at any time on or before January 2, 1999. As of December 31,
1997, 5,870 warrants were funded at a total price of $146,750 but not yet
issued. As of February 28, 1998, an additional 18,345 warrants were exercised at
a total price of $458,625.
(7) STOCK OPTIONS
During 1997, the Board resolved to adopt a stock option plan for the
management team of the Company. This plan will allow selected management team
members to subscribe for and purchase from the Company in whole or in part
28,000 shares at a price of $25 per share. These options will have a ten-year
life and a three-year vesting period. No options have been granted under this
plan as of December 31, 1997.
Separate from this resolution, stock options were granted during 1997 to an
officer and directors with a five-year life vesting 20% each year. A summary of
the status of these options as of December 31, 1997 follows:
NUMBER WEIGHTED
OF AVERAGE
OPTIONS EXERCISE PRICE
-------- ---------------
Outstanding at December 31, 1996..... -- --
Granted during 1997.................. 15,000 $ 25.00
-------- ---------------
Outstanding at December 31, 1997..... 15,000 $ 25.00
======== ===============
There are no options that are exercisable as of December 31, 1997. The fair
value of the options was determined at grant date using the Minimum Value
method. The Company assumed a risk-free interest rate of 5.56% in 1997. Had
compensation cost for the Company's plans been determined consistent with SFAS
No. 123, the Company's net income would have been reduced to $295,332.
(8) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF
INDEPENDENT AUDITORS' REPORT
During April 1998, the Company entered into a letter of intent with a
publicly-held liquid waste company. Under the terms of the agreement, the
Company, along with the liquid waste company and two other financial services
firms, would consolidate into a newly formed corporation that would acquire all
ownership of the four companies in a stock-for-stock transaction. Current
shareholders of the Company would own slightly more than 16% of the new
corporation, and current shareholders and partners of the other combining
companies would own slightly less than 84% of the new corporation. The letter of
intent is subject to: i) approval of shareholders of the Company, ii) receipt of
approvals by all governmental organizations having jurisdiction over the parties
involved in the transaction, iii) receipt of a financial fairness opinion from
an investment banking firm, iv) absence of adverse changes in the financial
condition of the parties involved in the transaction, v) SEC and Nasdaq
approvals for registration and listing of the new corporation's shares and vi)
other related conditions. This transaction is subject to the consummation of a
definitive agreement among all the parties.
F-55
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30,
1998
-----------
ASSETS
Cash and cash equivalents............ $ 92,809
Marketable securities................ 2,960,377
Accounts receivable.................. 35,696
Furniture and equipment, net of
accumulated depreciation of
$36,351............................ 114,895
Prepaid expenses and other assets.... 140,144
-----------
Total assets............... $ 3,343,921
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other
liabilities........................ $ 25,473
-----------
Shareholders' equity:
Common stock, par value $1 per
share; 1,000,000 shares
authorized; issued and
outstanding 149,900............ 149,900
Preferred stock, par value $.01
per share; 1,000,000 shares
authorized..................... --
Additional paid-in capital...... 3,585,600
Accumulated deficit............. (518,448)
Unrealized gain on marketable
securities..................... 101,396
-----------
Total shareholders'
equity.................... 3,318,448
-----------
Total liabilities and
shareholders' equity...... $ 3,343,921
===========
See accompanying notes to condensed interim financial statements.
F-56
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
----------------------
1998 1997
---------- ----------
Revenues:
Fiduciary and custodial fees.... $ 665,525 $ 460,528
Investment advisory fees........ -- 4,820
Interest, dividends and other... 43,035 54,739
Gain on sale of securities...... 187,823 124,143
---------- ----------
Total revenues............. 896,383 644,230
---------- ----------
Costs and expenses:
Salaries and employee
benefits....................... 368,304 270,279
General and administrative...... 187,672 179,266
Depreciation and amortization... 14,682 10,277
---------- ----------
Total costs and expenses... 570,658 459,822
---------- ----------
Net income (loss).......... $ 325,725 $ 184,408
========== ==========
See accompanying notes to condensed interim financial statements.
F-57
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net income...................... $ 325,725 $ 184,408
Adjustments to reconcile net
income to net cash provided by
operating activities:..........
Depreciation and
amortization........... 14,682 10,277
Gain on sale of
securities............. (187,823) (124,143)
Changes in assets and
liabilities:
(Increase) decrease in
accounts
receivable........ (16,369) 12,475
(Increase) decrease in
prepaid expenses
and other
assets............ (120,117) 7,661
Increase (decrease) in
accounts payable
and other
liabilities....... 3,060 (23,949)
------------ ------------
Net cash
provided by
operating
activities... 19,158 66,729
------------ ------------
Cash flows from investing activities:
Purchase of furniture and
equipment...................... (41,585) (23,101)
Purchase of securities.......... (2,598,105) (2,214,930)
Proceeds from sale of
securities..................... 1,702,959 1,749,574
------------ ------------
Net cash used in
investing
activities... (936,731) (488,457)
------------ ------------
Cash flows from financing activities:
Issuance of common stock........ 620,300 1,457,000
Decrease in payable to
shareholders................... (146,750) --
------------ ------------
Net cash
provided by
financing
activities... 473,550 1,457,000
------------ ------------
Net (decrease) increase in cash and
cash equivalents................... (444,023) 1,035,272
Cash and cash equivalents, beginning
of period.......................... 536,832 90,815
------------ ------------
Cash and cash equivalents, end of
period............................. $ 92,809 $ 1,126,087
============ ============
See accompanying notes to condensed interim financial statements.
F-58
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Pinnacle Management & Trust Company (the Company) commenced operations on
June 10, 1994 as a nonbanking trust company under the laws of the state of Texas
and is subject to supervision by the Banking Commissioner of Texas. The Company
provides fiduciary services and has custodial responsibilities for assets of
certain investment accounts for corporate, foundation, public and individual
clients.
The interim financial statements as of June 30, 1998 and for each of the
six month periods ended June 30, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 requires that a company
report comprehensive income and its components in the financial statements. SFAS
No. 131 requires that a public business enterprise report financial and
descriptive information about operating segments.
SFAS No. 130 and SFAS No. 131 are required for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 and SFAS No. 131 for the
year ended December 31, 1998. Total comprehensive income for the six months
ended June 30, 1997 and 1998 was $151,170 (unaudited) and $409,868 (unaudited),
respectively. The implementation of SFAS No. 130 and SFAS No. 131 will result
only in additional disclosure and will have no other impact on the financial
statements.
(2) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
During April 1998, the Company entered into a letter of intent with a
publicly-held liquid waste company. Under the terms of the agreement, the
Company, along with the liquid waste company and two other financial services
firms, would consolidate into a newly formed corporation that would acquire all
ownership of the four companies in a stock-for-stock transaction.
F-59
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Spires Financial, L.P.:
We have audited the accompanying statements of financial condition of
Spires Financial, L.P. as of December 31, 1997 and 1996, and the related
statements of operations, changes in partners' capital and cash flows for the
years ended December 31, 1997 and 1996 and for the period from inception
(January 18, 1995) to December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spires Financial, L.P. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996 and for the period from inception
(January 18, 1995) to December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 16, 1998
F-60
<PAGE>
SPIRES FINANCIAL, L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents............ $ 2,071,700 $ 2,042,762
Deposits held by clearing broker and
dealer, at market (cost: $1,231,242
and $1,284,992, respectively),
restricted......................... 1,245,859 1,300,015
Commissions receivable from clearing
broker and dealer.................. 765,980 464,658
Securities purchased under agreements
to resell.......................... 12,163,327 1,498,674
Inventory of marketable securities,
at market (cost: $18,053,284 and
$5,391,349, respectively).......... 18,055,669 5,454,812
Receivables from employees........... 42,211 41,836
Furniture and equipment, at cost,
net.................................. 330,821 345,166
Other assets......................... 548,367 123,535
------------ ------------
Total assets.................... $ 35,223,934 $ 11,271,458
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued
liabilities.......................... $ 109,908 $ 125,794
Securities sold under agreements to
repurchase......................... 4,129,571 4,176,967
Securities sold, not yet purchased,
at market (cost: $12,108,629 and
$1,487,362, respectively).......... 12,093,441 1,490,346
Due to clearing broker and dealer.... 13,463,685 --
Commissions payable to brokers....... 616,740 525,725
Payable to Secondary General
Partner............................ 20,597 32,512
------------ ------------
Total liabilities............... 30,433,942 6,351,344
Commitments and contingencies
Total partners' capital.............. 4,789,992 4,920,114
------------ ------------
Total liabilities and partners'
capital......................... $ 35,223,934 $ 11,271,458
============ ============
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE>
SPIRES FINANCIAL, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (JANUARY 18, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Brokerage commissions.............. $ 6,691,531 $ 7,321,387 $ 6,840,955
Revenue from securities traded..... 732,122 333,417 473,014
Unrealized gain (loss)............. 17,573 60,480 (18,097)
Interest income.................... 799,703 564,355 237,129
------------ ------------ ------------
Total revenues................ 8,240,929 8,279,639 7,533,001
------------ ------------ ------------
Expenses:
Broker commissions................. 2,530,838 2,084,405 1,390,006
Administrative employee
compensation and benefits........ 861,099 938,911 779,053
Data services...................... 477,524 364,689 272,514
Professional fees.................. 179,951 264,793 339,552
Occupancy expense.................. 162,408 138,470 91,644
Clearing charges................... 221,996 234,777 110,824
Interest expense................... 614,991 228,125 --
Other.............................. 1,007,597 779,736 453,582
------------ ------------ ------------
Total expenses................ 6,056,404 5,033,906 3,437,175
------------ ------------ ------------
Net income.................... $ 2,184,525 $ 3,245,733 $ 4,095,826
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE>
SPIRES FINANCIAL, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (JANUARY 18, 1995) TO DECEMBER 31, 1995
TOTAL
PARTNERS'
CAPITAL
-----------
Capital contributions at inception,
January 18, 1995........................ $ 3,672,612
Capital contributions................... 36,320
Capital distributions................... (2,400,000)
Net income.............................. 4,095,826
-----------
Balance at December 31, 1995............ 5,404,758
Capital distributions................... (3,730,377)
Net income.............................. 3,245,733
-----------
Balance at December 31, 1996............ 4,920,114
Capital distributions................... (2,314,647)
Net income.............................. 2,184,525
-----------
Balance at December 31, 1997............ $ 4,789,992
===========
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE>
SPIRES FINANCIAL, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (JANUARY 18, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................... $ 2,184,525 $ 3,245,733 $ 4,095,826
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation............... 88,851 71,173 37,995
Unrealized (gain) loss on
inventory of marketable
securities.............. (17,573) (60,480) 18,097
(Increase) decrease in
commissions receivable
from clearing broker and
dealer.................. (301,322) 370,125 (722,217)
Decrease (increase) in
commissions receivable
from mortgage
customers............... -- 46,435 (53,985)
Increase in securities
purchased under
agreements to resell.... (10,664,653) (1,498,674) --
Increase in inventory of
marketable securities... (12,583,284) (2,794,162) (2,428,335)
Increase in receivables
from employees.......... (375) (20,804) (14,365)
Increase in other assets... (424,832) (69,011) (41,501)
(Decrease) increase in
accounts payable and
accrued liabilities..... (15,886) (97,527) 184,361
(Decrease) increase in
securities sold under
agreements to
repurchase.............. (47,396) 4,176,967 --
Increase in securities
sold, not yet
purchased............... 10,603,095 1,490,346 --
Increase (decrease) in due
to clearing broker and
dealer.................. 13,463,685 (1,788,459) 1,788,459
Increase in commissions
payable to brokers...... 91,015 34,440 491,285
(Decrease) increase in
payable to Secondary
General Partner......... (11,915) (9,488) 42,000
--------------- -------------- --------------
Total adjustments..... 179,410 (149,119) (698,206)
--------------- -------------- --------------
Net cash provided by
operating
activities......... 2,363,935 3,096,614 3,397,620
--------------- -------------- --------------
Cash flows from investing activities:
Decrease (increase) in deposits
held by clearing broker and
dealer........................ 54,156 (69,787) (1,230,228)
Purchases of furniture and
equipment..................... (74,506) (134,095) (111,379)
Proceeds from disposals of
furniture and equipment....... -- 14,093 --
--------------- -------------- --------------
Net cash used in
investing
activities......... (20,350) (189,789) (1,341,607)
--------------- -------------- --------------
Cash flows from financing activities:
Distributions to partners....... (2,314,647) (3,730,377) (2,400,000)
Contributions by partners....... -- -- 3,810,532
Payments on note payable........ -- -- (100,000)
Decrease in payable to Class B
Limited Partners, net of
repayments.................... -- (286,297) (213,934)
--------------- -------------- --------------
Net cash (used in)
provided by
financing
activities......... (2,314,647) (4,016,674) 1,096,598
--------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents................... 28,938 (1,109,849) 3,152,611
Cash and cash equivalents, beginning
of year............................ 2,042,762 3,152,611 --
--------------- -------------- --------------
Cash and cash equivalents at end of
year............................... $ 2,071,700 $ 2,042,762 $ 3,152,611
=============== ============== ==============
Interest paid........................ $ 563,330 $ 224,942 $ 76,849
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE>
SPIRES FINANCIAL, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE PARTNERSHIP
Spires Financial, L.P. (the "Partnership") is a broker-dealer registered
with the Securities and Exchange Commission (SEC) and is a member of the
National Association of Securities Dealers (NASD). The Partnership is a Delaware
limited partnership.
The following provides general information about the Partnership. Readers
of the financial statements should refer to the partnership agreement for more
detailed information. The Partnership was formed effective January 18, 1995, for
a period of ten years and was capitalized by cash contributions from the
Managing General Partner, the Secondary General Partner, and various parties
collectively known as the Class A and Class B Limited Partners. Additionally,
the net assets of an active broker and dealer were contributed by a Class B
Limited Partner in connection with the merger of that broker and dealer into the
Partnership effective January 18, 1995. The net assets were transferred to the
Partnership at their historical cost basis, which approximated fair market
value. All of the general and limited partners are collectively known as the
Partners.
The Partners' initial ownership percentages and their subsequent profit and
loss allocations are specifically defined in the limited partnership agreement.
GENERAL
The books and records of the Partnership are maintained on the accrual
basis of accounting. The Partnership does not carry customer accounts or hold
funds or securities for customers, but operates as an introducing broker on a
fully disclosed basis and forwards all transactions to two clearing brokers and
dealers (the "Clearing Brokers"). 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.
SECURITIES TRANSACTIONS
Deposits held by clearing brokers and dealers, marketable securities and
securities sold, not yet purchased are carried at market value. Realized and
unrealized gains and losses, if any, are included in income from operations. The
inventory of marketable securities and securities sold, not yet purchased
consisted of securities issued by federal government agencies and corporate
securities.
Proprietary securities transactions are recorded on the trade date, as if
they had settled. Profit and loss arising from all securities transactions
entered into for the account and risk of the Partnership are recorded on a trade
date basis. Customers' securities are reported on a settlement date basis with
related commission income and expense reported on a trade date basis.
Amounts receivable and payable for securities transactions that have not
reached their contractual settlement date are recorded net on the statement of
financial condition.
RESALE AND REPURCHASE AGREEMENTS
Transactions involving purchases of securities under agreements to resell
(reverse repurchase agreements or reverse repos) or sales of securities under
agreements to repurchase (repurchase agreements or repos) are accounted for as
collateralized financings. It is the policy of the Partnership to obtain the
possession of collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. Collateral is valued daily, and
the Partnership may require counterparties to deposit additional collateral or
return collateral pledged when appropriate.
F-65
<PAGE>
SPIRES FINANCIAL, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost, net of accumulated
depreciation. Depreciation on furniture and equipment is provided using the
straight-line method over the estimated useful lives of the assets. Costs of
maintenance and repairs are charged to expense. Cost and accumulated
depreciation and amortization are removed from the accounts when assets are sold
or retired, and the resulting gains or losses are included in operations.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur. The Partnership's securities
transactions are settled by the Clearing Brokers.
FEDERAL INCOME TAXES
The Partnership is not a taxpaying entity for federal or state income tax
purposes, accordingly, no provision or liability for federal income taxes has
been recorded. The Partners are taxed individually on their respective portions
of the Partnership's earnings.
CASH AND CASH EQUIVALENTS
The Partnership considers all short-term highly liquid investments not held
for sale in the ordinary course of business which are readily convertible into
known amounts of cash and which have original maturities of three months or less
as cash equivalents.
2. DEPOSITS HELD BY CLEARING BROKER AND DEALER:
Under the terms of the clearing agreements between the Partnership and the
Clearing Broker and Dealer, the Partnership is required to maintain a certain
level of cash or securities on deposit with the Clearing Broker and Dealer. If
the Clearing Broker and Dealer suffers a loss due to a failure of a customer of
the Partnership to complete a transaction, the Partnership is required to
indemnify the Clearing Broker and Dealer. The Partnership has funds invested in
a one-year U.S. Treasury bill with a market value of $1,145,050 and funds
invested in a money market account with a market value of $100,809 as of
December 31, 1997, on deposit with the Clearing Broker and Dealer to meet this
requirement. As of December 31, 1996, the Partnership had funds invested in a
one-year U.S. Treasury bill with a market value of $1,300,015 to meet this
requirement.
3. FURNITURE AND EQUIPMENT:
The following is a summary of furniture and equipment as of December 31:
1997 1996
------------ ------------
Computer equipment................... $ 398,826 $ 332,206
Furniture and fixtures............... 91,092 89,837
Leasehold improvements............... 38,922 32,291
------------ ------------
528,840 454,334
Less accumulated depreciation and
amortization....................... (198,019) (109,168)
------------ ------------
Furniture and equipment, net......... $ 330,821 $ 345,166
============ ============
F-66
<PAGE>
SPIRES FINANCIAL, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. REGULATORY NET CAPITAL:
The Partnership 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, 1997, the
Partnership had net capital of $2,327,227, which was $1,104,527 in excess of its
required net capital of $1,222,700. The Partnership's ratio of aggregate
indebtedness to net capital was 7.88 to 1. At December 31, 1996, the Partnership
had net capital of $3,729,959, which was $3,405,892 in excess of its required
net capital of $324,067. The Partnership's ratio of aggregate indebtedness to
net capital was 1.30 to 1.
5. COMMITMENTS AND CONTINGENCIES:
The Partnership leases office space under noncancelable operating lease
agreements expiring through 2002. In addition, the Partnership leases certain
office equipment and software under noncancelable operating leases that expire
through 2002. Rent and other lease expense totaled $573,468, $221,386 and
$161,644 for the years ended December 31, 1997 and 1996 and for the period from
inception (January 18, 1995) to December 31, 1995, respectively.
Future minimum rental payments under the Partnership's noncancelable
operating lease agreements were as follows at December 31, 1997:
1998.................................... $ 674,265
1999.................................... 677,870
2000.................................... 609,789
2001.................................... 505,364
2002.................................... 505,364
------------
$ 2,972,652
============
6. CONCENTRATIONS OF CREDIT RISK AND OFF-BALANCE SHEET CREDIT AND MARKET RISK:
The Partnership maintains its cash in bank depository accounts which, at
times, may exceed federally insured limits. The Partnership selects depository
institutions based, in part, upon management's review of the financial stability
of the institutions.
The Partnership is engaged in various securities brokerage activities
serving a diverse group of institutional investors nationwide. All of the
Partnership's customer securities transactions are executed on a fully disclosed
basis through the Clearing Brokers. The Partnership has market risk on its
customers' buy and sell transactions. If customers do not fulfill their
obligations, a gain or loss could be suffered equal to the difference between a
customer's commitment and the market value of the underlying securities. The
risk of default depends on the creditworthiness of the customers. The
Partnership and the Clearing Broker perform extensive due diligence with respect
to each customer accepted to minimize the Partnership's risk.
In addition, the Partnership has sold U.S. Treasury Notes that it does not
currently own and will therefore be obligated to purchase such securities at a
future date. The Partnership has recorded these obligations in the financial
statements at the market values of the related securities and could incur a loss
if the market value of the securities increases.
The Partnership is further exposed to credit risk for resale and repurchase
agreements and for commissions receivable from the Clearing Broker.
F-67
<PAGE>
SPIRES FINANCIAL, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
o The carrying amounts of cash and cash equivalents approximate
fair value because of the short maturity of those instruments.
o The carrying amounts of commissions receivable from clearing
broker and dealer, receivables from partners and employees,
accounts payable and accrued liabilities, commissions payable to
brokers, and payable to Secondary General Partner approximate
their fair value.
o The fair value of inventory of marketable securities, deposits
held by clearing broker and dealer, securities sold, not yet
purchased, repurchase agreements and reverse repurchase
agreements, are based on quoted market prices for those or
similar securities or fair value as determined by management.
8. RESALE AND REPURCHASE AGREEMENTS:
The carrying value and fair value of resale and repurchase agreements are
as follows:
DECEMBER 31, 1997
------------------------------
CARRYING FAIR
VALUE VALUE
-------------- --------------
Securities sold under agreements to
repurchase............................ $ 4,129,571 $ 4,106,234
Securities purchased under agreements to
resell................................ $ 12,163,327 $ 12,126,122
At December 31, 1997 and 1996, securities sold under agreements to
repurchase were maintained for safekeeping with Daiwa Securities America, Inc.
("Daiwa"), the Partnership's clearing broker. The type of securities sold was
collateralized mortgage obligations. The agreements' maturities were overnight
and the weighted average interest rate was 5.65% and 5.60% at December 31, 1997
and 1996, respectively. Securities purchased under agreements to resell were
maintained for safekeeping with Daiwa. All of the securities purchased under
agreements to resell had overnight maturities.
9. SUBORDINATED LIABILITIES:
The Partnership had no subordinated liabilities at any time during the
years ended December 31, 1997 and 1996. Therefore, the statement of changes in
liabilities subordinated to claims of general creditors has not been presented
for the years ended December 31, 1997 and 1996.
10. EMPLOYEE PROFIT SHARING PLAN:
The Partnership has a contributory profit sharing plan and trust which
covers substantially all employees except sales representatives. Contributions
to the plan are discretionary, as defined, but may not exceed the amount
deductible for federal income tax purposes.
There were no Partnership contributions made to the plan for the year ended
December 31, 1997. Contributions in the amount of $187,165 and $53,696 were made
to the plan for 1996 and 1995, respectively.
F-68
<PAGE>
SPIRES FINANCIAL, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS:
In accordance with the partnership agreement, the Partnership made capital
distributions to the partners subsequent to December 31, 1997 as follows:
Managing General Partner............. $ 13,868
Secondary General Partner............ 1,553
Class A Limited Partners............. 464,482
Class B Limited Partners............. 956,882
------------
$ 1,436,785
============
12. RELATED PARTY TRANSACTIONS:
Pursuant to the terms of the Partnership agreement, the Partnership accrued
$20,597 and $32,512 at December 31, 1997 and 1996, respectively for consulting
services performed by the Secondary General Partner.
During 1995, the Partnership incurred professional fees of approximately
$40,000 for investigatory costs in connection with the formation of an
investment company which will ultimately be managed by an affiliate.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
As a result of the contribution of the net assets of an active broker and
dealer by a Class B Limited Partner (discussed in Note 1) the following noncash
transaction occurred in 1995:
Commissions receivable from clearing
broker and dealer.................. $ 112,566
Inventory of marketable securities... 189,932
Receivables from partners and
employees.......................... 6,667
Furniture and equipment.............. 186,633
Other assets......................... 5,473
Accounts payable and accrued
liabilities........................ (38,960)
Payable to Class B Limited
Partners........................... (500,231)
Notes payable........................ (100,000)
------------
Net liabilities contributed excluding
cash of $310,532................... $ (137,920)
============
Additionally, a Class B Limited Partner contributed furniture and equipment
amounting to $36,320, at predecessor cost in 1995.
F-69
<PAGE>
SPIRES FINANCIAL, L.P.
CONDENSED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, 1998
-------------
ASSETS
Cash and cash equivalents............ $ 163,882
Deposits held by clearing brokers and
dealers, at market, restricted..... 1,100,200
Commissions receivable from clearing
brokers and dealer................. 701,023
Securities purchased under agreements
to resell.......................... 5,015,786
Inventory of marketable securities,
at market.......................... 22,491,307
Receivables from employees........... 25,829
Furniture and equipment, at cost,
net................................ 353,315
Other assets......................... 693,907
-------------
Total assets.................... $ 30,545,249
=============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued
liabilities........................ $ 68,509
Securities sold under agreements to
repurchase......................... 21,444,263
Securities sold, not yet purchased,
at market.......................... 4,999,767
Due to clearing broker and dealer.... --
Commissions payable to brokers....... 321,916
Payable to Secondary General
Partner.............................. 6,407
-------------
Total liabilities............... 26,840,862
Commitments and contingencies
Total partners' capital.............. 3,704,387
-------------
Total liabilities and partners'
capital......................... $ 30,545,249
=============
The accompanying notes are an integral part of the condensed interim financial
statements.
F-70
<PAGE>
SPIRES FINANCIAL, L.P.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
Revenues:
Brokerage commissions.............. $ 3,336,994 $ 3,033,080
Revenue from securities traded..... 369,204 317,249
Unrealized loss.................... (12,746) (102,478)
Interest income.................... 523,038 351,142
------------ ------------
Total revenues................ 4,216,490 3,598,993
------------ ------------
Expenses:
Broker commissions................. 1,310,391 1,044,878
Administrative employee
compensation and benefits......... 444,568 341,503
Data services...................... 294,620 226,695
Professional fees.................. 156,470 86,761
Occupancy expense.................. 80,499 79,948
Clearing charges................... 123,280 114,711
Interest expense................... 537,894 275,075
Other.............................. 504,278 449,869
------------ ------------
Total expenses................ 3,452,000 2,619,440
------------ ------------
Net income.................... $ 764,490 $ 979,553
============ ============
The accompanying notes are an integral part of the condensed interim financial
statements.
F-71
<PAGE>
SPIRES FINANCIAL, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
--------------- --------------
Cash flows from operating activities:
Net income $ 761,536 $ 979,553
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation............... 43,321 42,332
Unrealized losses on
inventory of marketable
securities.............. 12,746 102,478
Decrease (increase) in
commissions
receivable.............. 64,957 (277,542)
Decrease (increase) in
securities purchased
under agreements to
resell.................. 7,147,541 (2,087,816)
(Increase) decrease in
inventory of marketable
securities.............. (4,448,384) 168,541
Decrease (increase) in
receivables from
employees............... 16,382 (18,936)
Increase in other assets... (145,540) (173,008)
Decrease in accounts
payable and accrued
liabilities............. (41,399) (23,347)
Increase in securities sold
under agreements to
repurchase.............. 17,314,692 4,634,601
(Decrease) increase in
securities sold, not yet
purchased............... (7,093,674) 1,980,646
Decrease in due to clearing
broker and dealer....... (13,463,685) (4,176,967)
Decrease in commissions
payable to brokers...... (294,824) (189,536)
Decrease in payable to
Secondary General
Partner................. (14,190) (24,498)
--------------- --------------
Total adjustments..... (902,057) (43,052)
--------------- --------------
Net cash provided by
(used in) operating
activities......... (140,521) 936,501
--------------- --------------
Cash flows from investing activities:
Decrease in deposits held by
clearing brokers and
dealers....................... 145,659 194,915
Purchases of furniture and
equipment..................... (65,815) (16,465)
--------------- --------------
Net cash provided by
financing
activities......... 79,844 178,450
--------------- --------------
Cash flows from financing activities:
Distribution to partners........ (1,847,141) (2,036,178)
--------------- --------------
Net cash used in
financing
activities......... (1,847,141) (2,036,178)
--------------- --------------
Net decrease in cash and cash
equivalents........................ (1,907,818) (921,227)
Cash and cash equivalents, beginning
of period.......................... 2,071,700 2,042,762
--------------- --------------
Cash and cash equivalents, end of
period............................. $ 163,882 $ 1,121,535
=============== ==============
The accompanying notes are an integral part of the condensed interim financial
statements.
F-72
<PAGE>
SPIRES FINANCIAL, L.P.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Spires Financial, L.P. (the "Partnership") is a broker-dealer registered
with the Securities and Exchange Commission ("SEC") and is a member of the
National Association of Securities Dealers. The unaudited financial statements
have been prepared consistent with the accounting policies reflected in the
audited financial statements included in this document dated December 31, 1997
and 1996.
In management's opinion, the unaudited financial statements include all
adjustments necessary for a fair presentation of the Partnership's financial
condition at June 30, 1998, the results of its operations and cash flows for the
six months ended June 30, 1998 and 1997. All such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of results for
a full year.
During April 1998, the Partnership entered into letters of intent with TEI,
Inc. ("TEI") whereby TEI would organize a newly formed subsidiary corporation
that would acquire the Partnership in a stock transaction.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period, except those resulting from investments by owner sand
distributions to owners. SFAS No. 130 was adopted by the Partnership on January
1, 1998. Initial adoption of this standard had no impact on the Partnership's
financial statements.
2. COMMITMENTS:
The Partnership has moved its home office. A new five year, non-cancellable
lease was executed which begins on October 15, 1998. The lease inception date is
contingent upon the completion of leasehold improvements currently under
construction by the lessor. The new lease commitment is as follows:
1998................................. $ 30,945
1999................................. 148,540
2000................................. 148,540
2001................................. 148,540
Thereafter........................... 266,135
----------
$ 742,700
==========
F-73
<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT
AND PLAN OF ORGANIZATION
DATED OCTOBER 2, 1998
AMONG
TEI, INC.,
PINNACLE GLOBAL GROUP, INC. AND ITS MERGER SUBSIDIARIES
AND
HARRIS WEBB & GARRISON, INC.,
PINNACLE MANAGEMENT & TRUST COMPANY
AND
SPIRES FINANCIAL, L.P.
AND
THEIR RESPECTIVE DIRECT AND INDIRECT
PARTNERS AND SHAREHOLDERS
<PAGE>
AMENDED AND RESTATED AGREEMENT
AND PLAN OF ORGANIZATION
This Amended and Restated Agreement and Plan of Organization (this
"AGREEMENT") dated as of October 2, 1998, among TEI, Inc., a Texas corporation
("TEI"), Pinnacle Global Group, Inc., a Texas corporation and a newly formed,
wholly owned subsidiary of TEI ("PGG"), TEI Combination Corp., a Texas
corporation and a newly formed, wholly owned subsidiary of PGG (the "TEI MERGER
SUBSIDIARY"), HWG Combination Corp., a Texas corporation and a newly formed,
wholly owned subsidiary of PGG (the "HWG MERGER SUBSIDIARY"), PMT Combination
Corp., a Texas corporation and a newly formed, wholly owned subsidiary of PGG
(the "PMT MERGER SUBSIDIARY"), Spires G.P. Combination Corp., a Texas
corporation and a newly formed, wholly owned subsidiary of PGG (the "SPIRES GP
SUBSIDIARY"), and Spires L.P. Combination Corp., a Texas corporation and a newly
formed, wholly owned subsidiary of PGG (the "SPIRES LP SUBSIDIARY"), all of
which are collectively referred to in this Agreement as the "TEI PARTIES";
Harris Webb & Garrison, Inc., a Texas corporation ("HWG"), and the undersigned
shareholders of HWG (the "HWG SHAREHOLDERS") who collectively own, at the date
of this Agreement, all of HWG's issued and outstanding capital stock and who,
collectively with HWG, are referred to in this Agreement as the "HWG PARTIES";
Pinnacle Management & Trust Company, a state trust company chartered under the
laws of the State of Texas ("PMT"), and the undersigned shareholders of PMT (the
"PMT SHAREHOLDERS") who collectively own, at the date of this Agreement, all of
PMT's issued and outstanding capital stock and who, collectively with PMT, are
referred to in this Agreement as the "PMT PARTIES"; and Spires Financial, L.P.,
a Delaware limited partnership ("SPIRES"), the undersigned general and limited
partners of Spires (the "SPIRES PARTNERS") who, at the date of this Agreement,
own all of the general and limited partnership interest in Spires, the
undersigned shareholders (collectively, the "SPIRES GP SHAREHOLDERS") of Spires
Financial GP, Inc., a Texas corporation and the Managing General Partner of
Spires (the "SPIRES MANAGING GENERAL PARTNER"), and Capital Financial Partner,
Inc., a Delaware corporation and the Secondary General Partner of Spires (the
"SPIRES SECONDARY GENERAL PARTNER," and, together with the Spires Managing
General Partner, the "SPIRES GENERAL PARTNERS"), respectively, the undersigned
shareholders (collectively, the "SFP SHAREHOLDERS") of Spires Financial
Partners, Inc. ("SFP"), a Delaware corporation and the sole general partner of
Spires Financial Funding L.P. ("SFF"), a Delaware limited partnership which is a
Class A limited partner of Spires, and OVH, Inc. ("OVH"), a Texas corporation
and the sole limited partner of SFF, all of which are collectively referred to
in this Agreement as the "SPIRES PARTIES";
W I T N E S S E T H
WHEREAS, the parties to this Agreement (the "PARTIES") wish to carry out a
common and prearranged plan for the organization and initial capitalization of
PGG (the "PLAN OF ORGANIZATION"), and TEI has caused PGG to be formed for that
purpose; and
WHEREAS, certain of the Parties entered into an Agreement and Plan of
Organization dated as of August 18, 1998 (the "ORIGINAL AGREEMENT"); and
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<PAGE>
WHEREAS, by this Agreement, the Parties wish to amend and restate the
Original Agreement; and
WHEREAS, to accomplish the Plan of Organization, the Parties wish to
effect a business combination in which:
(i) the TEI Merger Subsidiary will merge into TEI in a merger (the
"TEI MERGER") to be consummated in accordance with the Texas Business
Corporation Act (the "TBCA") and a Plan of Merger in the form attached as
Annex A to this Agreement (the "TEI PLAN OF MERGER");
(ii) the HWG Merger Subsidiary will merge into HWG in a merger (the
"HWG MERGER") to be consummated in accordance with the TBCA and a Plan of
Merger in the form attached as Annex B to this Agreement (the "HWG PLAN OF
MERGER");
(iii) the PMT Merger Subsidiary will merge into PMT in a merger (the
"PMT MERGER") to be consummated in accordance with the Texas Trust Company
Act (the "TTCA"), the TBCA, to the extent it is incorporated into TTCA and
is applicable to the PMT Merger, and a Plan of Merger in the form attached
as Annex C to this Agreement (the "PMT PLAN OF MERGER");
(iv) the Spires GP Shareholders will contribute their respective
shares in the respective Spires General Partners to PGG, which will in
turn immediately thereafter contribute such shares to the Spires GP
Subsidiary, the limited partners of Spires (other than SFF) will
contribute their respective limited partnership interests in Spires to
PGG, which will in turn immediately thereafter contribute such limited
partnership interests in Spires to the Spires L.P. Subsidiary, the SFP
Shareholders will contribute to PGG their respective shares in SFP which
remain outstanding following a partial redemption by SFP to be effected in
connection with the Plan of Organization, following which PGG will in turn
immediately thereafter contribute such shares to the Spires LP Subsidiary,
and OVH will contribute to PGG its limited partnership interest in SFF,
which will in turn immediately thereafter contribute such limited
partnership interest in SFF to the Spires LP Subsidiary (collectively, the
"SPIRES TRANSACTIONS"); and
(v) the shareholders of TEI (the "TEI SHAREHOLDERS"), the HWG
Shareholders, the PMT Shareholders, the Spires GP Shareholders, the Spires
Partners (other than the Spires General Partners and SFF), the SFP
Shareholders and OVH, respectively, will receive, in exchange for their
shares or partnership interests to be transferred to PGG in the Mergers or
the Spires Transactions, shares of common stock of PGG; and
WHEREAS, the Parties intend that the TEI Merger, the HWG Merger, the PMT
Merger and the Spires Transactions will all be accomplished pursuant to the Plan
of Organization and will
A-2
<PAGE>
collectively qualify as a "TRANSFER" of the nature described in Section 351 of
the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS. In this Agreement:
"AFFILIATE" means a Person that directly, or indirectly through one
or more intermediaries, controls, is controlled by or is under common
control with another Person with the terms "control" and "controlled"
meaning for purposes of this definition, the power to direct the
management and policies of a Person, directly or indirectly, whether
through the ownership of voting securities or partnership or other
ownership interests, or by contract or otherwise; PROVIDED, HOWEVER, that
no Spires Passive Investor Party shall be deemed an "AFFILIATE" of Spires
for any purpose of this Agreement.
"ALTERNATIVE TRANSACTION" means any third-party proposal for a
merger, consolidation, acquisition, business combination, sale of all or a
substantial portion of assets, liquidation, recapitalization or other
reorganization involving TEI or any of its Subsidiaries, or any proposal
or offer for the acquisition in any manner of a substantial equity
interest in TEI or any of its Subsidiaries, other than the transactions
contemplated by this Agreement.
"BROKER-DEALER REGULATORY REQUIREMENTS" means all Laws and rules and
regulations of all self-regulatory organizations which regulate the
registration, licensing, reporting, control or activities of a broker or
dealer, as such terms are defined in Section 3(a) of the Exchange Act,
including the Exchange Act, the Securities Investor Protection Act, the
rules of the NASD, state securities Laws, and the rules and regulations of
state securities commissions.
"BUSINESS DAY" means a day other than Saturday, Sunday or any day on
which banks located in Houston, Texas are authorized or obligated to
close.
"CHARTER DOCUMENTS" means (i) in the case of any Party which is a
corporation, its articles, certificate or memorandum of incorporation or
association and bylaws or regulations, and each certificate or other
document setting forth the designation, amount and relative rights,
limitations and preferences of any class or series of the corporation's
capital stock, (ii) in the case of PMT, its articles of association and
bylaws, (iii) in the case of Spires, the Spires Partnership Agreement and
the certificate of limited partnership of Spires, and (iv) in the case of
SFF, its agreement and certificate of limited partnership.
A-3
<PAGE>
"CLOSING" has the meaning specified in Section 2.4.
"CLOSING DATE" means (i) the fifth Business Day immediately
following the earliest date upon or by which all conditions to the
respective obligations of the Parties set forth in Articles XII, XIII and
XIV shall have been satisfied or waived, or (ii) such other date as TEI
and the Combining Companies may agree.
"CODE" means the United States Internal Revenue Code of 1986, as
amended.
"COMBINING ENTITIES" means HWG, PMT and Spires, collectively.
"DAMAGES" mean all obligations, claims, liabilities, damages,
penalties, deficiencies, losses, investigations, proceedings, judgments,
fines, and reasonable costs and expenses (including reasonable costs and
expenses incurred in connection with the performance of obligations,
interest, bonding and court costs and attorneys', accountants',
engineers', consultants' and investigators' fees and disbursements) and
disbursements incurred in connection with any investigation or defense of
any of the foregoing.
"DETERMINATION DATE" has the meaning specified in Section 14.7.
"EFFECTIVE TIME" means the time and date when (i) the Mergers become
effective pursuant to the Plans of Merger and (ii) the Spires Transactions
are consummated.
"ENVIRONMENTAL CLAIM" means any claim by a Person alleging or
imposing actual or potential liability (including potential liability for
any investigatory cost, containment cost, control cost, prevention cost,
remediation cost, cleanup cost, governmental response cost, natural
resources damage, property damage, personal injury, or penalty) arising
out of, based on, resulting from or relating to (i) the presence, storage,
transport, disposal, use, discharge, release or threatened release of any
Hazardous Substance at any location, whether or not owned by the Person
against which the claim is made, or (ii) circumstances forming the basis
for any liability under, or any violation or alleged violation of, any
Environmental Law.
"ENVIRONMENTAL LAWS" means all applicable U.S. federal, foreign,
state, local and other Laws, including common Laws and administrative or
judicial interpretations of those Laws by any Governmental Entity,
relating to pollution or the protection of human health and safety from
the effects of pollution or the environment (which includes its ambient
air, surface water, ground water, land surface and subsurface strata),
including Laws relating to emissions, discharges, releases or threatened
releases of Hazardous Substances, or otherwise relating to the
manufacture, processing, distribution, use, existence, treatment, storage,
disposal, transport, recycling, reporting or handling of Hazardous
Substances, but not including zoning and land use Laws.
A-4
<PAGE>
"ENVIRONMENTAL PERMITS" means all permits, licenses, registrations,
certifications, exemptions, approvals and other authorizations of or by
any Governmental Entity required under any Environmental Law for TEI or
any Combining Entity, or any of their respective Subsidiaries, to conduct
its or their operations as presently conducted.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA AFFILIATE" means, with respect to any Person, any trade or
business, whether or not incorporated, which together with that Person
would be deemed a single employer within the meaning of Section 4001 of
ERISA or Section 414 of the Code.
"ESCROW AGENT" means the bank, trust company or other financial
institution to be jointly designated by TEI and the SFP Shareholder
Representative to serve as the escrow agent under the Escrow Agreement.
"ESCROW AGREEMENT" means the Escrow Agreement to be entered into at
the Closing among PGG, the SFP Shareholders, the SFP Shareholder
Representative (as agent and attorney-in-fact for the SFP Shareholders)
and the Escrow Agent, as contemplated in Section 2.4(ix).
"ESCROW FUNDS" means the Initial Escrow Deposit and all interest,
dividends or other income therefrom or proceeds thereof which are from
time to time held by the Escrow Agent under the Escrow Agreement.
"ESTIMATED SFP CLOSING DATE TAX LIABILITY" has the meaning specified
in Section 15.14.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated under that
Act.
"FINAL SFP RETURN DATE" means the date by which the final U.S.
federal income Tax Return of SFP for the SFP Short Tax Period is required
to be filed with the IRS, after taking into account any extension granted
by the IRS for the filing of such Tax Return.
"GAAP" means United States generally accepted accounting principles
consistently applied throughout the specified period and, if applicable,
the immediately preceding comparable period.
"GOVERNMENTAL ENTITY" means any U.S. federal, state, local or
foreign court, executive office, legislature, governmental agency or
ministry, commission, or administrative, regulatory or self-regulatory
authority or instrumentality.
A-5
<PAGE>
"HWG DISCLOSURE SCHEDULE" means the Disclosure Schedule signed for
identification purposes only by the President, Chief Executive Officer or
Chief Financial Officer of HWG, which the HWG Parties have delivered to,
and which has been reviewed and accepted by, the other Parties on or
before the date of this Agreement, and which contains information relevant
to the representations and warranties made by the HWG Parties in Article
IV.
"HWG MERGER" has the meaning specified in the preamble of this
Agreement.
"HWG PLAN OF MERGER" has the meaning specified in the preamble of
this Agreement.
"HWG SHAREHOLDERS' AGREEMENT" means the Shareholders' Agreement
dated October 1, 1997, together with all Addenda thereto, among HWG and
the HWG Shareholders.
"HAZARDOUS SUBSTANCES" means chemicals, pollutants, contaminants,
wastes (including ambient wastes, hazardous wastes and liquid industrial
wastes), or other substances (including toxic, deleterious or hazardous
substances), as defined, listed or regulated pursuant to Environmental
Laws, including asbestos or asbestos-containing materials, polychlorinated
biphenyls, pesticides and oils, and petroleum and petroleum products (as
those exemplary terms are defined in or regulated under the United States
National Oil and Hazardous Substances Pollution Contingency Plan, 40
C.F.R. ss.ss. 300.1 ET.
SEQ. and other Environmental Laws).
"INITIAL ESCROW DEPOSIT" has the meaning specified in Section 15.13.
"INVESTMENT ADVISERS ACT" means the Investment Advisers Act of 1940,
as amended, and the rules and regulations of the SEC promulgated
thereunder.
"INVESTMENT ADVISORY RELATED AGREEMENTS" means all agreements and
arrangements of the following types to which HWG is a party or by which it
is bound and which are currently actively in effect, as they may have been
amended, supplemented, waived or otherwise modified: (i) written
agreements and arrangements for the performance of investment advisory,
investment sub-advisory or investment management services with respect to
securities, real estate, commodities, currencies or any other asset class
for clients or on behalf of third parties; (ii) written agreements and
arrangements for the distribution of securities of any "investment
company" within the meaning of the Investment Company Act or funds
underlying variable annuities, variable life insurance to other similar
products or the maintenance of shareholder accounts for any of the
foregoing products or the marketing of investment advisory or investment
management services or the maintenance of accounts for such services;
(iii) written trust agreements, custody arrangements, transfer agent
agreements, fund administration agreements, and similar services
agreements with respect to any of the foregoing; and (iv) all other
written agreements and arrangements of a similar nature that are material
to HWG.
A-6
<PAGE>
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940,
as amended, and the rules and regulations of the SEC promulgated
thereunder
"IRS" means the United States Internal Revenue Service or any
successor U.S. federal agency.
"LATEST TEI BALANCE SHEET" has the meaning specified in Section 3.9.
"LAW" means a law, statute, ordinance, rule, code or regulation
enacted or promulgated, or order, directive, instruction or other legally
binding guideline or policy issued or rendered by, any Governmental
Entity.
"LIEN" means a lien, mortgage, deed of trust, deed to secure debt,
pledge, hypothecation, assignment, deposit arrangement, easement,
preference, priority, assessment, security interest, lease, sublease,
charge, claim, adverse claim, levy, interest of other Persons, or other
encumbrance of any kind.
"LOCK-UP AGREEMENTS" has the meaning specified in Section 15.8.
"MAILING DATE" has the meaning specified in Section 10.6.
"MATERIAL ADVERSE EFFECT" means (i) when used with reference to a
Combining Entity, SFF, or SFP, a material adverse effect on the financial
condition, business or results of operations of the Combining Entity, SFF,
or SFP, as the case may be, and (ii) when used with reference to TEI and
its Subsidiaries, a material adverse effect on the financial condition,
business or results of operations of TEI and its Subsidiaries taken as a
whole, without giving effect to the consummation of the Transactions.
"MERGERS" means the TEI Merger, the HWG Merger and the PMT Merger,
collectively.
"NASD" means the National Association of Securities Dealers, Inc.
"NON-TEI PARTIES"means the Parties other than the TEI Parties.
"ORIGINAL AGREEMENT" has the meaning specified in the preamble of
this Agreement.
"OUTSTANDING HWG OPTIONS" means the presently outstanding options
issued under HWG's employee stock option plan for the purchase of an
aggregate 2,070 shares of common stock of HWG at an exercise price of
$166.67 per share.
"OUTSTANDING PMT OPTIONS" means (i) the presently outstanding
"founders" warrants for the purchase of an aggregate 6,712 shares of
common stock of PMT at an exercise price
A-7
<PAGE>
of $25 per share and (ii) the presently outstanding options issued under
PMT's management stock option plan for the purchase of an aggregate 43,000
shares of common stock of PMT at an exercise price of $25 per share,
collectively.
"OVH" has the meaning specified in the preamble of this Agreement.
"PGG COMMON STOCK" means the Common Stock, $.01 par value per share,
of PGG.
"PMT ACCUMULATED ADJUSTMENT ACCOUNT" means the accumulated
adjustment account maintained by PMT under Section 1368(e) of the Code and
representing the undistributed earnings of PMT on which the PMT
Shareholders have paid U.S. federal income taxes.
"PMT DISCLOSURE SCHEDULE" means the Disclosure Schedule signed for
identification purposes only by the President, Chief Executive Officer or
Chief Financial Officer of PMT, which the PMT Parties have delivered to,
and which has been reviewed and accepted by, the other Parties on or
before the date of this Agreement, and which contains information relevant
to the representations and warranties made by the PMT Parties in Article
V.
"PMT MERGER" has the meaning specified in the preamble of this
Agreement.
"PMT PLAN OF MERGER" has the meaning specified in the preamble of
this Agreement.
"PERMITTED LIENS" means (i) those Liens with respect to assets of
TEI, any Subsidiary of TEI or any Combining Entity set forth in Section
3.12 of the TEI Disclosure Schedule, Section 4.11 of the HWG Disclosure
Schedule, Section 5.11 of the PMT Disclosure Schedule or Section 6.11 of
the Spires Disclosure Schedule, respectively, (ii) those Liens reflected
in the TEI SEC Filings, in the case of the TEI Parties and their assets or
properties, the HWG SEC Filings, in the case of HWG, or the Spires SEC
Filings, in the case of Spires, (iii) Liens for water and sewer charges
and current taxes not yet due and payable or being contested in good
faith, and (iv) other Liens (including mechanics', couriers', workers',
repairers', landlords', materialmen's, warehousemen's and other similar
Liens) arising in the ordinary course of business as would not in the
aggregate materially adversely affect the value of, or materially
adversely interfere with the use of, the property subject thereto.
"PERSON" means an individual, corporation, partnership, association,
joint stock company, limited liability company, Governmental Entity,
business trust, unincorporated organization, or other legal entity.
"PLAN OF ORGANIZATION" has the meaning specified in the preamble of
this Agreement.
"PLANS OF MERGER" means the TEI Plan of Merger, the HWG Plan of
Merger and the PMT Plan of Merger, collectively.
A-8
<PAGE>
"PROXY STATEMENT" means the proxy statement of TEI to be included in
the Registration Statement for the purpose of obtaining the approval of
the TEI Shareholders of this Agreement, the TEI Merger and the issuance of
the Transaction Shares to the Transferors upon consummation of the
Transactions other than the TEI Merger.
"RAP" means regulatory accounting practices consistent with GAAP
except as modified and supplemented by, and as applied to Texas
state-chartered trust companies under, all rules and regulations of the
Texas Department of Banking or the Texas Banking Commissioner under the
TTCA.
"REDEMPTION PRICE" has the meaning specified in Section 15.12.
"REGISTRATION STATEMENT" means the Registration Statement on Form
S-4 to be filed with the SEC for the purpose of registering the
Transaction Shares under the Securities Act.
"RELEASES" means the Releases required to be delivered to the
respective Combining Entities and the TEI Parties by the respective
Transferors, as provided in Section 13.9.
"SEC" means the Securities and Exchange Commission or any successor
agency.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"SFF" has the meaning specified in the preamble of this Agreement.
"SFF LIMITED PARTNERSHIP INTEREST" means the sole outstanding
limited partnership interest in SFF, which is owned and held by OVH.
"SFP" has the meaning specified in the preamble of this Agreement.
"SFP CONTRIBUTED SHARES" means the 35,235 SFP Shares which will
remain outstanding following the SFP Redemption.
"SFP CURRENT YEAR ESTIMATED TAX PAYMENTS" means all quarterly
estimated payments of U.S. federal income Taxes made by SFP before the
Closing Date in respect of SFP's 1998 U.S. federal income Tax liability.
"SFP REDEMPTION" means SFP's redemption of the SFP Redemption Shares
as contemplated in Section 15.12.
"SFP REDEMPTION SHARES" means the 38,265 SFP Shares which SFP will
purchase from the SFP Shareholders immediately before the Closing in
connection with the SFP Redemption.
A-9
<PAGE>
"SFP SHAREHOLDER REPRESENTATIVE" means Antonio Marziale.
"SFP SHAREHOLDERS" has the meaning specified in the preamble of this
Agreement.
"SFP SHARES" means all of the issued and outstanding shares of
capital stock of SFP.
"SFP SHORT TAX PERIOD" means the taxable period of SFP beginning on
January 1, 1998 and ending on the close of business on the Closing Date.
"SPECIAL MEETINGS" has the meaning specified in Section 11.7.
"SPIRES DISCLOSURE SCHEDULE" means the Disclosure Schedule signed
for identification purposes only by the President, Chief Executive Officer
or Chief Financial Officer of the Spires Managing General Partner, which
the Spires Parties have delivered to, and which has been reviewed and
accepted by, the other Parties on or before the date of this Agreement,
and which contains information relevant to the representations and
warranties made by the Spires Parties in Article VI.
"SPIRES GENERAL PARTNERS" has the meaning specified in the preamble
of this Agreement.
"SPIRES GP SHAREHOLDERS" has the meaning specified in the preamble
of this Agreement.
"SPIRES GP SHARES" means all of the issued and outstanding shares of
capital stock of the respective Spires General Partners.
"SPIRES LIMITED PARTNERS" means the Spires Partners other than the
Spires General Partners.
"SPIRES LIMITED PARTNERSHIP INTERESTS" means all of the outstanding
Class A and Class B limited partnership interests in Spires.
"SPIRES MANAGING GENERAL PARTNER" has the meaning specified in the
preamble of this Agreement.
"SPIRES PARTIES" has the meaning specified in the preamble of this
Agreement.
"SPIRES PARTNERSHIP AGREEMENT" means the Second Amended and Restated
Agreement of Limited Partnership of Spires, effective as of January 20,
1995, as amended.
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<PAGE>
"SPIRES PASSIVE INVESTOR PARTIES" means the Spires Secondary General
Partner, its stockholders, those Spires Limited Partners that are holders
of Class A limited partnership interests in Spires, the SFP Shareholders
and OVH.
"SPIRES SECONDARY GENERAL PARTNER" has the meaning specified in the
preamble of this Agreement.
"SPIRES TRANSACTIONS" has the meaning specified in the preamble of
this Agreement.
"SUBORDINATION AGREEMENTS" means any agreement between HWG or Spires
and any other Person by which such Person subordinates to the claims of
other creditors of HWG or Spires, as the case may be, the payment of
indebtedness of HWG or Spires which HWG or Spires excludes from the
calculation of its "aggregate indebtedness" as defined in SEC Rule
15c3-1(c).
"SUBSIDIARY" of a Party means an Affiliate of that Party more than
50% of the aggregate voting power (or any other voting equity interest in
the case of a Person that is not a corporation) of which is beneficially
owned by that Party directly or indirectly through one or more other
Persons.
"TAX" means any tax of any kind, however denominated, including any
interest, penalties or other additions to tax that may become payable in
respect thereof or in respect of a failure to comply with any requirement
relating to any Tax Return, imposed by any U.S. federal, foreign, state or
local Governmental Entity, including all income, gross income, gross
receipts, profits, goods and services, social security, old age security,
sales and use, ad valorem, excise, franchise, business license,
occupation, real property gains, payroll and employee withholding,
unemployment insurance, real and personal property, stamp, environmental,
transfer, workers' compensation, severance, alternative minimum, windfall,
and capital taxes, and other obligations of the same or a similar nature
to any of the foregoing.
"TAXING AUTHORITY" means any Governmental Entity responsible for the
imposition, assessment, enforcement or collection of any Tax.
"TAX RETURNS" means all Tax returns, declarations, reports,
estimates, information returns and statements required to be filed with
any Taxing Authority, or provided to any partner, shareholder, joint
venturer or member under U.S. federal, foreign, state, or local Laws
(including reports with respect to backup withholding and payments to
Persons other than Taxing Authorities), and annual tax returns on behalf
of employee benefit plans sponsored by TEI or a Combining Entity or any of
their respective ERISA Affiliates.
"TBCA" has the meaning specified in the preamble of this Agreement.
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"TEI COMMON STOCK" means the Common Stock, $.01 par value per share,
of TEI.
"TEI DISCLOSURE SCHEDULE" means the Disclosure Schedule signed for
identification purposes only by the respective Presidents, Chief Executive
Officers or Chief Financial Officers of the respective TEI Parties, which
the TEI Parties have delivered to, and which has been reviewed and
accepted by, the other Parties on or before the date of this Agreement,
and which contains information relevant to the representations and
warranties made by the TEI Parties in Article III.
"TEI FAIRNESS OPINION" means the opinion of J.P. Morgan Securities
Inc. referred to in Section 3.21.
"TEI SEC FILINGS" has the meaning specified in Section 3.8.
"TEI SHAREHOLDERS" has the meaning specified in the preamble of this
Agreement and includes all Persons who from time to time are holders of
TEI Common Stock.
"TEI SHAREHOLDERS' MEETING" means the meeting of the TEI
Shareholders referred to in Section 10.6, as it may be continued following
any temporary adjournment or adjournments thereof.
"TEI STOCK OPTIONS" means the presently outstanding employee and
director stock options granted under TEI's stock option plans for the
purchase of an aggregate 724,500 shares of TEI Common Stock.
"TEXAS BANKING COMMISSIONER" means the banking commissioner of Texas
or a Person designated by the banking commissioner of Texas and acting
under the direction and authority of the banking commissioner.
"TRANSACTION SHARES" means all shares of PGG Common Stock to be
issued by PGG to the Transferors and the TEI Shareholders upon
consummation of the Transactions as contemplated in Sections 2.2 and 2.3
and the Plans of Merger.
"TRANSACTION SUBSIDIARIES" means the TEI Merger Subsidiary, the HWG
Merger Subsidiary, the PMT Merger Subsidiary, the Spires GP Subsidiary and
the Spires LP Subsidiary, collectively.
"TRANSACTIONS" means the Mergers and the Spires Transactions,
collectively.
"TRANSFERORS" means the HWG Shareholders, the PMT Shareholders, the
Spires GP Shareholders, and the Spires Limited Partners (other than SFF),
the SFP Shareholders and OVH, collectively; PROVIDED, HOWEVER, that as
used in Section 7.8, the term "TRANSFERORS" shall not include the Spires
Passive Investor Parties.
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"TRANSFERRED PROPERTY" means the property owned by the Transferors
which is to be transferred to PGG pursuant to the Plan of Organization and
any one of the Plans of Merger or the Spires Transactions, which property
is (i) in the case of HWG, shares of capital stock of HWG, (ii) in the
case of PMT, shares of PMT, (iii) in the case of Spires and the Spires
Limited Partners (other than SFF), partnership interests in Spires, (iv)
in the case of the Spires GP Shareholders, the Spires GP Shares, (v) in
the case of the SFP Shareholders, the SFP Contributed Shares, and (vi) in
the case of OVH, the SFF Limited Partnership Interest.
"TTCA" has the meaning specified in the preamble of this Agreement.
"WALTRIP GROUP SHAREHOLDERS" means and includes the following TEI
Shareholders: R.L. Waltrip, T. Craig Benson, W. Blair Waltrip, Holly
Waltrip Benson, Robert L. Waltrip, Jr., the William Blair Waltrip Trust,
the William Blair Waltrip Children's Trusts of 1985, the Robert L.
Waltrip, Jr. Trust, the Robert L. Waltrip 1992 Trust #1, and the Waltrip
1987 Grandchildren's Trust; PROVIDED, HOWEVER, that nothing in this
Agreement shall be construed or interpreted as meaning that any
combination of such TEI Shareholders constitutes a "GROUP" within the
meaning of Section 13(d)(3) of the Exchange Act.
"WAGES" has the meaning given such term by Section 3401(a) of the
Code.
"WARN ACT" means the Worker Adjustment and Retraining Notification
Act of 1988.
1.2 INTERPRETATION. Capitalized terms defined in this Agreement are
equally applicable to both their singular and plural forms. References to a
designated "Article" or "Section" refer to an Article or Section of this
Agreement, unless otherwise specifically indicated. All pronouns in this
Agreement shall be construed as including both genders and the neuter. In this
Agreement, "including" is used only to indicate examples, without limitation to
the indicated examples, and without limiting any generality which precedes it.
1.3 KNOWLEDGE. When a representation and warranty in Article III is made
to the "KNOWLEDGE" of TEI or the TEI Parties, it means receipt of notice by or
actual knowledge of the Chairman of the Board or the President and Chief
Executive Officer of TEI or the President of Energy Recovery Resources, Inc., a
Subsidiary of TEI. When a representation and warranty in Article IV, V or VI is
made to the "knowledge" of any Combining Entity and Parties related to it, it
means receipt of notice by or actual notice of the Chairman or President of that
Combining Entity, or by any Party who is a shareholder or partner of that
Combining Entity at the date of this Agreement. Nothing in this Section 1.3, and
no other provision of this Agreement, shall be construed as imputing to any
Spires Passive Investor Party any knowledge of any other Spires Party.
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ARTICLE II
MERGERS
2.1 THE MERGERS. Simultaneously with the execution and delivery of this
Agreement, the Plans of Merger are being executed and delivered by the
respective parties thereto. Subject to satisfaction of the conditions set forth
in this Agreement and in the respective Plans of Merger, at the Effective Time:
(i) the TEI Merger Subsidiary shall be merged with and into TEI in
accordance with the TBCA and the TEI Plan of Merger;
(ii) the HWG Merger Subsidiary shall be merged with and into HWG in
accordance with the TBCA and the HWG Plan of Merger; and
(iii) the PMT Merger Subsidiary shall be merged with and into PMT in
accordance with the TTCA (and, to the extent incorporated therein and
applicable to Texas state-chartered trust companies, the TBCA) and the PMT
Plan of Merger.
2.2 MERGER CONSIDERATION. As more fully provided in, and subject to the
terms and provisions of, the respective Plans of Merger:
(i) each share of TEI Common Stock outstanding immediately before
the Effective Time will, as a result of the TEI Merger, be converted into
.25 of a share of PGG Common Stock; and
(ii) all shares of capital stock of each of HWG and PMT outstanding
immediately before the Effective Time, as a result of the respective
Mergers involving such Combining Entities, be converted into an aggregate
2,375,000 shares of PGG Common Stock, of which an aggregate 1,187,500
Transaction Shares will be issued by PGG in connection with each of the
HWG Merger and the PMT Merger, respectively.
2.3 SPIRES TRANSACTIONS. Subject to the conditions set forth in this
Agreement, at the Closing:
(i) the Spires GP Shareholders shall transfer, assign and contribute
to PGG their respective Spires GP Shares, and PGG will in turn immediately
transfer, assign and contribute such shares to the Spires GP Subsidiary;
(ii) the Spires Limited Partners (other than SFF) shall transfer,
assign and contribute to PGG their respective Spires Limited Partnership
Interests, and PGG shall in turn immediately transfer, assign and
contribute such partnership interests to the Spires LP Subsidiary;
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(iii) the SFP Shareholders shall transfer, assign and contribute to
PGG their respective SFP Contributed Shares, and PGG shall in turn
immediately transfer, assign and contribute such shares to the Spires LP
Subsidiary;
(iv) OVH shall transfer, assign and contribute to PGG the SFF
Limited Partnership Interest, and PGG shall in turn immediately transfer,
assign and contribute the SFF Limited Partnership Interest to the Spires
LP Subsidiary;
(v) PGG, in consideration for the transfer, assignment and
contribution of the Spires GP Shares, the Spires Limited Partnership
Interests (other than that held by SFF), the SFP Shares and the SFF
Limited Partnership Interest to PGG, shall issue and deliver (a) to the
Spires GP Shareholders who are the shareholders of the Spires Managing
General Partner, PRO RATA in accordance with the number of shares of the
Spires Managing General Partner held by them as set forth in Section 6.5
of the Spires Disclosure Schedule, an aggregate 11,875 shares of PGG
Common Stock, (b) to the Spires GP Shareholders who are the shareholders
of the Spires Secondary General Partner, PRO RATA in accordance with the
number of shares of the Spires Secondary General Partner held by them as
set forth in Section 6.5 of the Spires Disclosure Statement, an aggregate
1,188 shares of PGG Common Stock, (c) to the Spires Limited Partners
(other than SFF), PRO RATA in accordance with their respective Spires
Limited Partnership Interests as set forth in Section 6.5 of the Spires
Disclosure Schedule, an aggregate 878,749 shares of PGG Common Stock, (d)
to the SFP Shareholders, PRO RATA in accordance with their respective
holdings of the SFP Shares as set forth in Section 6.5 of the Spires
Disclosure Schedule, an aggregate 249,383 shares of PGG Common Stock, and
(e) to OVH, 46,305 shares of PGG Common Stock.
2.4 CLOSING AND EFFECTIVE TIME OF THE TRANSACTIONS. The closing of the
Mergers and the Spires Transactions (the "CLOSING") shall take place at the
offices of Porter & Hedges, L.L.P., 700 Louisiana Street, Houston, Texas, as
soon as practicable, but not later than five Business Days, after the earliest
date upon which each of the conditions to consummation of the Transactions set
forth in Articles XII, XIII and XIV, respectively, shall have been satisfied or
waived. As soon as practicable after the Closing, or in the case of the PMT
Merger, before the Closing as required by the TTCA, or in the case of the Spires
Transactions, at the Closing:
(i) TEI and the TEI Merger Subsidiary will cause Articles of Merger
incorporating the TEI Plan of Merger to be executed and filed with the
Secretary of State of Texas as required by the TBCA;
(ii) HWG and the HWG Merger Subsidiary will cause Articles of Merger
incorporating the HWG Plan of Merger to be executed and filed with the
Secretary of State of Texas as required by the TBCA;
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(iii) PMT and the PMT Merger Subsidiary will cause Articles of
Merger incorporating the PMT Plan of Merger to be executed and filed with
the Banking Commissioner as required by the TTCA and, to the extent
applicable, the TBCA;
(iv) the Spires GP Shareholders shall deliver to PGG the
certificates representing the Spires GP Shares, in each case duly endorsed
in blank or accompanied by duly executed stock powers authorizing transfer
thereof on the stock transfer records of the respective Spires General
Partners, against PGG's issuance and delivery to the Spires GP
Shareholders of the certificates representing the number of Transaction
Shares issuable to the Spires GP Shareholders under Section 2.3;
(v) each Spires Limited Partner (other than SFF) shall execute and
deliver to PGG a written assignment by which such Spires Limited Partner
shall assign, transfer and contribute to PGG all of such Spires Limited
Partner's limited partnership interest in Spires, against PGG's issuance
and delivery to such Spires Limited Partners of the certificates
representing the number of Transaction Shares issuable to the Spires
Limited Partners under Section 2.3;
(vi) the SFP Shareholders shall deliver to PGG the certificates
representing the SFP Contributed Shares, in each case duly endorsed in
blank or accompanied by duly executed stock powers authorizing transfer
thereof on the stock transfer records of SFP, against issuance and
delivery to the SFP Shareholders of the certificates representing the
number of Transaction Shares issuable to the SFP Shareholders under
Section 2.3;
(vii) OVH shall execute and deliver to PGG a written assignment by
which OVH shall assign, transfer and contribute to PGG the SFF Limited
Partnership Interest, against PGG's issuance and delivery to OVH of a
certificate or certificates representing the number of Transaction Shares
issuable to OVH under Section 2.3;
(viii)PGG shall immediately thereafter assign, transfer and deliver
(x) to the Spires GP Subsidiary, as a contribution to its capital, all of
the Spires GP Shares, and (y) to the Spires LP Subsidiary, as a
contribution to its capital, (a) all of the Spires Limited Partnership
Interests transferred to PGG by those Spires Limited Partnerships other
than SFF, (b) the SFF Limited Partnership Interest, and (c) the SFP
Contributed Shares; and
(ix) PGG, the SFP Shareholders and the SFP Shareholder
Representative (as agent and attorney-in-fact for the SFP Shareholders)
shall execute and deliver, and shall cause the Escrow Agent to execute and
deliver, an Escrow Agreement in substantially the form of Exhibit I
attached to this Agreement, and SFP shall deposit with the Escrow Agent
the Initial Escrow Deposit.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF
TEI PARTIES
The TEI Parties jointly and severally represent and warrant to all of the
other Parties that:
3.1 ORGANIZATION OF TEI PARTIES. Each TEI Party is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Texas. Each TEI Party has full authority and corporate power to conduct its
business as it is currently being conducted and, unless it will not survive the
Mergers, as to be conducted following consummation of the Transactions. Each TEI
Party is duly qualified to do business, and in good standing, in each
jurisdiction where the nature of its properties or business requires such
qualification. The TEI Parties have delivered to the respective Combining
Entities true, correct and complete copies of the Charter Documents of each TEI
Party.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each TEI Party has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement. The execution and delivery of this Agreement, the consummation
of the Transactions, and the issuance and delivery of the Transaction Shares
upon consummation of the Transactions, have been duly authorized by the
respective Boards of Directors of the TEI Parties, and except for the approval
by the TEI Shareholders of the TEI Merger and the issuance of the Transaction
Shares to the Transferors in connection with the HWG Merger, the PMT Merger and
the Spires Transactions, no other corporate proceedings on the part of any TEI
Party are necessary to authorize this Agreement, the issuance and delivery of
the Transaction Shares or the consummation of the Transactions. This Agreement
has been duly executed and delivered by each TEI Party. Assuming the valid
authorization, execution and delivery of this Agreement by each Non-TEI Party,
this Agreement is a valid and binding obligation of each TEI Party, enforceable
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, motorium or other Laws relating to or
affecting creditors' rights generally or by equitable principles.
3.3 NO VIOLATIONS. The execution, delivery and performance of this
Agreement by the respective TEI Parties, the issuance and delivery by PGG of the
Transaction Shares in connection with the Transactions, and the consummation of
the Transactions will not:
(i) constitute a breach or violation of or default under the Charter
Documents of any TEI Party or any of its Subsidiaries or, assuming the
obtainment of the consents and approvals described in clauses (i) and (ii)
of Section 3.4, any Law applicable to any TEI Party or any of its
Subsidiaries; or
(ii) except as accurately reflected in Section 3.3 of the TEI
Disclosure Schedule, violate or conflict with or result in a breach of, or
constitute a default (or an event which,
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with notice or lapse of time or both, would constitute a default) under or
result in the termination of, or accelerate the performance by, or result
in a right of termination under, or result in the creation of any Lien
upon the assets or properties of TEI or any of its Subsidiaries under, any
contract, indenture, loan document, license, permit, order, decree or
instrument to which any TEI or any of its Subsidiaries is a party or by
which any of them or their assets or properties are bound.
3.4 CONSENTS AND APPROVAL. No consent, order, approval, waiver,
authorization of, or registration, application, declaration or filing with, any
Person is required with respect to any TEI Party or any Subsidiary of TEI in
connection with the execution and delivery of this Agreement, the issuance of
the Transaction Shares or the consummation of the Transactions, except for:
(i) consents, authorizations, approvals, filings or exemptions in
connection with the applicable provisions of all Broker-Dealer Regulatory
Requirements insofar as they pertain to the HWG Merger or the Spires
Transactions;
(ii) the approvals of the Texas Banking Commissioner described in
Section 12.4 with respect to the PMT Merger;
(iii) the consents and approvals described on Schedule 3.4 of the
TEI Disclosure Schedule;
(iv) the approval by the TEI Shareholders, as contemplated in
Section 10.6, of the TEI Merger and the issuance of the Transaction Shares
to be issued to the Transferors; and
(v) other cases, considered individually and in the aggregate, in
which any failure to make such registration, application, declaration or
filing or to obtain any such consent, order, approval, waiver or other
authorization is not reasonably likely to have a Material Adverse Effect
on TEI and its Subsidiaries.
The affirmative vote of the holders of not less than a majority 66 2/3% of
the outstanding shares of TEI Common Stock entitled to vote on the TEI Merger
and the issuance of the Transaction Shares to the Transferors are the only votes
of the holders of TEI capital stock necessary to approve this Agreement and any
of the transactions it contemplates.
3.5 TEI CAPITALIZATION. The authorized capital stock of TEI consists of
(i) 100 million shares of TEI Common Stock and (ii) 10 million shares of
Preferred Stock, $.10 par value, of TEI ("TEI PREFERRED STOCK"). At August 17,
1998, 14,251,012 shares of TEI Common Stock, and no shares of TEI Preferred
Stock, were issued and outstanding, 724,500 shares of TEI Common Stock were
reserved for issuance upon exercise of the TEI Stock Options, and 955,225 shares
of TEI Common Stock were held by TEI as treasury shares. All of the issued and
outstanding shares of TEI Common Stock are duly and validly issued, fully paid
and nonassessable, and were issued free of preemptive rights, in compliance with
any rights of first refusal, and in compliance with all Laws.
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Except for the TEI Stock Options, no subscription, warrant, option, convertible
security, stock appreciation or other right (contingent or other) to purchase or
acquire any shares of any class of capital stock of TEI or any of its
Subsidiaries is authorized or outstanding, and there is not outstanding any
commitment of TEI or any of its Subsidiaries to issue any shares, warrants,
options or other such rights or to distribute to holders of any class of its
capital stock any evidences of indebtedness or assets. Neither TEI nor any of
its Subsidiaries has any contingent or other obligation to purchase, redeem or
otherwise acquire any shares of its capital stock or any interest therein or to
pay any dividend or make any other distribution in respect thereof. TEI is not a
party, and has no knowledge that any TEI Shareholders are parties, to any voting
agreement, voting trust or similar agreement or arrangement relating to TEI's
capital stock or any agreement or arrangement relating to or providing for
registration rights with respect to its capital stock.
3.6 PGG CAPITALIZATION. The authorized capital stock of PGG consists of
(i) 100 million shares of PGG Common Stock and (ii) 10 million shares of
Preferred Stock, $.10 par value, of PGG ("PGG PREFERRED STOCK"). At the date of
this Agreement, (i) 1,000 shares of PGG Common Stock are issued and outstanding,
(ii) no shares of PGG Preferred Stock are issued or outstanding and (iii) no
shares of capital stock of PGG are held by it as treasury shares. All of the
presently issued and outstanding shares of PGG Common Stock are duly and validly
issued, fully paid and nonassessable, are owned of record and beneficially by
TEI, and will be cancelled as a result of the TEI Merger. PGG is not a party to
any voting agreement, voting trust or similar agreement or arrangement relating
to its capital stock or any agreement or arrangement relating to or providing
for registration rights with respect to its capital stock. Upon their issuance
upon consummation of the Transactions, (i) the Transaction Shares will be duly
authorized, validly issued, fully paid and nonassessable and (ii) the
Transaction Shares issued in connection with the HWG Merger, the PMT Merger and
the Spires Transactions, respectively, will represent 16.6633% (or 49.99% in the
aggregate) of the total number of shares of PGG Common Stock outstanding at the
Closing Date or issuable upon the exercise of options substituted for the TEI
Stock Options and outstanding at the Closing Date (assuming no exercises of the
TEI Stock Options between the date of this Agreement and the Closing Date).
3.7 TEI SUBSIDIARIES. Each Subsidiary of TEI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has full authority and corporate power to
conduct its business as it is presently being conducted. Each Subsidiary of TEI
is duly qualified to do business, and in good standing, in each jurisdiction
where the nature of its properties or business requires such qualification. All
of the outstanding shares of capital stock of each Subsidiary of TEI are validly
issued, fully paid and nonassessable and are owned of record and beneficially by
TEI or a wholly owned direct or indirect Subsidiary of TEI, free and clear of
all Liens. There are no outstanding subscriptions, options, warrants, calls,
rights, convertible securities, obligations to make capital contributions or
advances, voting trust arrangements, shareholders' agreements or other
agreements, commitments or understandings relating to the issued and outstanding
capital stock of any Subsidiary of TEI. Each of PGG and the Transaction
Subsidiaries has been formed specifically for purposes of a Merger or a Spires
Transaction pursuant to the Plan of Organization, has no employees, has
conducted no operations, and has no obligations or liabilities
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of any kind except for expenses related to its organization and the
Transactions. Except as described in Section 3.7 of the TEI Disclosure Schedule,
TEI does not, directly or indirectly, have any equity investment in any
corporation, partnership or joint venture or other business entity.
3.8 SEC FILINGS. TEI has filed all forms, reports and documents required
to be filed by it with the SEC since January 1, 1995, and TEI has made available
to the Combining Entities true and complete copies of (i) TEI's Annual Reports
on Form 10-K for the years ended December 31, 1995, 1996 and 1997, and (ii) all
other reports (including Current Reports on Form 8-K), statements and
registration statements filed by TEI with the SEC since December 31, 1997
(collectively, the "TEI SEC FILINGS"). The TEI SEC Filings, including all
financial statements or schedules included in them, (i) comply in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and (ii) did not at the time of filing (or if amended, supplemented
or superseded by a later filing, on the date of the later filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
3.9 TEI FINANCIAL STATEMENTS. The consolidated balance sheets and
consolidated statements of operations, stockholders' equity and cash flows of
TEI and its Subsidiaries included in the TEI SEC Filings fairly present in all
material respects the consolidated financial position of TEI and its
Subsidiaries at their respective dates and the consolidated results of
operations of TEI and its Subsidiaries for the respective periods then ended, in
accordance with GAAP, subject, in the case of unaudited interim financial
statements, to year-end adjustments (which consist of normal recurring accruals)
and the absence of explanatory footnote disclosures required by GAAP. TEI's
unaudited consolidated balance sheet at June 30, 1998 included in the TEI SEC
Filings is herein called the "LATEST TEI BALANCE SHEET."
3.10 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.10 of
the TEI Disclosure Schedule, since June 30, 1998, TEI and its Subsidiaries have
conducted their businesses only in the ordinary course, consistent with past
practice, there has not occurred a Material Adverse Effect or any event that
could reasonably be expected to result in a Material Adverse Effect on TEI and
its Subsidiaries, and neither TEI nor any of its Subsidiaries has:
(i) amended its Charter Documents;
(ii) issued, sold or delivered, or agreed to issue, sell or deliver,
any capital stock, bonds or other securities, or granted or agreed to
grant any options, warrants or other rights calling for the issue, sale or
delivery of its securities;
(iii) borrowed or agreed to borrow any funds, or incurred or become
subject to any absolute or contingent obligation or liability, except
trade accounts payable and accrued operating expenses incurred in the
ordinary course of business since June 30, 1998;
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(iv) paid any obligation or liability other than current liabilities
reflected in the Latest TEI Balance Sheet and current liabilities incurred
since June 30, 1998, in the ordinary course of business;
(v) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind in respect of its
capital stock, or purchased, redeemed or otherwise acquired, or agreed to
purchase or redeem or otherwise acquire, directly or indirectly, any of
its outstanding capital stock;
(vi) sold, transferred or otherwise disposed of, or agreed to sell,
transfer or otherwise dispose of, any of its assets other than in the
ordinary course of business, properties or rights, or cancelled or
otherwise terminated, or agreed to cancel or otherwise terminate, any
debts or claims;
(vii) entered into or agreed to enter into any agreement or
arrangement granting any preferential right to purchase any of its assets,
properties or rights, or requiring any consent of any party to the
transfer or assignment of any such asset, property or right;
(viii) suffered any material casualty Damages, destruction or
physical losses, or waived or surrendered any rights of value which are
material;
(ix) made or permitted any amendment or termination of any material
contract, agreement or license to which it is a party or by which it or
any of its assets or properties are subject;
(x) made, directly or indirectly, any accrual or arrangement for or
payment of bonuses or special compensation of any kind or any severance or
termination pay to any present or former officer, director or employee of
TEI or any of its Subsidiaries;
(xi) except for normal merit raises in the case of individual
employees, granted any general pay increases to its employees or agents,
or adopted any new or made any increase in any existing profit sharing,
bonus, deferred compensation, savings, insurance, pension, retirement or
other employee benefit plan for or with any of its employees or agents;
(xii) experienced any labor strike or labor dispute or entered into
any collective bargaining agreement;
(xiii)incurred or become subject to any material claim or liability
for any Damages or alleged Damages for actual or alleged negligence or
other tort or breach of contract; or
(xiv) made or agreed to make any capital expenditures in excess of
$50,000 in the aggregate.
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3.11 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Latest TEI
Balance Sheet or in Section 3.11 of the TEI Disclosure Schedule, TEI and its
Subsidiaries have no liabilities or obligations, known or unknown, fixed or
contingent, other than (i) those arising since June 30, 1998 in the ordinary
course of business and consistent with past practice, (ii) liabilities and
obligations arising after the date of this Agreement without violation of
Section 10.2, or (iii) liabilities and obligations that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect on TEI and its Subsidiaries.
3.12 TEI PROPERTIES. TEI and its Subsidiaries have good and marketable
title to the properties and assets reflected in the Latest TEI Balance Sheet
(other than properties and assets disposed of in the ordinary course of business
since June 30, 1998, which, in the aggregate, are not material), free of all
Liens except Permitted Liens and Liens disclosed in Section 3.12 of the TEI
Disclosure Schedule.
3.13 TAXES AND TAX RETURNS. Except as described in Section 3.13 of the TEI
Disclosure Schedule:
(i) all Tax Returns required to be filed with any Taxing Authority
by or on behalf of TEI or any of its Subsidiaries have been duly filed on
a timely basis in accordance with all applicable Laws;
(ii) at the time of their filings all such Tax Returns were complete
and correct;
(iii) all Taxes required to be paid by TEI or any of its
Subsidiaries on or before the date of this Agreement have been paid, and
the reserves for Taxes reflected in the Latest TEI Balance Sheet are
adequate to cover all Taxes that had not been paid, but which under GAAP
were accruable, through the date of the Latest TEI Balance Sheet;
(iv) there are no Liens for Taxes upon any assets of TEI or any of
its Subsidiaries, except Liens for Taxes not yet due for current Tax
periods ending after the date of this Agreement;
(v) there are no outstanding deficiencies, assessments or written
proposals for the assessment of Taxes proposed, asserted or assessed
against TEI or any Subsidiary of TEI, and, to the knowledge of TEI, no
grounds exist for any such assessments of Taxes;
(vi) no extension of the statute of limitations on the assessment of
any Taxes has been granted to or applied for by TEI or any Subsidiary of
TEI;
(vii) neither TEI nor any of its Subsidiaries (x) is a party to any
Tax sharing or allocation agreement, (y) has been a member of a
consolidated, combined or unitary group (other than a group of which TEI
is or was the common parent corporation), for purposes of
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filing Tax Returns, and (z) has any liability for the Taxes of any Person
(other than TEI or its Subsidiaries) as a transferee or successor, by
contract or otherwise; and
(viii) none of the Tax Returns of TEI or any of its Subsidiaries are
the subject of an audit by a Governmental Entity.
3.14 LITIGATION. Except as disclosed in Section 3.14 of the TEI Disclosure
Schedule, there is no suit, action, investigation or proceeding pending or, to
the knowledge of the TEI Parties, threatened against TEI or any of its
Subsidiaries at Law or in equity before or by any Governmental Entity or before
any arbitrator or mediator of any kind, that is reasonably likely to have a
Material Adverse Effect on TEI and its Subsidiaries, and there is no judgment,
decree, injunction, rule or order of any Governmental Entity, arbitrator or
mediator to which TEI or any TEI Subsidiary is subject that is reasonably likely
to have a Material Adverse Effect on TEI and its Subsidiaries. No TEI Party has
knowledge of any grounds on which any suit, action, investigation or proceeding
of the nature referred to in this Section 3.14 might be commenced with any
reasonable likelihood of success.
3.15 ENVIRONMENTAL MATTERS. Except as reflected in Section 3.15 of the TEI
Disclosure Schedule, and except to the extent that the inaccuracy of any of the
following, individually or in the aggregate, is not reasonably likely to have a
Material Adverse Effect on TEI and its Subsidiaries:
(i) TEI and its Subsidiaries hold, and are in compliance with and
have been in compliance with, all Environmental Permits, and are otherwise
in compliance with, and have been in compliance with, all applicable
Environmental Laws, and there is no condition that is reasonably likely to
prevent or interfere with compliance by the TEI or any of its Subsidiaries
with any Environmental Law;
(ii) no modification, revocation, reissuance, alteration, transfer
or amendment of any Environmental Permit, or any review by, or approval
of, any Governmental Entity or other third party of any Environmental
Permit is required in connection with the execution or delivery of this
Agreement, the consummation of the Transactions or the operation of the
business of TEI or its Subsidiaries on and immediately following the
Closing Date;
(iii) neither TEI nor any of its Subsidiaries has received any
Environmental Claim, nor has any Environmental Claim been threatened
against TEI any of its Subsidiaries;
(iv) neither TEI nor any of its Subsidiaries has entered into,
agreed to or is subject to any judgment, decree, order or other directive
issued by, or consent arrangement with, any Governmental Entity under any
Environmental Law, including any such judgment, decree, order or other
directive relating to compliance with any Environmental Law or to the
investigation, cleanup, remediation or removal of Hazardous Substances;
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(v) there are no circumstances that could reasonably be expected to
(x) give rise to liability, and no Person has made any claim against any
TEI Party, under any agreements with any Person under which TEI or any of
its Subsidiaries would be required to defend, indemnify, hold harmless, or
otherwise be responsible for any violation by or other liability or
expense of such Person, or alleged violation by or other liability or
expense of such Person, arising under any Environmental Law or relating to
the possession, use, storage, transportation or disposition of Hazardous
Substances, or (y) prevent TEI or any of its Subsidiaries from complying
with its contractual obligations relating to any such matter;
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to a liability or obligation of TEI or any
of its Subsidiaries under any Environmental Law; and
(vii) no environmental report, survey, review or audit relating to
TEI, its Subsidiaries, their predecessors, or their past or present assets
or operations, has been prepared by or at the direction or for the benefit
of, or has been delivered to, TEI or any of its Subsidiaries.
3.16 EMPLOYEE BENEFIT PLANS. Section 3.16 of the TEI Disclosure Schedule
accurately sets forth each retirement, pension, bonus, stock purchase, profit
sharing, stock option, deferred compensation, severance or termination pay,
insurance, medical, hospital, dental, vision care, drug, sick leave, disability,
salary continuation, unemployment benefits, vacation, incentive or other
compensation plan or arrangement or other employee benefit which is maintained,
or otherwise contributed to or required to be contributed to, by TEI or any of
its Subsidiaries or any ERISA Affiliate of TEI or any its Subsidiaries for the
benefit of employees or former employees of TEI or any of its Subsidiaries (the
"TEI EMPLOYEE PLANS"). Each of TEI and its Subsidiaries has complied, and
currently is in compliance, both as to form and operation, in all material
respects, with the terms of each TEI Employee Plan and all applicable provisions
of ERISA and each other Law or regulation imposed or administered by any
Governmental Entity with respect to each of the TEI Employee Plans. Except as
set forth in Section 3.16 of the TEI Disclosure Schedule, neither TEI nor any of
its Subsidiaries has at any time maintained, adopted, established, contributed
to or been required to contribute to, otherwise participated in or been required
to participate in, or had any liability with respect to, any "employee benefit
plan" within the meaning of Section 3(3) of ERISA. All contributions to, and
payments from, each TEI Employee Plan which may have been required to be made in
accordance with the terms of any such TEI Employee Plan and, where applicable,
the Laws which govern such TEI Employee Plan, have been made in a timely manner.
All material reports, Tax Returns and similar documents with respect to any TEI
Employee Plan required to be filed with any Governmental Entity or distributed
to any TEI Employee Plan participant have been duly filed on a timely basis or
distributed. There are no pending investigations by any Governmental Entity
involving or relating to any TEI Employee Plan, no threatened or pending claims
(except for claims for benefits payable in the normal operation of the TEI
Employee Plans), suits or proceedings against any TEI Employee Plan or asserting
any rights or claims to benefits under any TEI Employee Plan which could give
rise to a liability of TEI or any Subsidiary of TEI, nor, to the knowledge of
the TEI
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Parties, are there any facts that could give rise to any such liability in the
event of any such investigation, claim, suit or proceeding. No notice has been
received by TEI or any of its Subsidiaries of any complaints or other
proceedings of any kind involving TEI or any of its Subsidiaries or any of the
employees of TEI or any of its Subsidiaries before any Governmental Entity
relating to any TEI Employee Plan. The assets of each TEI Employee Plan are at
least equal to the liabilities of such TEI Employee Plan.
3.17 MATERIAL CONTRACTS. Section 3.17 of the TEI Disclosure Schedule lists
all of the following written or oral contracts, agreements and commitments
(collectively, the "TEI CONTRACTS"):
(i) all employment, consulting or personal service agreements or
contracts with any present or former officer, director or employee of TEI
or any of its Subsidiaries who has an annual salary of $125,000 or more;
(ii) all loan or credit agreements, and all bonds, debentures,
promissory notes or other instruments of indebtedness, relating to the
borrowing of money by TEI or any of its Subsidiaries or any indebtedness
of TEI or any of its Subsidiaries for borrowed money;
(iii) all guaranty, suretyship or similar arrangements under which
TEI or a TEI Subsidiary guaranteed or is otherwise contingently or
secondarily liable for any indebtedness, liability or obligation of any
Person other than TEI or one of its Subsidiaries;
(iv) all leases or subleases of real property used in the conduct of
business of TEI or any TEI Subsidiary providing for annual rental payments
to be paid by or on behalf of TEI or any Subsidiary of TEI of more than
$100,000 in each case;
(v) all contracts or agreements committing TEI or any Subsidiary of
TEI to make a capital expenditure in excess of $50,000;
(vi) all contracts, agreements, agreements in principle, letters of
intent and memoranda of understanding which call for or contemplate the
future disposition (including restrictions on transfer and rights of first
offer or refusal) or acquisition of (or right to acquire) any interest in
any business enterprise, and all contracts, agreements and commitments
relating to the future disposition of a material portion of the assets and
properties of TEI or any Subsidiary of TEI other than in the ordinary
course of business;
(vii) all contracts, agreements with or commitments to any Person
containing any provision or covenant relating to the indemnification or
holding harmless by TEI or any Subsidiary of TEI which could result in a
liability to TEI or a Subsidiary of TEI in excess of $50,000 or more;
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(viii) all contracts, agreements and undertakings with any
Governmental Entity or other Person which contain any provision or
covenant limiting (x) the ability of TEI or any Subsidiary of TEI to
engage in any line of business, to compete with any Person, to do business
with any Person or in any location or to employ any Person or (y) the
ability of any Person to compete with or obtain products or services from
TEI or any Subsidiary of TEI; and
(ix) all outstanding proxies, powers of attorney or similar
delegations of authority granted by TEI or any Subsidiary of TEI to any
other Person.
The TEI Parties have delivered to each of the Combining Entities a true
and correct copy of each TEI Contract. Each TEI Contract is in full force and
effect and constitutes a legal, valid and binding obligation of TEI or the TEI
Subsidiary which is a party to it, and, to the knowledge of the TEI Parties, of
each other Person that is a party to it. Except as set forth in Section 3.17 of
the TEI Disclosure Schedule, neither TEI nor any of its Subsidiaries is, and to
the knowledge of the TEI Parties, no other party to any TEI Contract is, in
violation or breach of or in default under such TEI Contract, or with or without
notice or lapse of time or both, would be in violation or breach of or in
default under any such TEI Contract, except for any violation, breach or default
which, individually or in the aggregate, could not result in a Material Adverse
Effect on TEI and its Subsidiaries. Except as set forth in Section 3.17 of the
TEI Disclosure Schedule, no TEI Contract provides that any party thereto other
than TEI or a TEI Subsidiary may terminate such TEI Contract by reason of the
execution of this Agreement or the consummation of any of the Transactions.
3.18 GOVERNMENTAL LICENSES AND PERMITS; COMPLIANCE WITH LAWS. Except as
described in the TEI SEC Filings or Section 3.18 of the TEI Disclosure Schedule,
neither TEI nor any of its Subsidiaries has received notice of any revocation or
modification of any licence, certification, tariff, permit, registration,
exemption, approval or other authorization by any Governmental Entity, the
revocation or modification of which has had or is reasonably likely to have a
Material Adverse Effect on TEI and its Subsidiaries. The conduct of the business
of TEI and its Subsidiaries complies with all applicable Laws, except for
violations or failures to comply, if any, that, individually or aggregate, are
not reasonably likely to have a Material Adverse Effect on TEI and its
Subsidiaries.
3.19 LABOR MATTERS. To the knowledge of the TEI Parties, there is no labor
strike, dispute, slowdown, work stoppage, unresolved labor union grievance or
labor arbitration proceedings pending or threatened against TEI or any of its
Subsidiaries, and there are no current union organizing activities among
employees of TEI or its Subsidiaries. Since the enactment of the WARN Act,
neither TEI nor any of its Subsidiaries has effectuated (i) a "plant closing"
(as defined in the WARN Act) affecting any site of employment or one or more
facilities or operating units within any site of any employment facility or (ii)
a "mass layoff" (as defined in the WARN Act) affecting any site of employment or
facility of TEI or any of its Subsidiaries. Neither TEI nor any of its
Subsidiaries has been affected by any transaction or engaged in any layoffs or
employment terminations sufficient in number to trigger application of any
similar state or local Law. No
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employees of TEI or any of its Subsidiaries have suffered an "employment loss"
(as defined in the WARN Act) since December 31, 1995.
3.20 TRANSACTIONS WITH AFFILIATES: Except as specifically contemplated by
this Agreement or as set forth in the TEI SEC Filings or Section 3.20 of the TEI
Disclosure Statement, no Affiliate of TEI:
(i) is a party to or has any interest in any contract or agreement
with TEI or any of its Subsidiaries;
(ii) has any outstanding loan to or receivable from TEI or any of
its Subsidiaries; or
(iii) has any ownership interest (other than a stock ownership
interest representing less than 1% of the outstanding stock of any
corporation which is publicly traded), directly, indirectly, or
beneficially, in any supplier to TEI or any of its Subsidiaries.
3.21 OPINION OF FINANCIAL ADVISOR. On the date of this Agreement, TEI has
received the opinion of J.P. Morgan Securities Inc. to the effect that on the
basis of the assumptions referred to therein, the consideration to be received
by the TEI Shareholders in connection with the TEI Merger, and the consideration
to be paid to the Transferors in the other Transactions, taken as a whole, are
fair to the TEI Shareholders from a financial point of view.
3.22 LETTERS FROM SHAREHOLDERS. On or before the date of this Agreement,
TEI has received, and has delivered to the respective Combining Entities copies
of, letters from each of Donald R. Campbell, Samuel W. Rizzo and the Waltrip
Group Shareholders, expressing favorable views with respect to the Transactions
and agreeing to vote all shares of TEI Common Stock held by them for approval of
the TEI Merger and the issuance of the Transaction Shares to the Transferors in
connection with the HWG Merger, the PMT Merger and the Spires Transactions.
3.23 STATE TAKEOVER STATUTES. No state takeover statute or similar Law
applies or purports to apply to TEI in connection with this Agreement or the any
of the Transactions.
3.24 BROKERS. Except for J.P. Morgan Securities Inc., which has acted as
financial advisor to TEI in connection with the Transactions, no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with this Agreement or the Transactions based upon
arrangements made by or on behalf of any TEI Party.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF
HWG PARTIES
The HWG Parties represent and warrant to all of the other Parties that:
4.1 ORGANIZATION OF HWG. HWG is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Texas. HWG has full
authority and corporate power to conduct its business as it is currently being
conducted and as to be conducted following consummation of the HWG Merger. HWG
is duly qualified to do business, and in good standing, in each jurisdiction
where the nature of its properties or business requires such qualification. The
HWG Parties have delivered to the TEI Parties and the other Combining Entities
true, correct and complete copies of the Charter Documents of HWG.
4.2 AUTHORITY RELATIVE TO THIS AGREEMENT. HWG has the requisite corporate
power and authority to enter into and perform its obligations under this
Agreement. The execution and delivery of this Agreement and the consummation of
the HWG Merger have been duly authorized by the Board of Directors of HWG, and
except for the approval by the HWG Shareholders of the HWG Merger as
contemplated in Section 11.7, and no other corporate proceedings on the part of
HWG are necessary to authorize this Agreement or the consummation of the HWG
Merger. This Agreement has been duly executed and delivered by HWG. Assuming the
valid authorization, execution and delivery of this Agreement by each Party
other than the HWG Parties, this Agreement is a valid and binding obligations of
HWG, enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other Laws
relating to or affecting creditors' rights generally or by equitable principles.
4.3 NO VIOLATIONS. The execution, delivery and performance of this
Agreement by HWG and the consummation of the HWG Merger will not:
(i) constitute a breach or violation of or default under the Charter
Documents of HWG or, assuming the obtainment of the consents and approvals
described in clause (i) of Section 4.4, any Law applicable to HWG; or
(ii) except as accurately reflected in Section 4.3 of the HWG
Disclosure Schedule, violate or conflict with or result in a breach of, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under or result in the termination of,
or accelerate the performance by, or result in a right of termination
under, or result in the creation of any Lien upon the assets or properties
of HWG under, any contract, indenture, loan document, license, permit,
order, decree or instrument to which HWG is a party or by which HWG or its
assets or properties are bound.
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4.4 CONSENTS AND APPROVAL. No consent, order, approval, waiver,
authorization of, or registration, application, declaration or filing with, any
Person is required with respect to HWG in connection with the execution and
delivery of this Agreement or the consummation of the HWG Merger, except for:
(i) consents, authorizations, approvals, filings or exemptions in
connection with the applicable provisions of all Broker-Dealer Regulatory
Requirements insofar as they pertain to the HWG Merger;
(ii) the consents of the other parties to all Investment Advisory
Related Agreements as contemplated in Section 11.5;
(iii) the consents and approvals described on Schedule 4.4 of the
HWG Disclosure Schedule; and
(iv) other cases, considered individually and in the aggregate, in
which any failure to make such registration, application, declaration or
filing or to obtain any such consent, order, approval, waiver or other
authorization is not reasonably likely to have a Material Adverse Effect
on HWG.
4.5 HWG CAPITALIZATION. The authorized capital stock of HWG consists of
50,000 shares of common stock, $1 par value, of which, at the date of this
Agreement, 26,425 shares are issued and outstanding, and 336 shares are held by
HWG as treasury shares. All of the issued and outstanding shares of HWG Common
Stock are duly and validly issued, fully paid and nonassessable, and were issued
free of preemptive rights, in compliance with any rights of first refusal, and
in compliance with all Laws. Except for the Outstanding HWG Options, no
subscription, warrant, option, convertible security, stock appreciation or other
right (contingent or other) to purchase or acquire any shares of any class of
capital stock of HWG is authorized or outstanding and there is not outstanding
any commitment of HWG to issue any shares, warrants, options or other such
rights or to distribute to holders of any class of its capital stock any
evidences of indebtedness or assets. HWG has no contingent or other obligation
to purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof. Section 4.5 of the HWG Disclosure Schedule lists all HWG
Shareholders and the number of shares of HWG common stock owned by each of them,
in each case as of the date of this Agreement. Except as set forth in the HWG
Shareholders' Agreement or in Section 4.5 of the HWG Disclosure Statement, HWG
is not a party to any voting agreement, voting trust or similar agreement or
arrangement relating to its capital stock or any agreement or arrangement
relating to or providing for registration rights with respect to its capital
stock.
4.6 NO SUBSIDIARIES. HWG has no Subsidiaries. Except as described in
Section 4.6 of the HWG Disclosure Schedule, HWG does not, directly or
indirectly, have any equity investment in any corporation, partnership or joint
venture or other business entity.
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4.7 SEC FILINGS. HWG has filed all forms, reports and documents required
to be filed by it with the SEC since HWG's inception, and HWG has made available
to the TEI Parties and all other Combining Entities true and complete copies of
(i) HWG's Annual Reports filed with the SEC pursuant to SEC Rule 17a-5(d) for
the years ended December 31, 1995, 1996 and 1997, and (ii) all other reports,
statements and registration statements (including Form ADVs and Form BDs, and
all amendments thereto) filed by HWG with the SEC since the date of organization
of HWG (collectively, the "HWG SEC FILINGS"). The HWG SEC Filings, including all
financial statements or schedules included in them, (i) comply in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and (ii) did not at the time of filing (or if amended, supplemented
or superseded by a later filing, on the date of the later filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
4.8 HWG FINANCIAL STATEMENTS. The balance sheets and statements of
operations, stockholders' equity and cash flows of HWG included in the HWG SEC
Filings fairly present in all material respects the financial position of HWG at
their respective dates and the results of operations of HWG for the respective
periods then ended, in accordance with GAAP, subject, in the case of unaudited
interim financial statements, to year-end adjustments (which consist of normal
recurring accruals) and the absence of explanatory footnote disclosures required
by GAAP. HWG's unaudited consolidated balance sheet at June 30, 1998 included in
the HWG SEC Filings is herein called the "LATEST HWG BALANCE SHEET."
4.9 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 4.9 of the
HWG Disclosure Schedule, since June 30, 1998, HWG has conducted its business
only in the ordinary course, consistent with past practice, there has not
occurred a Material Adverse Effect or any event that could reasonably be
expected to result in a Material Adverse Effect on HWG, and HWG has not:
(i) amended its Charter Documents;
(ii) issued, sold or delivered, or agreed to issue, sell or deliver,
any capital stock, bonds or other securities, or granted or agreed to
grant any options, warrants or other rights calling for the issue, sale or
delivery of its securities;
(iii) borrowed or agreed to borrow any funds, or incurred or become
subject to any absolute or contingent obligation or liability, except
trade accounts payable and accrued operating expenses incurred in the
ordinary course of business since June 30, 1998;
(iv) paid any obligation or liability other than current liabilities
reflected in the Latest HWG Balance Sheet and current liabilities incurred
since June 30, 1998, in the ordinary course of business;
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(v) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind in respect of its
capital stock, or purchased, redeemed or otherwise acquired, or agreed to
purchase or redeem or otherwise acquire, directly or indirectly, any of
its outstanding capital stock;
(vi) sold, transferred or otherwise disposed of, or agreed to sell,
transfer or otherwise dispose of, any of its assets other than in the
ordinary course of business, properties or rights, or cancelled or
otherwise terminated, or agreed to cancel or otherwise terminate, any
debts or claims;
(vii) entered into or agreed to enter into any agreement or
arrangement granting any preferential right to purchase any of its assets,
properties or rights, or requiring any consent of any party to the
transfer or assignment of any such asset, property or right;
(viii) suffered any material casualty Damages, destruction or
physical losses, or waived or surrendered any rights of value which are
material;
(ix) made or permitted any amendment or termination of any material
contract, agreement or license to which it is a party or by which it or
any of its assets or properties are subject;
(x) made, directly or indirectly, any accrual or arrangement for or
payment of bonuses or special compensation of any kind or any severance or
termination pay to any present or former officer, director or employee of
HWG;
(xi) except for normal merit raises in the case of individual
employees, granted any general pay increases to its employees or agents,
or adopted any new or made any increase in any existing profit sharing,
bonus, deferred compensation, savings, insurance, pension, retirement or
other employee benefit plan for or with any of its employees or agents;
(xii) experienced any labor strike or labor dispute or entered into
any collective bargaining agreement;
(xiii)incurred or become subject to any material claim or liability
for any Damages or alleged Damages for actual or alleged negligence or
other tort or breach of contract; or
(xiv) made or agreed to make any capital expenditures in excess of
$50,000 in the aggregate.
4.10 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Latest HWG
Balance Sheet or in Section 4.10 of the HWG Disclosure Schedule, HWG has no
liabilities or obligations, known or unknown, fixed or contingent, other than
(i) those arising since June 30, 1998 in the ordinary course of business and
consistent with past practice, (ii) liabilities and obligations arising after
the
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date of this Agreement without violation of Section 10.2, or (iii) liabilities
and obligations that, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect on HWG.
4.11 HWG PROPERTIES. HWG has good and marketable title to the properties
and assets reflected in the Latest HWG Balance Sheet (other than properties and
assets disposed of in the ordinary course of business since June 30, 1998,
which, in the aggregate, are not material), free of all Liens except Permitted
Liens and Liens disclosed in Section 4.11 of the HWG Disclosure Schedule.
4.12 TAXES AND TAX RETURNS. Except as described in Section 4.12 of the HWG
Disclosure Schedule:
(i) all Tax Returns required to be filed with any Taxing Authority
by or on behalf of HWG have been duly filed on a timely basis in
accordance with all applicable Laws;
(ii) at the time of their filings all such Tax Returns were complete
and correct;
(iii) all Taxes required to be paid by HWG on or before the date of
this Agreement have been paid, and the reserves for Taxes reflected in the
Latest HWG Balance Sheet are adequate to cover all Taxes that have not
been paid, but which under GAAP were accruable, through the date of the
Latest HWG Balance Sheet;
(iv) there are no Liens for Taxes upon any assets of HWG, except
Liens for Taxes not yet due for current Tax periods ending after the date
of this Agreement;
(v) there are no outstanding deficiencies, assessments or written
proposals for the assessment of Taxes proposed, asserted or assessed
against HWG, and, to the knowledge of the HWG Parties, no grounds exist
for any such assessment of Taxes;
(vi) at all times from its inception through May 31, 1997, there was
in effect an election with the IRS for HWG to be treated as a Subchapter S
corporation within the meaning of Section 1361 of the Code;
(vii) at May 31, 1997, HWG owned no assets the disposition of which
would cause HWG to have a net recognized built-in gain within the meaning
of Section 1374 of the Code;
(viii)through May 31, 1997, HWG had no item of income that had not
been taken into account by HWG on or before that date and that would be
treated as recognized built-in gain under Section 1374(d) of the Code;
(ix) no extension of the statute of limitations on the assessment of
any Taxes has been granted to or applied for by HWG;
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(x) HWG (x) is not a party to any Tax sharing or allocation
agreement, (y) has not been a member of a consolidated, combined or
unitary group for purposes of filing Tax Returns, and (z) has no liability
for the Taxes of any other Person as a transferee or successor, by
contract or otherwise; and
(xi) none of the Tax Returns of HWG are the subject of an audit by a
Governmental Entity.
4.13 LITIGATION. Except as disclosed in Section 4.13 of the HWG Disclosure
Schedule, there is no suit, action, investigation or proceeding pending or, to
the knowledge of the HWG Parties, threatened against HWG at Law or in equity
before or by any Governmental Entity or before any arbitrator or mediator of any
kind, that is reasonably likely to have a Material Adverse Effect on HWG, and
there is no judgment, decree, injunction, rule or order of any Governmental
Entity, arbitrator or mediator to which HWG is subject that is reasonably likely
to have a Material Adverse Effect on HWG. No HWG Party has knowledge of any
grounds on which any suit, action, investigation or proceeding of the nature
referred to in this Section 4.13 might be commenced with any reasonable
likelihood of success.
4.14 ENVIRONMENTAL MATTERS. Except as described in Section 4.14 of the HWG
Disclosure Schedule, and except to the extent that the inaccuracy of any of the
following, individually or in the aggregate, is not reasonably likely to have a
Material Adverse Effect on HWG:
(i) HWG holds, and is in compliance with and has been in compliance
with, all Environmental Permits, and is otherwise in compliance and has
been in compliance with, all applicable Environmental Laws, and there is
no condition that is reasonably likely to prevent or interfere with
compliance by HWG with any Environmental Law;
(ii) no modification, revocation, reissuance, alteration, transfer
or amendment of any Environmental Permit, or any review by, or approval
of, any Governmental Entity or other third party of any Environmental
Permit is required in connection with the execution or delivery of this
Agreement, the consummation of the HWG Merger or the operation of the
business of HWG on the Closing Date;
(iii) HWG has not received any Environmental Claim, nor has any
Environmental Claim been threatened against HWG;
(iv) HWG has not entered into or agreed to, and is not subject to,
any judgment, decree, order or other directive issued by, or consent
arrangement with, any Governmental Entity under any Environmental Law,
including any such judgment, decree, order or other directive relating to
compliance with any Environmental Law or to the investigation, cleanup,
remediation or removal of Hazardous Substances;
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(v) there are no circumstances that could reasonably be expected to
(x) give rise to liability under any agreements with any Person under
which HWG would be required to defend, indemnify, hold harmless, or
otherwise be responsible for any violation by or other liability or
expense of such Person, or alleged violation by or other liability or
expense of such Person, arising under any Environmental Law, or (y)
prevent HWG from complying with its contractual obligations relating to
any such matter;
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to liability or obligation of HWG under any
Environmental Law; and
(vii) no environmental report, survey, review or audit relating to
HWG, its predecessors, or its past or present assets or operations has
been prepared by or at the direction or for benefit of, or has been
delivered to, HWG.
4.15 EMPLOYEE BENEFIT PLANS. Section 4.15 of the HWG Disclosure Schedule
accurately sets forth each retirement, pension, bonus, stock purchase, profit
sharing, stock option, deferred compensation, severance or termination pay,
insurance, medical, hospital, dental, vision care, drug, sick leave, disability,
salary continuation, unemployment benefits, vacation, incentive or other
compensation plan or arrangement or other employee benefit which is maintained,
or otherwise contributed to or required to be contributed to, by HWG or any
ERISA Affiliate of HWG for the benefit of employees or former employees of HWG
(the "HWG EMPLOYEE PLANS"). HWG has complied, and currently is in compliance,
both as to form and operation, in all material respects, with the terms of each
HWG Employee Plan and all applicable provisions of ERISA and each other Law or
regulation imposed or administered by any Governmental Entity with respect to
each of the HWG Employee Plans. Except as set forth in Section 4.15 of the HWG
Disclosure Schedule, HWG has not at any time maintained, adopted, established,
contributed to or been required to contribute to, otherwise participated in or
been required to participate in, or had any liability with respect to, any
"employee benefit plan" within the meaning of Section 3(3) of ERISA. All
contributions to, and payments from, each HWG Employee Plan which may have been
required to be made in accordance with the terms of any such HWG Employee Plan
and, where applicable, the Laws which govern such HWG Employee Plan, have been
made in a timely manner. All material reports, Tax Returns and similar documents
with respect to any HWG Employee Plan required to be filed with any Governmental
Entity or distributed to any HWG Employee Plan participant have been duly filed
on a timely basis or distributed. There are no pending investigations by any
Governmental Entity involving or relating to a HWG Employee Plan, no threatened
or pending claims (except for claims for benefits payable in the normal
operation of the HWG Employee Plans), suits or proceedings against any HWG
Employee Plan or asserting any rights or claims to benefits under any HWG
Employee Plan which could give rise to a liability of HWG, nor, to the knowledge
of the HWG Parties, are there any facts that could give rise to any liability of
HWG in the event of any such investigation, claim, suit or proceeding. No notice
has been received by HWG of any complaints or other proceedings of any kind
involving HWG or any of the employees of any of HWG before any Governmental
Entity relating to any HWG Employee Plan. The assets of each HWG Employee Plan
are at least equal to the liabilities of such HWG Employee Plan.
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4.16 MATERIAL CONTRACTS. Section 4.16 of the HWG Disclosure Schedule lists
all of the following written or oral contracts, agreements and commitments
(collectively, the "HWG CONTRACTS"):
(i) all employment, consulting or personal service agreements or
contracts with any present or former officer, director or employee of HWG
who has an annual salary of $125,000 or more;
(ii) all loan or credit agreements, and all bonds, debentures,
promissory notes or other instruments of indebtedness, relating to the
borrowing of money by HWG or any indebtedness of HWG for borrowed money;
(iii) all guaranty, suretyship or similar arrangements under which
HWG has guaranteed or is otherwise contingently or secondarily liable for
any indebtedness, liability or obligation of any Person;
(iv) all leases or subleases of real property used in the conduct of
business of HWG providing for annual rental payments to be paid by or on
behalf of HWG of more than $50,000 in each case;
(v) all contracts or agreements committing HWG to make a capital
expenditure in excess of $50,000;
(vi) all contracts between HWG and each broker or dealer which
clears transactions for HWG or to which HWG transmits customer funds or
securities in connection with transactions in which HWG acts as an
introducing broker or dealer;
(vii) all Subordination Agreements pertaining to indebtedness of
HWG;
(viii) all Investment Advisory Related Agreements;
(ix) all contracts, agreements, agreements in principle, letters of
intent and memoranda of understanding which call for or contemplate the
future disposition (including restrictions on transfer and rights of first
offer or refusal) or acquisition of (or right to acquire) any interest in
any business enterprise, and all contracts, agreements and commitments
relating to the future disposition of a material portion of the assets and
properties of HWG other than in the ordinary course of business;
(x) all contracts, agreements with or commitments to any Person
containing any provision or covenant relating to the indemnification or
holding harmless by HWG which could result in a liability to HWG in excess
of $25,000 or more;
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(xi) all contracts, agreements and undertakings with any
Governmental Entity or other Person which contain any provision or
covenant limiting (x) the ability of HWG to engage on any line of
business, to compete with any Person, to do business with any Person or in
any location or to employ any Person or (y) the ability of any Person to
compete with or obtain products or services from HWG; and
(xii) all outstanding proxies, powers of attorney or similar
delegations of authority granted by HWG to any other Person.
The HWG Parties have delivered to the TEI Parties and each of the other
Combining Entities a true and correct copy of each HWG Contract. Each HWG
Contract is in full force and effect and constitutes a legal, valid and binding
obligation of HWG, and, to the knowledge of the HWG Parties, of each other
Person that is a party to it. Except as set forth in Section 4.16 of the HWG
Disclosure Schedule, HWG is not, and to the knowledge of the HWG Parties, no
other party to any HWG Contract is, in violation or breach of or in default
under such HWG Contract, or with or without notice or lapse of time or both,
would be in violation or breach of or in default under any such HWG Contract,
except for any violation, breach or default which, individually or in the
aggregate, could not result in a Material Adverse Effect on HWG. Except as set
forth in Section 4.16 of the HWG Disclosure Schedule, no HWG Contract provides
that any party thereto other than HWG may terminate such HWG Contract by reason
of the execution of this Agreement or the consummation of the HWG Merger.
4.17 GOVERNMENTAL LICENSES AND PERMITS; COMPLIANCE WITH LAWS. Except as
described in the HWG SEC Filings or Section 4.17 of the HWG Disclosure Schedule,
HWG has not received notice of any revocation or modification of any licence,
certification, tariff, permit, registration, exemption, approval or other
authorization by any Governmental Entity, the revocation or modification of
which has had or is reasonably likely to have a Material Adverse Effect on HWG.
The conduct of the business of HWG complies with all applicable Laws, except for
violations or failures to comply, if any, that, individually or aggregate, are
not reasonably likely to have a Material Adverse Effect on HWG.
4.18 BROKER-DEALER MATTERS. Except as set forth in Section 4.18 of the HWG
Disclosure Schedule, and except to the extent that any inaccuracy in the
following representations and warranties is not reasonably likely to result in a
Material Adverse Effect:
(i) HWG is registered as a broker-dealer with the SEC and under all
applicable state Laws which require it to be so registered, and such
registrations are in full force and effect;
(ii) each Affiliate of HWG, and each officer, employee, consultant,
agent or independent contractor of HWG or any such Affiliate, who is
required by reason of the nature of his employment by HWG or such
Affiliate to be registered as a broker-dealer, broker-dealer agent,
registered representative or sales person with the SEC or the securities
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commission of any state or any self-regulatory body or other Governmental
Entity, is duly registered or appointed as such, and such registration or
appointment is in full force and effect;
(iii) neither HWG nor, to the knowledge of the HWG Parties, any
Affiliate or "associated person" (within the meaning of the Exchange Act)
of HWG, is ineligible pursuant to Section 15(b) of the Exchange Act to
serve as a broker-dealer or as an associated person to a registered
broker-dealer;
(iv) HWG is a member organization in good standing of the NASD, the
Securities Investor Protection Corporation, and such other organizations
in which its membership is required in order to conduct its business as
now conducted;
(v) HWG is, and has been since its inception, in compliance with all
Broker-Dealer Regulatory Requirements relating to its maintenance of
minimum net capital and its compliance with a maximum
indebtedness-to-net-capital ratio under SEC Rule 15c3-1, its maintenance
of reserves under SEC Rule 15c3-1, the filing of quarterly and annual
reports under Section 17 of the Exchange Act and Rule 17a-5 thereunder,
and all other Broker-Dealer Regulatory Requirements;
(vi) in connection with its broker-dealer activities, HWG meets, and
has met since its inception, all requirements specified in SEC Rule
15c3-3(k)(2) for exemption from all possession, control and reserve
requirements under SEC Rule 15c3-; and
(vii) all Subordination Agreements pertaining to indebtedness of HWG
comply with all requirements of Appendix D to SEC Rule 15c3-1.
4.19 INVESTMENT ADVISER MATTERS. HWG is registered an investment adviser
with the SEC and under all applicable state Laws which require it to be so
registered, and such registrations are in full force and effect. Each Affiliate
of HWG, and each officer, employee, consultant, agent or independent contractor
of HWG or any such Affiliate, who is required by reason of the nature of his
employment by HWG or such Affiliate to be registered as an investment adviser or
investment adviser representative with the SEC or the securities commission of
any state or any self-regulatory body or other Governmental Entity, is duly
registered or appointed as such, and such registration or appointment is in full
force and effect. Neither HWG, nor to the knowledge of the HWG Parties, any
Affiliate or "associated person" (within the meaning of the Investment Advisers
Act) of HWG, is ineligible pursuant to Section 203(e) of the Investment Advisers
Act to serve as an investment adviser or as an associated person to a registered
investment adviser.
4.20 NO INVESTMENT COMPANY. HWG is not, and may not be deemed to be, an
investment company under the Investment Company Act. HWG does not have any
Investment Advisory Related Agreements with, and does not provide investment
advisory services to, any investment company within the meaning of the
Investment Company Act.
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4.21 LABOR MATTERS. To the knowledge of the HWG Parties, there is no labor
strike, dispute, slowdown, work stoppage, unresolved labor union grievance or
labor arbitration proceedings pending or threatened against HWG, and no current
union organizing activities among employees of HWG.
4.22 TRANSACTIONS WITH AFFILIATES: Except as specifically contemplated by
this Agreement or as set forth in Section 4.22 of the HWG Disclosure Statement,
no Affiliate of HWG:
(i) is a party to or has any interest in any contract or agreement
with HWG;
(ii) has any outstanding loan to or receivable from HWG; or
(iii) has any ownership interest (other than a stock ownership
interest representing less than 1% of the outstanding stock of any
corporation which is publicly traded), directly, indirectly, or
beneficially, in any supplier to HWG.
4.23 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with this Agreement
or any of the Transactions based upon arrangements made by or on behalf of any
HWG Party.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF
PMT PARTIES
The PMT Parties represent and warrant to all of the other Parties that:
5.1 ORGANIZATION OF PMT. PMT is a state trust company within the meaning
of, and chartered under, the TTCA, and is duly organized, validly existing and
in good standing under the Laws of the State of Texas. PMT has full authority
and trust company power to conduct its business as it is currently being
conducted and as to be conducted following consummation of the PMT Merger. PMT
is duly qualified to do business, and in good standing, in each jurisdiction
where the nature of its properties or business requires such qualification. The
PMT Parties have delivered to the TEI Parties and the other Combining Entities
true, correct and complete copies of the Charter Documents of PMT.
5.2 AUTHORITY RELATIVE TO THIS AGREEMENT. PMT has the requisite trust
company power and authority to enter into and perform its obligations under this
Agreement. The execution and delivery of this Agreement and the consummation of
the PMT Merger have been duly authorized by the Board of Directors of PMT, and
except for the approval by the PMT Shareholders of the PMT Merger as
contemplated in Section 11.7, and no other trust company proceedings on the part
of any
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PMT Party are necessary to authorize this Agreement or the consummation of the
PMT Merger. This Agreement has been duly executed and delivered by PMT. Assuming
the valid authorization, execution and delivery of this Agreement by each Party
other than the PMT Parties, this Agreement is a valid and binding obligation of
PMT, enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other Law
relating to or affecting creditors' rights generally or by equitable principles.
5.3 NO VIOLATIONS. The execution, delivery and performance of this
Agreement by PMT, and the consummation of the PMT Merger, will not:
(i) constitute a breach or violation of or default under the Charter
Documents of PMT or, assuming the obtainment of the approvals of the Texas
Banking Commissioner as described in clause (i) of Section 5.4, any Law
applicable to PMT; or
(ii) except as accurately reflected in Section 5.4 of the PMT
Disclosure Schedule, violate or conflict with or result in a breach of, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under or result in the termination of,
or accelerate the performance by, or result in a right of termination
under, or result in the creation of any Lien upon the assets or properties
of PMT under, any contract, indenture, loan document, license, permit,
order, decree or instrument to which PMT is a party or by which it or its
assets or properties are bound.
5.4 CONSENTS AND APPROVAL. No consent, order, approval, waiver,
authorization of, or registration, application, declaration or filing with, any
Person is required with respect to PMT in connection with the execution and
delivery of this Agreement or the consummation of the PMT Merger, except for:
(i) the approval of the PMT Merger by the Texas Banking Commissioner
under Sections 3.301 through 3.303 of the TTCA, and the approval by the
Texas Banking Commissioner, under Sections 4.001 through 4.006 of the
TTCA, of the acquisition of control of PMT by PGG upon consummation of the
PMT Merger;
(ii) the consents and approvals described on Schedule 5.4 of the PMT
Disclosure Schedule; and
(iii) other cases, considered individually and in the aggregate, in
which any failure to make such registration, application, declaration or
filing or to obtain any such consent, order, approval, waiver or other
authorization is not reasonably likely to have a Material Adverse Effect
on PMT.
5.5 PMT CAPITALIZATION. The authorized capital stock of PMT consists of
(i) 1,000,000 shares of common stock, $1 par value per share, of which, at the
date of this Agreement, 152,551 shares are issued and outstanding, and (ii)
1,000,000 shares of Preferred Stock, $.01 par value per
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share, none of which are issued or outstanding. No shares of PMT capital stock
are held by PMT as treasury shares. All of the issued and outstanding shares of
PMT common stock are duly and validly issued, fully paid and nonassessable, and
were issued free of preemptive rights, in compliance with any rights of first
refusal, and in compliance with all Laws. Except for the Outstanding PMT
Options, no subscription, warrant, option, convertible security, stock
appreciation or other right (contingent or other) to purchase or acquire any
shares of any class of capital stock of PMT is authorized or outstanding and
there is not outstanding any commitment of PMT to issue any shares, warrants,
options or other such rights or to distribute to holders of any class of its
capital stock any evidences of indebtedness or assets. PMT has no contingent or
other obligation to purchase, redeem or otherwise acquire any shares of its
capital stock or any interest therein or, except as permitted by Section 11.2,
to pay any dividend or make any other distribution in respect thereof. Section
5.5 of the PMT Disclosure Statement lists all PMT Shareholders and the number of
shares of PMT common stock owned by each of them, in each case as of the date of
this Agreement. Except as set forth in Section 5.5 of the PMT Disclosure
Statement, PMT is not a party to any voting agreement, voting trust or similar
agreement or arrangement relating to its capital stock or any agreement or
arrangement relating to or providing for registration rights with respect to its
capital stock.
5.6 NO SUBSIDIARIES. PMT has no Subsidiaries. Except as described in
Section 5.6 of the PMT Disclosure Schedule, PMT does not, directly or
indirectly, have any equity investment in any corporation, partnership or joint
venture or other business entity.
5.7 PMT GAAP FINANCIAL STATEMENTS. The PMT Parties have delivered to the
TEI Parties and all other Combining Entities (i) the audited balance sheets and
consolidated statements of operations, stockholders' equity and cash flows of
PMT at December 31, 1995, 1996 and 1997 and for each of the three years then
ended and (ii) the unaudited balance sheet of PMT at June 30, 1998 (the "LATEST
PMT BALANCE SHEET"), and the related unaudited statements of operations,
stockholders' equity and cash flows of PMT for the three months then ended. All
such financial statements fairly present in all material respects the financial
position of PMT at their respective dates and the results of operations of PMT
for the respective periods then ended, in accordance with GAAP, subject, in the
case of unaudited interim financial statements, to year-end adjustments (which
consist of normal recurring accruals) and the absence of explanatory footnote
disclosures required by GAAP.
5.8 PMT RAP FINANCIAL STATEMENTS. The PMT Parties have delivered to the
TEI Parties and the other Combining Entities (i) all annual statements of income
and condition of PMT filed by it with the Texas Banking Commissioner in respect
of each full or partial calendar year ending since the organization of PMT and
on or before December 31, 1997, and (ii) the quarterly statement of income and
condition of PMT filed by it with the Texas Banking Commissioner in respect of
the calendar quarter ended June 30, 1998 (collectively the "PMT RAP
STATEMENTS"). Each PMT RAP Statement complied (and each RAP Statement filed
after the date of this Agreement will comply) with all applicable Laws when so
filed. Each RAP Statement was prepared in accordance with RAP (and all other
applicable statutory accounting practices) and presents fairly, in all material
respects,
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the income and financial condition of PMT for the respective periods covered
thereby and at the respective dates thereof.
5.9 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 5.9 of the
PMT Disclosure Schedule, since June 30, 1998, PMT has conducted its business
only in the ordinary course, consistent with past practice, there has not
occurred a Material Adverse Effect or any event that could reasonably be
expected to result in a Material Adverse Effect on PMT, and PMT has not:
(i) amended its Charter Documents;
(ii) issued, sold or delivered, or agreed to issue, sell or deliver,
any capital stock, bonds or other securities, or granted or agreed to
grant any options, warrants or other rights calling for the issue, sale or
delivery of its securities;
(iii) borrowed or agreed to borrow any funds, or incurred or become
subject to any absolute or contingent obligation or liability, except
trade accounts payable and accrued operating expenses incurred in the
ordinary course of business since June 30, 1998;
(iv) paid any obligation or liability other than current liabilities
reflected in the Latest PMT Balance Sheet and current liabilities incurred
since June 30, 1998, in the ordinary course of business;
(v) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind in respect of its
capital stock, or purchased, redeemed or otherwise acquired, or agreed to
purchase or redeem or otherwise acquire, directly or indirectly, any of
its outstanding capital stock;
(vi) sold, transferred or otherwise disposed of, or agreed to sell,
transfer or otherwise dispose of, any of its assets other than in the
ordinary course of business, properties or rights, or cancelled or
otherwise terminated, or agreed to cancel or otherwise terminate, any
debts or claims;
(vii) entered into or agreed to enter into any agreement or
arrangement granting any preferential right to purchase any of its assets,
properties or rights, or requiring any consent of any party to the
transfer or assignment of any such asset, property or right;
(viii) suffered any material casualty Damages, destruction or
physical losses, or waived or surrendered any rights of value which are
material;
(ix) made or permitted any amendment or termination of any material
contract, agreement or license to which it is a party or by which it or
any of its assets or properties are subject;
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(x) made, directly or indirectly, any accrual or arrangement for or
payment of bonuses or special compensation of any kind or any severance or
termination pay to any present or former officer, director or employee of
PMT;
(xi) except for normal merit raises in the case of individual
employees, granted any general pay increases to its employees or agents,
or adopted any new or made any increase in any existing profit sharing,
bonus, deferred compensation, savings, insurance, pension, retirement or
other employee benefit plan for or with any of its employees or agents;
(xii) experienced any labor strike or labor dispute or entered into
any collective bargaining agreement;
(xiii)incurred or become subject to any material claim or liability
for any Damages or alleged Damages for actual or alleged negligence or
other tort or breach of contract; or
(xiv) made or agreed to make any capital expenditures in excess of
$50,000 in the aggregate.
5.10 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Latest PMT
Balance Sheet or in Section 5.10 of the PMT Disclosure Schedule, PMT has no
liabilities or obligations, known or unknown, fixed or contingent, other than
(i) those arising since June 30, 1998 in the ordinary course of business and
consistent with past practice, (ii) liabilities and obligations arising after
the date of this Agreement without violation of Section 11.2, or (iii)
liabilities and obligations that, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect on PMT.
5.11 PMT PROPERTIES. PMT has good and marketable title to the properties
and assets reflected in the Latest PMT Balance Sheet (other than properties and
assets disposed of in the ordinary course of business since June 30, 1998,
which, in the aggregate, are not material), free of all Liens except Permitted
Liens and Liens disclosed in Section 5.11 of the PMT Disclosure Schedule.
5.12 TAXES AND TAX RETURNS. Except as described in Section 5.12 of the PMT
Disclosure Schedule:
(i) all Tax Returns (including information returns) required to be
filed with any Taxing Authority by or on behalf of PMT have been duly
filed on a timely basis in accordance with all applicable Laws;
(ii) at the time of their filings all such Tax Returns were complete
and correct;
(iii) all Taxes required to be paid by PMT on or before the date of
this Agreement have been paid;
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(iv) there are no Liens for Taxes upon any assets of PMT, except
Liens for Taxes not yet due for current Tax periods ending after the date
of this Agreement;
(v) there are no outstanding deficiencies, assessments or written
proposals for the assessment of Taxes proposed, asserted or assessed
against PMT and, to the knowledge of the PMT Parties, no grounds exist for
any such assessment of Taxes;
(vi) no extension of the statute of limitations on the assessment of
any Taxes has been granted to or applied for by PMT;
(vii) PMT has made, and there is now in effect and has been in
effect since the inception of PMT, an election with the IRS to be treated
as a Subchapter S corporation within the meaning of Section 1361 of the
Code;
(viii)PMT owns no assets the disposition of which would cause PMT to
have a net recognized built-in gain within the meaning of Section 1374 of
the Code;
(ix) PMT has had no item of income that has not been taken into
account by PMT and that would be treated as a recognized built-in gain
under Section 1374(d) of the Code;
(x) PMT will not be liable for any U.S. federal income Taxes as a
result of the PMT Merger;
(xi) PMT (x) is not a party to any Tax sharing or allocation
agreement, (y) has not been a member of a consolidated, combined or
unitary group for purposes of filing Tax Returns, and (z) has no liability
for the Taxes of any other Person as a transferee or successor, by
contract or otherwise; and
(xii) none of the Tax Returns of PMT are the subject of an audit by
a Governmental Entity.
5.13 LITIGATION. Except as disclosed in Section 5.13 of the PMT Disclosure
Schedule, there is no suit, action, investigation or proceeding pending or, to
the knowledge of the PMT Parties, threatened against PMT at law or in equity
before or by any Governmental Entity or before any arbitrator or mediator of any
kind, that is reasonably likely to have a Material Adverse Effect on PMT, and
there is no judgment, decree, injunction, rule or order of any Governmental
Entity, arbitrator or mediator to which PMT is subject that is reasonably likely
to have a Material Adverse Effect on PMT. No PMT Party has knowledge of any
grounds on which any suit, action, investigation or proceeding of the nature
referred to in this Section 5.13 might be commenced with any reasonable
likelihood of success.
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5.14 ENVIRONMENTAL MATTERS. Except as reflected in Section 5.14 of the PMT
Disclosure Schedule, and except to the extent that the inaccuracy of any of the
following, individually or in the aggregate, is not reasonably likely to have a
Material Adverse Effect on PMT:
(i) PMT holds, and is in compliance with and has been in compliance
with, all Environmental Permits, and is otherwise in compliance and has
been in compliance with, all applicable Environmental Laws, and there is
no condition that is reasonably likely to prevent or interfere with
compliance by the PMT with any Environmental Law;
(ii) no modification, revocation, reissuance, alteration, transfer
or amendment of any Environmental Permit, or any review by, or approval
of, any Governmental Entity or other third party of any Environmental
Permit is required in connection with the execution or delivery of this
Agreement, the consummation of the PMT Merger or the operation of the
business of PMT on the Closing Date;
(iii) PMT has not received any Environmental Claim, nor has any
Environmental Claim been threatened against PMT;
(iv) PMT has not entered into, or agreed to, and is not subject to,
any judgment, decree, order or other directive issued by, or consent
arrangement with, any Governmental Entity under any Environmental Law,
including any such judgment, decree, order or other directive relating to
compliance with any Environmental Law or to the investigation, cleanup,
remediation or removal of Hazardous Substances;
(v) there are no circumstances that could reasonably be expected to
(x) give rise to liability under any agreements with any Person under
which PMT would be required to defend, indemnify, hold harmless, or
otherwise be responsible for any violation by or other liability or
expense of such Person, or alleged violation by or other liability or
expense of such Person, arising under any Environmental Law, or (y)
prevent PMT from complying with its contractual obligations relating to
any such matter; and
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to liability or obligation of PMT under any
Environmental Law; and
(vii) no environmental report, survey, review or audit relating to
PMT, its predecessors, or its past or present assets or operations has
been prepared by or at the direction or for the benefit of, or has been
delivered to, PMT.
5.15 EMPLOYEE BENEFIT PLANS. Section 5.15 of the PMT Disclosure Schedule
accurately sets forth each retirement, pension, bonus, stock purchase, profit
sharing, stock option, deferred compensation, severance or termination pay,
insurance, medical, hospital, dental, vision care, drug, sick leave, disability,
salary continuation, unemployment benefits, vacation, incentive or other
compensation plan or arrangement or other employee benefit which is maintained,
or otherwise
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contributed to or required to be contributed to, by PMT or any ERISA Affiliate
of PMT for the benefit of employees or former employees of PMT (the "PMT
EMPLOYEE PLANS"). PMT has complied, and currently is in compliance, both as to
form and operation, in all material respects, with the terms of each PMT
Employee Plan and all applicable provisions of ERISA and each other Law or
regulation imposed or administered by any Governmental Entity with respect to
each of the PMT Employee Plans. Except as set forth in Section 5.15 of the PMT
Disclosure Schedule, PMT has not at any time maintained, adopted, established,
contributed to or been required to contribute to, otherwise participated in or
been required to participate in, or had any liability with respect to, any
"employee benefit plan" within the meaning of Section 3(3) of ERISA. All
contributions to, and payments from, each PMT Employee Plan which may have been
required to be made in accordance with the terms of any such PMT Employee Plan
and, where applicable, the Laws which govern such PMT Employee Plan, have been
made in a timely manner. All material reports, Tax Returns and similar documents
with respect to any PMT Employee Plan required to be filed with any Governmental
Entity or distributed to any PMT Employee Plan participant have been duly filed
on a timely basis or distributed. There are no pending investigations by any
Governmental Entity involving or relating to a PMT Employee Plan, no threatened
or pending claims (except for claims for benefits payable in the normal
operation of the PMT Employee Plans), suits or proceedings against any PMT
Employee Plan or asserting any rights or claims to benefits under any PMT
Employee Plan which could give rise to a liability of PMT, nor, to the knowledge
of the PMT Parties, are there any facts that could give rise to any liability of
PMT in the event of any such investigation, claim, suit or proceeding. No notice
has been received by PMT of any complaints or other proceedings of any kind
involving PMT or any of the employees of PMT before any Governmental Entity
relating to any PMT Employee Plan. The assets of each PMT Employee Plan are at
least equal to the liabilities of such PMT Employee Plan.
5.16 MATERIAL CONTRACTS. Section 5.16 of the PMT Disclosure Schedule lists
all of the following written or oral contracts, agreements and commitments
(collectively, the "PMT CONTRACTS"):
(i) all employment, consulting or personal service agreements or
contracts with any present or former officer, director or employee of PMT
who has an annual salary of $125,000 or more;
(ii) all loan or credit agreements, and all bonds, debentures,
promissory notes or other instruments of indebtedness, relating to the
borrowing of money by PMT or any indebtedness of PMT for borrowed money;
(iii) all guaranty, suretyship or similar arrangements under which
PMT has guaranteed or is otherwise contingently or secondarily liable for
any indebtedness, liability or obligation of any Person;
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(iv) all leases or subleases of real property used in the conduct of
business of PMT providing for annual rental payments to be paid by or on
behalf of PMT of more than $50,000 in each case;
(v) all contracts or agreements committing PMT to make a capital
expenditure in excess of $50,000;
(vi) all contracts, agreements, agreements in principle, letters of
intent and memoranda of understanding which call for or contemplate the
future disposition (including restrictions on transfer and rights of first
offer or refusal) or acquisition of (or right to acquire) any interest in
any business enterprise, and all contracts, agreements and commitments
relating to the future disposition of a material portion of the assets and
properties of PMT other than in the ordinary course of business;
(vii) all contracts, agreements with or commitments to any Person
containing any provision or covenant relating to the indemnification or
holding harmless by PMT which could result in a liability to PMT in excess
of $25,000 or more;
(viii) all contracts, agreements and undertakings with any
Governmental Entity or other Person which contain any provision or
covenant limiting (x) the ability of PMT to engage on any line of
business, to compete with any Person, to do business with any Person or in
any location or to employ any Person or (y) the ability of any Person to
compete with or obtain products or services from PMT; and
(ix) all outstanding proxies, powers of attorney or similar
delegations of authority granted by PMT to any other Person.
The PMT Parties have delivered to the TEI Parties and to each of the other
Combining Entities a true and correct copy of each PMT Contract. Each PMT
Contract is in full force and effect and constitutes a legal, valid and binding
obligation of PMT, and, to the knowledge of the PMT Parties, of each other
Person that is a party to it. Except as set forth in Section 5.16 of the PMT
Disclosure Schedule, PMT is not, and to the knowledge of the PMT Parties, no
other party to any PMT Contract is, in violation or breach of or in default
under such PMT Contract, or with or without notice or lapse of time or both,
would be in violation or breach of or in default under any such PMT Contract,
except for any violation, breach or default which, individually or in the
aggregate, could not result in a Material Adverse Effect on PMT. Except as set
forth in Section 5.16 of the PMT Disclosure Schedule, no PMT Contract provides
that any party thereto other than PMT may terminate such PMT Contract by reason
of the execution of this Agreement or the consummation of the PMT Merger.
5.17 GOVERNMENTAL LICENSES AND PERMITS; COMPLIANCE WITH LAWS. Except as
described in Section 5.17 of the PMT Disclosure Schedule, PMT has not received
notice of any revocation or modification of any licence, certification, tariff,
permit, registration, exemption, approval or other
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authorization by any Governmental Entity, the revocation or modification of
which has had or is reasonably likely to have a Material Adverse Effect on PMT.
The conduct of the business of PMT complies with all applicable Laws, except for
violations or failures to comply, if any, that, individually or aggregate, are
not reasonably likely to have a Material Adverse Effect on PMT.
5.18 COMPLIANCE WITH TTCA. PMT is, and has been at all times since its
organization, in compliance with all requirements and provisions of the TTCA
applicable to PMT and its "trust business" (as that term is defined in the
TTCA). Without limiting the generality of the foregoing:
(i) PMT is not now, and has not been since its organization,
"insolvent" within the mean of the TTCA;
(ii) PMT is not now engaged, and has never engaged, in an
"unauthorized trust activity" within the meaning of the TTCA;
(iii) there does not now exist, and there has never existed, with
respect to PMT, any "hazardous condition" within the meaning of the TTCA;
(iv) no officer, director, manager or shareholder of PMT, and, to
the knowledge of the PMT Parties, no affiliate (within the meaning of the
TTCA) of PMT, has engaged in any transaction with PMT which is prohibited
by Section 4.107 of the TTCA;
(v) all fiduciary records of PMT have been kept separate and
distinct from all other records of PMT and reflect all appropriate
material information relative to each fiduciary account of PMT, in each
case as required by Section 4.109 of the TTCA;
(vi) PMT maintains, and has maintained at all times since its
organization, "restricted capital" (as defined in the TTCA) in at least
the minimum amount required by the TTCA;
(vii) PMT has invested its restricted capital only in investments
permitted under Section 5.101 of the TTCA;
(viii) PMT has never received a notice of revocation from the Texas
Banking Commissioner seeking to revoke any exemption granted to PMT under
Section 3.011 of the TTCA; and
(ix) PMT has never received a determination letter from the Texas
Banking Commissioner to the effect that a condition exists or existed that
may warrant the issuance of an enforcement order under Chapter 6 of the
TTCA, and no cease and desist order has ever been entered against PMT
under Section 6.002 of the TTCA.
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5.19 BROKER-DEALER MATTERS. PMT is not, and is not required to be,
registered as a broker-dealer with the SEC or under any applicable state Laws.
5.20 INVESTMENT COMPANY MATTERS. PMT is not, and may not be deemed to be,
an investment company under the Investment Company Act, and does not conduct any
activities that could require it to register as, an investment adviser (as such
term is defined in Section 2(a)(20) of the Investment Company Act and Section
202(a)(ii) of the Investment Advisers Act) under the Investment Advisers Act.
5.21 LABOR MATTERS. To the knowledge of the PMT Parties, there is no labor
strike, dispute, slowdown, work stoppage, unresolved labor union grievance or
labor arbitration proceedings pending or threatened against PMT, and no current
union organizing activities among employees of PMT.
5.22 TRANSACTIONS WITH AFFILIATES: Except as specifically contemplated by
this Agreement or as set forth in Section 5.22 of the PMT Disclosure Statement,
no Affiliate of PMT:
(i) is a party to or has any interest in any contract or agreement
with PMT;
(ii) has any outstanding loan to or receivable from PMT; or
(iii) has any ownership interest (other than a stock ownership
interest representing less than 1% of the outstanding stock of any
corporation which is publicly traded), directly, indirectly, or
beneficially, in any supplier to PMT.
5.23 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with this Agreement
or the Transactions based upon arrangements made by or on behalf of any PMT
Party.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF
SPIRES PARTIES
The Spires Parties (other than the Spires Passive Investor Parties)
represent and warrant (and the Spires Passive Investor Parties, based solely on
their knowledge, represent and warrant), to all of the other Parties that:
6.1 ORGANIZATION OF SPIRES. Spires is a limited partnership duly
organized, validly existing and in good standing under the Laws of the State of
Delaware. Spires has full authority and partnership power to conduct its
business as it is currently being conducted. Spires is duly qualified
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to do business, and in good standing, in Texas and in each other jurisdiction
where the nature of its properties or business requires such qualification. The
Spires Parties have delivered to the TEI Parties and the other Combining
Entities true, correct and complete copies of the Charter Documents of Spires.
6.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Spires has the requisite
partnership power and authority to enter into and perform its obligations under
this Agreement. The execution and delivery of this Agreement and the
consummation of the Spires Transactions have been duly authorized by the Spires
General Partners, through their respective Boards of Directors, and except for
the approval by the Spires Partners of the Spires Transactions as contemplated
in Section 11.7, no other partnership proceedings on the part of any Spires
Party are necessary to authorize this Agreement or the consummation of the
Spires Transactions. This Agreement has been duly executed and delivered by
Spires. Assuming the approval of the Spires Transaction by the Spires Partners
as contemplated in Section 11.7 and the valid authorization, execution and
delivery of this Agreement by each Party other than a Spires Party, this
Agreement is the valid and binding obligation of Spires, enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other law relating to or
affecting creditors' rights generally or by equitable principles.
6.3 NO VIOLATIONS. The execution, delivery and performance of this
Agreement and the consummation of the Spires Transactions will not:
(i) constitute a breach or violation of or default under any of the
Charter Documents of Spires or, assuming the obtainment of the consents
and approvals described in clause (i) of Section 6.4, any Law applicable
to Spires; or
(ii) except as accurately reflected in Section 6.3 of the Spires
Disclosure Schedule, violate or conflict with or result in a breach of, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under or result in the termination of,
or accelerate the performance by, or result in a right of termination
under, or result in the creation of any Lien upon the assets or properties
of Spires under, any contract, indenture, loan document, license, permit,
order, decree or instrument to which Spires is a party or by it any of its
assets or properties are bound.
6.4 CONSENTS AND APPROVAL. No consent, order, approval, waiver,
authorization of, or registration, application, declaration or filing with, any
Person is required with respect to Spires in connection with the execution and
delivery of this Agreement or the consummation of the Spires Transactions,
except for:
(i) consents, authorizations, approvals, filings or exemptions in
connection with the applicable provisions of all Broker-Dealer Regulatory
Requirements insofar as they pertain to the Spires Transactions;
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(ii) the consents and approvals described on Schedule 6.4 of the
Spires Disclosure Schedule; and
(iii) other cases, considered individually and in the aggregate, in
which any failure to make such registration, application, declaration or
filing or to obtain any such consent, order, approval, waiver or other
authorization is not reasonably likely to have a Material Adverse Effect
on Spires.
6.5 OWNERSHIP. The Spires General Partners are the only general partners
of Spires and the Spires Limited Partners are the only limited partners of
Spires. No subscription, warrant, option, convertible security or other right
(contingent or other) to purchase or acquire any security of or equity interest
in Spires is authorized or outstanding and there is not outstanding any
commitment of Spires to issue any partnership or other equity interest or other
such rights or, except as permitted by Section 11.2, to distribute to Spires
Partners any evidences of indebtedness or assets. Section 6.5 of the Spires
Disclosure Statement lists (i) all Spires Partners and the percentage
partnership interest, by class, owned by each of them in Spires, (ii) the number
of issued and outstanding shares of the Spires Managing General Partner owned by
each Spires GP Shareholder, (iii) the number of issued and outstanding shares of
the Spires Secondary General Partner owned by each Spires GP Shareholder, (iv)
the number of issued and outstanding shares of SFP owned by each SFP Shareholder
and (v) all general and limited partners of SFF and the percentage limited or
general partnership interest in SFF owned by each of them. Spires has no
contingent or other obligation to purchase, redeem or otherwise acquire any of
its outstanding partnership interests or any interest therein or to make any
distribution in respect thereof.
6.6 NO SUBSIDIARIES. Spires has no Subsidiaries. Except as described in
Section 6.6 of the Spires Disclosure Schedule, Spires does not, directly or
indirectly, have any equity investment in any corporation, partnership or joint
venture or other business entity.
6.7 SEC FILINGS. Spires has filed all forms, reports and documents
required to be filed by it with the SEC since Spires' inception, and Spires has
made available to the TEI Parties and all other Combining Entities true and
complete copies of (i) Spires's Annual Reports pursuant to SEC Rule 17a-5(d) for
the years ended December 31, 1995, 1996 and 1997, and (ii) all other reports,
statements and registration statements (including Form BDs and all amendments
thereto) filed by Spires with the SEC since the date of formation of Spires
(collectively, the "SPIRES SEC FILINGS"). The Spires SEC Filings, including all
financial statements or schedules included in them, (i) comply in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and (ii) did not at the time of filing (or if amended, supplemented
or superseded by a later filing, on the date of the later filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
6.8 SPIRES FINANCIAL STATEMENTS. The balance sheets and statements of
operations, partners' capital and cash flows of Spires included in the Spires
SEC Filings fairly present in all
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material respects the financial position of Spires at their respective dates and
the results of operations of Spires for the respective periods then ended, in
accordance with GAAP, subject, in the case of unaudited interim financial
statements, to year-end adjustments (which consist of normal recurring accruals)
and the absence of explanatory footnote disclosures required by GAAP. Spires'
unaudited consolidated balance sheet at June 30, 1998 included in the Spires SEC
Filings is herein called the "LATEST SPIRES BALANCE SHEET."
6.9 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 6.9 of the
Spires Disclosure Schedule, since June 30, 1998, Spires has conducted its
business only in the ordinary course, consistent with past practice, there has
not occurred a Material Adverse Effect or any event that could reasonably be
expected to result in a Material Adverse Effect on Spires, and Spires has not:
(i) amended its Charter Documents;
(ii) issued, sold or delivered, or agreed to issue, sell or deliver,
any capital stock, bonds or other securities, or granted or agreed to
grant any options, warrants or other rights calling for the issue, sale or
delivery of its securities;
(iii) borrowed or agreed to borrow any funds, or incurred or become
subject to any absolute or contingent obligation or liability, except
trade accounts payable and accrued operating expenses incurred in the
ordinary course of business since June 30, 1998;
(iv) paid any obligation or liability other than current liabilities
reflected in the Latest Spires Balance Sheet and current liabilities
incurred since June 30, 1998, in the ordinary course of business;
(v) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind in respect of its
capital stock, or purchased, redeemed or otherwise acquired, or agreed to
purchase or redeem or otherwise acquire, directly or indirectly, any of
its outstanding capital stock;
(vi) sold, transferred or otherwise disposed of, or agreed to sell,
transfer or otherwise dispose of, any of its assets other than in the
ordinary course of business, properties or rights, or cancelled or
otherwise terminated, or agreed to cancel or otherwise terminate, any
debts or claims;
(vii) entered into or agreed to enter into any agreement or
arrangement granting any preferential right to purchase any of its assets,
properties or rights, or requiring any consent of any party to the
transfer or assignment of any such asset, property or right;
(viii) suffered any material casualty Damages, destruction or
physical losses, or waived or surrendered any rights of value which are
material;
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(ix) made or permitted any amendment or termination of any material
contract, agreement or license to which it is a party or by which it or
any of its assets or properties are subject;
(x) made, directly or indirectly, any accrual or arrangement for or
payment of bonuses or special compensation of any kind or any severance or
termination pay to any present or former officer, director or employee of
Spires;
(xi) except for normal merit raises in the case of individual
employees, granted any general pay increases to its employees or agents,
or adopted any new or made any increase in any existing profit sharing,
bonus, deferred compensation, savings, insurance, pension, retirement or
other employee benefit plan for or with any of its employees or agents;
(xii) experienced any labor strike or labor dispute or entered into
any collective bargaining agreement;
(xiii)incurred or become subject to any material claim or liability
for any Damages or alleged Damages for actual or alleged negligence or
other tort or breach of contract; or
(xiv) made or agreed to make any capital expenditures in excess of
$50,000 in the aggregate.
6.10 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Latest Spires
Balance Sheet or in Section 6.10 of the Spires Disclosure Schedule, Spires has
no liabilities or obligations, known or unknown, fixed or contingent, other than
(i) those arising since June 30, 1998 in the ordinary course of business and
consistent with past practice, (ii) liabilities and obligations arising after
the date of this Agreement without violation of Section 11.2, or (iii)
liabilities and obligations that, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect on Spires.
6.11 SPIRES PROPERTIES. Spires has good and marketable title to the
properties and assets reflected in the Latest Spires Balance Sheet (other than
properties and assets disposed of in the ordinary course of business since June
30, 1998, which, in the aggregate, are not material), free of all Liens except
Permitted Liens and Liens disclosed in Section 6.11 of the Spires Disclosure
Schedule.
6.12 TAXES AND TAX RETURNS. Except as described in Section 6.12 of the
Spires Disclosure Schedule:
(i) all Tax Returns (including information returns) required to be
filed with any Taxing Authority by or on behalf of Spires have been duly
filed on a timely basis in accordance with all applicable Laws;
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(ii) at the time of their filings all such Tax Returns were complete
and correct;
(iii) all Taxes required to be paid by Spires on or before the date
of this Agreement have been paid;
(iv) Spires is a partnership for U.S. federal income tax purposes,
is not taxable, and has not made an election to be taxable, as an entity
for U.S. federal income tax purposes, and has no liability for U.S.
federal income Taxes;
(v) there are no Liens for Taxes upon any assets of Spires, except
Liens for Taxes not yet due for current Tax periods ending with or after
the Closing Date;
(vi) there are no outstanding deficiencies, assessments or written
proposals for the assessment of Taxes proposed, asserted or assessed
against Spires, and, to the knowledge of the Spires Parties, no grounds
exist for any such assessment of Taxes;
(vii) no extension of the statute of limitations on the assessment
of any Taxes has been granted to or applied for by Spires;
(viii) Spires (x) is not a party to any Tax sharing or allocation
agreement, (y) has not been a member of a consolidated, combined or
unitary group for purposes of filing Tax Returns, and (z) has no liability
for Taxes of any other Person, as a transferee or successor, by contract
or otherwise; and
(ix) none of the Tax Returns of Spires are the subject of an audit
by a Governmental Entity.
6.13 LITIGATION. Except as disclosed in Section 6.13 of the Spires
Disclosure Schedule, there is no suit, action, investigation or proceeding
pending or, to the knowledge of the Spires Parties, threatened against Spires at
law or in equity before or by any Governmental Entity or before any arbitrator
or mediator of any kind, that is reasonably likely to have a Material Adverse
Effect on Spires, and there is no judgment, decree, injunction, rule or order of
any Governmental Entity, arbitrator or mediator to which Spires is subject that
is reasonably likely to have a Material Adverse Effect on Spires. No Spires
Party has knowledge of any grounds on which any suit, action, investigation or
proceeding of the nature referred to in this Section 6.13 might be commenced
with any reasonable likelihood of success.
6.14 ENVIRONMENTAL MATTERS. Except as described in Section 6.14 of the
Spires Disclosure Schedule, and except to the extent that the inaccuracy of any
of the following, individually or in the aggregate, is not reasonably likely to
have a Material Adverse Effect on Spires;
(i) Spires holds, and is in compliance with, and has been in
compliance with, all Environmental Permits, and is otherwise in compliance
and has been in compliance with, all
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applicable Environmental Laws, and there is no condition that is
reasonably likely to prevent or interfere with compliance by Spires with
any Environmental Law;
(ii) no modification, revocation, reissuance, alteration, transfer
or amendment of any Environmental Permit, or any review by, or approval
of, any Governmental Entity or other third party of any Environmental
Permit is required in connection with the execution or delivery of this
Agreement, the consummation of the Spires Merger or the operation of the
business of Spires on the Closing Date;
(iii) Spires has not received any Environmental Claim, nor has any
Environmental Claim been threatened against Spires;
(iv) Spires has not entered into or agreed to, and is not subject
to, any judgment, decree, order or other directive issued by, or consent
arrangement with, any Governmental Entity under any Environmental Law,
including any such judgment, decree, order or other directive relating to
compliance with any Environmental Law or to the investigation, cleanup,
remediation or removal of Hazardous Substances;
(v) there are no circumstances that could reasonably be expected to
(x) give rise to liability under any agreements with any Person under
which Spires would be required to defend, indemnify, hold harmless, or
otherwise be responsible for any violation by or other liability or
expense of such Person, or alleged violation by or other liability or
expense of such Person, arising under any Environmental Law or (y) prevent
Spires from complying with its contractual obligations relating to any
such matter;
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to liability or obligation of Spires under
any Environmental Law; and
(vii) no environmental report, survey, review or audit relating to
Spires, its predecessors, or its past or present assets or operations has
been prepared by or at the direction of, or has been delivered to, Spires.
6.15 EMPLOYEE BENEFIT PLANS. Section 6.15 of the Spires Disclosure
Schedule accurately sets forth each retirement, pension, bonus, stock purchase,
profit sharing, stock option, deferred compensation, severance or termination
pay, insurance, medical, hospital, dental, vision care, drug, sick leave,
disability, salary continuation, unemployment benefits, vacation, incentive or
other compensation plan or arrangement or other employee benefit which is
maintained, or otherwise contributed to or required to be contributed to, by
Spires or any ERISA Affiliate of Spires for the benefit of employees or former
employees of Spires (the "SPIRES EMPLOYEE PLANS"). Spires has complied, and
currently is in compliance, both as to form and operation, in all material
respects, with the terms of each Spires Employee Plan and all applicable
provisions of ERISA and each other Law or regulation imposed or administered by
any Governmental Entity with respect to each of the Spires Employee Plans.
Except as set forth in Section 6.15 of the Spires Disclosure Schedule, Spires
has
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not at any time maintained, adopted, established, contributed to or been
required to contribute to, otherwise participated in or been required to
participate in, or had any liability with respect to, any "employee benefit
plan" within the meaning of section 3(3) of ERISA. All contributions to, and
payments from, each Spires Employee Plan which may have been required to be made
in accordance with the terms of any such Spires Employee Plan and, where
applicable, the Laws which govern such Spires Employee Plan, have been made in a
timely manner. All material reports, Tax Returns and similar documents with
respect to any Spires Employee Plan required to be filed with any Governmental
Entity or distributed to any Spires Employee Plan participant have been duly
filed on a timely basis or distributed. There are no pending investigations by
any Governmental Entity involving or relating to a Spires Employee Plan, no
threatened or pending claims (except for claims for benefits payable in the
normal operation of the Spires Employee Plans), suits or proceedings against any
Spires Employee Plan or asserting any rights or claims to benefits under any
Spires Employee Plan which could give rise to a liability of Spires, nor, to the
knowledge of the Spires Parties, are there any facts that could give rise to any
liability of Spires in the event of any such investigation, claim, suit or
proceeding. No notice has been received by Spires of any complaints or other
proceedings of any kind involving Spires or any of the employees of Spires
before any Governmental Entity relating to any Spires Employee Plan. The assets
of each Spires Employee Plan are at least equal to the liabilities of such
Spires Employee Plan.
6.16 MATERIAL CONTRACTS. Section 6.16 of the Spires Disclosure Schedule
lists all of the following written or oral contracts, agreements and commitments
(collectively, the "SPIRES CONTRACTS"):
(i) all employment, consulting or personal service agreements or
contracts with any present or former officer, director or employee of
Spires who has an annual salary of $125,000 or more (other than those
which will have been terminated at or before the Effective Time without
any continuing liability or obligation on the part of Spires or either
Spires General Partner);
(ii) all loan or credit agreements, and all bonds, debentures,
promissory notes or other instruments of indebtedness, relating to the
borrowing of money by Spires or any indebtedness of Spires for borrowed
money;
(iii) all guaranty, suretyship or similar arrangements under which
Spires has guaranteed or is otherwise contingently or secondarily liable
for any indebtedness, liability or obligation of any Person other than
Spires;
(iv) all leases or subleases of real property used in the conduct of
business of Spires providing for annual rental payments to be paid by or
on behalf of Spires of more than $50,000 in each case;
(v) all contracts or agreements committing Spires to make a capital
expenditure in excess of $50,000;
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(vi) all contracts between Spires and each broker or dealer which
clears transactions for Spires or to which Spires transmits customer funds
or securities in connection with transactions in which Spires acts as an
introducing broker or dealer;
(vii) all Subordination Agreements pertaining to indebtedness of
Spires;
(viii)all contracts, agreements, agreements in principle, letters of
intent and memoranda of understanding which call for or contemplate the
future disposition (including restrictions on transfer and rights of first
offer or refusal) or acquisition of (or right to acquire) any interest in
any business enterprise, and all contracts, agreements and commitments
relating to the future disposition of a material portion of the assets and
properties of Spires other than in the ordinary course of business;
(ix) all contracts, agreements with or commitments to any Person
containing any provision or covenant relating to the indemnification or
holding harmless by Spires which could result in a liability to Spires in
excess of $50,000 or more;
(x) all contracts, agreements and undertakings with any Governmental
Entity or other Person which contain any provision or covenant limiting
(x) the ability of Spires to engage on any line of business, to compete
with any Person, to do business with any Person or in any location or to
employ any Person or (y) the ability of any Person to compete with or
obtain products or services from Spires; and
(xi) all outstanding proxies, powers of attorney or similar
delegations of authority granted by Spires to any other Person.
The Spires Parties have delivered to the TEI Parties and each of the other
Combining Entities a true and correct copy of each Spires Contract. Each Spires
Contract is in full force and effect and constitutes a legal, valid and binding
obligation of Spires, and, to the knowledge of the Spires Parties, of each other
Person that is a party to it. Except as set forth in Section 6.16 of the Spires
Disclosure Schedule, Spires is not, and to the knowledge of the Spires Parties,
no other party to any Spires Contract is, in violation or breach of or in
default under such Spires Contract, or with or without notice or lapse of time
or both, would be in violation or breach of or in default under any such Spires
Contract, except for any violation, breach or default which, individually or in
the aggregate, could not result in a Material Adverse Effect on Spires. Except
as set forth in Section 6.16 of the Spires Disclosure Schedule, no Spires
Contract provides that any party thereto other than Spires may terminate such
Spires Contract by reason of the execution of this Agreement or the consummation
of the Spires Transactions.
6.17 GOVERNMENTAL LICENSES AND PERMITS; COMPLIANCE WITH LAWS. Except as
described in the Spires SEC Filings or Section 6.17 of the Spires Disclosure
Schedule, Spires has not received notice of any revocation or modification of
any licence, certification, tariff, permit, registration, exemption, approval or
other authorization by any Governmental Entity, the revocation or
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modification of which has had or is reasonably likely to have a Material Adverse
Effect on Spires. The conduct of the business of Spires complies with all
applicable Laws, except for violations or failures to comply, if any, that,
individually or aggregate, are not reasonably likely to have a Material Adverse
Effect on Spires.
6.18 BROKER-DEALER MATTERS. Except to the extent that any inaccuracy in
the following representations and warranties is not reasonably likely to result
in a Material Adverse Effect:
(i) Spires is registered as a broker-dealer with the SEC and under
all applicable state Laws which require it to be so registered, and such
registrations are in full force and effect;
(ii) each Affiliate of Spires, and each partner, officer, employee,
consultant, agent or independent contractor of Spires or any such
Affiliate, who is required by reason of the nature of his employment by
Spires or such Affiliate to be registered as a broker-dealer,
broker-dealer agent, registered representative or sales person with the
SEC or the securities commission of any state or any self-regulatory body
or other Governmental Entity, is duly registered or appointed as such and
such registration or appointment is in full force and effect;
(iii) neither Spires nor, to the knowledge of the Spires Parties,
any Affiliate or "associated person" (within the meaning of the Exchange
Act) thereof, is ineligible pursuant to Section 15(b) of the Exchange Act
to serve as a broker-dealer or as an associated person to a registered
broker-dealer;
(iv) Spires is a member organization in good standing of the NASD,
the Securities Investor Protection Corporation, and such other
organizations in which its membership is required in order to conduct its
business as now conducted;
(v) Spires is, and has been since its inception, in compliance with
all Broker-Dealer Regulatory Requirements relating to its maintenance of
minimum net capital and its compliance with a maximum
indebtedness-to-net-capital ratio under SEC Rule 15c3-1, its maintenance
of reserves under SEC Rule 15c3-1, the filing of quarterly and annual
reports under Section 17 of the Exchange Act and Rule 17a-5 thereunder,
and all other Broker-Dealer Regulatory Requirements;
(vi) in connection with its broker-dealer activities, Spires meets,
and has met since its inception, all requirements specified in SEC Rule
15c3-3(k)(2) for exemption from all possession, control and reserve
requirements under SEC Rule 15c3-3; and
(vii) all Subordination Agreements pertaining to indebtedness of
Spires comply with all requirements of Appendix D to SEC Rule 15c3-1.
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6.19 INVESTMENT COMPANY MATTERS. Spires is not, and may not be deemed to
be, an investment company under the Investment Company Act, and does not conduct
any activities that could require it to register as an investment adviser (as
such term is defined in Section 2(a)(20) of the Investment Company Act and
Section 202(a)(ii) of the Investment Advisers Act) under the Investment Advisers
Act.
6.20 LABOR MATTERS. To the knowledge of the Spires Parties, there is no
labor strike, dispute, slowdown, work stoppage, unresolved labor union grievance
or labor arbitration proceedings pending or threatened against Spires, and no
current union organizing activities among employees of Spires.
6.21 TRANSACTIONS WITH AFFILIATES. Except as specifically contemplated by
this Agreement or as set forth in Section 6.21 of the Spires Disclosure
Statement, no Affiliate of Spires, and, in case of clauses (i) and (ii) below,
no Spires Passive Investor Party:
(i) is a party to or has any interest in any contract or agreement
with Spires (other than the Spires Partnership Agreement and agreements
which will be terminated at or before the Effective Time without any
continuing liability or obligation on the part of Spires or either Spires
General Partner);
(ii) has any outstanding loan to or receivable from Spires; or
(iii) has any ownership interest (other than a stock ownership
interest representing less than 1% of the outstanding stock of any
corporation which is publicly traded), directly, indirectly, or
beneficially, in any supplier to Spires.
6.22 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with this Agreement
or any of the Transactions based upon arrangements made by or on behalf of any
Spires Party.
ARTICLE VII
REPRESENTATIONS AND AGREEMENTS OF THE TRANSFERORS
Each Transferor, severally as to himself, herself or itself only,
represents and warrants to, and agrees with, all other Parties that:
7.1 OWNERSHIP AND STATUS OF TRANSFERRED PROPERTY. The Transferor is the
record and beneficial owner (or if the Transferor is a trust or the estate of a
deceased natural person, the legal owner) of the Transferred Property set
opposite the Transferor's name in Section 4.5, 5.5 or 6.5, respectively, of the
HWG Disclosure Schedule, the PMT Disclosure Schedule and the Spires Disclosure
Schedule, respectively, free and clear of all Liens.
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7.2 POWER OF THE TRANSFEROR. The Transferor has the full power, legal
capacity and authority to execute this Agreement and to perform the Transferor's
obligations under this Agreement. This Agreement constitutes the legal, valid
and binding obligation of the Transferor, enforceable against the Transferor in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other Laws relating to or
affecting creditors' rights generally or by equitable principles. If the
Transferor is an entity, the Transferor has, in accordance with all Laws and the
articles or certificate of incorporation, partnership agreement or certificate
of partnership, or similar organizational documents or internal rules or
regulations governing the corporate, partnership or other activities of the
Transferor, obtained all approvals and taken all actions necessary for the
authorization, execution, delivery and performance by the Transferor of this
Agreement. If the Transferor is a trust, (i) its trustee or trustees executing
this Agreement on its behalf are duly named and serving trustees of the
Transferor, (ii) the execution and delivery by such trustee or trustees are
within their trust powers, (iii) the performance by the Transferor of this
Agreement are within the powers and purposes of the Transferor under the terms
of all documents creating, evidencing or governing the Transferor, and (iv)
neither the execution, delivery, nor performance by the Transferor of this
Agreement will violate, constitute a breach of or conflict with any documents
creating, evidencing or governing the Transferor.
7.3 APPROVAL OF TRANSACTIONS. The Transferor, acting in each capacity in
which he is entitled, by reason of any Combining Entity's Charter Documents, or
any applicable Laws, to vote to approve or disapprove the consummation of any of
the Transactions, agrees to vote all the Transferred Property owned by him and
entitled to vote on that matter, in any one or more of the manners prescribed or
permitted by his Combining Entity's Charter Documents and all applicable Laws,
to approve this Agreement and the Transaction involving each Combining Entity in
which the Transferor's Transferred Property represents an equity interest.
7.4 NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Transferor will not:
(i) violate any Laws:
(ii) breach or constitute a default under any agreement or
instrument to which the Transferor is a party or by which the Transferor
or any of the Transferor's Transferred Property is bound; or
(iii) result in the creation or imposition of, or afford any Person
the right to obtain, any Lien upon the Transferred Property of the
Transferor.
7.5 NO LITIGATION. No Litigation is pending or, to the knowledge of the
Transferor, threatened against the Transferor which:
(i) questions or involves the validity or enforceability of any of
the Transferor's obligations under this Agreement; or
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(ii) seeks to prevent or delay the consummation by the Transferor of
any Merger or Spires Transaction or the Plan of Organization, or seeks
Damages in connection with any consummation by the Transferor of any
Transaction or the Plan of Organization.
7.6 PREEMPTIVE AND OTHER RIGHTS; WAIVER. Except for the right of the
Transferor to receive Transaction Shares as a result of a Transaction and any
right the Transferor may have to purchase shares of capital stock of a Combining
Entity pursuant to the exercise of an Outstanding HWG Option or an Outstanding
PMT Option, the Transferor either:
(i) does not have any statutory or contractual preemptive or other
right of any kind (including any right of first offer or refusal) to
acquire any equity interest in any Combining Entity or either of the
Spires General Partners; or
(ii) hereby irrevocably waives each such right of that type that the
Transferor has or may have.
7.7 EXERCISE OF OUTSTANDING OPTIONS. If the Transferor holds any
Outstanding HWG Options or any Outstanding PMT Options, the Transferor agrees to
exercise such options in accordance with their terms, prior to the Effective
Time.
7.8 CONTROL OF RELATED BUSINESS. Except as set forth in Section 4.22 of
the HWG Disclosure Schedule, Section 5.22 of the PMT Disclosure Schedule, or
Section 6.22 of the Spires Disclosure Schedule, the Transferor is not, and none
of his immediate family member are, in any case alone or with one or more other
Persons, the controlling Affiliate of any Entity, business or trade (other than
a Combining Entity, if the Transferor is an Affiliate of a Combining Entity)
that:
(i) is engaged in any line of business which is the same as or
similar to any line of business in which a Combining Entity is engaged;
(ii) is a significant supplier to any Combining Entity; or
(iii) is, or has within the three-year period ending on the date of
this Agreement, engaged in any transaction or been a party to any
agreement with any Combining Entity.
ARTICLE VIII
REPRESENTATIONS AND AGREEMENTS
RELATED TO PLAN OF ORGANIZATION
With respect to the Plan of Organization:
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8.1 REPRESENTATIONS AND AGREEMENTS OF TEI PARTIES. The TEI Parties
represent and warrant to, and agree with, the Transferors that:
(i) PGG will retain and use in a trade or business the Transferred
Property transferred to it by the Transferors, and has no present plan or
intention to dispose of the Transferred Property other than in the normal
course of business;
(ii) PGG has no current plan or intention to redeem or otherwise
reacquire any of the Transaction Shares to be issued to the Transferors or
the TEI Shareholders in the Transactions;
(iii) at the Effective Time, PGG will not be an "investment company"
within the meaning of Section 351(e)(1) of the Code or a "personal service
corporation" within the meaning of Section 269A of the Code;
(iv) immediately after the Effective Time, PGG (x) will have
outstanding only one class of stock, which will be the PGG Common Stock,
and (y) except as described in the Registration Statement, will not have
outstanding any obligations requiring it to issue shares of its capital
stock; and
(v) immediately after the Effective Time, the Transferors and the
TEI Shareholders will own at least 80% of each class of PGG stock
outstanding.
8.2 REPRESENTATIONS AND AGREEMENTS OF TRANSFERORS. Each of the
Transferors, severally and for himself or itself and as to his or its
Transferred Property only, represents and warrants to, and agrees with, the TEI
Parties and all other Transferors that:
(i) the Transferor will not have, at the Effective Time, any current
plan or intention to transfer any of the Transaction Shares which the
Transferor will hold immediately after the Effective Time or any current
plan or intention to transfer any shares of PGG Common Stock which the
Transferor could acquire by the exercise of any option or warrant which
the Transferor holds at that time (it being acknowledged that the grant of
a security interest in shares of PGG Common Stock pursuant to an arm's
length, recourse borrowing from a bank or other commercial lender shall
not be deemed a "transfer" under this clause (i) if the grant of the
security interest is not intended by a Transferor to effect a transfer of
ownership of such shares);
(ii) following consummation of the Transactions, the Transferor will
not retain any rights in his Transferred Property;
(iii) at the Effective Time, the Transferor will not be under the
jurisdiction of a court in a Title 11 or similar case within the meaning
of Section 368(a)(3)(A) of the Code;
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(iv) no indebtedness or liabilities of the Transferor will be
assumed by any TEI Party, and the Transferor will not use the Transaction
Shares which the Transferor will receive as a result of the Transactions
to satisfy any such indebtedness or liabilities;
(v) no Transferred Property transferred by the Transferor to PGG in
connection with a Transaction will be "Section 306 stock" within the
meaning of Section 306 of the Code;
(vi) no Transferred Property transferred by the Transferor to PGG in
connection with a Transaction will be stock in an investment company as
defined in Section 368(a)(2)(F)(ii) or (iv) of the Code;
(vii) no Transferred Property transferred by the Transferor to PGG
in connection with a Transaction will be stock received by the Transferor
as part of a plan liquidation of another Entity; and
(viii) no PGG Common Stock will be received by the Transferor in
exchange for services.
8.3 MUTUAL REPRESENTATIONS. Each TEI Party, jointly and severally, and
each Transferor, severally and only on his or its own behalf, represents and
warrants to, and agrees with, all other TEI Parties and all other Transferors
that:
(i) each TEI Party and each Transferor intends that the Transactions
be undertaken as part of the Plan of Organization;
(ii) the Plan of Organization defines the rights of the Parties as
contemplated in Treasury Regulation Section 1.351-1(a)(1), and is intended
to accomplish the formation of PGG under Section 351 of the Code;
(iii) each Transferor will receive Transaction Shares having a value
approximately equal to the fair market value of the Transferred Property
transferred to PGG by the Transferor in one or more of the Transactions;
(iv) there is no indebtedness owed between any TEI Party and the
Transferor, and no indebtedness of any TEI Party to any Transferor will be
created as a result of any Transaction;
(v) no Transferred Property transferred to PGG by the Transferor in
a Transaction will be leased back to the Transferor by any TEI Party;
(vi) no Transaction Shares will be issued in return for services
rendered to or for the benefit of PGG;
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(vii) none of the Transaction Shares will be issued for indebtedness
of PGG or interest on any such indebtedness; and
(viii) the Transactions will be reported by all Parties on their
respective federal income Tax Returns in a manner consistent with the
provisions of this Article VIII.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
OF
CERTAIN SPIRES PARTIES
9.1 REGARDING THE SPIRES MANAGING GENERAL PARTNER. The Spires GP
Shareholders who are the shareholders of the Spires Managing General Partner
jointly and severally represent and warrant to the TEI Parties, the HWG Parties,
the PMT Parties and all other Spires Parties that:
(i) the Spires Managing General Partner is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Texas, has full authority and corporate power to conduct its
business as presently conducted, and is not required to be qualified to do
business as a foreign corporation in any jurisdiction;
(ii) the Spires GP Shareholders who are the shareholders of the
Spires Managing General Partner have delivered to the TEI Parties and the
Combining Entities true and correct copies of the Charter Documents of the
Spires Managing General Partner;
(iii) the consummation of the Transactions will not constitute a
breach or violation of or default under the Charter Documents of the
Spires Managing General Partner or any Law applicable to the Spires
Managing General Partner;
(iv) the Spires Managing General Partner does not have any assets,
rights or properties other than its general partnership interest in
Spires;
(v) the Spires Managing General Partner does not have any debts,
liabilities or obligations, fixed or contingent other than debts,
liabilities and obligations of Spires, obligations under the Charter
Documents of Spires, obligations of the nature to be released at the
Effective Time under Section 15.11, and liabilities for federal and state
income and franchise Taxes;
(vi) the Spires Managing General Partner is not a party to or bound
by, nor are its assets or properties subject to any contract or agreement
other than the Spires Charter Documents;
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(vii) the shares of capital stock of the Spires Managing General
Partner to be transferred, assigned and contributed to PGG under this
Agreement represent all of the issued and outstanding shares of capital
stock of the Spires Managing General Partner, and no subscription,
warrant, option, convertible security, stock appreciation or other right
(contingent or other) to purchase or acquire any shares of any class of
capital stock of the Spires Managing General Partner is authorized or
outstanding and there is not outstanding any commitment of the Spires
Managing General Partner to issue any shares, warrants, options or other
such rights or to distribute to holders of any class of its capital stock
any evidences of indebtedness or assets;
(viii) the Spires Managing General Partner has no Subsidiaries, and
does not otherwise have any equity investment in any corporation,
partnership or joint venture or other business entity other than Spires;
(ix) there is no suit, action, investigation or proceeding pending
or threatened against the Spires Managing General Partner at Law or in
equity before or by any Governmental Entity or before any arbitrator or
mediator of any kind, except such as may be pending or threatened against
the Spires Managing General Partner in its capacity as a general partner
of Spires; and
(x) the Spires Managing General Partner does not have, and has not
had within the last three years, any employees, and does not conduct, and
has not conducted within the last three years, any business or operations
other than to serve as the managing general partner of Spires.
9.2 REGARDING THE SPIRES SECONDARY GENERAL PARTNER. The Spires GP
Shareholders who are the shareholders of the Spires Secondary General Partner
jointly and severally represent and warrant to the TEI Parties, the HWG Parties,
the PMT Parties and all other Spires Parties that:
(i) the Spires Secondary General Partner is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full authority and corporate power to conduct its
business as presently conducted, is duly qualified and in good standing as
a foreign corporation authorized to do business in Texas, and is not
required to be qualified to do business as a foreign corporation in any
other jurisdiction;
(ii) the Spires GP Shareholders who are the shareholders of the
Spires Secondary General Partner have delivered to the TEI Parties and the
Combining Entities true and correct copies of the Charter Documents of the
Spires Secondary General Partner;
(iii) the consummation of the Transactions will not constitute a
breach or violation of or default under the Charter Documents of the
Spires Secondary General Partner or any Law applicable to the Spires
Secondary General Partner;
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(iv) the Spires Secondary General Partner does not have any assets,
rights or properties other than its general partnership interest in
Spires;
(v) the Spires Secondary General Partner does not have any assets,
rights or properties other than its general partnership interest in
Spires;
(vi) the Spires Secondary General Partner does not have any debts,
liabilities or obligations, fixed or contingent other than debts,
liabilities and obligations of Spires, obligations under the Charter
Documents of Spires, and obligations of the nature to be released at the
Effective Time under Section 15.11, and liabilities for federal and state
income and franchise Taxes;
(vii) the Spires Secondary General Partner is not a party to or
bound by, nor are its assets or properties subject to any contract or
agreement other than the Spires Charter Documents;
(viii) the shares of capital stock of the Spires Secondary General
Partner to be transferred, assigned and contributed to PGG under this
Agreement represent all of the issued and outstanding shares of capital
stock of the Spires Secondary General Partner, and no subscription,
warrant, option, convertible security, stock appreciation or other right
(contingent or other) to purchase or acquire any shares of any class of
capital stock of the Spires Secondary General Partner is authorized or
outstanding and there is not outstanding any commitment of the Spires
Secondary General Partner to issue any shares, warrants, options or other
such rights or to distribute to holders of any class of its capital stock
any evidences of indebtedness or assets;
(ix) the Spires Secondary General Partner has no Subsidiaries, and
does not otherwise have any equity investment in any corporation,
partnership or joint venture or other business entity other than Spires;
(x) there is no suit, action, investigation or proceeding pending or
threatened against the Spires Secondary General Partner at Law or in
equity before or by any Governmental Entity or before any arbitrator or
mediator of any kind, except such as may be pending or threatened against
the Spires Secondary General Partner in its capacity as a general partner
of Spires; and
(xi) the Spires Secondary General Partner does not have, and has not
had within the last three years, any employees and does not conduct, and
has not conducted within the last three years, any business or operations
other than to serve as the secondary general partner of Spires.
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9.3 REGARDING SFP. SFP represents and warrants to the TEI Parties, the HWG
Parties, the PMT Parties and the Spires Parties other than the SFP Shareholders
that:
(i) SFP is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has full authority
and corporate power to conduct its business as presently conducted, and is
not required to be qualified to do business as a foreign corporation in
any jurisdiction;
(ii) SFP has delivered to the TEI Parties and the Combining Entities
true and correct copies of the Charter Documents of SFP;
(iii) the consummation of the Transactions will not constitute a
breach or violation of or default under the Charter Documents of SFP or
any Law applicable to SFP;
(iv) SFP does not have any assets, rights or properties other than
(x) its general partnership interest in Spires and (y) cash which will be
used to redeem the SFP Redemption Shares in connection with the SFP
Redemption as provided in Section 15.13;
(v) SFP does not have any debts, liabilities or obligations, fixed
or contingent other than debts, liabilities and obligations of SFF,
obligations under the Charter Documents of SFF, and liabilities for
federal and state income and franchise Taxes;
(vi) SFP is not a party to or bound by, nor are its assets or
properties subject to any contract or agreement other than the SFF Charter
Documents;
(vii) following consummation of the SFP Redemption, the shares of
capital stock of SFP to be transferred, assigned and contributed to PGG
under this Agreement will represent all of the issued and outstanding
shares of capital stock of SFP, and no subscription, warrant, option,
convertible security, stock appreciation or other right (contingent or
other) to purchase or acquire any shares of any class of capital stock of
SFP is authorized or outstanding, and there is not outstanding any
commitment of the SFP to issue any shares, warrants, options or other such
rights or, except in connection with the SFP Redemption, to distribute to
holders of any class of its capital stock any evidences of indebtedness or
assets;
(viii) SFP has no Subsidiaries, and does not otherwise have any
equity investment in any corporation, partnership or joint venture or
other business entity other than SFF;
(ix) there is no suit, action, investigation or proceeding pending
or threatened against SFP at Law or in equity before or by any
Governmental Entity or before any arbitrator or mediator of any kind; and
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(x) SFP does not have, and has not had within the last three years,
any employees, and does not conduct, and has not conducted within the last
three years, any business or operations other than to serve as the general
partner of SFF.
9.4 REGARDING SFF. SFP and OVH jointly and severally represent and warrant
to the TEI Parties, the HWG Parties, the PMT Parties and all other Spires
Parties that:
(i) SFF is a limited partnership duly organized, validly existing
and in good standing under the laws of the State of Delaware, has full
authority and partnership power to conduct its business as presently
conducted, is duly qualified and in good standing as a foreign limited
partnership authorized to do business in Texas, and is not required to be
qualified to do business as a foreign limited partnership in any other
jurisdiction;
(ii) SFF has delivered to the TEI Parties and the Combining Entities
true and correct copies of the Charter Documents of SFF;
(iii) the consummation of the Transactions will not constitute a
breach or violation of or default under the Charter Documents of SFF or
any Law applicable to SFF;
(iv) SFF does not have any assets, rights or properties other than
(x) its Class A limited partnership interest in Spires and (y) cash and
cash equivalents which will be distributed to its partners prior to the
Effective Time as provided in Section 15.14;
(v) SFF does not have any debts, liabilities or obligations, fixed
or contingent other than debts, liabilities and obligations of Spires and
obligations under the Charter Documents of Spires;
(vi) SFF is not a party to or bound by, nor are its assets or
properties subject to any contract or agreement other than the Spires
Charter Documents;
(vii) the limited partnership interest in SFF to be transferred,
assigned and contributed to PGG by OVH under this Agreement and the
general partnership interest in SFF owned by SFP represent all of the
outstanding partnership interests in SFF, and no subscription, warrant,
option, convertible security or other right (contingent or other) to
purchase or acquire any security of or equity interest in SFF is
authorized or outstanding, and there is not outstanding any commitment of
SFF to issue any partnership or other equity interest, or other such
rights or, except as set forth in Section 15.12, to distribute to the
partners of SFF any evidences of indebtedness or assets;
(viii) SFF has no Subsidiaries, and does not otherwise have any
equity investment in any corporation, partnership or joint venture or
other business entity other than Spires;
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(ix) there is no suit, action, investigation or proceeding pending
or threatened against SFF at Law or in equity before or by any
Governmental Entity or before any arbitrator or mediator of any kind; and
(x) SFF does not have, and has not had within the last three years,
any employees and does not conduct, and has not conducted within the last
three years, any business or operations other than to own its Class A
limited partnership interest in Spires.
ARTICLE X
TEI COVENANTS PENDING CLOSING
The TEI Parties agree that pending the Closing:
10.1 CONDUCT OF TEI'S BUSINESS. TEI and its Subsidiaries shall conduct
their operations according to their ordinary and usual course of business, and
shall use their best efforts to preserve intact their business organizations,
keep available the services of their officers and employees and maintain normal
business relationships with customers, clients and others having business
relationships with them. TEI shall confer on a regular and frequent basis with
one or more representatives of the respective Combining Entities to report on
operational matters of materiality and to report the general status of ongoing
operations of TEI and its Subsidiaries. TEI shall notify each Combining Entity
of:
(i) any unexpected emergency or other material change in the normal
course of business or in the operation of the properties of TEI and its
Subsidiaries;
(ii) any significant development in any regulatory proceedings,
governmental complaints, investigations or hearings (or communication
indicating that any may be contemplated) involving TEI or any of its
Subsidiaries and which could have a Material Adverse Effect on TEI and its
Subsidiaries; and
(iii) any matter or event which comes to the knowledge of the TEI
Parties which makes or could make any representation and warranty made
concerning TEI or any of its Subsidiaries in Article III untrue.
TEI shall keep the Combining Entities fully informed of such events and
permit representations of the respective Combining Entities access to all
materials prepared in connection with any such event.
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10.2 FORBEARANCE BY TEI. TEI shall not:
(i) amend or propose to amend its Charter Documents;
(ii) issue any shares of TEI Common Stock or securities convertible
into or exchangeable for shares of TEI Common Stock, or enter into any
agreement or commitment with respect to the issuance or purchase of any
such shares or securities, except that TEI may issue shares of TEI Common
Stock upon any exercise of any TEI Stock Options;
(iii) split, combine or reclassify any outstanding shares of TEI
Common Stock;
(iv) declare, pay or set aside for payment any dividend or other
distribution in respect of any outstanding shares of TEI Common Stock;
(v) incur, or cause or permit any Subsidiary of TEI to incur,
indebtedness for borrowed money;
(vi) increase the compensation levels of its officers or management
level employees or grant any general salary increases other than merit
increases in the ordinary course of business, or cause or permit any to
its Subsidiaries to do so;
(vii) enter into any lease agreements or other long-term commitments
or cause or permit any Subsidiaries to do so;
(viii) acquire or negotiate for the acquisition of any business
either directly or indirectly through a Subsidiary of TEI;
(ix) sell or agree to sell all or substantially all, or any material
portion, of its assets or the assets of any Subsidiary of TEI, or to merge
or consolidate, or cause or permit any Subsidiary of TEI to merge or
consolidate, with any other entity; or
(x) take any of the other actions or permit to occur any of the
other events specified in Section 3.10 which are within the control of TEI
or its Subsidiaries.
10.3 ACCESS AND INFORMATION. TEI shall give the Combining Entities and
their representatives full access during normal business hours to all the
properties, books, contracts, commitments and records of TEI and its
Subsidiaries so that the Combining Entities may have full opportunity to make
such investigation of TEI and its Subsidiaries as they shall reasonably request
in advance. TEI will furnish each Combining Entity all information concerning
TEI and its Subsidiaries required for inclusion in any application, filing,
statement or notice made by any Combining Entity to, or filed or joined in by
any Combining Entity with, any Governmental Entity in connection with this
Agreement or the Transactions. None of the information furnished to any
Combining Entity under this Section 10.3 shall, at the date furnished, contain
any untrue statement
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of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
10.4 SUPPLEMENTAL INFORMATION. TEI shall, within five days following each
such filing, furnish each Combining Entity with a copy of each Current Report on
Form 8-K, each Quarterly Report on Form 10-Q and each Annual Report on Form 10-K
filed by TEI with the SEC. TEI shall also furnish each Combining Entity copies
of TEI's interim monthly consolidated financial statements as soon as
practicable but in any event within 35 days after the end of each month,
together with any information ordinarily prepared in connection with such
financial statements. All financial statements included in each such Quarterly
Report on Form 10-Q and Annual Report on Form 10-K shall be prepared in
conformity with GAAP, shall present fairly in all material respects, in
accordance with GAAP, the consolidated financial position of TEI and its
Subsidiaries at the end of the periods covered thereby and the results of their
consolidated operations for the periods covered thereby, subject, in the case of
unaudited interim financial statements, to year-end adjustments (consisting of
normal recurring accruals) and the omission of explanatory footnote materials
required by GAAP.
10.5 TEI REGISTRATION STATEMENT. TEI will prepare and file (or cause PGG
to prepare and file) with the SEC the Registration Statement under the
Securities Act (which will include the Proxy Statement) complying with all the
requirements of the Securities Act, for the purpose of registering the
Transaction Shares. TEI shall use its best efforts to cause the Registration
Statement to become effective as soon as practicable, to qualify the Transaction
Shares under the securities or blue sky Laws of such jurisdictions as may be
required, and to keep the Registration Statement and such qualifications current
and in effect for as long as necessary to consummate the Transactions. In
addition, TEI shall use its best efforts to cause the Transaction Shares to be
listed in the Nasdaq National Market tier of the Nasdaq Stock Market and to be
freely tradeable except to the extent any Transaction Shares received by the
Transferors are subject to the provisions of SEC Rule 145 or a Lock-Up Agreement
or are restricted under applicable rules related to transfers under Section 351
of the Code or the related representations made by the respective Transferors in
(and as the term "TRANSFERORS" is used in) Article VIII. All information
concerning TEI or any of its Subsidiaries included in the Registration Statement
will be, on the date of its filing and on the date it becomes effective, true
and correct in all material respects without omission of any material fact
required to be stated to make the information set forth therein not misleading,
and the Registration Statement will comply as to form with all applicable
provisions of the Securities Act.
10.6 TEI SHAREHOLDERS' MEETING. As soon as practicable following the
effectiveness of the Registration Statement, TEI shall call a special meeting of
the TEI Shareholders to be held to vote to approve the TEI Merger and the
issuance of the Transaction Shares to be issued in connection with the
Transactions other than the TEI Merger. TEI will use its best efforts to hold
the TEI Shareholders' Meeting no later than 40 days following the date of
mailing of the definitive proxy statement to be furnished to TEI Shareholders in
connection with such meeting (the "PROXY STATEMENT"). TEI will recommend
approval of the matters referred to above, and agrees to use its best efforts to
obtain a favorable vote thereon. As soon as practicable following the
effectiveness
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of the Registration Statement, and subject to the last sentence of this Section
10.6, TEI will cause to be mailed to each TEI Shareholder a copy of the Proxy
Statement complying in all material respects with the Exchange Act. All
information concerning TEI or any of its Subsidiaries included in the Proxy
Statement will be, on the date of commencement of the mailing of the Proxy
Statement (the "MAILING DATE"), true and correct in all material respects
without omission of any material fact required to be stated to make the
information set forth therein not misleading. TEI shall not be required to mail
or otherwise furnish the Proxy Statement to TEI Shareholders unless it shall
have received a letter from J.P. Morgan Securities Inc., dated no earlier than
three days prior to the Mailing Date, which confirms as of the date thereof the
conclusion set forth in the TEI Fairness Opinion.
10.7 CONFIDENTIALITY. All information and data furnished by the Non-TEI
Parties to the TEI Parties under this Agreement shall be received, held and
treated confidentially by the TEI Parties, and none of such information shall be
used in any manner for the benefit of TEI or any of its Subsidiaries or for the
benefit of any business controlled by it or them. As soon as practicable after
any termination of this Agreement, the TEI Parties shall return to the
respective Combining Entities, and shall cause their representatives to return
to the Combining Entities, all documents (and all copies thereof) obtained from
the respective Combining Entities under this Agreement.
10.8 NO SOLICITATION. TEI will immediately terminate any existing
activities, discussions and negotiations with third parties concerning any
possible Alternative Transaction. TEI will, and TEI will not cause or permit its
Subsidiaries and the respective officers, directors, representatives, agents or
representatives of TEI or its Subsidiaries to, directly or indirectly knowingly
encourage, solicit or initiate any discussions or negotiations with any Person
concerning any Alternative Transaction; PROVIDED, HOWEVER, that (i) if TEI's
Board of Directors determines, after consultation with counsel, that it is
required to do so in the exercise of the fiduciary duties of TEI's directors to
the Company or its stockholders, TEI's Board of Directors may respond to a
written offer for an Alternative Transaction and (ii) nothing in this Section
10.8 shall prohibit TEI or its Board of Directors from taking and disclosing to
the TEI Shareholders a position with respect to a tender offer by a third party
pursuant to Rules 14d-9 and 14e-2(a) under the Exchange Act or from making such
other disclosure to the TEI Shareholders which, as advised by its counsel, is
required under applicable Law. TEI will promptly communicate to the Combining
Entities the terms and conditions of any proposal for an Alternative Transaction
that it may receive and will keep the Combining Entities informed as to the
status of any discussions or other actions taken pursuant to such proposed or
contemplated Alternative Transaction.
10.9 FINANCING OF OPTION EXERCISE. TEI agrees that immediately prior to
the Effective Time, it will lend to those holders of PMT Options designated by
PMT (the "OPTIONEE BORROWERS") up to $825,000 for the purpose of enabling the
Option Borrowers to exercise their respective Outstanding PMT Options. The
proceeds of all such loans (the "OPTIONEE LOANS") shall be paid by TEI directly
to PMT, for the account of the Optionee Borrowers, in payment of the exercise
price of their respective Outstanding PMT Options. Each Optionee loan shall be:
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(i) evidenced by and payable as provided in a promissory note of the
Optionee Borrower in the form attached as Exhibit G to this Agreement to
be executed and delivered to TEI by the Optionee Borrower immediately
before the Effective Time;
(ii) secured by a pledge by the Optionee Borrower of all Transaction
Shares issued to the Optionee Borrower pursuant to the Transaction in
exchange for the shares of PMT common stock purchased by the Optionee
Borrower upon exercise of his or her Outstanding PMT Options (but not by
any other Transaction Shares issued to the Optionee Borrower in exchange
for any other shares of PMT common stock owned by such Optionee Borrower),
each such pledge to be made by a Stock Pledge Agreement to be executed and
delivered to TEI by the Optionee Borrower immediately before the Effective
Time, but to become effective upon the Effective Time.
The obligation of TEI to make each Optionee Loan shall be conditioned on
TEI's receipt from the Optionee Borrower for whose account such loan is to be
made, of such promissory note and Stock Pledge Agreement.
10.10 CONSUMMATION OF TRANSACTIONS. The TEI Parties shall use their best
efforts to perform and fulfill all conditions and obligations on their part to
be performed and fulfilled under this Agreement, to the end that the
Transactions shall be consummated.
ARTICLE XI
COVENANTS OF COMBINING
ENTITIES PENDING CLOSING
The Combining Entities severally agree that pending the Closing:
11.1 CONDUCT OF BUSINESS. Each Combining Entity shall conduct its
operations according to its ordinary and usual course of business, and shall use
its best efforts to preserve intact its business organization, keep available
the services of its officers and employees and maintain normal business
relationships with customers, clients and others having business relationships
with it. Each Combining Entity shall confer on a regular and frequent basis with
one or more designated representatives of TEI to report on operational matters
of materiality and to report the general status of ongoing operations of such
Combining Entity. Each Combining Entity shall notify TEI and each other
Combining Entity of:
(i) any unexpected material emergency or other material change in
the normal course of business or in the operation of the properties of
such Combining Entity;
(ii) any significant development in any regulatory proceedings,
governmental complaints, investigations or hearings (or communication
indicating that any may be
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contemplated) involving such Combining Entity and which could have a
Material Adverse Effect on such Combining Entity; and
(iii) any matter or event which comes to the knowledge of such
Combining Entity and which makes or could make any representation and
warranty made concerning such Combining Entity in Article IV, V or VI,
respectively, untrue or inaccurate.
Each Combining Entity shall keep TEI and each other Combining Entity fully
informed of such events and permit representatives of TEI and the other
Combining Entities access to all materials prepared in connection with such
events.
11.2 FORBEARANCE BY COMBINING ENTITIES. No Combining Entity shall:
(i) incur any indebtedness for borrowed money, other than to finance
its trading activities in the normal course of its business;
(ii) increase the compensation levels of its officers or management
level employees or grant any general salary increases, other than merit
increases in the ordinary course of business;
(iii) enter into any lease agreements or other long-term
commitments;
(iv) acquire or negotiate for the acquisition of any business;
(v) effect any change in its capital structure;
(vi) declare or pay any dividends or pay any bonuses, extraordinary
commissions or any other unusual distributions to its shareholders or
partners;
(vii) sell or agree to sell all or substantially all, or any
material portion, of its assets, or merge or consolidate with any other
Entity; or
(viii) take any of the other actions or permit to occur any of the
other events specified in Section 4.9, 5.9 or 6.9, as the case may be,
which are within the control of such Combining Entity;
PROVIDED, HOWEVER, that notwithstanding the foregoing restrictions:
(i) PMT will be permitted to distribute to the PMT Shareholders
before the Closing all amounts accumulated in PMT's Accumulated Adjustment
Account in respect of earnings of PMT for all periods ending on or before
the Closing Date, but only if and to the extent such distributions will
not cause PMT's shareholders' equity to be reduced below $2,888,280;
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(ii) Spires will be permitted to make distributions to the Spires
Partners prior to the Closing as long as partners' capital of Spires is
not below, and if and to the extent the distributions will not cause
partners' capital of Spires to be reduced below, $1,736,320;
(iii) any Combining Entity may lease office equipment which is not
material in amount, and Spires may enter into leases for office space
which do not commit Spires for annual rentals in excess of $190,000 or
rentals over the life of the lease in excess of $1.2 million;
(iv) Spires may employ or engage new brokers or group of new brokers
and open new offices;
(v) HWG may issue shares of its common stock in connection with
exercises of Outstanding HWG Options as provided in Sections 7.7 and 13.8;
and
(vi) PMT may issue shares of its common stock in connection with
exercises of Outstanding PMT Options as provided in Sections 7.7 and 13.8.
11.3 ACCESS AND INFORMATION. Each Combining Entity shall give TEI and each
other Combining Entity and their respective representatives access during normal
business hours to all the properties, books, contracts, commitments and records
of such Combining Entity so that TEI and each other Combining Entity may have
full opportunity to make such investigation of such Combining Entity as they
shall reasonably request in advance. Each Combining Entity will furnish TEI and
each other Combining Entity all information concerning such Combining Entity
required for inclusion in any application, filing, statement or notice made by
TEI or any other Combining Entity to, or filed or joined in by TEI or any other
Combining Entity with, any Government Entity in connection with this Agreement
or the Transactions. None of the information furnished to TEI or any other
Combining Entity under this Section 11.3, including any information concerning a
Combining Entity furnished by it for inclusion in the Registration Statement or
the Proxy Statement included therein, shall, at the date furnished, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
11.4 SUPPLEMENTAL INFORMATION. Each Combining Entity shall furnish TEI and
each other Combining Entity copies of such Combining Entity's interim monthly
financial statements as soon as practicable but in any event within 35 days
after the end of each month, together with any information ordinarily prepared
in connection with such financial statements. All such financial statements
shall be prepared in conformity with GAAP, shall present fairly in all material
respects, in accordance with GAAP, the financial position of the reporting
Combining Entity at the end of the periods covered thereby, subject to year-end
adjustments (consisting of normal recurring accruals) and the omission of
explanatory footnote materials required by GAAP.
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11.5 ADVISORY CONTRACT CONSENTS. As soon as reasonably practicable, HWG
shall inform its noninvestment company advisory clients of the transactions
contemplated by this Agreement and shall, in compliance with the Investment
Advisers Act and any other applicable Law, request such clients' consents may be
necessary to effect the assignment of its Investment Advisory Related
Agreements. HWG may satisfy this obligation, insofar as it relates to
noninvestment company advisory clients (other than collective investment
arrangements managed by HWG as to which the governing instruments or applicable
Law require any different or supplemental procedure, in which case the different
or supplemental procedures must be followed), by providing each such client with
the notice described in the first sentence of this Section 11.5 and obtaining
either a new investment advisory contract with such client effective at the
Effective Time or such client's consent in the form of an actual written consent
or in the form of an implied consent and complying with any other requirements,
including, to the extent applicable, the disclosure requirements of Rule 204-3
under the Investment Advisers Act. Each such implied consent may be obtained by
requesting written consent as aforesaid and informing the client in writing at
least 60 days in advance of the Effective Time of:
(i) the HWG Merger and HWG's intention to complete the HWG Merger so
as to result in a statutory assignment of such Investment Advisory Related
Agreement;
(ii) HWG's intention to continue the advisory services after the
Effective Time if the client does not terminate its Investment Advisory
Related Agreement before the Effective Time; and
(iii) the fact that the consent of the client will be implied if the
client continues to accept advisory services without termination.
11.6 CONFIDENTIALITY. All information and data furnished to a Combining
Entity by a TEI Party or another Combining Entity under this Agreement, whether
furnished orally or in writing, shall be received, held and treated
confidentially by such receiving Combining Entity, and none of such information
shall be used in any manner for the benefit of the receiving Combining Entity or
for the benefit of any business controlled by it. As soon as practicable after
any termination of this Agreement, each Combining Entity shall return to the TEI
Parties and the other Combining Entities, respectively, and shall cause their
representatives to return to the TEI Parties and the other Combining Entities,
respectively, all documents (and all copies thereof) obtained from them under
this Agreement.
11.7 SHAREHOLDERS' AND PARTNERS' MEETINGS. As soon as practicable
following effectiveness of the Registration Statement, each Combining Entity
shall call a special meeting of its shareholders or partners, as the case may
be, to be held to vote to approve (i) the HWG Merger in the case of HWG and the
HWG Shareholders, (ii) the PMT Merger in the case of PMT and the PMT
Shareholders, and (iii) the Spires Transactions in the case of Spires and its
partners (collectively, the "SPECIAL MEETINGS"). Each Combining Entity will use
its best efforts to hold its Special Meeting no later than 30 days following the
effectiveness of the Registration Statement. Each Combining Entity will
recommend approval of the matters to be acted upon at its Special Meeting as
provided above, and agrees to use its best efforts to obtain a favorable vote
thereon.
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11.8 CONSUMMATION OF TRANSACTIONS. The Combining Entities shall use their
best efforts to perform and fulfill all conditions and obligations on their part
to be performed and fulfilled under this Agreement, to the end that the
Transactions shall be consummated.
ARTICLE XII
MUTUAL CONDITIONS
The respective obligations of all Parties to consummate the Transactions
are subject to the fulfillment of each of the following conditions on or before
the Closing Date:
12.1 NO ADVERSE PROCEEDINGS. No order entered or Law promulgated or
enacted by any Governmental Entity shall be in effect which would prevent
consummation of any of the Transactions, and no proceeding brought by a
Governmental Entity or any other Person shall have been commenced and be pending
which seeks to restrain, enjoin, prevent or materially delay or restructure any
of the Transactions.
12.2 REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective with the SEC, and no stop order suspending its
effectiveness shall have been issued and no proceedings for that purpose shall
have been instituted by the SEC, and the Registration Statement shall have
registered the issuance of all of the Transaction Shares so as to make them
freely tradeable except to the extent contemplated in Section 10.5.
12.3 LISTING OF TRANSACTION SHARES. The Transaction Shares to be issued in
connection with the Transactions shall have been approved for inclusion in the
Nasdaq National Market tier of the Nasdaq Stock Market, subject to official
notice of issuance.
12.4 APPROVAL OF BANKING COMMISSIONER. The Texas Banking Commissioner
shall have approved (i) the PMT Merger under Sections 3.501 through 3.303 of the
TTCA and (ii) the acquisition of control of PMT by PGG, under Sections 4.001
through 4.006 of the TTCA.
12.5 BROKER-DEALER REGULATORY REQUIREMENTS. All consents, authorizations,
approvals, filings or exemptions required under all applicable Broker-Dealer
Regulatory Requirements in connection with the HWG Merger and the Spires Merger,
respectively, shall have been obtained and not rescinded or adversely modified.
12.6 TEI SHAREHOLDER APPROVAL. The TEI Merger and the issuance of the
Transaction Shares to be issued in connection with the Transactions other than
the TEI Merger shall have been approved by the requisite vote of the TEI
Shareholders.
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12.7 OTHER SHAREHOLDER AND PARTNER APPROVALS. The HWG Merger shall have
been approved by the requisite vote of the HWG Shareholders, the PMT Merger
shall have been approved by the requisite vote of the PMT Shareholders, and the
Spires Transactions shall have been approved by the requisite vote or consent of
the Spires Partners under Article XVI of the Spires Partnership Agreement.
ARTICLE XIII
CONDITIONS TO OBLIGATIONS OF TEI PARTIES
The respective obligations of the TEI Parties to consummate the
Transactions are subject to the fulfillment of each of the following conditions
on or before the Closing Date:
13.1 REPRESENTATIONS TRUE AT CLOSING. The TEI Parties shall not have
discovered any material error, misstatement or omission in the representations
and warranties made by the Non-TEI Parties in any of Articles IV through VII;
the representations and warranties made by the Non-TEI Parties in Articles IV
through VII shall be deemed to have been made again as of the time of the
Closing, and shall then be true in all material respects; each Non-TEI Party
shall have performed and complied with all agreements and conditions required to
be performed or complied with by it at or prior to the Closing; and the TEI
Parties shall have received certificates, each dated the Closing Date, of the
President or a Vice President of each of the Combining Entities, to the effect
set forth in this Section 13.1.
13.2 NO ADVERSE CHANGES. Since the date of this Agreement, no event shall
have occurred which has had or could be reasonably expected to have a Material
Adverse Effect on any of the Combining Entities.
13.3 OPINION OF HWG COUNSEL. The TEI Parties shall have received an
opinion, dated the Closing Date, of Ryan & Sudan, L.L.P., counsel to the HWG
Parties, in the form attached as Exhibit A to this Agreement.
13.4 OPINION OF PMT COUNSEL. The TEI Parties shall have received an
opinion, dated the Closing Date, of Ryan & Sudan, L.L.P., counsel for the PMT
Parties, to the effect set forth in Exhibit B attached to this Agreement.
13.5 OPINION OF SPIRES COUNSEL. The TEI Parties shall have received an
opinion, dated the Closing Date, of Mayor, Day, Caldwell & Keeton, L.L.P.,
counsel for the Spires Parties, to the effect set forth in Exhibit C attached to
this Agreement.
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13.6 TAX OPINION. The TEI Parties shall have received an opinion dated the
Closing Date from Porter & Hedges, L.L.P., counsel to TEI, to the effect that:
(i) the transactions contemplated by this Agreement, including the
TEI Merger, will not result in the recognition by the TEI Shareholders of
income, gain, loss or deduction for federal income tax purposes;
(ii) for federal income tax purposes, the holding period of the
Transaction Shares received by the TEI Shareholders in connection with the
TEI Merger will include the holding period of the shares of TEI Common
Stock surrendered therefor; and
(iii) the Proxy Statement accurately sets forth the material federal
income tax consequences to the TEI Shareholders of the TEI Merger and the
other transactions contemplated in this Agreement.
13.7 AFFILIATE AGREEMENTS. The TEI Parties shall have received from each
"affiliate" (within the meaning of SEC Rule 145) of each Combining Entity, on or
before the Closing Date, an affiliate's agreement in substantially the form
attached as Exhibit E to this Agreement.
13.8 EXERCISE OF OUTSTANDING OPTIONS. All Outstanding HWG Options and all
Outstanding PMT Options shall have been exercised in accordance with their
terms, and each holder of an Outstanding HWG Option or an Outstanding PMT Option
who is not a Party shall have executed and delivered to TEI an agreement by
which such holder shall have severally joined in the representations and
warranties made by the Transferors in Articles VII and VIII with respect to such
option holder and the shares of capital stock of HWG or PMT, as the case may be,
issued to such option holder upon his or her exercise of such option, and shall
have become subject to and bound by the same indemnification obligations as are
set forth in Sections 17.1 and 17.2 with respect to the Transferors.
13.9 RELEASES. The TEI Parties and each Combining Entity shall have
received a Release, in the form attached as Exhibit F to this Agreement, from
each Transferor who is a shareholder or partner of such Combining Entity.
13.10 AFFIRMATION OF FAIRNESS OPINION. TEI shall have received a letter
from J.P. Morgan Securities Inc., dated the Closing Date, which confirms as of
the date thereof the conclusion set forth in the TEI Fairness Opinion.
13.11 SFP BALANCE SHEET AUDIT. TEI shall have received an audited balance
sheet of SFP as of the latest practicable date (but not more than 30 days) prior
to the Closing Date, together with a report thereon of PricewaterhouseCoopers
LLP, and such audited balance sheet shall not have reflected any fixed or
contingent debts, liabilities or obligations of SFP at the date thereof, other
than for U.S. federal and state income and franchise Taxes in respect of SFP's
taxable period beginning January 1, 1998.
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13.12 SFF BALANCE SHEET AUDIT. TEI shall have received an audited balance
sheet of SFF as of the latest practicable date (but not more than 30 days) prior
to the Closing Date, together with a report thereon of PricewaterhouseCoopers
LLP, and such audited balance sheet shall not have reflected any fixed or
contingent debts, liabilities or obligations of SFF at the date thereof.
ARTICLE XIV
CONDITIONS TO NON-TEI PARTIES OBLIGATIONS
The respective obligations of the Non-TEI Parties to consummate the
Transactions and are subject to the fulfillment of each of the following
conditions on or before the Closing Date:
14.1 TEI REPRESENTATIONS TRUE AT CLOSING. The Combining Entities shall not
have discovered any material error, misstatement or omission in the
representations and warranties made by the TEI Parties in Articles III and VIII;
the representations and warranties made by the TEI Parties in Articles III and
VIII shall be deemed to have been made again as of the time of the Closing, and
shall then be true in all material respects; each TEI Party shall have performed
and complied with all agreements and conditions required to be performed or
complied with by it at or prior to the Closing; and the Combining Entities shall
have received certificates, each dated the Closing Date, of the President or
Vice President of each of the TEI Parties, to the effects set forth in this
Section 14.1.
14.2 OTHER REPRESENTATIONS TRUE AT CLOSING. In the case of any one
Combining Entity and the Transferors related to it, such Combining Entity shall
not have discovered any material error, misstatement or omission in the
representations and warranties made by another Combining Entity in Article IV, V
or VI, as the case may be; the representations and warranties made by the other
Combining Entities in Articles IV, V and VI, as applicable, shall be deemed to
have been made again as of the time of the Closing, and shall then be true in
all material respects; each other Combining Entity shall have performed and
complied with all agreements and conditions required to be performed or complied
with by it at or prior to Closing; and such Combining Entity shall have received
certificates, each dated the Closing Date, of the President or Vice President of
each of the other Combining Entities to the effects set forth in this Section
14.2.
14.3 NO ADVERSE TEI CHANGES. Since the date of this Agreement, no event
shall have occurred which could reasonably be expected to have a Material
Adverse Effect on TEI and its Subsidiaries.
14.4 NO OTHER ADVERSE CHANGES. In the case of any one Combining Entity and
its related Transferors, no event shall have occurred which could reasonably be
expected to have a Material Adverse Effect on another Combining Entity.
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14.5 OPINION OF TEI'S COUNSEL. The Combining Entities and the Transferors
shall have received an opinion, dated the Closing Date, of Porter & Hedges,
L.L.P., counsel to the TEI Parties, in the form attached as Exhibit D to this
Agreement.
14.6 TAX OPINION. The Combining Entities shall have received an opinion,
dated the Closing Date, of PricewaterhouseCoopers LLP, to the effect that:
(i) the transactions contemplated by this Agreement, including the
HWG Merger, the PMT Merger and the Spires Transactions, will not result in
the recognition by the Transferors of income, gain, loss or deduction for
federal income tax purposes; and
(ii) for federal income tax purposes, the holding period of the
Transaction Shares received by the respective Transferors in connection
with the HWG Merger, the PMT Merger and the Spires Transactions,
respectively, will include the holding period of the shares of capital
stock and partnership interests in the Combining Entities surrendered
therefor.
14.7 WORKING CAPITAL; CASH AND INVESTMENTS. As of the end of the last full
calendar month ended at least 30 days before the Closing Date (the
"DETERMINATION DATE"), (i) the sum of (x) the total consolidated current assets
of TEI and its consolidated Subsidiaries (as determined in accordance with GAAP)
and (y) all costs and expenses incurred and paid by TEI after June 30, 1998 and
on or before the Determination Date in connection with the Transactions, shall
have equaled or exceeded $29 million, and (ii) the consolidated net working
capital of TEI and its consolidated Subsidiaries (determined by deducting (x)
all consolidated current liabilities of TEI and its consolidated Subsidiaries at
the Determination Date, determined in accordance with GAAP, but excluding all
then current liabilities representing accrued and unpaid costs and expenses
incurred by TEI in connection with the Transactions from (y) the amount set
forth in clause (i) of this sentence, shall have equaled or exceeded $27.6
million. The cash, cash equivalents and short-term investments of TEI and its
consolidated Subsidiaries at the Closing Date, plus all Transaction Expenses
paid after the June 30, 1998 and before the Closing Date, shall have equaled or
exceeded $27 million.
14.8 ADJUSTED NET WORTH. As of the Determination Date, the sum of (i) the
total consolidated current assets of TEI and its consolidated Subsidiaries
(determined in accordance with GAAP) minus (ii) the sum of (x) consolidated
liabilities (both current and long-term, but excluding all then current
liabilities representing accrued and unpaid costs and expenses incurred by TEI
in connection with the Transactions) of TEI and its consolidated Subsidiaries,
and (y) without duplication of any such liability, any amounts which are or
which in accordance with GAAP should have been, recorded on the consolidated
balance sheet of TEI and its consolidated Subsidiaries at the Determination Date
as a commitment or contingency, shall have equaled or exceeded $26.6 million.
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14.9 PGG BOARD REPRESENTATION. PGG shall have increased the size of its
Board of Directors to twelve, and Titus H. Harris, Jr., Robert E. Garrison, II,
Stephen M. Reckling, Peter W. Badger, Richard C. Webb and Sean Dobson, or such
other individuals (in lieu of those named) as may be designated by the Combining
Entities and as are reasonably acceptable to PGG, shall have been appointed to
PGG's Board of Directors.
ARTICLE XV
ADDITIONAL AGREEMENTS
15.1 APPLICATION TO BANKING COMMISSIONER. As soon as practicable after the
execution of this Agreement, (i) PMT, the PMT Merger Subsidiary and TEI shall
prepare and file with the Texas Banking Commissioner an application under
Section 3.302 of the TTCA seeking the Texas Banking Commissioner's approval of
the PMT Merger, (ii) TEI shall prepare and file with the Texas Banking
Commissioner an application under Section 4.002 of the TTCA seeking the Texas
Banking Commissioner's approval of PGG's acquisition of control of PMT, and
(iii) upon being notified by the Texas Banking Commissioner that the application
described in clause (ii) is complete, TEI shall either (x) publish notice of the
application to acquire control of PMT in a newspaper of general circulation in
Harris County, Texas in compliance with Section 4.002(d) of the TTCA or (y)
request from the Texas Banking Commissioner, under Section 4.002(e) of the TTCA,
a waiver of the publication of notice requirement. Thereafter, the TEI Parties
and the PMT Parties shall take all such action and shall attend all such
hearings and provide all such information to the Texas Banking Commissioner as
the Commissioner may require in connection with the Commissioner's consideration
of the applications described in this Section 15.1; PROVIDED, HOWEVER, that
nothing in this Section 15.1 shall require any TEI Party or PMT to (i) agree to
the imposition of any material limitation on the ability of PMT to conduct its
trust business after the Closing in substantially the same manner as before the
Closing or (ii) make any undertaking relating to PMT or its assets, properties,
business, operations, employees or practices which, in the reasonable judgment
of the TEI Parties and the other Combining Entities, would or could have, after
the Closing, a Material Adverse Effect on PMT.
15.2 CONSENTS AND APPROVALS. All Parties shall use their best efforts to
obtain before the Closing, in addition to the approvals and consents referred to
in Section 12.2, 12.3, 12.4 and 12.6, all other consents and approvals listed
and disclosed in Section 4.3 or 4.4 of the HWG Disclosure Schedule, PMT
Disclosure Schedule or the Spires Disclosure Schedule, respectively.
15.3 PUBLICITY. No Party other than TEI or a Combining Entity shall issue
any press release or public announcement pertaining to the Transactions. TEI and
the Combining Entities shall consult with each other concerning any such press
release or public announcement and shall use their best efforts to agree on its
text before its public dissemination and before making any filings with any
Governmental Entity or national securities exchange with respect to any such
press release or public announcement. In cases where TEI and the Combining
Entities are unable to agree on a press release or public announcement, the
Party proposing it will not issue or make it unless the proposing
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Party is required to do so by Law or by any listing agreement with, or rules of,
any national securities exchange (including the Nasdaq Stock Market), in which
case the Party so obligated shall use its reasonable efforts to provide a copy
of the press release or public announcement to the other Party before its filing
or public dissemination.
15.4 EXPENSES. Each TEI Party shall pay its own costs and expenses
incurred in connection with the Transactions, and the respective Combining
Entities and Spires General Partners shall pay their costs and expenses and the
costs and expenses of their respective shareholders and partners in connection
with the Transactions, in each case whether or not the Transactions are
consummated; PROVIDED, HOWEVER, that (i) the SFP Shareholders shall pay all
accounting fees incurred in connection with the preparation of the audited
balance sheet of SFP referred to in Section 13.11, and (ii) the SFP Shareholders
and OVH shall pay all accounting fees incurred in connection with the
preparation of the audited balance sheet of SFF referred to in Section 13.12.
15.5 CONVEYANCE TAXES. The Parties shall cooperate in the preparation of
all Tax Returns, questionnaires, applications or other documents regarding any
real property transfer tax, any stock transfer or stamp tax, or any other
similar transfer or conveyance taxes which become payable in connection with the
Transactions. This Section 15.5 does not apply or extend to any federal, state,
or local income Tax.
15.6 EMPLOYEE PROFIT SHARING PLANS. Each employee profit sharing plan
maintained by a Combining Entity shall fully vest as of the Effective Time the
account balances of all Combining Entity employees who are participants in such
plan ("PARTICIPATING EMPLOYEES"), and the respective Combining Entities shall
take all such actions, if any, as may be necessary to provide for the
distribution to or on behalf of the Participating Employees of their vested
account balances. To the extent permitted by applicable Law, Participating
Employees with loans outstanding under any such Combining Entity profit sharing
plan as of the Effective Time may directly roll over any such loan to TEI's
401(k) Plan (the "TEI PLAN") provided the loan has not been accelerated at the
time of the rollover. Each Combining Entity shall use its best efforts to:
(i) permit each Participating Employee to elect prior to the
Effective Time (contingent on the consummation of the Transactions) a
direct rollover of his or her rolloverable account balance in the
Combining Entity's profit sharing plan to the TEI Plan; and
(ii) cause the profit sharing plan of such Combining Entity to
deliver to the TEI Plan at the Effective Time (or as soon thereafter as
reasonably practicable) the promissory notes and other loan documentation,
if any, of the Participating Employees who have elected a direct rollover
in accordance with procedures prescribed by the Combining Entity.
The TEI Plan shall accept the direct rollover, as provided in Section
401(a)(31) of the Code, and, if applicable, promissory notes that are not
accelerated, from the Combining Entity's respective profit sharing plans.
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15.7 RULE 144 REPORTS. For as long as any Transferor remains subject to
SEC Rule 144 or SEC Rule 145 with respect to such Transferor's sale of shares of
PGG Common Stock, PGG will make available to such Transferor the benefit of
rules and regulations of the SEC which may permit such Transferor to sell shares
of PGG Common Stock without registration by:
(i) making and keeping "current public information" "available" (as
both those terms are defined in Rule 144) at all times;
(ii) timely filing with SEC in accordance with all applicable rules
and regulations, all reports and other documents (x) required of PGG for
Rule 144 or 145, as either Rule may be amended from time to time (or any
rule, regulation, or statute replacing Rule 144 or 145) to be available
and (y) required to be filed under Section 15d of the Exchange Act even if
PGG's duty to file those reports or documents is suspended or otherwise
terminated under the terms of Section 15d; and
(iii) furnishing a written statement by PGG that it has complied
with the reporting requirements of the Exchange Act and Rule 144, together
with a copy of the most recent annual or quarterly report of PGG and such
reports and documents filed by PGG with the SEC as may reasonably be
requested by any such Transferor.
15.8 LOCK-UP AGREEMENTS. At the Closing, each Transferor who immediately
after the Closing will be (i) an officer or director of PGG, (ii) a holder of
shares of PGG Common Stock representing 2.5% or more of the total number of
shares of PGG Common Stock outstanding immediately after the Effective Time, or
(iii) a member of a "group" (within the meaning of SEC Rule 13d.1) which holds
shares of PGG Common Stock representing 10% or more of the total number of
shares of PGG Common Stock outstanding immediately after the Effective Time,
will deliver to PGG, and TEI will cause each current officer or director of TEI
and each Waltrip Group Shareholder who meets one or more of the criteria
specified in clauses (i) through (iii) above of this Section 15.8, to deliver to
TEI, a letter (collectively, the "LOCK-UP AGREEMENTS"), reasonably satisfactory
in form and substance to TEI, under which each such Person will agree that for a
period of one year following the Closing Date such Person will not, without the
prior written consent of PGG, sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase or otherwise transfer any shares
of TEI Common Stock or any securities convertible into or exercisable for shares
of TEI Common Stock.
15.9 STANDSTILL. If this Agreement is terminated for any reason before the
Closing (other than pursuant to clause (iv) of Section 18.3), no Combining
Entity will, and each Combining Entity will cause each of its Affiliates not to,
at any time within one year following the date of any termination of this
Agreement:
(i) acquire, offer to acquire, or agree to acquire, directly or
indirectly, by purchase or otherwise, any voting securities or direct or
indirect rights or options to acquire
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any voting securities of TEI or any of its Affiliates other than as a
result of a stock split, stock dividend or similar recapitalization;
(ii) make or cause to be made any proposal for the acquisition of
TEI or its Affiliates, any assets or businesses of TEI or its Affiliates,
or securities of TEI or its Affiliates or for any other extraordinary
transaction involving TEI, including any merger, or other business
combination, restructuring, tender offer, exchange offer,
recapitalization, liquidation or similar transaction, except (x) as
expressly permitted by this Agreement or (y) proposals pursuant to
customary business transactions in the ordinary course of TEI's business;
(iii) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) with respect to any
securities of TEI or its Affiliates other than with Persons who are
Affiliates of a Combining Entity;
(iv) make, or in any way cause or participate in, any "solicitation"
of "proxies" to vote (as those terms are defined in Regulation 14A under
the Exchange Act) with respect to TEI or its Affiliates, or communicate
with, seek to advise, encourage or influence any Person, in any manner,
with respect to the voting of, securities of TEI or its Affiliates other
than Persons who are Affiliates of a Combining Entity, or become a
"participant" in any "election contest" (as those terms are defined or
used in Rule 14a-11 under the Exchange Act) with respect to TEI or its
Affiliates;
(v) initiate, propose or otherwise solicit stockholders for the
approval of one or more stockholder proposals with respect to TEI or its
Affiliates or induce or attempt to induce any other Person to initiate any
stockholder proposal, or seek election to or seek to place a
representative on the Board of Directors of TEI or its Affiliates or seek
the removal of any member of the Board of Directors of TEI or its
Affiliates;
(vi) in any manner, agree, attempt, seek or propose (or make any
request for permission with respect thereto) to deposit any securities of
TEI or its Affiliates, directly or indirectly, in any voting trust or
similar arrangement or to subject any securities of TEI or its Affiliates
to any other voting or proxy agreement, arrangement or understanding;
(vii) disclose any intention, plan or arrangement, or make any
public announcement (or request permission to make any such announcement),
or induce any other Person to take any action, inconsistent with the
foregoing;
(viii) enter into any negotiations, arrangements or understandings
with any third party with respect to any of the foregoing;
(ix) advise, assist or encourage or finance (or assist or arrange
financing to or for) any other Person in connection with any of the
foregoing; or
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(x) otherwise act in concert with others, to seek to control or
influence the management, Board of Directors or policies of TEI or its
Affiliates;
PROVIDED, that this Section 15.9 shall not restrict or inhibit the right of a
Combining Entity or any of its Affiliates, or any present shareholder of TEI, to
exercise its voting rights as a shareholder of TEI.
15.10 RELEASE OF TRANSFERORS. Effective as of the Effective Time, and
without the requirement of any further action on the part of any TEI Party, any
Combining Entity or either Spires General Partner, each Transferor shall be
released and forever discharged by each TEI Party, each Combining Entity and
each Spires General Partner (collectively, together with their respective
successors and assigns, the "RELEASING PARTIES") from any and all disputes,
claims, controversies, demands, rights, obligations, liabilities, actions and
causes of action of every kind and nature which any Combining Entity or either
Spires General Partner may have had prior to the Effective Time, or which any
Releasing Party may have after the Effective Time, and which are based on any
act or omission by any Transferor taken or omitted to be taken by such
Transferor in such Transferor's capacity as an officer, director, employee,
stockholder, partner or "controlling person" of a Combining Entity or a Spires
General Partner; PROVIDED, HOWEVER, that nothing in this Section 15.10 shall
release any Transferor from any obligation of such Transferor under this
Agreement.
15.11 SFF PRE-CLOSING DISTRIBUTIONS. Immediately before the SFP Redemption
and the Closing, SFF shall distribute to SFP and OVH all cash and cash
equivalents then owned and held by SFF.
15.12 SFP REDEMPTION. On the Closing Date, immediately before the Closing,
SFP shall purchase and redeem from the SFP Shareholders, PRO RATA in accordance
with their respective holdings of the SFP Shares, 38,265 of the SFP Shares in
exchange for a purchase price (the "REDEMPTION PRICE") equal to the amount of
cash owned and held by SFP at the Closing Date. With respect to the payment of
the Redemption Price, the SFP Shareholders authorize and direct that (i) an
amount of cash equal to 110% of the Estimated SFP Closing Date Tax Liability
(the "INITIAL ESCROW DEPOSIT") shall be deposited by SFP with the Escrow Agent
to be held and distributed by the Escrow Agent as provided in Section 15.13 and
in the Escrow Agreement and (ii) the remaining balance of the Redemption Price
shall be paid by SFP, in cash, by wire transfer, to the SFP Shareholder
Representative for the account of, and for distribution by the SFP Shareholder
Representative to, the SFP Shareholders.
15.13 SFP TAX LIABILITY AND RELATED ESCROW. At least ten and not more than
20 days before the Closing Date, SFP and TEI shall cause PricewaterhouseCoopers
LLP and Margolis Phipps & Wright P.C. to jointly determine the estimated U.S.
federal income tax liability of SFP for the SFP Short Tax Period. The amount of
such estimated tax liability, as determined by such accounting firms, less the
amount of the SFP Current Year Estimated Tax Payments, is herein called the
"ESTIMATED SFP CLOSING DATE TAX LIABILITY." Following the Closing, SFP shall pay
when due, and PGG shall cause SFP to pay when due and shall furnish to SFP all
funds which SFP may require in order for SFP to pay when due, all quarterly
estimated payments of U.S. federal income Taxes which
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may become due and owing by SFP after the Closing Date in respect of SFP's 1998
U.S. federal income Tax liability.
At least 30 days before the Final SFP Return Date, PGG shall prepare, or
cause to be prepared, and deliver to the SFP Shareholder Representative, the
U.S. federal income Tax return of SFP for the SFP Short Tax Period, reflecting
the actual U.S. federal income Tax liability of SFP for the SFP Short Tax Period
(the "SFP FINAL TAX RETURN"). Unless within ten days from the date of his
receipt of the SFP Final Tax Return the SFP Shareholder Representative delivers
to PGG a written notice (a "NOTICE OF OBJECTION") stating that the SFP Final Tax
Return does not accurately reflect SFP's U.S. federal income Tax liability for
the SFP Short Tax Period, PPG and the SFP Shareholder Representative shall
promptly issue joint written instructions to the Escrow Agent to distribute:
(i) to PGG, a portion of the Escrow Funds equal to the excess, if
any, of (x) the amount of the U.S. federal income Tax liability of SFP for
the SFP Short Tax Period, as reflected in the SFP Final Tax Return, over
(y) the amount of the SFP Current Year Estimated Tax Payments, plus an
amount equal to any interest which SFP may be required to pay to the IRS
in respect of the U.S. federal income Tax liability of SFP for the SFP
Short-Tax Period; and
(ii) to the SFP Shareholder Representative, the balance, if any, of
the Escrow Funds.
If the PFS Shareholder Representative delivers to PGG a Notice of
Objection within the ten-day period specified above, then the U.S. federal
income Tax liability of SFP for the SFP Short Tax Period shall be calculated by
PricewaterhouseCoopers LLP, whose determination in the matter shall be final,
conclusive and binding on all Parties and the Shareholder Representative. In
such case PGG and the SFP Shareholder Representative, within five days from the
date of such determination by PricewaterhouseCoopers LLP, shall issue joint
written instructions to the Escrow Agent to distribute:
(i) to PGG, a portion of the Escrow Funds equal to the excess, if
any, of (x) the amount of the U.S. federal income Tax liability of SFP for
the SFP Short Tax Period, as determined by PricewaterhouseCoopers LLP,
over (y) the amount of the SFP Current Year Estimated Tax Payments, plus
an amount equal to any interest which SFP may be required to pay to the
IRS in respect of the U.S. federal income Tax liability of SFP for the SFP
Short-Tax Period; and
(ii) to the SFP Shareholder Representative, for the account of the
SFP Shareholders, the balance, if any, of the Escrow Funds.
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ARTICLE XVI
NATURE AND SURVIVAL
OF
REPRESENTATIONS AND WARRANTIES
16.1 NATURE OF STATEMENTS. All, but only those, statements contained in
this Agreement or any Disclosure Schedule or certificate delivered by or on
behalf of a Party under this Agreement shall be deemed representations and
warranties made by that Party in connection with the transactions contemplated
by this Agreement.
16.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the TEI Parties in Article III, the representations and
warranties made by the HWG Parties in Article IV, the representations and
warranties made by the PMT Parties in Article V, and the representations and
warranties made by the Spires Parties in Article VI shall not survive, and shall
terminate upon, the Closing. Regardless of any investigation made at any time by
or on behalf of any Party or of any information any Party may have as a result
of any such investigation, all other representations and warranties made by the
respective Parties in Articles VII, VIII and IX shall survive the Closing and
shall continue in effect thereafter.
ARTICLE XVII
INDEMNIFICATION
The respective indemnification obligations of the Parties are:
17.1 INDEMNIFICATION BY THE TRANSFERORS. Each Transferor severally agrees
to pay and to indemnify and hold harmless each TEI Party, each Combining Entity,
each other Transferor, and their respective Affiliates (but, in the case of the
Combining Entities, only their respective Affiliates after the Closing),
successors and assigns from and against any and all Damages caused by, arising
out of or in respect of:
(i) any breach or default in the performance by the Transferor of
any covenant or agreement made by the Transferor in this Agreement; or
(ii) any breach of warranty or inaccurate or erroneous
representation made by the Transferor in Article VII of this Agreement.
17.2 OTHER INDEMNIFICATION BY THE TRANSFERORS. Each Transferor agrees to
pay and to indemnify and hold harmless each TEI Party, each Combining Entity,
each other Transferor, and their respective Affiliates (but, in the case of the
Combining Entities, only their respective Affiliates after the Closing),
successors and assigns from and against any and all Damages caused by, arising
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out of or in respect of any breach of warranty or inaccurate or erroneous
representation made by such Transferor in Article VIII of this Agreement.
17.3 INDEMNIFICATION BY THE TEI PARTIES. The TEI Parties jointly and
severally agree to pay and to indemnify and hold harmless and defend each
Non-TEI Party and its Affiliates (but not any Combining Entity after the
Closing), and their respective successors and assigns from and against any and
all Damages caused by or arising out of or in respect of:
(i) any breach or default in the performance by any TEI Party of any
covenant or agreement of such TEI Party contained in this Agreement; and
(ii) any breach of warranty or inaccurate or erroneous
representation made by such TEI Party in Article VIII of this Agreement.
17.4 INDEMNIFICATION BY SPIRES GP SHAREHOLDERS. The Spires GP Shareholders
who are shareholders of the Spires Managing General Partner jointly and
severally agree to pay and to indemnify and hold harmless each TEI Party, each
Combining Entity, each other Transferor, and their respective Affiliates (but,
in the case of the Combining Entities, only their respective Affiliates after
the Closing), successors and assigns from and against any and all Damages caused
by, arising out of or in respect of (i) any breach of warranty or inaccurate or
erroneous representation made by such Spires GP Shareholders in Section 9.1 and
(ii) any liability of the Spires Managing General Partner for any federal or
state income Taxes for any taxable period ending on or before the Closing Date.
The Spires GP Shareholders who are shareholders of the Spires Secondary
General Partner jointly and severally agree to pay and to indemnify and hold
harmless each TEI Party, each Combining Entity, each other Transferor, and their
respective Affiliates (but, in the case of the Combining Entities, only their
respective Affiliates after the Closing), successors and assigns from and
against any and all damages caused by, arising out of or in respect of (i) any
breach of warranty or inaccurate or erroneous representation made by such Spires
GP Shareholders in Section 9.2 and (ii) any liability of the Spires Secondary
General Partner for any federal or state income Taxes for any taxable period
ending on or before the Closing Date.
17.5 REQUESTS FOR INDEMNIFICATION. If any Party (an "INDEMNIFIED PARTY")
becomes aware of a fact, circumstance, claim, situation, demand or other matter
for which it or any other Indemnified Party has been indemnified under this
Article XVII (any such item being herein called an "INDEMNITY MATTER"), the
Indemnified Party shall give prompt written notice of the Indemnity Matter to
the Indemnifying Party, requesting indemnification therefor, specifying the
nature of and specific basis for the Indemnity Matter and the amount or
estimated amount thereof to the extent then feasible; provided, however, a
failure to give such notice will not waive any rights of the Indemnified Party
except to the extent the rights of the Indemnifying Party are actually
materially prejudiced by such failure. The Indemnifying Party shall have the
right to assume the defense or investigation of such Indemnity Matter and to
retain counsel and other experts to represent the
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Indemnified Party and shall pay the fees and disbursements of such counsel and
other experts. If within 30 days after receipt of the request (or five days if
litigation is pending) the Indemnifying Party fails to give notice to the
Indemnified Party that the Indemnifying Party assumes the defense or
investigation of the Indemnity Matter, an Indemnified Party may retain counsel
and other experts (whose fees and disbursements shall be at the expense of the
Indemnifying Party) to file any motion, answer or other pleading and take such
other action which the Indemnified Party reasonably deems necessary to protect
its interests or those of the Indemnifying Party until the date on which the
Indemnified Party receives such notice from the Indemnifying Party. If an
Indemnifying Party retains counsel and other experts, any Indemnified Party
shall have the right to retain its own counsel and other experts, but the fees
and expenses of such counsel and other experts shall be at the expense of the
Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party
mutually agree to the retention of such counsel and other experts or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would, in the opinion of counsel retained by the
Indemnifying Party, be inappropriate due to actual or potential differing
interests between them.
If requested by the Indemnifying Party, the Indemnified Party agrees to
cooperate with the Indemnifying Party and its counsel in contesting any
Indemnity Matter which the Indemnifying Party defends, or, if appropriate and
related to the Indemnity Matter in question, in making any counterclaim against
the person asserting the Indemnity Matter, or any cross-complaint against any
person. No Indemnity Matter may be settled by the Indemnified Party without the
consent of the Indemnifying Party, which consent will not be unreasonably
withheld. Unless the Indemnifying Party agrees in writing that the Damages to
the Indemnified Party resulting from such settlement are fully covered by the
indemnities provided herein and that such Damages are fully compensable in
money, no Indemnity Matter may be settled without the consent of the Indemnified
Party, which consent will not be unreasonably withheld. Except with respect to
settlements entered without the Indemnified Party's consent pursuant to the
immediately preceding sentence, to the extent it is determined that the
Indemnified Party has no right under this Article XVII to be indemnified by the
Indemnifying Party, the Indemnified Party shall promptly pay to the Indemnifying
Party any amounts previously paid or advanced by the Indemnifying Party with
respect to such matters pursuant to this Article XVII.
After the delivery of a notice of an Indemnity Matter hereunder, at the
reasonable request of the Indemnifying Party the Indemnified Party shall grant
the Indemnifying Party and its representatives full and complete access to the
books, records and properties of the Indemnified Party to the extent reasonably
related to the matters to which the notice relates. The Indemnifying Party will
not disclose to any third person (except its representatives) any information
obtained pursuant to the preceding sentence which is designated as confidential
by the Indemnified Party and which is not otherwise generally available to the
public or not already within the knowledge of the Indemnifying Party, except as
may be required by applicable law. The Indemnifying Party shall request its
representatives not to disclose any such information (unless already within its
knowledge or as may be required by applicable law). All such access shall be
subject to the normal safety
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regulations of the Indemnified Party, and shall be granted under conditions
which will not unreasonably interfere with the business and operations of the
Indemnified Party.
ARTICLE XVIII
AMENDMENT AND TERMINATION
18.1 AMENDMENT. This Agreement may be amended by TEI and the Combining
Entities, by or pursuant to action taken by their respective Boards of
Directors, at any time before or after approval by the TEI Shareholders of the
matters specified in Section 10.6, but after such approval, no amendment shall
be made which increases the number of Transaction Shares issuable to the
Transferors in connection with the Transactions, or which in any way alters or
changes any of the other terms or conditions of this Agreement if the alteration
or change would materially adversely affect the rights of the TEI Shareholders,
without the further approval of the TEI's Shareholders. This Agreement may be
amended only by a written instrument executed by TEI and all of the Combining
Entities.
18.2 WAIVER. At any time on or before the Closing Date, each of the
Parties may (i) extend the time for the performance of any of the obligations or
other act of any of the other Parties, (ii) waive any inaccuracies in the
representations and warranties made in this Agreement or in a Disclosure
Schedule of a Party, (iii) waive compliance with any of the agreements or
conditions of this Agreement which may be legally waived, and (iv) grant
consents under this Agreement. Any such extension, waiver or grant shall be
valid only if evidenced by a written instrument executed by the Party giving it.
Any such extension, waiver or grant on behalf of (i) the TEI Parties need only
be executed by TEI, (ii) the HWG Parties need only be executed by HWG, (iii) the
PMT Parties need only be executed by PMT, and (iv) the Spires Parties need only
be executed by Spires.
18.3 TERMINATION. This Agreement may be terminated at any time before the
Closing by:
(i) the mutual consent of the Boards of Directors of TEI and each
Combining Entity;
(ii) by the Board of Directors of TEI or any Combining Entity, or
the Spires General Partners, if the Transactions have not been consummated
on or before December 31, 1998 (or any later date which may be agreed to
by the mutual written consent of the respective Board of Directors of TEI
and the respective Combining Entities); PROVIDED, HOWEVER, that such right
to terminate this Agreement shall not be available to any Party that has
breached in any material respect its obligations under this Agreement in
any manner that has proximately contributed to the failure of the
Transactions to occur on or before such date; and PROVIDED, FURTHER, that
this Agreement shall be extended not more than 45 days after January 31,
1999 if (x) the Transactions have not been consummated as a result of the
failure
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to receive the approvals or consents set forth in Sections 12.2, 12.3,
12.4 and 12.5 and (y) the Parties are diligently pursuing such approvals
and consents;
(iii) by either the Non-TEI Parties or the TEI Parties if the TEI
Shareholders shall have failed to approve at the TEI Shareholders' Meeting
the matters specified in Section 10.6; and
(iv) by the Board of Directors of any Combining Entity, or the
Spires General Partners, if the Board of Directors of TEI (x) withdraws,
or modifies in a manner adverse to the Non-TEI Parties, its recommendation
for approval of the Transactions or (y) approves or recommends an
Alternative Transaction.
18.4 CONSEQUENCES OF TERMINATION. If this Agreement is terminated as
provided in Section 18.3, it shall forthwith become void and there shall be no
liability or obligation on the part of any Party or their respective officers or
directors, except that the provisions of Sections 10.7, 11.6 and 15.9 shall
survive such a termination. Nothing in this Section 18.4 shall, however, relieve
any Party from any liability for any breach of this Agreement.
ARTICLE XIX
GENERAL PROVISIONS
19.1 NON-BUSINESS DAYS. If the date on which any action (including the
delivery of notices) to be taken under this Agreement falls on a day which is
not a Business Day, the action will be deemed timely taken if on the next
following Business Day.
19.2 SHAREHOLDER CONSENTS. Pursuant to Articles 5.03 and 9.10 of the TBCA:
(i) TEI, as the sole shareholder of PGG, approves this Agreement,
the TEI Merger and the TEI Plan of Merger; and
(ii) PGG, as the sole shareholder of each of the TEI Merger
Subsidiary, the HWG Merger Subsidiary and the PMT Merger Subsidiary,
respectively, approves this Agreement and the TEI Merger, the HWG Merger
and the PMT Merger, respectively, and the HWG Plan of Merger and the PMT
Plan of Merger, respectively.
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19.3 HWG SHAREHOLDERS' AGREEMENT. HWG and the HWG Shareholders agree that:
(i) at the Effective Time, the HWG Shareholders' Agreement shall be
terminated without any further action on the part of any of its parties;
(ii) the execution and delivery of this Agreement by the HWG Parties
shall not be affected by, or constitute a breach or violation of, the HWG
Shareholders' Agreement;
(iii) if at the date of this Agreement there has begun to run, or if
after the date of this Agreement and prior to the Effective Time there
begins to run, any period of time (herein called a "LIMITATION PERIOD")
within which any party bound by or entitled to the benefits of, or whose
shares of HWG common stock are subject to, the HWG Shareholders'
Agreement, must give any notice, offer such shares for sale, accept any
offer to purchase any such shares, purchase shares of HWG common stock,
make any election or take any other action in order to preserve or
maintain any right or benefit of such party, then such Limitation Period
shall cease to run and shall be tolled as of the date of this Agreement,
or, in the case of any Limitation Period beginning after the date of this
Agreement, shall not begin to run unless and until such Limitation Period
shall be resumed and reinstated as provided in clause (v) below of this
Section 19.3;
(iv) for so long as any Limitation Period is tolled under clause
(iii) of this Section 19.3, no party to the HWG Shareholders' Agreement
may exercise any right or option such party would otherwise have but for
the provisions of this Section 19.3; and
(v) if this Agreement is terminated pursuant to Article XVII, then
as of the close of business on the date this Agreement is terminated, the
provisions of this Section 19.3 shall terminate and any Limitation Period
shall resume and be reinstated, or shall commence, as the case may be, ten
days following such termination, and promptly thereafter HWG shall notify
each of the HWG Shareholders that the provisions of this Section 19.3 have
terminated.
19.4 APPOINTMENT OF SELLER REPRESENTATIVE. Each SFP Shareholder hereby
irrevocably constitutes and appoints the Seller Representative as such SFP
Shareholder's true and lawful agent and attorney-in-fact, with full power of
substitution, to act in the name and on behalf of such SFP Shareholder:
(i) to execute and deliver such amendments or supplements to, and to
grant such waivers and consents under, this Agreement as the Seller
Representative in his sole discretion shall deem advisable;
(ii) to receive and receipt for (x) all Transaction Shares issuable
to such SFP Shareholder under this Agreement, (y) the Redemption Price
payable to such SFP
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Shareholder under Section 15.13, and (z) all Escrow Funds held by the
Escrow Agent for the account of or distributable to such SFP Shareholder;
(iii) to receive and receipt for all notices and other
communications required or permitted to be given to such SFP Shareholder
under this Agreement or the Escrow Agreement;
(iv) once the Escrow Agreement is executed and delivered, to execute
and deliver such amendments or supplements to, and to grant such waivers
and consents under, the Escrow Agreement as the Seller Representative in
his discretion shall deem advisable;
(v) to direct the investment and reinvestment of the Escrow Funds;
(vi) to employ legal counsel to represent such SFP Shareholder in
connection with any matter based on or arising under this Agreement of the
Escrow Agreement; and
(vii) to authorize and instruct the Escrow Agent to act in any
manner under the Escrow Agreement with respect to the Escrow Funds.
Each SFP Shareholder acknowledges that the power of attorney granted in
this Section 19.4 is being granted with the understanding that such SFP
Shareholder's interest in the Escrow Funds is hereby rendered subject to the
interests of the other SFP Shareholders, PGG and all other Parties for the
purpose of the Transactions. The powers and authority granted in this Section
19.4 shall be irrevocable and shall not be terminated by any act of such SFP
Shareholder. The Seller Representative shall incur no liability for any action
taken by the Seller Representative, or any omission to take action, in good
faith and in accordance with this Section 19.4, and shall be indemnified, by the
SFP Shareholders from and against any Damages incurred by the Seller
Representative in the performance of his duties as such in the absence of bad
faith, gross negligence or willful misconduct on the part of the Seller
Representative.
19.5 NOTICES. All notices or other communications which are required or
may be given under this Agreement shall be in writing and shall be deemed to
have been duly given when delivered in person or transmitted by telecopier (with
receipt confirmed) to a Party at the address or telecopy number, as applicable,
set forth below (as any such address or telecopier number may be changed from
time to time by notice similarly given):
(i) if to any TEI Party, to:
TEI, Inc.
2900 N. Loop West, Suite 1230
Houston, Texas 77092
Attention: Donald R. Campbell, President
Telecopy No.: (713) 263-0653
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with a copy to:
Porter & Hedges, L.L.P.
700 Louisiana Street, Suite 3500
Houston, Texas 77002
Attention: James M. Harbison, Jr.
Telecopy No.: (713) 228-1331
(ii) if to any HWG Party, to:
Harris Webb & Garrison, Inc.
5599 San Felipe, Suite 301
Houston, Texas 77056
Attention: Titus H. Harris, Jr., Chairman
Telecopy No.: (713) 993-4698
with a copy to:
Ryan & Sudan, L.L.P.
Two Houston Center
909 Fannin Street, 39th Floor
Houston, Texas 77010-1010
Attention: James W. Ryan
Telecopy No.: (713) 652-0503
(iii) if to any PMT Party, to:
Pinnacle Management & Trust Company
5599 San Felipe, Suite 301
Houston, Texas 77056
Attention: Robert E. Garrison II, Chairman
Telecopy No.: (713) 993-4698
with a copy to:
Ryan & Sudan, L.L.P.
Two Houston Center
909 Fannin Street, 39th Floor
Houston, Texas 77010-1010
Attention: James W. Ryan
Telecopy No.: (713) 652-0503
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(iv) if to any Spires Party, to:
Spires Financial, L.P.
5151 San Felipe, Suite 1300
Houston, Texas 77056
Attention: Peter W. Badger, President
Telecopy No.: (713) 572-0308
with copy to:
Mayor, Day, Caldwell & Keeton, L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002-2778
Attention: Jeff C. Dodd
Telecopy No.: (713) 225-7047
19.6 ENTIRE AGREEMENT. This Agreement, its Exhibits, the Disclosure
Schedules, and all documents delivered under this Agreement, constitute the
entire agreement, and supersede all of the prior agreements and undertakings,
both written and oral, among the Parties, or any of them, with respect to the
subject matter of this Agreement.
19.7 ASSIGNMENT; BINDING EFFECT. This Agreement may not be assigned by any
of its Parties. Subject to the preceding sentence, this Agreement shall be
binding upon the Parties and their respective successors and assigns.
19.8 COUNTERPARTS. This Agreement may be executed in counterparts which
together shall constitute a single agreement. Delivery of a signed counterpart
by telephonic facsimile transmission shall be effective as delivery of a
manually signed counterpart.
19.9 GOVERNING LAW; JURISDICTION; SERVICE. This Agreement and the rights
and obligations of the parties created hereby shall be governed by the internal
Laws of the State of Texas without regard to its conflict of law rules. The
Parties irrevocably consent to the non-exclusive jurisdiction of the courts of
the State of Texas in connection with any dispute between or among them arising
under this Agreement.
19.10 SEVERABILITY OF PROVISIONS. If a provision of this Agreement or its
application to any Person or circumstance, is held invalid or unenforceable in
any jurisdiction, to the extent permitted by law, such provision or the
application of such provision to Persons or circumstances other than those as to
which it is held invalid or unenforceable and in other jurisdictions, and the
remaining provisions of this Agreement, shall not be affected.
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19.11 SPECIFIC PERFORMANCE. Each Party agrees that one or more other
Parties would be irreparably damaged if any provision of this Agreement were not
performed in accordance with its specific terms or was otherwise breached.
Therefore, the Parties agree that each Party shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement or any of its provisions
and to specifically enforce this Agreement and its terms and provisions in any
action instituted in any court of the United States or any state thereof having
subject matter jurisdiction, in addition to any other remedy to which a Party
may be entitled, at law or in equity.
19.12 JOINT DRAFTING. This Agreement and its Exhibits have been jointly
drafted by the Parties and their counsel. Neither this Agreement nor any of its
Exhibits shall be construed against any Party based on its authorship.
19.13 CAPTIONS. The article and section headings in this Agreement are for
convenience only, and shall not affect the meaning or interpretation of this
Agreement.
19.14 NO THIRD-PARTY BENEFICIARIES. There are no third-party beneficiaries
of this Agreement, except that the respective Affiliates of the Parties are
entitled to the benefits of the respective indemnification obligations of the
Parties under Article XVII.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Parties have duly executed this Agreement, all as
of the date first written above.
TEI PARTIES:
TEI, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President and
Chief Executive Officer
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President and
Chief Executive Officer
TEI COMBINATION CORP.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President
HWG COMBINATION CORP.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President
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PMT COMBINATION CORP.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President
SPIRES COMBINATION CORP.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President
COMBINING ENTITIES:
HARRIS WEBB & GARRISON, INC.
By: /s/ TITUS H. HARRIS, JR.
Titus H. Harris, Jr., Chairman of
the Board and Chief Executive
Officer
PINNACLE MANAGEMENT & TRUST COMPANY
By: /s/ ROBERT E. GARRISON, II
Robert E. Garrison II, Chairman of
the Board and Chief Executive
Officer
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SPIRES FINANCIAL, L.P.
By: Spires Financial, G.P., Inc.,
Managing General Partner
By: /s/ PETER W. BADGER
Peter W. Badger, President
Capital Financial Partner, Inc.,
Secondary General Partner
By: /s/ ANTONIO MARZIALE
Antonio Marziale, President
HWG SHAREHOLDERS:
Robert E. Garrison II*
Titus H. Harris, Jr.*
W. Wayne Patterson*
Richard C. Webb*
Bruce G. Garrison*
John H. Styles*
Arthur Seeligson III*
G. Clyde Buck*
A. Gary Kovacs*
Harry C. Webb, Jr.*
Charles G. Goodwin*
Brian W. Garrison*
Edward C. Hutcheson, Jr.*
Jeffrey A. Helton*
John N. Giannukos*
Wilkinson Investments*
D. Anned Muse*
Bonnie Studebaker*
Michael Richmond*
Richard P. Paulson*
Robert E. Jones, Jr.*
Howard Y. Wong*
Ronald L. Latta, Jr.*
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Sue Minton Harris, Trustee for the
Estate of Pinkye Lou Blair*
John C. Kerr*
Louis M. Girard*
Styles Family Partnership*
Jeffrey W. Farley*
Jerald S. Cobbs*
Kathleen T. Taylor*
Sidney B. Gervais*
Titus H. Harris III*
Brit W. King*
Caroline O. Wylie*
Amy C. Helmcamp*
Andrea H. Denney*
Cary E. McDonald*
Christopher K. Harshbarger*
Donna B. McMullen*
Janice Webb-McCann*
Pamela S. Caloway*
Reba J. Hocher*
Sinda E. Simms*
*By: /s/ TITUS H. HARRIS, JR.
Titus H. Harris, Jr., Agent and
Attorney-in-Fact
PMT SHAREHOLDERS:
Robert E. Garrison II*
Stephen M. Reckling*
Estate of Harris Masterson III*
Peter W. Badger*
Stephen D. Strake*
Titus H. Harris, Jr.*
T. Craig Benson*
Thomas R. Reckling III*
Lynn A. Bernard, Jr.*
Harvey R. Houck, Jr.
Baine P. Kerr*
John B. Reckling*
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Don M. Woo*
Bruce G. Garrison*
Edward C. Hutcheson, Jr.*
John B. Goodman*
Sue Minton Harris, Trustee for the
Estate of Pinkye Lou Blair*
Norman A. Myers*
John H. Styles*
Laverne Styles*
Richard C. Webb*
H. Greg Goodman, as Co-Trustee for
Harold G. Goodman 1984 Grantor Trust*
John C. Kerr*
Howard Y. Wong*
Bert F. Winston, Jr.*
Alan D. Feinsilver*
Louis M. Girard*
W. Wayne Patterson*
John H. Styles, Jr.*
Mary Harris Cooper*
James S. Reckling*
Sherry G. Ashley*
Pamela S. Caloway*
John W. Lyons*
Thomas K. Reckling*
David Beveridge*
Legacy Trust, Successor Trustee for
Alfred C. Glassel III 1972 Trust*
Linda J. Halcomb*
Lee L. Neathery*
Annette DeWalch Strake*
Melissa Annette Strake*
Jerald S. Cobbs*
Melanie Meeks*
Gerald Wilson*
A. Gary Kovacs*
D. Anned Muse*
Chaille W. Hawkins*
Randa R. Roach*
Patricia A. Flowers*
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Linda K. Martin*
Charles A. Crocker*
Ronald L. Latta, Jr.*
*By: /s/ ROBERT E. GARRISON, II
Robert E. Garrison II, Agent and
Attorney-In-Fact
SPIRES PARTNERS:
SPIRES FINANCIAL - PB, INC.
/s/ PETER W. BADGER
Peter W. Badger, President
SPIRES FINANCIAL - TA, INC.
/s/ TRACY ADAMS
Tracy Adams, President
SPIRES FINANCIAL - SD, INC.
/s/ SEAN DOBSON
Sean Dobson, President
SPIRES FINANCIAL - SG, INC.
/s/ STEVE GORMAN
Steve Gorman, President
SPIRES FINANCIAL G.P., INC.
By: /s/ PETER W. BADGER
Peter W. Badger, President
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CAPITAL FINANCIAL PARTNER, INC.
By: /s/ ANTONIO MARZIALE
Antonio Marziale, President
SPIRES FINANCIAL FUNDING, L.P.
By: Spires Financial Partners, Inc.
By: /s/ ANTONIO MARZIALE
Antonio Marziale, President
INTERFIN COMMERCIAL FUNDING CORPORATION
By: /s/ GIORGIO BORLENGHI
Giorgio Borlenghi, President
SPIRES GP SHAREHOLDERS:
SHAREHOLDERS OF
SPIRES FINANCIAL G.P., INC.:
/s/ PETER W. BADGER
Peter W. Badger
/s/ TRACY ADAMS
Tracy Adams
/s/ SEAN DOBSON
Sean Dobson
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SOLE SHAREHOLDER OF
CAPITAL FINANCIAL PARTNER, INC.:
/s/ ANTONIO MARZIALE
Antonio Marziale
SFP SHAREHOLDERS:
HEPTAGON INVESTMENTS, LTD.
By: /s/ RATHIER CATTIER
Rathier Cattier, Attorney-In-Fact
RIO BRAVO INVERSIONES, S.a.
By: /s/ RATHIER CATTIER
Rathier Cattier, Director
ELONSER S.A.
By: /s/ ALFONSO MARIA LESSA MARQUIS
Alfonso Maria Lessa Marquis,
President
SAGRES GROUP LTD.
By: /s/ R. MARZIALE
R. Marziale, Director
By: /s/ A. MANTONI
A. Mantoni, Director
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FINANCIERA E INVERSIONISTA LAS COLINAS
By: /s/ ANTONIO MARZIALE
Antonio Marziale, Attorney-In-Fact
FINANCIERA E INVERSIONISTA XANA
By: /s/ ANTONIO MARZIALE
Antonio Marziale, Attorney-In-Fact
/s/ FRED VINTON
Fred Vinton
OVH, INC.
By: /s/ IAN S. BARNETT
Ian S. Barnett, President
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APPENDIX B
PLAN OF MERGER
THIS PLAN OF MERGER ( "PLAN OF MERGER") dated October 2, 1998, pursuant to
Article 5.01 of the Texas Business Corporation Act, as amended (the "TBCA"), is
among TEI, Inc., a Texas corporation ("TEI" or the "SURVIVING COMPANY"), TEI
Combination Corporation, a Texas corporation (the "MERGER SUBSIDIARY"), and
Pinnacle Global Group, Inc., a Texas corporation and the parent corporation of
the Merger Subsidiary ("PGG"). TEI and the Merger Subsidiary are hereinafter
sometimes together referred to as the "MERGING CORPORATIONS."
W I T N E S S E T H:
WHEREAS, TEI is a corporation duly organized and validly existing under
the laws of the State of Texas, and has authorized capital stock consisting of
(i) 100 million shares of common stock, $.01 par value per share ("TEI COMMON
STOCK"), of which at the date of this Plan of Merger, 14,251,012 shares are
issued and outstanding, and (ii) 10 million shares of Preferred Stock, $.10 par
value, none of which are issued or outstanding;
WHEREAS, the Merger Subsidiary is a corporation duly organized and validly
existing under the laws of the State of Texas, and has authorized capital stock
consisting of 1,000 shares of common stock, $.01 par value per share, all of
which are issued and outstanding and owned and held by PGG;
WHEREAS, PGG is a corporation duly organized and validly existing under
the laws of the State of Texas, and has authorized capital stock consisting of
(i) 100 million shares of common stock, $.01 par value per share ("PGG COMMON
STOCK"), of which 1,000 shares are issued and outstanding and held by TEI, and
(ii) 10 million shares of Preferred Stock, $.10 par value per share, none of
which are issued or outstanding;
WHEREAS, the respective Boards of Directors of the Merging Corporations
deem it advisable and in the best interests of the respective Merging
Corporations and their respective stockholders that the Merger Subsidiary be
merged with and into TEI with TEI to be the surviving corporation (the
"MERGER"), as authorized by the laws of the State of Texas, under and pursuant
to the terms and conditions hereinafter set forth, and the Board of Directors of
each of the Merging Corporations has duly approved this Plan of Merger and
recommended its approval to the respective stockholders of the Merging
Corporations; and
WHEREAS, simultaneously herewith, TEI, the Merger Subsidiary, PGG and the
other parties thereto have entered into an Amended and Restated Agreement and
Plan of Organization of even date herewith (the "ORGANIZATION AGREEMENT"), which
provides for the execution of this Plan of Merger by PGG, the Merger Subsidiary,
and TEI;
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NOW, THEREFORE, in consideration of the mutual and dependent covenants and
agreements herein contained, and for the purpose of setting forth the terms and
conditions of the Merger, the mode of carrying the Merger into effect, and such
other details and provisions as are deemed necessary or desirable, the parties
hereto have agreed and do hereby agree, subject to the approval of this Plan of
Merger by the requisite consent of the stockholders of each of the Merging
Corporations, and subject to the conditions hereinafter set forth, as follows:
1. MERGER. At the Effective Time (as defined in Section 7 below) of the
Merger, the Merger Subsidiary shall be merged with and into TEI, with TEI being
the surviving corporation, which shall not be a new corporation, but which shall
continue its corporate existence as a Texas corporation to be governed by the
laws of the State of Texas.
2. TERMS AND CONDITIONS OF MERGER. At the Effective Time of the Merger:
(i) the Merging Corporations shall be a single corporation, which
shall be TEI, the corporation designated herein as the surviving
corporation;
(ii) the separate corporate existence of the Merger Subsidiary shall
cease; and
(iii) the Merger shall have the effects stated in Article 5.06(2),
(3) and (4) of the TBCA
3. EFFECT OF THE MERGER ON CAPITAL STOCK. As of the Effective Time, as a
result of the Merger and without any action on the part of any holder thereof:
(i) each share of TEI Common Stock then issued and outstanding,
without any action on the part of the holder thereof, shall (x)
automatically become and be converted into the right to receive one-fourth
(.25) of a fully paid and nonassessable share of issued and outstanding
PGG Common Stock, (y) cease to be outstanding and to exist, and (z) be
canceled and retired;
(ii) each share of TEI Common Stock held in the treasury of TEI
shall be canceled and retired;
(iii) each share of PGG Common Stock issued and outstanding and held
by TEI immediately prior to the Effective Time will be cancelled and
retired;
(iv) each unexpired option to purchase TEI Common Stock that is
outstanding at the Effective Time (each, a "TEI STOCK OPTION"), whether or
not then exercisable, shall automatically and without any action on the
part of the holder thereof, be converted into an option to purchase the
number of shares of PGG Common Stock equal to one-fourth (.25) of the
number of shares of TEI Common Stock that could be purchased under such
TEI
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Stock Option at a price per share of PGG Common Stock equal to 25% of the
per share exercise price of such TEI Stock Option; and
(v) each share of Common Stock of the Merger Subsidiary issued and
outstanding prior to the Effective Time will be converted into one share
of Common Stock, $1.00 par value per share, of the Surviving Corporation,
and the shares of Common Stock of the Surviving Corporation issued on such
conversion will constitute all of the issued and outstanding shares of
capital stock of the Surviving Corporation.
Upon and after the Effective Time of the Merger, no transfer of shares of
TEI Common Stock issued and outstanding immediately prior to the Effective Time
of the Merger shall be made on the stock transfer books of the Surviving
Corporation.
Each holder of a certificate representing shares of TEI Common Stock
immediately prior to the Effective Time will, as of the Effective Time and
thereafter, cease to have any rights respecting those shares other than the
right to receive, without interest, the shares of PGG Common Stock into which
shares of TEI Common Stock shall have been converted as a result of the Merger,
and the additional cash, if any, owing with respect to those shares as provided
in Section 5.
4. DELIVERY, EXCHANGE AND PAYMENT.
(A) DEPOSIT WITH EXCHANGE AGENT. As soon as practicable after the
Effective Time, PGG shall deposit with a bank or trust company designated by PGG
(the "EXCHANGE AGENT") certificates representing shares of PGG Common Stock
required to effect the exchanges contemplated hereby, together with cash payable
in respect to fractional shares.
(B) SURRENDER OF CERTIFICATES. At or after the Effective Time: (i) each
holder of an outstanding certificate or certificates theretofore representing
shares of TEI Common Stock ("STOCKHOLDER"), will, on surrender of his
certificate to the Exchange Agent, receive, subject to the provisions of Section
5, a certificate representing the number of shares of PGG Common Stock into
which such Stockholders' shares of TEI Common Stock shall have been converted as
a result of the Merger; and (ii) until any certificate representing TEI Common
Stock is surrendered pursuant to this Section 4, that certificate will, for all
purposes, be deemed to evidence ownership of the number of whole shares of PGG
Common Stock issuable in respect of that certificate pursuant to Section 3. All
shares of PGG Common Stock issuable in the Merger will be deemed for all
purposes to have been issued by PGG at the Effective Time.
(C) CERTAIN TRANSFERS. In the event of a transfer of ownership of shares
of TEI Common Stock which is not registered in the transfer records of TEI, the
certificate representing shares of PGG Common Stock issuable in respect of such
shares of TEI Common Stock may be issued to a transferee if the certificate
representing such shares of TEI Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
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by evidence satisfactory to the Exchange Agent that any applicable stock
transfer taxes have been paid.
(D) LOST CERTIFICATES. If any certificate representing shares of TEI
Common Stock shall have been lost, stolen, mislaid or destroyed, upon receipt of
(i) an affidavit of that fact from the Stockholder claiming such certificate to
be lost, stolen, mislaid or destroyed, (ii) such bond, security or indemnity as
PGG or the Exchange Agent may reasonably require, and (iii) any other
documentation necessary to evidence and effect the bona fide exchange thereof,
the Exchange Agent shall issue to such Stockholder a certificate representing
the shares of PGG Common Stock into which the shares represented by such lost,
stolen, mislaid or destroyed certificate would have been exchanged.
(E) DIVIDENDS AND DISTRIBUTIONS. No dividends (or interest) or other
distributions declared or earned after the Effective Time with respect to PGG
Common Stock and payable to the holders of record thereof after the Effective
Time will be paid to the holder of any unsurrendered certificate representing
shares of TEI Common Stock for which shares of PGG Common Stock have been issued
in the Merger until the unsurrendered certificates are surrendered as provided
herein, but (i) on such surrender, PGG will cause to be paid, to the person in
whose name the certificate representing such shares of PGG Common Stock shall
then be issued, the amount of dividends or other distributions previously paid
with respect to such whole shares of PGG Common Stock with a record date, or
which have accrued, subsequent to the Effective Time, but prior to surrender,
and the amount of any cash payable to such person for and in lieu of fractional
shares pursuant to Section 5, and (ii) at the appropriate payment date or as
soon as practicable thereafter, PGG will cause to be paid to that person the
amount of dividends or other distributions with a record date, or which have
been accrued, subsequent to the Effective Time, but which are not payable until
a date subsequent to surrender, which are payable with respect to such number of
whole shares of PGG Common Stock, subject in all cases to any applicable escheat
laws. No interest will be payable with respect to the payment of such dividends
or other distributions (or cash for and in lieu of fractional shares) on
surrender of outstanding certificates.
(F) TERMINATION OF EXCHANGE AGENCY. Subject to any contrary provision of
governing law, all consideration deposited with the Exchange Agent and into
which the outstanding shares of TEI Common Stock shall have been converted,
which remains unclaimed for one year after the Effective Time, shall be paid or
delivered to PGG; and the holder of any unexchanged certificate or certificates
which before the Effective Time represented shares of TEI Common Stock shall
thereafter look only to PGG for exchange thereof or payment therefor upon
surrender of such certificate or certificates to PGG.
5. NO FRACTIONAL SHARES. Notwithstanding any other provision of this Plan
of Merger, no certificates for fractional share interests of PGG Common Stock
will be issued, and any Stockholder otherwise entitled to receive a fractional
share of PGG Common Stock but for this Section 5 will instead be entitled to
receive one additional whole share of PGG Common Stock.
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6. ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS, COMMITTEES AND OFFICERS.
(A) ARTICLES OF INCORPORATION. From and after the Effective Time of the
Merger, the Articles of Incorporation of TEI as existing immediately prior to
the Effective Time of the Merger, shall be the Articles of Incorporation of the
Surviving Corporation, subject to the right of the Surviving Corporation to
amend its Articles of Incorporation after the Effective Time of the Merger in
accordance with such Articles of Incorporation and the TBCA.
(B) BYLAWS. From and after the Effective Time of the Merger, the bylaws of
TEI, as in effect immediately prior to the Effective Time of the Merger, shall
be the bylaws of the Surviving Corporation, until changed or amended as provided
therein.
(C) DIRECTORS. From and after the Effective Time of the Merger, the
directors of the Surviving Corporation shall be Donald R. Campbell, Titus H.
Harris, Jr. and Robert E. Garrison, II. If before the Effective Time of the
Merger, any one or more of such persons dies or refuses or becomes unable to
serve as a director, then the remaining named persons shall be the directors of
the Surviving Corporation from and after the Effective Time of the Merger. The
directors of the Surviving Corporation shall hold office subject to the
provisions of the TBCA and the bylaws of the Surviving Corporation.
(D) COMMITTEES. From and after the Effective Time of the Merger, all
committees of the Board of Directors of TEI existing immediately prior to the
Effective Time of the Merger shall be abolished.
(E) OFFICERS. From and after the Effective Time of the Merger, the
officers of the Surviving Corporation shall be as set forth below:
President and Chief Executive Officer Titus H. Harris, Jr.
Vice President: Robert E. Garrison, II
Secretary and Treasurer: Donald R. Campbell
All other officers of the Surviving Corporation shall be as elected by the
Board of Directors of the Surviving Corporation at its first meeting following
the Effective Time of the Merger. From and after the Effective Time of the
Merger, the officers of the Surviving Corporation shall hold office subject to
the provisions of the TBCA and the bylaws of the Surviving Corporation.
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7. APPROVAL AND EFFECTIVE TIME OF MERGER. This Plan of Merger shall be
submitted to the stockholders of each of the Merging Corporations as provided by
the TBCA. After the approval of this Plan of Merger by the stockholders of each
Merging Corporation in accordance with the requirements of the TBCA, all
required documents shall be executed, filed and recorded and all required acts
shall be done in order to accomplish the Merger under the provisions of the TBCA
and this Plan of Merger. The Merger shall become effective upon the issuance of
certificates of merger by the Secretary of State of the State of Texas
subsequent to the filing of Articles of Merger by the Merging Corporations with
the Secretary of State of the State of Texas (the "EFFECTIVE TIME").
8. OTHER PROVISIONS.
(A) FURTHER ASSURANCES. If at any time TEI shall consider or be advised
that any further assignment or assurance in law or other action is necessary or
desirable to vest, perfect or confirm, or record or otherwise, in TEI the title
to any property or rights of the Merger Subsidiary acquired or to be acquired by
or as a result of the Merger, the proper officers and directors of the Merging
Corporations, respectively, shall be, and they hereby are, severally and fully
authorized to execute and deliver such deeds, assignments and assurances in law
and take such other action as may be necessary or proper in the name of TEI or
the Merger Subsidiary to vest, perfect or confirm title to such property or
rights in TEI and otherwise carry out the purposes of this Plan of Merger.
(B) TERMINATION. This Plan of Merger may be terminated at any time prior
to the Effective Time of the Merger, whether before or after action thereon by
the stockholders of the Merging Corporations (if such stockholder approval is
required), by mutual consent of the Merging Corporations, expressed by action of
their respective Boards of Directors. This Plan of Merger shall be automatically
abandoned upon the valid termination of the Organization Agreement, in
accordance with the terms thereof, prior to the filing of Articles of Merger
referred to in Section 7 of this Plan of Merger with the Secretary of State of
the State of Texas.
(C) COUNTERPARTS. For the convenience of the parties and to facilitate the
filing and recording of this Plan of Merger, any number of counterparts hereof
may be executed, and each such counterpart shall be deemed to be an original
instrument.
(D) AMENDMENTS. The Merging Corporations, by mutual consent of their
respective Boards of Directors, and to the extent permitted by law, may amend,
modify, supplement and interpret this Plan of Merger in such manner as may be
mutually agreed upon by them in writing at
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<PAGE>
any time before or after adoption thereof by their respective shareholders, and,
in the case of an interpretation, the actions of such Boards shall be binding.
[SIGNATURE PAGE FOLLOWS]
B-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to be
executed as of the date first above written.
TEI, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TEI COMBINATION CORPORATION
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT
B-8
<PAGE>
APPENDIX C
PLAN OF MERGER
THIS PLAN OF MERGER ( "PLAN OF MERGER") dated October 2, 1998, pursuant to
Article 5.01 of the Texas Business Corporation Act, as amended (the "TBCA"), is
among Pinnacle Global Group, Inc., a Texas corporation ("PGG"), HWG Combination
Corporation, a Texas corporation (the "MERGER SUBSIDIARY"), and Harris Webb &
Garrison, Inc., a Texas corporation ("HWG" or the "SURVIVING CORPORATION"). The
Merger Subsidiary and HWG are hereinafter together referred to as the "MERGING
CORPORATIONS,"
W I T N E S S E T H:
WHEREAS, PGG is a corporation duly organized and validly existing under
the laws of the State of Texas, and has authorized capital stock consisting of
(i) 100 million shares of common stock, $.01 par value per share ("PGG COMMON
STOCK"), of which 1,000 shares are issued and outstanding, and (ii) 10 million
shares of Preferred Stock, $.10 par value per share, none of which are issued or
outstanding;
WHEREAS, the Merger Subsidiary is a corporation duly organized and validly
existing under the laws of the State of Texas, and has authorized capital stock
consisting of 1,000 shares of common stock, $.01 par value per share, all of
which are issued and outstanding and owned and held by PGG;
WHEREAS, HWG is a corporation duly organized and validly existing under
the laws of the State of Texas, and has authorized capital stock consisting of
50,000 shares of common stock, $1.00 par value per share ("HWG COMMON STOCK"),
of which 28,495 shares are, or will be immediately before the Effective Time (as
defined in Section 7 of this Plan of Merger), issued and outstanding, and 336
shares are held by HWG as treasury shares;
WHEREAS, the respective Boards of Directors of the Merging Corporations
deem it advisable and in the best interests of the respective Merging
Corporations and their respective stockholders that the Merger Subsidiary be
merged with and into HWG, with HWG to be the surviving corporation (the
"MERGER"), as authorized by the laws of the State of Texas, under and pursuant
to the terms and conditions hereinafter set forth, and the Board of Directors of
each of the Merging Corporations has duly approved this Plan of Merger and
recommended its approval to the respective stockholders of the Merging
Corporations; and
WHEREAS, simultaneously herewith, PGG, the Merger Subsidiary, HWG and the
other parties thereto have entered into an Amended and Restated Agreement and
Plan of Organization of even date herewith (the "ORGANIZATION AGREEMENT"), which
provides for the execution of this Plan of Merger by PGG, the Merger Subsidiary
and HWG;
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NOW, THEREFORE, in consideration of the mutual and dependent covenants and
agreements herein contained, and for the purpose of setting forth the terms and
conditions of the Merger, the mode of carrying the Merger into effect, and such
other details and provisions as are deemed necessary or desirable, the parties
hereto have agreed and do hereby agree, subject to the approval of this Plan of
Merger by the requisite consent of the stockholders of each of the Merging
Corporations, and subject to the conditions hereinafter set forth, as follows:
1. MERGER. At the Effective Time of the Merger, the Merger Subsidiary
shall be merged with and into HWG, with HWG being the surviving corporation,
which shall not be a new corporation, but which shall continue its corporate
existence as a Texas corporation to be governed by the laws of the State of
Texas.
2. TERMS AND CONDITIONS OF MERGER. At the Effective Time of the Merger:
(i) the Merging Corporations shall be a single corporation, which
shall be HWG, the corporation designated herein as the surviving
corporation;
(ii) the separate corporate existence of the Merger Subsidiary shall
cease; and
(iii) the Merger shall have the effects stated in Article 5.06(2),
(3) and (4) of the TBCA.
3. EFFECT OF THE MERGER ON CAPITAL STOCK. As of the Effective Time, as a
result of the Merger and without any action on the part of any holder thereof:
(i) each share of HWG Common Stock then issued and outstanding,
without any action on the part of the holder thereof, shall (x)
automatically become and be converted into the right to receive 41.673977
fully paid and nonassessable shares of issued and outstanding PGG Common
Stock, (y) cease to be outstanding and to exist, and (z) be canceled and
retired;
(ii) each share of HWG Common Stock held in the treasury of HWG be
canceled and retired; and
(iii) each share of Common Stock of the Merger Subsidiary issued and
outstanding immediately prior to the Effective Time will be converted into
one share of Common Stock, par value $1.00 per share, of the Surviving
Corporation, and the shares of Common Stock of the Surviving Corporation
issued on such conversion will constitute all of the issued and
outstanding shares of capital stock of the Surviving Corporation.
C-2
<PAGE>
Upon and after the Effective Time of the Merger, no transfer of shares of
HWG Common Stock issued and outstanding immediately prior to the Effective Time
of the Merger shall be made on the stock transfer books of the Surviving
Corporation.
Each holder of a certificate representing shares of HWG Common Stock
immediately prior to the Effective Time will, as of the Effective Time and
thereafter, cease to have any rights respecting those shares other than the
right to receive, without interest, the shares of PGG Common Stock into which
shares of HWG Common Stock shall have been converted as a result of the Merger,
and the additional cash, if any, owing with respect to those shares as provided
in Section 5.
4. DELIVERY, EXCHANGE AND PAYMENT.
(A) DEPOSIT WITH EXCHANGE AGENT. As soon as practicable after the
Effective Time, PGG shall deposit with a bank or trust company designated by PGG
(the "EXCHANGE AGENT") certificates representing shares of PGG Common Stock
required to effect the exchanges contemplated hereby, together with cash payable
in respect to fractional shares.
(B) SURRENDER OF CERTIFICATES. At or after the Effective Time: (i) each
holder of an outstanding certificate or certificates theretofore representing
shares of HWG Common Stock ("STOCKHOLDER"), will, on surrender of his
certificate to the Exchange Agent, receive, subject to the provisions of Section
5, a certificate representing the number of shares of PGG Common Stock into
which such shares of HWG Common Stock shall have been converted as a result of
the Merger, and (ii) until any certificate representing HWG Common Stock is
surrendered pursuant to this Section 4, that certificate will, for all purposes,
be deemed to evidence ownership of the number of whole shares of PGG Common
Stock issuable in respect of that certificate pursuant to Section 3. All shares
of PGG Common Stock issuable in the Merger will be deemed for all purposes to
have been issued by PGG at the Effective Time.
(C) CERTAIN TRANSFERS. In the event of a transfer of ownership of such
shares of HWG Common Stock which is not registered in the transfer records of
HWG, the certificate representing shares of PGG Common Stock issuable in respect
of such shares of HWG Common Stock may be issued to a transferee if the
certificate representing such shares of HWG Common Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence satisfactory to the Exchange Agent that any
applicable stock transfer taxes have been paid.
(D) LOST CERTIFICATES. If any certificate representing shares of HWG
Common Stock shall have been lost, stolen, mislaid or destroyed, upon receipt of
(i) an affidavit of that fact from the Stockholder claiming such certificate to
be lost, stolen, mislaid or destroyed, (ii) such bond, security or indemnity as
PGG or the Exchange Agent may reasonably require, and (iii) any other
documentation necessary to evidence and effect the bona fide exchange thereof,
the Exchange Agent
C-3
<PAGE>
shall issue to such Stockholder a certificate representing the shares of PGG
Common Stock into which the shares of HWG Common Stock represented by such lost,
stolen, mislaid or destroyed certificate would have been exchanged.
(E) DIVIDENDS AND DISTRIBUTIONS. No dividends (or interest) or other
distributions declared or earned after the Effective Time with respect to PGG
Common Stock and payable to the holders of record thereof after the Effective
Time will be paid to the holder of any unsurrendered certificate representing
shares of HWG Common Stock for which shares of PGG Common Stock have been issued
in the Merger until the unsurrendered certificates are surrendered as provided
herein, but (i) on such surrender, PGG will cause to be paid, to the person in
whose name the certificate representing such shares of PGG Common Stock shall
then be issued, the amount of dividends or other distributions previously paid
with respect to such whole shares of PGG Common Stock with a record date, or
which have accrued, subsequent to the Effective Time, but prior to surrender,
and the amount of any cash payable to such person for and in lieu of fractional
shares pursuant to section 5 and (ii) at the appropriate payment date or as soon
as practicable thereafter, PGG will cause to be paid to that person the amount
of dividends or other distributions with a record date, or which have been
accrued, subsequent to the Effective Time, but which are not payable until a
date subsequent to surrender, which are payable with respect to such number of
whole shares of PGG Common Stock, subject in all cases to any applicable escheat
laws. No interest will be payable with respect to the payment of such dividends
or other distributions (or cash for and in lieu of fractional shares) on
surrender of outstanding certificates.
(F) TERMINATION OF EXCHANGE AGENCY. Subject to any contrary provision of
governing law, all consideration deposited with the Exchange Agent and into
which the outstanding shares of HWG Common Stock shall have been converted,
which remains unclaimed for one year after the Effective Time, shall be paid or
delivered to PGG; and the holder of any unexchanged certificate or certificates
which before the Effective Time represented shares of HWG Common Stock shall
thereafter look only to PGG for exchange or payment thereof upon surrender of
such certificate or certificates to PGG.
5. NO FRACTIONAL SHARES. Notwithstanding any other provision of this Plan
of Merger, no certificates for fractional share interests of PGG Common Stock
will be issued, and any Stockholder otherwise entitled to receive a fractional
share of PGG Common Stock but for this Section 5 will instead be entitled to
receive one additional whole share of PGG Common Stock.
6. ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS, COMMITTEES AND OFFICERS.
(A) ARTICLES OF INCORPORATION. From and after the Effective Time of the
Merger, the Articles of Incorporation of HWG as existing immediately prior to
the Effective Time of the Merger, shall be the Articles of Incorporation of the
Surviving Corporation, subject to the right of the Surviving Corporation to
amend its Articles of Incorporation after the Effective Time of the Merger in
accordance with such Articles of Incorporation and the TBCA.
C-4
<PAGE>
(B) BYLAWS. From and after the Effective Time of the Merger, the bylaws of
HWG, as in effect immediately prior to the Effective Time of the Merger, shall
be the bylaws of the Surviving Corporation, until changed or amended as provided
therein.
(C) DIRECTORS. From and after the Effective Time of the Merger, the
directors of the Surviving Corporation shall be those persons constituting the
directors of HWG immediately prior to the Effective Time of the Merger, each of
whom shall hold office subject to the provisions of the TBCA and the Articles of
Incorporation and bylaws of the Surviving Corporation.
(D) COMMITTEES. From and after the Effective Time of the Merger, all
committees of the Board of Directors of HWG existing immediately prior to the
Effective Time of the Merger, shall remain the committees of the Surviving
Corporation, subject to the provisions of the TBCA and the bylaws of the
Surviving Corporation.
(E) OFFICERS. From and after the Effective Time of the Merger, the
officers of the Surviving Corporation shall be those persons constituting the
officers of HWG immediately prior to the Effective Time of the Merger (each of
whom shall serve in the same capacity or capacities in which he or she served
immediately prior to the Effective Time of the Merger). From and after the
Effective Time of the Merger, the officers of the Surviving Corporation shall
hold office subject to the provisions of the TBCA and the bylaws of the
Surviving Corporation.
7. APPROVAL AND EFFECTIVE TIME OF MERGER. This Plan of Merger shall be
submitted to the stockholders of each of the Merging Corporations as provided by
the TBCA. After the approval of this Plan of Merger by the stockholders of each
Merging Corporation in accordance with the requirements of the TBCA, all
required documents shall be executed, filed and recorded and all required acts
shall be done in order to accomplish the Merger under the provisions of the TBCA
and this Plan of Merger. The Merger shall become effective upon the issuance of
certificates of merger by the Secretary of State of the State of Texas
subsequent to the filing of Articles of Merger by the Merging Corporations with
the Secretary of State of the State of Texas (the "Effective Time").
8. OTHER PROVISIONS.
(A) FURTHER ASSURANCES. If at any time HWG shall consider or be advised
that any further assignment or assurance in law or other action is necessary or
desirable to vest, perfect or confirm, or record or otherwise, in HWG the title
to any property or rights of the Merger Subsidiary acquired or to be acquired by
or as a result of the Merger, the proper officers and directors of the Merging
Corporations, respectively, shall be, and they hereby are, severally and fully
authorized to execute and deliver such deeds, assignments and assurances in law
and take such other action as may be necessary or proper in the name of the
Merger Subsidiary or HWG to vest, perfect or confirm title to such property or
rights in HWG and otherwise carry out the purposes of this Plan of Merger.
C-5
<PAGE>
(B) TERMINATION. This Plan of Merger may be terminated at any time prior
to the Effective Time of the Merger, whether before or after action thereon by
the stockholders of the Merging Corporations (if such stockholder approval is
required), by mutual consent of the Merging Corporations, expressed by action of
their respective Boards of Directors. This Plan of Merger shall be automatically
abandoned upon the valid termination of the Organization Agreement, in
accordance with the terms thereof, prior to the filing of Articles of Merger
referred to in Section 7 of this Plan of Merger with the Secretary of State of
the State of Texas.
(C) COUNTERPARTS. For the convenience of the parties and to facilitate the
filing and recording of this Plan of Merger, any number of counterparts hereof
may be executed, and each such counterpart shall be deemed to be an original
instrument.
(D) AMENDMENTS. The Merging Corporations, by mutual consent of their
respective Boards of Directors, and to the extent permitted by law, may amend,
modify, supplement and interpret this Plan of Merger in such manner as may be
mutually agreed upon by them in writing at any time before or after adoption
thereof by their respective shareholders, and, in the case of an interpretation,
the actions of such Boards shall be binding.
[SIGNATURE PAGE FOLLOWS]
C-6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to be
executed as of the date first above written.
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HARRIS WEBB & GARRISON, INC.
By: /s/ TITUS H. HARRIS, JR.
Titus H. Harris, Jr.,
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
HWG COMBINATION CORPORATION
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT
C-7
<PAGE>
APPENDIX D
PLAN OF MERGER
THIS PLAN OF MERGER ( "PLAN OF MERGER") dated October 2, 1998, pursuant to
Subchapter D of the Texas Trust Company Act (the "TTCA"), and, to the extent
incorporated therein and applicable to Texas state-chartered trust companies,
Article 5.01 of the Texas Business Corporation Act, as amended (the "TBCA"), is
among Pinnacle Global Group, Inc., a Texas corporation ("PGG"), PMT Combination
Corporation, a Texas corporation (the "MERGER SUBSIDIARY"), and Pinnacle
Management & Trust Company, a Texas chartered trust company ("PMT" or the
"SURVIVING ENTITY"). The Merger Subsidiary and PMT are hereinafter together
referred to as the "MERGING ENTITIES,"
W I T N E S S E T H:
WHEREAS, PGG is a corporation duly organized and validly existing under
the laws of the State of Texas, and has authorized capital stock consisting of
(i) 100 million shares of common stock, $.01 par value per share ("PGG COMMON
STOCK"), of which 1,000 shares are issued and outstanding, and (ii) 10 million
shares of Preferred Stock, $.10 par value per share, none of which are issued or
outstanding;
WHEREAS, the Merger Subsidiary is a corporation duly organized and validly
existing under the laws of the State of Texas, and has authorized capital stock
consisting of 1,000 shares of common stock, $.01 par value per share, all of
which are issued and outstanding and owned and held by PGG;
WHEREAS, PMT is a corporation duly organized and validly existing under
the laws of the State of Texas, and has authorized capital stock consisting of
(i) 1,000,000 shares of common stock, $1.00 par value per share ("PMT COMMON
STOCK"), of which 202,263 shares are, or will be immediately before the
Effective Time (as defined in Section 7 of this Plan of Merger), issued and
outstanding, and (ii) 1,000,000 shares of Preferred Stock, $.01 par value per
share none of which are issued or outstanding;
WHEREAS, the respective Boards of Directors of the Merging Entities deem
it advisable and in the best interests of the respective Merging Entities and
their respective stockholders that the Merger Subsidiary be merged with and into
PMT, with PMT to be the surviving entity (the "MERGER"), as authorized by the
laws of the State of Texas, under and pursuant to the terms and conditions
hereinafter set forth, and the Board of Directors of each of the Merging
Entities has duly approved this Plan of Merger and recommended its approval to
the respective stockholders of the Merging Entities; and
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<PAGE>
WHEREAS, simultaneously herewith, PGG, the Merger Subsidiary, PMT and the
other parties thereto have entered into an Amended and Restated Agreement and
Plan of Organization of
D-2
<PAGE>
even date herewith (the "ORGANIZATION AGREEMENT"), which provides for the
execution of this Plan of Merger by PGG, the Merger Subsidiary and PMT;
NOW, THEREFORE, in consideration of the mutual and dependent covenants and
agreements herein contained, and for the purpose of setting forth the terms and
conditions of the Merger, the mode of carrying the Merger into effect, and such
other details and provisions as are deemed necessary or desirable, the parties
hereto have agreed and do hereby agree, subject to the approval of this Plan of
Merger by the requisite consent of the stockholders of each of the Merging
Entities and subject to the conditions hereinafter set forth, as follows:
1. MERGER. At the Effective Time of the Merger, the Merger Subsidiary
shall be merged with and into PMT, with PMT being the surviving entity, which
shall not be a new entity, but which shall continue its existence as a Texas
state-chartered trust company to be governed by the laws of the State of Texas.
2. TERMS AND CONDITIONS OF MERGER. At the Effective Time of the Merger:
(i) the Merging Entities shall be a single trust company, which
shall be PMT, the entity designated herein as the surviving entity;
(ii) the separate corporate existence of the Merger Subsidiary shall
cease; and
(iii) the Merger shall have the effects stated in Article 5.06(2),
(3) and (4) of the TBCA.
3. EFFECT OF THE MERGER ON CAPITAL STOCK. As of the Effective Time, as a
result of the Merger and without any action on the part of any holder thereof:
(i) each share of PMT Common Stock then issued and outstanding,
without any action on the part of the holder thereof, shall (x)
automatically become and be converted into the right to receive 5.8710688
fully paid and nonassessable shares of issued and outstanding PGG Common
Stock, (y) cease to be outstanding and to exist, and (z) be canceled and
retired;
(ii) each share of PMT Common Stock held in the treasury of PMT be
canceled and retired; and
(iii) each share of Common Stock of the Merger Subsidiary issued and
outstanding immediately prior to the Effective Time will be converted into
one share of Common Stock, par value $1.00 per share, of the Surviving
Entity, and the shares of Common Stock of the Surviving Entity issued on
such conversion will constitute all of the issued and outstanding shares
of capital stock of the Surviving Entity.
D-3
<PAGE>
Upon and after the Effective Time of the Merger, no transfer of shares of
PMT Common Stock issued and outstanding immediately prior to the Effective Time
of the Merger shall be made on the stock transfer books of the Surviving Entity.
Each holder of a certificate representing shares of PMT Common Stock
immediately prior to the Effective Time will, as of the Effective Time and
thereafter, cease to have any rights respecting those shares other than the
right to receive, without interest, the shares of PGG Common Stock into which
shares of PMT Common Stock shall have been converted as a result of the Merger,
and the additional cash, if any, owing with respect to those shares as provided
in Section 5.
4. DELIVERY, EXCHANGE AND PAYMENT.
(A) DEPOSIT WITH EXCHANGE AGENT. As soon as practicable after the
Effective Time, PGG shall deposit with a bank or trust company designated by PGG
(the "EXCHANGE AGENT") certificates representing shares of PGG Common Stock
required to effect the exchanges contemplated hereby, together with cash payable
in respect to fractional shares.
(B) SURRENDER OF CERTIFICATES. At or after the Effective Time: (i) each
holder of an outstanding certificate or certificates theretofore representing
shares of PMT Common Stock ("STOCKHOLDER"), will, on surrender of his
certificate to the Exchange Agent, receive, subject to the provisions of Section
5, a certificate representing the number of shares of PGG Common Stock into
which such shares of PMT Common Stock shall have been converted as a result of
the Merger; and (ii) until any certificate representing PMT Common Stock is
surrendered pursuant to this Section 4, that certificate will, for all purposes,
be deemed to evidence ownership of the number of whole shares of PGG Common
Stock issuable in respect of that certificate pursuant to Section 3. All shares
of PGG Common Stock issuable in the Merger will be deemed for all purposes to
have been issued by PGG at the Effective Time.
(C) CERTAIN TRANSFERS. In the event of a transfer of ownership of such
shares of PMT Common Stock which is not registered in the transfer records of
PMT, the certificate representing shares of PGG Common Stock issuable in respect
of such shares of PMT Common Stock may be issued to a transferee if the
certificate representing such shares of PMT Common Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence satisfactory to the Exchange Agent that any
applicable stock transfer taxes have been paid.
(D) LOST CERTIFICATES. If any certificate representing shares of PMT
Common Stock shall have been lost, stolen, mislaid or destroyed, upon receipt of
(i) an affidavit of that fact from the Stockholder claiming such certificate to
be lost, stolen, mislaid or destroyed, (ii) such bond, security or indemnity as
PGG or the Exchange Agent may reasonably require, and (iii) any other
documentation necessary to evidence and effect the bona fide exchange thereof,
the Exchange Agent shall issue to such Stockholder a certificate representing
shares of PGG Common Stock issuable in
D-4
<PAGE>
respect of such shares of PMT Common Stock into which the shares represented by
such lost, stolen, mislaid or destroyed certificate would have been exchanged.
(E) DIVIDENDS AND DISTRIBUTIONS. No dividends (or interest) or other
distributions declared or earned after the Effective Time with respect to PGG
Common Stock and payable to the holders of record thereof after the Effective
Time will be paid to the holder of any unsurrendered certificate representing
shares of PMT Common Stock for which shares of PGG Common Stock have been issued
in the Merger until the unsurrendered certificates are surrendered as provided
herein, but (i) on such surrender, PGG will cause to be paid, to the person in
whose name the certificate representing such shares of PGG Common Stock shall
then be issued, the amount of dividends or other distributions previously paid
with respect to such whole shares of PGG Common Stock with a record date, or
which have accrued, subsequent to the Effective Time, but prior to surrender,
and the amount of any cash payable to such person for and in lieu of fractional
shares pursuant to section 5 and (ii) at the appropriate payment date or as soon
as practicable thereafter, PGG will cause to be paid to that person the amount
of dividends or other distributions with a record date, or which have been
accrued, subsequent to the Effective Time, but which are not payable until a
date subsequent to surrender, which are payable with respect to such number of
whole shares of PGG Common Stock, subject in all cases to any applicable escheat
laws. No interest will be payable with respect to the payment of such dividends
or other distributions (or cash for and in lieu of fractional shares) on
surrender of outstanding certificates.
(F) TERMINATION OF EXCHANGE AGENCY. Subject to any contrary provision of
governing law, all consideration deposited with the Exchange Agent and into
which the outstanding shares of PMT Common Stock shall have been converted,
which remains unclaimed for one year after the Effective Time, shall be paid or
delivered to PGG; and the holder of any unexchanged certificate or certificates
which before the Effective Time represented shares of PMT Common Stock shall
thereafter look only to PGG for exchange or payment thereof upon surrender of
such certificate or certificates to PGG.
5. NO FRACTIONAL SHARES. Notwithstanding any other provision of this Plan
of Merger, no certificates for fractional share interests of PGG Common Stock
will be issued, and any Stockholder otherwise entitled to receive a fractional
share of PGG Common Stock but for this Section 5 will instead be entitled to
receive one additional whole share of PGG Common Stock.
6. ARTICLES OF ASSOCIATION, BYLAWS, DIRECTORS, COMMITTEES AND OFFICERS.
(A) ARTICLES OF ASSOCIATION. From and after the Effective Time of the
Merger, the Articles of Association of PMT as existing immediately prior to the
Effective Time of the Merger, shall be the Articles of Association of the
Surviving Entity, subject to the right of the Surviving Entity to amend its
Articles of Association after the Effective Time of the Merger in accordance
with such Articles of Association, the TTCA and the TBCA.
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<PAGE>
(B) BYLAWS. From and after the Effective Time of the Merger, the bylaws of
PMT, as in effect immediately prior to the Effective Time of the Merger, shall
be the bylaws of the Surviving Entity, until changed or amended as provided
therein.
(C) DIRECTORS. From and after the Effective Time of the Merger, the
directors of the Surviving Entity shall be those persons constituting the
directors of PMT immediately prior to the Effective Time of the Merger, each of
whom shall hold office subject to the provisions of the TBCA and the Articles of
Incorporation and by-laws of the Surviving Entity.
(D) COMMITTEES. From and after the Effective Time of the Merger, all
committees of the Board of Directors of PMT existing immediately prior to the
Effective Time of the Merger, shall remain the committees of the Surviving
Entity, subject to the provisions of the TBCA and the by-laws of the Surviving
Entity.
(E) OFFICERS. From and after the Effective Time of the Merger, the
officers of the Surviving Entity shall be those persons constituting the
officers of PMT immediately prior to the Effective Time of the Merger (each of
whom shall serve in the same capacity or capacities in which he or she served
immediately prior to the Effective Time of the Merger). From and after the
Effective Time of the Merger, the officers of the Surviving Entity shall hold
office subject to the provisions of the TTCA, the TBCA and the bylaws of the
Surviving Entity.
7. APPROVAL AND EFFECTIVE TIME OF MERGER. This Plan of Merger shall be
submitted to the stockholders of each of the Merging Entities as provided by the
TTCA and the TBCA. After the approval of this Plan of Merger by the stockholders
of each Merging Entity in accordance with the requirements of the TTCA and the
TBCA, all required documents shall be executed, filed and recorded and all
required acts shall be done in order to accomplish the Merger under the
provisions of the TTCA, the TBCA and this Plan of Merger. The Merger shall
become effective following the approval of the Merger by the Banking Commission
of the State of Texas subsequent to the filing of Articles of Merger by the
Merging Entities with the Banking Commission of the State of Texas, the Articles
of Merger shall specify the date and time when the Merger is to become effective
(the "EFFECTIVE TIME"), which shall be on the date specified in the Organization
Agreement as the Closing Date.
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8. OTHER PROVISIONS.
(A) FURTHER ASSURANCES. If at any time PMT shall consider or be advised
that any further assignment or assurance in law or other action is necessary or
desirable to vest, perfect or confirm, or record or otherwise, in PMT the title
to any property or rights of the Merger Subsidiary acquired or to be acquired by
or as a result of the Merger, the proper officers and directors of the Merging
Entities, respectively, shall be, and they hereby are, severally and fully
authorized to execute and deliver such deeds, assignments and assurances in law
and take such other action as may be necessary or proper in the name of the
Merger Subsidiary or PMT to vest, perfect or confirm title to such property or
rights in PMT and otherwise carry out the purposes of this Plan of Merger.
(B) TERMINATION. This Plan of Merger may be terminated at any time prior
to the Effective Time of the Merger, whether before or after action thereon by
the stockholders of the Merging Entities (if such stockholder approval is
required), by mutual consent of the Merging Entities, expressed by action of
their respective Boards of Directors. This Plan of Merger shall be automatically
abandoned upon the valid termination of the Organization Agreement, in
accordance with the terms thereof, prior to the filing of Articles of Merger
referred to in Section 7 of this Plan of Merger with the Banking Commission of
the State of Texas.
(C) COUNTERPARTS. For the convenience of the parties and to facilitate the
filing and recording of this Plan of Merger, any number of counterparts hereof
may be executed, and each such counterpart shall be deemed to be an original
instrument.
(D) AMENDMENTS. The Merging Entities, by mutual consent of their
respective Boards of Directors, and to the extent permitted by law, may amend,
modify, supplement and interpret this Plan of Merger in such manner as may be
mutually agreed upon by them in writing at any time before or after adoption
thereof by their respective shareholders, and, in the case of an interpretation,
the actions of such Boards shall be binding.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to be
executed as of the date first above written.
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PINNACLE MANAGEMENT & TRUST COMPANY
By: /s/ ROBERT E. GARRISON, II
Robert E. Garrison, II,
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
PMT COMBINATION CORPORATION
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell,
PRESIDENT
D-8
<PAGE>
APPENDIX E
__________________, 1998 [date of the Proxy Statement/Prospectus]
The Board of Directors
TEI, Inc.
2900 N. Loop West
Suite 1230
Houston, Texas 77092
Attention:Donald R. Campbell
President
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of TEI, Inc. (the "Company") of the consideration
proposed to be paid by Pinnacle Global Group, Inc. ("PGG") in connection with
the proposed mergers and other transactions (collectively, the "Merger") between
the Company and Harris, Webb & Garrison, Inc., Pinnacle Management & Trust
Company, and Spires Financial, L.P. (collectively, the "Sellers"). Pursuant to
the Agreement and Plan of Organization, dated as of August 18, 1998 (the
"Agreement") among the Company, PGG, certain merger subsidiaries of PGG, the
Sellers and the shareholders and/or partners of the Sellers, PGG will be
organized and initially capitalized, each share of the Company's common stock
will be converted into .25 of a share of the Common Stock, $.01 par value per
share, of PGG (the "PGG Common Stock"), and the Sellers will receive shares of
the PGG Common Stock in the amounts set forth in the Agreement.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) the Proxy
Statement/Prospectus of the Company and PGG with respect to the Merger (the
"Proxy Statement"); (iii) the audited financial statements of the Company and
the Sellers for the fiscal year ended December 31, 1997, and the unaudited
financial statements of the Company and the Sellers for the period ended June
30, 1998; (iv) certain publicly available information concerning the business of
the Sellers and of certain other companies engaged in businesses comparable to
those of the Sellers, and the reported market prices for certain other
companies' securities deemed comparable; (v) publicly available terms of certain
transactions involving companies comparable to the Sellers and the consideration
received for such companies; (vi) the terms of other business combinations that
we deemed relevant; and (vii) certain internal financial analyses and forecasts
prepared by the Company and the Sellers and their respective managements.
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In addition, we have held discussions with certain members of the management of
the Company and the Sellers with respect to certain aspects of the Merger, the
past and current business operations of the Company and the Sellers, the
financial condition and future prospects and operations of the Company and the
Sellers, the effects of the Merger on the financial condition and future
prospects of the Company and the Sellers, and certain other matters we believed
necessary or appropriate to our inquiry. We have visited certain representative
facilities of the Company and the Sellers, and reviewed such other financial
studies and analyses and considered such other information as we deemed
appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and the Sellers or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. We have not conducted any valuation or appraisal of any assets or
liabilities, nor have any such valuations or appraisals been provided to us. In
relying on financial analyses and forecasts provided to us, we have assumed that
they have been reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by management as to the expected
future results of operations and financial condition of the Company and the
Sellers to which such analyses or forecasts relate. We have also assumed that
the Merger will have the tax consequences described in the Proxy Statement and
in discussions with, and materials furnished to us by, representatives of the
Company, and that the other transactions contemplated by the Agreement will be
consummated as described in the Proxy Statement and the Agreement. We have
relied as to all legal matters relevant to rendering our opinion upon the advice
of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We are expressing no opinion herein as to the price at which the PGG Common
Stock will trade at any future time.
In addition, we were not requested to and did not provide advice concerning the
structure, the specific amount of the consideration, or any other aspects of the
Merger, or to provide services other than the delivery of this opinion. We did
not participate in negotiations with respect to the terms of the Merger and
related transactions. Consequently, we have assumed that such terms are the most
beneficial terms from the Company's perspective that could under the
circumstances be negotiated among the parties to such transactions.
In the ordinary course of their businesses, our affiliates may actively trade
the debt and equity securities of the Company for their own account or for the
accounts of customers and, accordingly, they may at any time hold long or short
positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the consideration to be paid by the Company in the proposed Merger
is fair, from a financial point of view, to the shareholders of the Company.
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<PAGE>
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote with respect to the Merger.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By:__________________________
Name:
Title:Managing Director
E-3
<PAGE>
APPENDIX F
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
PINNACLE GLOBAL GROUP, INC.
Pursuant to Article 4.04 of the Texas Business Corporation Act, the
undersigned corporation (the "Corporation") adopted the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the Corporation is Pinnacle Global Group, Inc..
ARTICLE TWO
The following amendments to the Articles of Incorporation were adopted by
the sole shareholder of the Corporation by a written consent signed by such
shareholder and dated September 30, 1998:
ARTICLE FOUR of the Original Articles of Incorporation of the
Corporation is amended in its entirety so that, as amended, ARTICLE FOUR
shall be as follows:
ARTICLE FOUR
AUTHORIZED SHARES
SECTION 1. AUTHORIZED SHARES. The aggregate number of shares
of all classes of stock which the Corporation shall have authority
to issue is 110,000,000 shares, consisting of: (i) 100,000,000
shares of common stock, par value $.01 per share (the "Common
Stock"), and (ii) 10,000,000 shares of preferred stock, par value
$.10 per share (the "Preferred Stock"). Shares of any class of
capital stock of the Corporation may be issued for such
consideration and for such corporate purposes as the Board of
Directors of the Corporation (the "Board of Directors") may from
time to time determine. Each share of Common Stock shall be entitled
to one vote.
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<PAGE>
SECTION 2. PREFERRED STOCK. The Preferred Stock may be divided
into and issued from time to time in one or more series as may be
fixed and determined by the Board of Directors. The relative rights
and preferences of the Preferred Stock of each series shall be such
as shall be stated in any resolution or resolutions adopted by the
Board of Directors setting forth the designation of the series and
fixing and determining the relative rights and preferences thereof
(a "Directors' Resolution"). The Board of Directors is hereby
authorized to fix and determine the powers, designations,
preferences, and relative, participating, optional or other rights,
including, without limitation, voting powers, full or limited,
preferential rights to receive dividends or assets upon liquidation,
rights of conversion or exchange into Common Stock, Preferred Stock
of any series or other securities, any right of the Corporation to
exchange or convert shares into Common Stock, Preferred Stock of any
series or other securities, or redemption provisions or sinking fund
provisions, as between series and as between the Preferred Stock or
any series thereof and the Common Stock, and the qualifications,
limitations or restrictions thereof, if any, all as shall be stated
in a Directors' Resolution, and the shares of Preferred Stock or any
series thereof may have full or limited voting powers, or be without
voting powers, all as shall be stated in a Directors' Resolution.
Except where otherwise set forth in the Directors' Resolution
providing for the issuance of any series of Preferred Stock, the
number of shares comprising such series may be increased or
decreased (but not below the number of shares then outstanding) from
time to time by like action of the Board of Directors. The shares of
Preferred Stock of any one series shall be identical with the other
shares in the same series in all respects except as to the dates
from and after which dividends thereon shall cumulate, if
cumulative.
SECTION 3. REACQUIRED SHARES OF PREFERRED STOCK. Shares of any
series of any Preferred Stock that have been redeemed (whether
through the operation of a sinking fund or otherwise), purchased by
the Corporation, or which, if convertible or exchangeable, have been
converted into, or exchanged for, shares of stock of any other class
or classes or any evidences of indebtedness shall have the status of
authorized and unissued shares of Preferred Stock and may be
reissued as a part of the series of which they were originally a
part or may be reclassified and reissued as part of a new series of
Preferred Stock or as part of any other series of Preferred Stock,
all subject to the conditions or restrictions on issuance set forth
in the Directors'
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<PAGE>
Resolution providing for the issuance of any series of Preferred
Stock and to any filing required by law.
ARTICLE SEVEN of the Original Articles of Incorporation is amended
in its entirety so that, as amended, ARTICLE SEVEN shall be as follows:
ARTICLE SEVEN
BOARD OF DIRECTORS
SECTION 1. INITIAL BOARD OF DIRECTORS. The initial Board of
Directors will consist of one member. The name and address of the
person who will serve as director of the Corporation until the first
annual meeting of shareholders, or until his successor is elected
and qualified, is:
NAME ADDRESS
---- -------
Donald R. Campbell 2900 North Loop West, Suite 1230
Houston, Texas 77092
SECTION 2. NUMBER, ELECTION AND TERMS OF DIRECTORS. The number
of directors which shall constitute the whole Board of Directors
shall be fixed from time to time by a majority of the directors then
in office and shall be divided into three classes: Class I, Class II
and Class III; PROVIDED, HOWEVER, that from and after the first date
as of which the Corporation has a class or series of capital stock
registered under the Exchange Act, the number of directors which
shall constitute the whole Board of Directors shall be not less than
three. Each director shall serve for a term ending on the third
annual meeting following the annual meeting at which such director
was elected; PROVIDED, HOWEVER, that the directors first elected to
Class I shall serve for a term expiring at the annual meeting next
following the end of the calendar year 1998, the directors first
elected to Class II shall serve for a term expiring at the annual
meeting next following the end of the calendar year 1999, and the
directors first elected to Class III shall serve for a term expiring
at the annual meeting next following the end of the calendar year
2000. Each director shall hold office until the annual meeting at
which such director's term expires and, the foregoing
notwithstanding, shall serve
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<PAGE>
until his successor shall have been duly elected and qualified or
until his earlier death, resignation or removal.
At such annual election, the directors chosen to succeed those
whose terms then expire shall be of the same class as the directors
they succeed, unless, by reason of any intervening changes in the
authorized number of directors, the Board of Directors shall have
designated one or more directorships whose terms then expires as
directorships of another class in order to more nearly achieve
equality of number of directors among the classes.
In the event of any changes in the authorized number of
directors, each director then continuing to serve shall nevertheless
continue as a director of the class of which he is a member until
the expiration of his current term, or his prior death, resignation
or removal. The Board of Directors shall specify the class to which
a newly created directorship shall be allocated.
Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
SECTION 3. REMOVAL OF DIRECTORS. No director of the
Corporation shall be removed from office as a director by vote or
other action of the stockholders or otherwise except for cause, and
then only by the affirmative vote of the holders of at least
two-thirds of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election
of directors, voting together as a single class. Except as may
otherwise be provided by law, cause of removal of a director shall
be deemed to exist only if: (i) the director whose removal is
proposed has been convicted, or where a director is granted immunity
to testify where another has been convicted, of a felony by a court
of competent jurisdiction and such conviction is no longer subject
to direct appeal; (ii) such director has been found by the
affirmative vote of a majority of the entire Board of Directors at
any regular or special meeting of the Board of Directors called for
that purpose or by a court of competent jurisdiction to have been
grossly negligent or guilty of misconduct in the performance of his
duties to the Corporation in a matter of substantial importance to
the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which
mental incompetency directly affects his ability as a director of
the Corporation.
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<PAGE>
SECTION 4. VACANCIES. Subject to any requirements of law to
the contrary, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board
of Directors resulting from death, resignation, removal or other
cause shall be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum
of the Board of Directors. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the
full term of the class of directors in which the new directorship
was created or the vacancy occurred and until such director's
successor shall have been elected and qualified or until his earlier
death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term
of any incumbent director.
ARTICLE EIGHT of the Articles of Incorporation is amended in its
entirety, so that, as amended ARTICLE EIGHT shall be as follows:
ARTICLE EIGHT
Provisions for Regulation of the
INTERNAL AFFAIRS OF THE CORPORATION
SECTION 1. VOTING OF SHARES. Each outstanding share of Common
Stock will be entitled to vote on each matter submitted to a vote of
stockholders. The right to accumulate votes in the election of
directors, and/or cumulative voting by any shareholder is hereby
expressly denied.
SECTION 2. BYLAWS. The Board of Directors is expressly
authorized to adopt, amend or repeal the Bylaws of the Corporation,
or adopt new Bylaws, without any action on the part of the
stockholders, except as may be otherwise provided by applicable law
or the Bylaws of the Corporation.
SECTION 3. DENIAL OF PREEMPTIVE RIGHTS. The shareholders of
the Corporation will not have the preemptive right to acquire
additional, unissued or treasury shares of the Corporation, or
securities of the Corporation convertible into or carrying a right
to subscribe to or acquire shares.
SECTION 4. SPECIAL MEETINGS OF STOCKHOLDERS. Except as
otherwise required by law, special meetings of the stockholders of
the
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<PAGE>
Corporation may be called only by the Chairman of the Board, the
Chief Executive Officer, the President, the Board of Directors by
the written order of a majority of the entire Board of Directors,
and not by the stockholders, except as otherwise provided by law or
the Bylaws.
SECTION 5. LIMITATION OF LIABILITY OF DIRECTORS. No director
of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages for an act or omission in such
director's capacity as a director except for (i) a breach of the
director's duty of loyalty to the Corporation or its shareholders,
(ii) an act or omission not in good faith that constitutes a breach
of duty to the Corporation or an act or omission involving
intentional misconduct or a knowing violation of the law, (iii) a
transaction from which the director received an improper benefit
(whether or not the benefit resulted from an action taken within the
scope of the director's office), (iv) an act or omission for which
the liability of the director is expressly provided by applicable
statute.
ARTICLE THREE
The number of shares of the Corporation outstanding at the time of
adoption of this Amendment was 1,000 shares of Common Stock, $1.00 par value,
and the number of shares entitled to vote on the Amendment was 1,000 shares of
Common Stock, $1.00 par value.
ARTICLE FOUR
The holder of all of the shares outstanding and entitled to vote on this
Amendment has signed a consent in writing adopting this Amendment.
ARTICLE FIVE
Effective upon the filing with the Secretary of State of Texas of these
Articles of Amendment, each issued and outstanding share of Common Stock, $1.00
par value, of the
7
<PAGE>
Corporation shall automatically be and become, and be reclassified into, one
share of Common Stock, $0.01 par value, of the Corporation.
ARTICLE SIX
As a result of these Articles of Amendment, the stated capital of the
Corporation is reduced by $990.00, from $1,000.00 to $10.00.
DATED: October 1, 1998.
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President
F-7
<PAGE>
ARTICLES OF INCORPORATION
OF
PINNACLE GLOBAL GROUP, INC.
The undersigned, natural person of the age of eighteen years or more,
acting as incorporator of a corporation (the "Corporation") under the Texas
Business Corporation Act (the "Act"), hereby adopts the following Articles of
Incorporation for the Corporation.
ARTICLE ONE
NAME
----
The name of the Corporation is PINNACLE GLOBAL GROUP, INC.
ARTICLE TWO
DURATION
--------
The period of the Corporation's duration is perpetual.
ARTICLE THREE
PURPOSE
-------
SECTION 1. The purpose for which the Corporation is organized is to engage
in any lawful business or activity, subject to the limitations set forth in
Section 2 of this article.
SECTION 2. Nothing in this article is to be construed as authorizing the
Corporation to transact any business in the State of Texas expressly prohibited
by any law of the State of Texas, or to engage in any activity in the State of
Texas which cannot lawfully be engaged in by a corporation incorporated under
the Act or which cannot lawfully be engaged in without first obtaining a license
under the laws of the State of Texas and which license cannot be granted to a
corporation organized under the Act, or to operate in Texas any of the
businesses referred to in section B(4) of article 2.01 of the Act, or to take
any action in violation of any of the laws referred to in section C of article
2.02 of the Act.
F-8
<PAGE>
ARTICLE FOUR
AUTHORIZED SHARES
-----------------
The aggregate number of shares which the Corporation shall have authority
to issue is 1,000 shares of Common Stock of the par value of $1.00 each ("Common
Stock").
ARTICLE FIVE
RESTRICTION ON COMMENCEMENT OF BUSINESS
---------------------------------------
The Corporation will not commence business until it has received for the
issuance of its shares consideration of the value of a stated sum which will be
at least One Thousand Dollars ($1,000.00), consisting of money, labor done or
property actually received.
ARTICLE SIX
REGISTERED OFFICE AND REGISTERED AGENT
--------------------------------------
The street address of the initial registered office of the Corporation is:
2900 North Loop West, Suite 1230
Houston, Texas 77092
The name of the initial registered agent of the Corporation at such
address is:
Donald R. Campbell
ARTICLE SEVEN
BOARD OF DIRECTORS
------------------
SECTION 1. INITIAL BOARD OF DIRECTORS. The initial Board of Directors will
consist of one member. The name and address of the person who will serve as
director of the Corporation until the first annual meeting of shareholders, or
until his successor is elected and qualified, is:
F-9
<PAGE>
NAME ADDRESS
---- -------
Donald R. Campbell 2900 North Loop West, Suite 1230
Houston, Texas 77092
SECTION 2. NUMBER AND QUALIFICATION. The number and qualifications of
directors constituting the Board of Directors of the Corporation will be fixed
or determined in the manner provided in the Bylaws of the Corporation. The
number of directors may be increased or decreased from time to time in the
manner set forth in the Bylaws of the Corporation.
ARTICLE EIGHT
Provisions for Regulation of the
INTERNAL AFFAIRS OF THE CORPORATION
Provisions for the regulation of the internal affairs of the Corporation
will include the following, but such enumeration is not in limitation of the
power of the shareholders or the Board of Directors to formulate in the Bylaws,
by resolution, or any other proper manner any other lawful provision not
inconsistent with law or these articles:
SECTION 1. VOTING. Each outstanding share of common stock will be entitled
to one vote on each matter submitted to a vote of shareholders.
SECTION 2. BYLAWS. The Board of Directors will adopt the initial Bylaws,
and from time to time may alter, amend or repeal the Bylaws or adopt new Bylaws;
but the shareholders from time to time may alter, amend or repeal any Bylaws
adopted by the Board of Directors or may adopt new Bylaws.
SECTION 3. DENIAL OF PREEMPTIVE RIGHTS. The shareholders of the
Corporation will not have the preemptive right to acquire additional, unissued
or treasury shares of the Corporation, or securities of the Corporation
convertible into or carrying a right to subscribe to or acquire shares.
SECTION 4. CONSENTS IN LIEU OF MEETINGS. Any action required by the Act to
be taken or which may be taken at any annual or special meeting of shareholders
may be taken without a meet ing, without prior notice and without a vote, if a
consent (or consents) in writing, setting forth the action to be taken, is
signed by the holders or holder of shares having not less than the minimum
number of votes that would be necessary to take such action at a meeting at
which the holders of all shares entitled to vote on the action were present and
voted. In order to be effective, such consent or consents shall comply with all
requirements of the Act.
SECTION 5. LIMITATION OF LIABILITY OF DIRECTORS. No director of the
Corporation shall be liable to the Corporation or its shareholders for monetary
damages for an act or omission in such director's
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<PAGE>
capacity as a director except for (i) a breach of the director's duty of loyalty
to the Corporation or its shareholders, (ii) an act or omission not in good
faith that constitutes a breach of duty to the Corporation or an act or omission
involving intentional misconduct or a knowing violation of the law, (iii) a
transaction from which the director received an improper benefit (whether or not
the benefit resulted from an action taken within the scope of the director's
office), (iv) an act or omission for which the liability of the director is
expressly provided by applicable statute.
ARTICLE NINE
INCORPORATOR
The name and the address of the incorporator of the Corporation is:
NAME ADDRESS
---- -------
James M. Harbison, Jr. 700 Louisiana, 35th Floor
Houston, Texas 77002
In order to evidence the foregoing, I have signed these Articles of
Incorporation on this 14th day of August, 1998.
/s/ JAMES M. HARBISON, JR.
James M. Harbison, Jr.
F-11
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act,
the articles of incorporation of a Texas corporation may provide that a director
of that corporation shall not be liable, or shall be liable only to the extent
provided in the articles of incorporation, to the corporation or its
shareholders for monetary damages for acts or omissions in the director's
capacity as a director, except that the articles of incorporation cannot provide
for the elimination or limitation of liability of a director to the extent that
the director is found liable for (i) a breach of the director's duty of loyalty
to the corporation or its shareholders, (ii) acts or omissions not in good faith
that constitute a breach of duty of the director to the corporation or an act or
missions not in good faith that constitute a breach of duty of the director to
the corporation or an act or omission that involves intentional misconduct or a
knowing violation of the law, (iii) any transaction from which the director
received an improper benefit, or (iv) an act or omission for which the liability
of a director is expressly provided by an applicable statute. Article IX of the
Registrant's Articles of Incorporation, as amended, states that a director of
the Registrant shall not be liable to the Registrant or its shareholders for
monetary damages except to the extent otherwise expressly provided by the
statutes of the State of Texas.
In addition, Article 2.02-1 of the Texas Business Corporation Act (the
"TBCA") authorizes a Texas corporation to indemnify a person who was, is, or
is threatened to be made a named defendant or respondent in a proceeding,
including any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative, or investigative because
the person is or was a director. The TBCA provides that unless a court of
competent jurisdiction determines otherwise, indemnification is permitted only
if it is determined that the person (1) conducted himself in good faith; (2)
reasonably believed (a) in the case of conduct in his official capacity s a
director of the corporation, that his conduct was in the corporation's best
interests; and (b) in all other cases, that his conduct was at least not opposed
to the corporation's best interests; and (3) in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. A
person may be indemnified under Article 2.02-1 of the TBCA against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person (including court costs and
attorneys' fees), but if the person is found liable to the corporation or is
found liable on the basis that personal benefit was improperly received by him,
the indemnification is limited to reasonable expenses actually incurred and
shall not be made in respect of any proceeding in which the person has been
found liable for willful or intentional misconduct in the performance of his
duty to the corporation. A corporation is obligated under Article 2.02-1 of the
TBCA to indemnify a director or officer against reasonable expenses incurred by
him in connection with a proceeding in which he is named defendant or respondent
because he is or was director or officer if he has been wholly successful, on
the merits or otherwise, in the defense of the proceeding. Under Article 2.02-1
of the TBCA a corporation may (i) indemnify and advance expenses to an officer,
employee, agent or other persons who are or were serving at the request of the
corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another entity to the same extent that
it may indemnify and advance expenses to its directors, (ii) indemnify and
advance expenses to directors and such other persons identified in (i) to such
further extent, consistent with law, as may be provided in the corporation's
articles of incorporation, bylaws, action of its board of directors, or contract
or as permitted by common law and (iii) purchase and maintain insurance or
another arrangement on behalf of directors and such other persons identified in
(i) against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person.
The Bylaws of the Registrant set forth specific provisions for
indemnification of directors, officers, agents and other persons which are
substantially identical to the provisions of Article 2.02-1 of the TBCA
described above.
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<PAGE>
The Registrant maintains directors' and officers' insurance. After
consummation of the Transactions, PGG intends to enter into agreements to
indemnify each of its directors and certain of its executive officers regarding
liabilities that may result from such officer's service as an officer or
director of PGG.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all the exhibits and financial statement
schedules filed as part of the Registration Statement.
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------
*2.1 -- Amended and Restated Agreement and
Plan of Reorganization dated October
2, 1998, among the Registrant, 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
(Included as Appendix A to the Proxy
Statement/Prospectus forming a part
of this Registration Statement).
*2.2 -- Plan of Merger dated October 2, 1998,
among TEI, TEI Combination
Corporation and the Registrant
(Included as Appendix B to the Proxy
Statement/Prospectus forming a part
of this Registration Statement).
*2.3 -- Plan of Merger dated October 2, 1998,
among HWG, HWG Combination Corpora-
tion and the Registrant (Included as
Appendix C to the Proxy
Statement/Prospectus forming a part
of this Registration Statement).
*2.4 -- Plan of Merger dated October 2, 1998,
among PMT, PMT Combination
Corporation and the Registrant
(Included as Appendix D to the Proxy
Statement/Prospectus forming a part
of this Registration Statement).
*3.1 -- Articles of Incorporation of
Registrant, as amended (Included as
Appendix F to the Proxy
Statement/Prospectus forming a part
of this Registration Statement).
*3.2 -- Amended and Restated Bylaws of
Registrant.
+5.1 -- Opinion of Porter & Hedges, L.L.P. as
to the legality of the securities
being registered.
+8.1 -- Tax Opinion of Porter & Hedges,
L.L.P.
+8.2 -- Tax Opinion of PricewaterhouseCoopers
LLP.
+10.1 -- 1998 Incentive Plan of Registrant.
10.2 -- 1989 Stock Option Plan for TEI, as
amended (Filed as an exhibit to TEI's
Form 10-K for the year ending
December 31, 1992 (File No. 0-18899)
and incorporated herein by
reference).
10.3 -- Form of Incentive Stock Option
Agreement for use in connection with
the 1989 Stock Option Plan of TEI
(Filed as an exhibit to TEI's Form
S-1 (File No. 33-36822) and
incorporated herein by reference).
10.4 -- Form of Nonincentive Stock Option
Agreement for use in connection with
the 1989 Stock Option Plan of TEI
(Filed as an exhibit to TEI's Form
S-1 (File No. 33-36822) and
incorporated herein by reference).
10.5 -- Nondisclosure Agreement to be used in
conjunction with certain options
granted under the 1989 Stock Option
Plan of TEI (Filed as an exhibit to
TEI's Form S-1 (File No. 33-36822)
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).
10.7 -- 1991 Nonemployee Director Stock
Option Plan (Filed as an exhibit to
TEI's Form S-1 (File No. 33-36822)
and incorporated herein by
reference).
10.8 -- 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).
II-2
<PAGE>
10.9 -- 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).
10.10 -- Asset Purchase Agreement between
Tanknology Environmental, Inc. and
Jack Holder Enterprises, Inc. dated
January 31, 1994 (Filed as an exhibit
to TEI's Form 10-K for the year
ending December 31, 1994 (File No.
0-18899) and incorporated herein by
reference).
10.11 -- 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
10.15 -- 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).
+10.16 -- 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.
+10.17 -- Office Lease Agreement dated February
1, 1998 between 5599 San Felipe, Ltd.
and Harris Webb & Garrison, Inc.
+10.18 -- Letter Agreement dated January 14,
1994 between S.G. Cowen & Company and
Harris Webb & Garrison, Inc., as
amended January 19, 1994.
+10.19 -- Autotrust Agreement dated January 9,
1998 between SunGard Trust Systems
Inc. and Pinnacle Management & Trust
Company.
*21.1 -- List of Subsidiaries of the
Registrant
*23.1 -- Consent of PricewaterhouseCoopers
LLP.
*23.2 -- Consent of Cheshier & Fuller, L.L.P.
*23.3 -- Consent of KPMG Peat Marwick LLP.
*23.4 -- Consent of Grant Thornton LLP.
23.5 -- Consents of Porter & Hedges, L.L.P.
(contained in opinions filed as
Exhibit 5.1 and Exhibit 8.1).
23.6 -- Consent of PricewaterhouseCoopers LLP
(contained in opinion filed as
Exhibit 8.2).
+23.7 -- Consent of J.P. Morgan Securities
Inc.
*23.8 -- Consent of W. Blair Waltrip, a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
+23.9 -- Consent of [TEI Designee] a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
*23.10 -- Consent of T.G. Bogle, a person named
in the Registration Statement as
about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
II-3
<PAGE>
*23.11 -- Consent of James H. Greer, a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
*23.12 -- Consent of Tony Coelho, a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
*23.13 -- Consent of Titus H. Harris, Jr., a
person named in the Registration
Statement as about to become a
director who has not signed the
Registration Statement pursuant to
Rule 438.
*23.14 -- Consent of Robert E. Garrison, II, a
person named in the Registration
Statement as about to become a
director who has not signed the
Registration Statement pursuant to
Rule 438.
*23.15 -- Consent of Richard C. Webb, a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
*23.16 -- Consent of Stephen M. Reckling, a
person named in the Registration
Statement as about to become a
director who has not signed the
Registration Statement pursuant to
Rule 438.
*23.17 -- Consent of Peter W. Badger, a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
*23.18 -- Consent of Sean Dobson, a person
named in the Registration Statement
as about to become a director who has
not signed the Registration Statement
pursuant to Rule 438.
*27.1 -- Financial Data Schedule as of June 30, 1998.
*27.2 -- Financial Data Schedule as of December 31, 1997.
+99.1 -- Form of Proxy of TEI (relating to the
TEI Special Meeting described in the
Proxy Statement/Prospectus forming a
part of this Registration Statement).
- ------------
* Filed herewith.
+ To be filed by Amendment.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
1. To respond to requests for information that is incorporated by
reference in the Joint Proxy Statement/Prospectus pursuant to Items 4,
10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the requests;
2. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective;
3. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
4. That every prospectus (i) that is filed pursuant to paragraph (3)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415 will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to
II-4
<PAGE>
be a new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof;
5. To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
a. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b. To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
c. To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
6. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
7. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON OCTOBER 7, 1998.
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
DONALD R. CAMPBELL,
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE INDICATED CAPACITIES
AND ON THE 7th DAY OF OCTOBER , 1998.
SIGNATURE TITLE
- -------------------------------- -----------------------------------------------
/s/DONALD R. CAMPBELL Director, President (Principal Executive and
DONALD R. CAMPBELL Accounting Officer)
II-6
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS OF
PINNACLE GLOBAL GROUP, INC.
<PAGE>
Table of Contents
Page
ARTICLE I
OFFICES......................................................................1
Section 1.1.OFFICES....................................................1
ARTICLE II
CAPITAL STOCK................................................................1
Section 2.1.CERTIFICATE REPRESENTING SHARES............................1
Section 2.2.STOCK CERTIFICATE BOOK AND SHAREHOLDERS OF RECORD..........1
Section 2.3.SHAREHOLDER'S CHANGE OF NAME OR ADDRESS....................2
Section 2.4.TRANSFER OF STOCK..........................................2
Section 2.5.TRANSFER AGENT AND REGISTRAR...............................2
Section 2.6.LOST, STOLEN OR DESTROYED CERTIFICATES.....................2
Section 2.7.FRACTIONAL SHARES..........................................2
ARTICLE III
THE SHAREHOLDERS.............................................................3
Section 3.1.ANNUAL MEETING.............................................3
Section 3.2.SPECIAL MEETINGS...........................................3
Section 3.3.NOTICE OF MEETINGS - WAIVER................................4
Section 3.4.DISCHARGE OF NOTICE REQUIREMENT............................4
Section 3.5.CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE...........4
Section 3.6.DISTRIBUTIONS AND SHARE OWNERSHIP AS OF RECORD DATE........5
Section 3.7.VOTING LIST................................................5
Section 3.8.QUORUM AND OFFICERS........................................5
Section 3.9.VOTING AT MEETINGS.........................................6
Section 3.10.PROXIES...................................................6
Section 3.11.BALLOTING.................................................6
Section 3.12.VOTING RIGHTS, PROHIBITION OF
CUMULATIVE VOTING FOR DIRECTORS......................................6
Section 3.13. RECORD OF SHAREHOLDERS...................................6
Section 3.14. ACTION WITHOUT MEETING...................................6
ARTICLE IV
THE BOARD OF DIRECTORS.......................................................7
Section 4.1. NUMBER, QUALIFICATIONS, TERM AND NOMINATION..............7
Section 4.2. REMOVAL..................................................8
Section 4.3. VACANCIES................................................8
Section 4.4. REGULAR MEETINGS.........................................8
Section 4.5. SPECIAL MEETINGS.........................................8
Section 4.6. QUORUM...................................................9
Section 4.7. PROCEDURE AT MEETINGS....................................9
i
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Section 4.8. PRESUMPTION OF ASSENT....................................9
Section 4.9. ACTION WITHOUT A MEETING.................................9
Section 4.10. COMPENSATION............................................9
Section 4.11. EXECUTIVE COMMITTEE....................................10
Section 4.12. OTHER COMMITTEES.......................................10
ARTICLE V
OFFICERS....................................................................10
Section 5.1. NUMBER..................................................10
Section 5.2. ELECTION; TERM; QUALIFICATION...........................10
Section 5.3. REMOVAL.................................................11
Section 5.4. VACANCIES...............................................11
Section 5.5. DUTIES..................................................11
Section 5.6. CHAIRMAN OF THE BOARD...................................11
Section 5.7. THE PRESIDENT...........................................11
Section 5.8. THE VICE PRESIDENTS.....................................11
Section 5.9. SECRETARY...............................................12
Section 5.10. ASSISTANT OFFICERS.....................................12
Section 5.11. SALARIES...............................................12
Section 5.12. BONDS OF OFFICERS......................................12
Section 5.13. DELEGATION.............................................12
ARTICLE VI
MISCELLANEOUS...............................................................12
Section 6.1. DISTRIBUTIONS...........................................12
Section 6.2. CONTRACTS...............................................13
Section 6.3. CHECKS, DRAFTS, ETC.....................................13
Section 6.4. DEPOSITORIES............................................13
Section 6.5. ENDORSEMENT OF STOCK CERTIFICATES.......................13
Section 6.6. CORPORATE SEAL..........................................13
Section 6.7. FISCAL YEAR.............................................13
Section 6.8. BOOKS AND RECORDS.......................................13
Section 6.9. RESIGNATIONS............................................14
Section 6.10. INDEMNIFICATION OF OFFICERS AND DIRECTORS..............14
Section 6.11. INDEMNITY INSURANCE....................................15
Section 6.12. MEETINGS BY TELEPHONE..................................15
ARTICLE VII
AMENDMENTS..................................................................15
Section 7.1. AMENDMENTS..............................................15
Certificate by Secretary....................................................16
ii
<PAGE>
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 2900 North Loop West, Suite 1230, Houston, Texas 77092. The
Corporation may have such other business offices within or without the State of
Texas as 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 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. The names and addresses of shareholders as they appear
on the stock certificate book shall be the
1
<PAGE>
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 1999,
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 the principal office of the Corporation, at 10:00 a.m. local
time, on March 1 of each year unless such day is a legal holiday, in which case
such meeting shall be held at such hour on the first day thereafter which is not
a legal holiday; or at such other place and time as may be designated by the
board of directors. 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
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distribution involving a purchase or redemption by the corporation of any of its
own shares) or a share dividend, 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
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duties shall be performed by any other officer authorized by these bylaws or any
person appointed by resolution duly adopted at the meeting.
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.
SECTION 3.14. ACTION WITHOUT MEETING. Unless otherwise permitted by
the articles of incorporation, any action required by statute to be taken at a
meeting of the shareholders of the Corporation, or any action which may be taken
at a meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by the holder or
holders of all of the issued and outstanding shares of the Corporation's common
stock, and such consent shall have the same force and effect as a vote of the
shareholders. Any such signed consent, or a signed copy thereof, shall be placed
in the minute book of the Corporation. All notices with respect to such consent
required by the applicable statute shall be sent by the Corporation in a timely
manner.
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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. Such number may be increased or decreased by amendment of these bylaws,
provided 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 of Texas. Except as otherwise provided in 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
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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.
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
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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, 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 selected by
the members present shall preside. The secretary of the Corporation shall act as
secretary at all meetings of the board. 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
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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 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.
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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.
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.
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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 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.
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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 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
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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.
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.
14
<PAGE>
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, 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 a majority of the 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
15
<PAGE>
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.
CERTIFICATE BY SECRETARY
The undersigned, being the secretary of Pinnacle Global Group, Inc.,
hereby certifies that the foregoing code of bylaws was duly adopted by the
directors of said corporation effective on October 1, 1998.
IN WITNESS WHEREOF, I have signed this certification on this the 1st
day of October, 1998.
/s/ LORI H. DYER
Lori H. Dyer, Secretary
16
EXHIBIT 21.1
SUBSIDIARIES OF PINNACLE GLOBAL GROUP, INC.(1)
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY ORGANIZATION TRADE NAME
- ---------------------------------------- ------------ -------------------------
<S> <C>
TEI, Inc.(2)
Tanknology Environmental Services, Delaware TES, Inc.
Inc.(3)..........................
Tanknology/Engineered Systems, Delaware Engineered Systems, Inc.
Inc.(3)..........................
Tanknology Worldwide, Inc.(3)...... Delaware TW, Inc.
Tanknology of Illinois, Inc.(3).... Delaware Tanknology of Illinois,
Inc.
Energy Recovery Resources, Delaware James Waste Oil Service
Inc.(3)..........................
Harris Webb & Garrison, Inc.(2)......... Texas
Pinnacle Management & Trust Texas
Company(2)............................
Spires G.P. Combination Corp.(2)........ Texas
Spires Financial G.P., Inc.(3)..... Texas
Capital Financial Partner, Delaware
Inc.(3)..........................
Spires Financial Partners, Delaware
Inc.(3)(4).......................
Spires L.P. Combination Corp.(2)........ Texas
Spires Financial Funding, Delaware
L.P.(3)(5).......................
Spires Financial, L.P.(3)(6)....... Delaware
- ------------
</TABLE>
(1) List of subsidiaries as of the closing of the Transactions.
(2) Represents a first-tier subsidiary.
(3) Represents a second-tier subsidiary.
(4) The sole general partner of Spires Financial Funding, L.P.
(5) The partnership interests are owned 84.3% by Spires Financial Partners,
Inc., the sole general partner, and 15.7% by Spires L.P. Combination Corp.
(6) The partnership interests are owned 1.0% by Spires Financial G.P., Inc., a
general partner, 0.1% by Capital Financial Partner, Inc., a general partner,
24.9% by Spires Financial Funding, L.P., and 74.0% by Spires L.P.
Combination Corp.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
(i) our report dated October 1, 1998 on our audit of the consolidated balance
sheet of Pinnacle Global Group, Inc., (ii) our report dated February 17, 1998,
on our audits of the financial statements of TEI, Inc. and Subsidiaries, and
(iii) our report dated February 16, 1998 on our audits of the financial
statements of Spires Financial, L.P. We also consent to the reference to our
firm under the captions "Experts."
PricewaterhouseCoopers LLP
Houston, Texas
October 7, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated February 3, 1998 (except for Note 13 for which the date is
March 18, 1998 and Notes 7 and 14 for which the date is October 6, 1998), on our
audits of the financial statements of Harris Webb & Garrison, Inc. We also
consent to the references to our firm under the captions "Experts."
CHESHIER & FULLER, L.L.P.
Dallas, Texas
October 7, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pinnacle Management & Trust Company:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Houston, Texas
October 5, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 7, 1997, accompanying the
financial statements of Pinnacle Management & Trust Company contained in the
Registration Statement and Proxy Statement/Prospectus. We consent to the use of
the aforementioned report in the Registration Statement and Proxy
Statement/Prospectus, and to the use of our name as it appears under the caption
"Experts".
GRANT THORNTON LLP
Houston, Texas
October 5, 1998
EXHIBIT 23.8
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ W. BLAIR WALTRIP
W. Blair Waltrip
EXHIBIT 23.10
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ T. G. BOGLE
T. G. Bogle
EXHIBIT 23.11
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ JAMES H. GREER
James H. Greer
EXHIBIT 23.12
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ TONY COELHO
Tony Coelho
EXHIBIT 23.13
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ TITUS H. HARRIS, JR.
Titus H. Harris, Jr.
EXHIBIT 23.14
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ ROBERT E. GARRISON, II
Robert E. Garrison, II
EXHIBIT 23.15
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ RICHARD C. WEBB
Richard C. Webb
EXHIBIT 23.16
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ STEPHEN M. RECKLING
Stephen M. Reckling
EXHIBIT 23.17
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ PETER W. BADGER
Peter W. Badger
EXHIBIT 23.18
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned consents to being named in this Registration Statement on Form
S-4 as a person who is about to become a director of Pinnacle Global Group, Inc.
October 5, 1998
/s/ SEAN A. DOBSON
Sean A. Dobson
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TEI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000867888
<NAME> TANKNOLOGY ENVIRONMENTAL INC
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 13,191,678
<SECURITIES> 14,456,491
<RECEIVABLES> 926,166
<ALLOWANCES> 0
<INVENTORY> 309,783
<CURRENT-ASSETS> 31,088,820
<PP&E> 4,931,798
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,066,410
<CURRENT-LIABILITIES> 1,399,433
<BONDS> 0
0
0
<COMMON> 152,062
<OTHER-SE> 37,514,915
<TOTAL-LIABILITY-AND-EQUITY> 39,066,410
<SALES> 1,556,194
<TOTAL-REVENUES> 1,556,194
<CGS> 974,961
<TOTAL-COSTS> 2,338,079
<OTHER-EXPENSES> (769,230)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,655)
<INCOME-TAX> (2,795)
<INCOME-CONTINUING> (9,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,860)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TEI, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000867888
<NAME> TANKNOLOGY ENVIRONMENTAL INC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,810,100
<SECURITIES> 15,516,366
<RECEIVABLES> 639,678
<ALLOWANCES> 0
<INVENTORY> 178,839
<CURRENT-ASSETS> 31,411,412
<PP&E> 4,789,141
<DEPRECIATION> 800,254
<TOTAL-ASSETS> 39,042,721
<CURRENT-LIABILITIES> 1,377,574
<BONDS> 0
0
0
<COMMON> 151,992
<OTHER-SE> 37,513,155
<TOTAL-LIABILITY-AND-EQUITY> 39,042,721
<SALES> 2,725,749
<TOTAL-REVENUES> 2,725,749
<CGS> 2,190,367
<TOTAL-COSTS> 4,815,500
<OTHER-EXPENSES> (1,530,264)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,748
<INCOME-PRETAX> (559,487)
<INCOME-TAX> (159,585)
<INCOME-CONTINUING> (399,902)
<DISCONTINUED> (2,193,860)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,781,616)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
